Market reaction to the transitory effects of IFRS: an examination of disaggregated measures

Theresa Hilliard (Department of Accounting, Fort Lewis College, Durango, Colorado, USA)
Presha Neidermeyer (Department of Accounting, West Virginia University, Morgantown, West Virginia, USA)

International Journal of Accounting & Information Management

ISSN: 1834-7649

Publication date: 5 March 2018

Abstract

Purpose

This study examines how International Financial Reporting Standards (IFRS) are applied, disaggregates the cumulative effect of the IFRS transition into magnitude measurements of the standard-to-standard differences (by standard) and management discretionary choices (by choice) and tests which transitory effects at every level of disaggregation alter investor behavior.

Design/methodology/approach

Using hand-collected data from the IFRS 1 disclosures, the research design consists of eight regression models which test fluctuations in investment behavior as a function of varying measures of IFRS adjustments at aggregated and disaggregated levels including magnitude measurements of pronouncements and management choices.

Findings

Findings from the study identify specific standards and management discretionary choices associated with market reaction. Evidence from this study demonstrates the value of disaggregated measures to obtain a more comprehensive understanding of market reaction and associations with transitory effects of IFRS. Findings from the study suggest that the market favors management discretionary choices that decrease retained earnings and potentially increase future net income. Overall, model results suggest that a more comprehensive understanding of the specific standards is obtained that alters market behavior and how the market responds to positive and negative equity adjustments.

Originality/value

This study contributes to the literature examining the capital market effects of IFRS by decomposing the generally accepted accounting principle (GAAP) transition into magnitude measurements of specific standard-to-standard differences (by standard) and management discretionary choices (by choice) to understand how the market responds to the transitory effects of a GAAP change. This is important because it puts regulators, standard setters, investors and researchers on notice that the way in which the authors analyze and measure equity components could be consequential to the authors ability to assess a GAAP change. This study informs all jurisdictions which have adopted or are deliberating the adoption of IFRS how IFRS is being implemented and which areas of application are relevant to investors. Further, market reactions to accounting information pertaining to a GAAP change may only be revealed at the disaggregated and decomposed levels of the retrospective application of the GAAP implementation.

Keywords

Citation

Hilliard, T. and Neidermeyer, P. (2018), "Market reaction to the transitory effects of IFRS: an examination of disaggregated measures", International Journal of Accounting & Information Management, Vol. 26 No. 1, pp. 2-37. https://doi.org/10.1108/IJAIM-04-2016-0045

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Publisher

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Emerald Publishing Limited

Copyright © 2018, Emerald Publishing Limited


1. Introduction

The transition to International Financial Reporting Standards (IFRS) is widely regarded as a significant disclosure enhancing event (Cormier, 2013; Fifield et al., 2011; Karamanou and Nishiotis, 2009). As mandated by IFRS 1, First Time Adoption of International Financial Reporting Standards (IFRS 1) previously reported economic activities are presented under two sets of accounting rules. This critical turning point in a firm’s reporting history provides a unique opportunity to examine the intersection of two generally accepted accounting principle (GAAP) systems.

The growing body of literature that examines IFRS as it relates to an improvement to the quality (Barth et al., 2008; Goodwin et al., 2008; Iatridis, 2010; Soderstrom and Sun, 2007), comparability (Callao et al., 2007; Horton et al., 2013) and transparency (Barth and Schipper, 2008) of financial reporting have provided valuable empirics. With potential and existing investors stated as two of the primary user groups in the Conceptual Framework for Financial Reporting [IASB; Financial Accounting Standards Board (FASB), 2010], researchers have extensively studied capital market reactions[1] to the IFRS financial reporting vehicle. Evidence from the extant literature is “almost unanimous” as to the positive effects in capital markets attributed to IFRS adoption (Brüggemann et al., 2013). However, the explanations as to the specific reasons underlying the positive market reactions are mixed and speculative. The literature has identified the use of aggregate measures such as the book value of equity (Brüggemann et al., 2013) and the challenge of disentangling IFRS adoption from other concurrent changes (Pope and McLeay, 2011) as explanations for these mixed and speculative results. These authors have made a call for research that disaggregates the book value of equity[2]. Canada provides an optimal setting to examine the IFRS transition in a country context with a high-quality predecessor GAAP, diligently enforced. Further, IFRS was implemented in Canada without other concurrent regulatory or institutional changes to overcome the limitations of the current body of IFRS research.

The true value of any financial reporting transition is insight into how the standard(s) is implemented and applied and how the market reacts to the transitory effects of GAAP changeover. In this study we explore the following research question, do we learn more about market behavior by examining associations with particular standards or management discretionary choices that would otherwise be concealed at the aggregate level? The research objective of this study is to examine how IFRS are applied, disaggregate the cumulative effect of the IFRS transition into magnitude measurements of the standard-to-standard differences (by standard) and management discretionary choices (by choice) and test which transitory effects at every level of disaggregation alter investor behavior.

This cross-sectional study investigates IFRS 1 first time adoption reconciliation adjustments at the time of transition for 396 Canadian firms. IFRS 1 sets the precedent for financial reporting under IFRS, permits accounting policy elections and prescribes various detailed disclosures and reconciliations[3]. These mandated disclosures provide a demarcation of the accounting treatment of cumulative economic events as measured under the former GAAP (Canadian GAAP) and under IFRS, including detailed explanations and nuances of the measurement systems under both GAAPs, management discretionary choices and material reclassifications. In addition, explanatory language accompanies the reconciliation detailing the financial reporting impact of specific pronouncement differences, management discretionary decisions made in applying IFRS and the optional exemption choices elected.

Findings from this study suggest that disaggregating the change in the book value of equity related to the adoption of IFRS into standard-to-standard differences and management discretionary choices provides enhanced explanatory power as to fluctuations in market behavior when compared to aggregated measures. Results from the study identified specific standards and choices which incrementally altered investor behavior: IAS 16 Property, Plant and Equipment, IAS 27 Consolidated and Separate Financial Statements, IAS 36 Impairment of Assets, IFRS 2 Share-based payments and IAS 38 Intangible Assets. Evidence from this study indicates positive market reactions are associated with management discretionary choices pertaining to Share-Based Payments and Employee Benefits which remeasure assets and liabilities while increasing (decreasing) retained earnings. Further, consistent with prior research (Henry, 2009; Cormier et al., 2009), the market tends to favor management strategies that reduce retained earnings and bypass the income statement in current and future periods. Overall, evidence from this study reveals positive market response to enhanced transparency and valuation provided by IFRS.

This study contributes to the literature examining the capital market effects of IFRS by decomposing the GAAP transition into magnitude measurements of specific standard-to-standard differences (by standard) and management discretionary choices (by choice) to understand how the market responds to the transitory effects of a GAAP change. This is important because it puts regulators, standard setters, investors and researchers on notice that the way in which we analyze and measure equity components could be consequential to our ability to assess a GAAP change. The decision by the Canadian Accounting Standards Board (AcSB) to adopt IFRS demands ex post analysis to evaluate the cost benefit of this financial reporting transition (Ahmed et al., 2013). This study informs all jurisdictions which have adopted or are deliberating the adoption of IFRS how IFRS is being implemented and which areas of application are relevant to investors. Further, market reactions to accounting information pertaining to a GAAP change may only be revealed at the disaggregated and decomposed levels of the retrospective application of the GAAP implementation (Brüggemann et al., 2013). Understanding the nuances of market behavior pertaining to a particular pronouncement difference or management discretionary choice provides valuable insight into GAAP transitions (Carmona and Trombetta, 2008). Data from IFRS 1 reconciliations can have long-term effects on future IFRS financial statements (Nobes, 2004).

The remainder of the paper is organized as follows. Section 2 provides information on the context of the study and related literature. Section 3 presents the research design. Section 4 presents the findings. Section 5 concludes and discusses the implications of the study.

2. Context and literature review

2.1 Canadian context

Canada provides an optimal context for the examination of a wholesale GAAP changeover. Canada has a large market-oriented economy with a common-law legal system. Leading up to 2005, CA GAAP paralleled US GAAP[4]. The extant literature has provided evidence of the harmonization of CA GAAP and US GAAP in the form of value relevance tests in which CA GAAP information was indistinguishable from US GAAP (Bandyopadhyay et al., 1994; Barth and Clinch, 1996). Motivated by the desire to expand access to global capital markets and reduce the cost of capital, the Canadian AcSB changed the course of the Canadian Financial Reporting System by announcing its intention to adopt IFRS in January 2006 with mandatory application by January 2011. Canada provides the first opportunity to observe the application of IFRS in North America.

Canada did not experience many of the concurrent changes such as the introduction of enforcement mechanisms as evidenced by studies conducted in Europe. These concurrent changes create an identification problem in conducting IFRS research (Brüggemann et al., 2013; Pope and McLeay, 2011). Identification problems represent the challenge of disentangling the potential impact of mandatory IFRS adoption from other changes outside the realm of financial reporting (Brüggemann et al., 2013; Pope and McLeay, 2011). Financial reporting under the predecessor Canadian GAAP was considered a high-quality reporting mechanism diligently enforced by 13 provincial and territorial securities commissions. Because the country-level enforcement framework is strong (Cormier, 2013), any firm-level effects observed in the Canadian context should avoid challenges related to low internal validity in the research design (Wysocki, 2011; Brüggemann et al., 2013; Pope and McLeay, 2011). Further, the Canadian implementation of IFRS was not “bundled” with other institutional or regulatory changes that could confound the impact of the capital market effects (Christensen et al., 2013). The power of statistical tests are enhanced when conducted in a single jurisdictional setting, such as Canada, that controls for international variances and confounding factors (Chalmers et al., 2011; Holthausen, 2009).

2.2 Market reaction – studies of value relevance

Value relevance can be broadly defined as a statistically significant association between accounting numbers and stock prices (Mohammadrezaei et al., 2015). Tests of value relevance are a methodological approach to empirically operationalize the conceptual framework’s objective for evaluating the market’s reaction to accounting information (Barth et al., 2001). Accounting information that is deemed to be value relevant can be influential in the strategic decisions made by financial statement users (Barth et al., 2001). Evidence from value relevance research has the potential to provide valuable feedback to accounting standard setters as to how accounting information is being reflected in stock prices. More specifically, accounting information that has a statistically significant association with fluctuations in stock prices provides regulators and standard setters insight as to financial information valued by the stock market (investors). This is particularly important for studies that examine the transition and implementation of IFRS with the ongoing deliberations by International Accounting Standards Board (IASB), Financial Accounting Standards Board (FASB) and the Canadian AcSB.

The growing body of literature that examines market behavior associations with IFRS presents evidence with conflicting results (Christensen et al., 2013; Brüggemann et al., 2013, Ahmed et al., 2013; Brown, 2011; Barth et al., 2001; Daske et al., 2008). The mixed results have been attributed to predecessor reporting systems (GAAP), compliance with IFRS and country context in terms of the legal and regulatory environments (Brown, 2011; Dayanandan et al., 2016). In a review of the consequences of IFRS adoption, Brüggemann et al. (2013) attributes evidence of positive effects in capital markets at the macroeconomic level to the use of aggregate measures and large firm bias from the use of commercial databases. They argue that aggregate measures capture only a subset of potential changes in financial reporting and fall short of examining metrics that are relevant to financial statement users. The authors make a call for advancing future research by enhancing research designs that test disaggregated variables, examine IFRS disclosures and accounting choices permitted under IFRS 1, use hand-collected data and test samples that comprise varying sized firms.

2.3 First time adoption of international financial reporting standards

Financial transparency culminates with first-time adoption of IFRS through compliance with the explicit guidance set forth in IFRS 1, First Time Adoption of International Financial Reporting Standards. Under the requirements of IFRS 1, the precedent for financial reporting under IFRS is established, transitional provisions included in other IFRS are overridden and detailed disclosures are presented. The IFRS 1 disclosure explains how the transition from Canadian GAAP (CA GAAP) to IFRS affected the entity’s financial position.

IFRS 1 requires entities to apply, retrospectively, all IFRS standards effective at the end of their first IFRS reporting period. The standard requires the opening presentation of IFRS statement of financial position and the comparative financial statements be prepared in accordance with the recognition, measurement, presentation and disclosure requirements of these standards. The Canadian Securities Administrators (CSA) require the presentation of an opening IFRS statement of financial position in the first IFRS interim financial report. In the opening statement of financial position, a Canadian company must do the following:

  • recognize all assets and liabilities required by IFRS;

  • derecognize all assets and liabilities not permitted by IFRS;

  • classify all assets, liabilities and components of equity in accordance with IFRS; and

  • measure all assets and liabilities in accordance with IFRS.

All adjustments, when applicable, should be recognized through retained earnings or other equity items, at the transition date (CICA, 2011).

IFRS 1 also establishes two categories of exceptions to the retrospective rule: mandatory and optional exemptions. Mandatory exemptions prohibit retrospective application of IFRS because of insufficient measurement reliability. Optional exemptions grant relief from IFRS requirements in which the costs of compliance exceed the benefits to the users of the financial statements. For example, IFRS 1 Fair Value or Revaluation as Deemed Cost is a choice made by management that permits a one-time revaluation of property, plant and equipment on an item-by-item basis to fair value. This deviates from IAS 16 Property, Plant and Equipment which requires application of the standard to an entire class of assets rather than item-by-item as permitted by IFRS 1. These exemption choices represent compromises of the IFRS measurement system upon adoption. The magnitude and frequency of exemption choices that compromise the IFRS system upon adoption should be of interest to both regulators and investors (Capkun et al., 2011). In a 2007 report on the European Union implementation of IFRS, the Institute of Chartered Accountants in England and Wales (ICAEW) noted that comparability was impeded among and between first-time adopters. The report also stated that these implementation differences will have an effect on future periods of financial reporting [Institute of Chartered Accountants in England and Wales (ICAEW), 2007; Jermakowicz and Gornik-Tomaszewski, 2006].

IFRS 1.39 requires the first IFRS financial statements to include a reconciliation of the equity reported under national GAAP to the equity under IFRS at the date of transition to IFRS and at the end of the latest period for comparative information presented in the first IFRS financial statements. For this study, the reconciliation of book value of equity is of particular interest. According to IFRS 1.40, the reconciliations have to be sufficiently detailed to enable users to understand the material adjustments to the balance sheet and income statement.

2.4 Studies examining the book value of equity pre- and post-international financial reporting standards

A considerable number of IFRS studies examine the value relevance of the book value of equity by comparing these amounts as measured under the predecessor GAAP and IFRS. Hung and Subramanyam (2007), using German firms switching from German GAAP to IFRS during the period 1998 and 2002, find that the value relevance of book value of equity is not significantly different between the two accounting systems. However, Jermakowicz and Gornik-Tomaszewski (2006) report an increase in the explanatory power of the book value of equity after the voluntary adoption of IFRS for a sample of DAX-30 firms from 1995 to 2004. In a Norwegian study that used a price model, Gjerde et al. (2008) found that the book value of equity was more value relevant under IFRS. The authors provided evidence of marginal relevance for IFRS reconciliation adjustments. In a cross-country analysis of five European Stock Exchanges, the book value of equity displayed a greater valuation role under IFRS than under the predecessor GAAP for the UK (Devalle et al., 2010). However, Iatridis (2010) found no significant change in the value relevance of accounting information for UK firms post-IFRS adoption. The mixed evidence on IFRS adoption effects may be attributed to the use of aggregated measures, the book value of equity. It is possible that the lack of evidence or marginal findings could be attributed to the offsetting of underlying accounting items that behave differently (Schipper, 2007).

2.5 Studies examining international financial reporting standards 1 reconciliations in the year of transition

While studies that explore the association between accounting information and market values using the IFRS 1, reconciliation information is rare because the data can only be obtained through hand collection, and the limited studies that have been conducted provide mixed evidence of incrementally improved value relevance of book equity under IFRS. For example, Jarva and Lantto (2012) found no significant change in the value relevance of book value for Finnish firms with the adoption of IFRS. When comparing book value of equity as measured by Australian GAAP and reconciled to IFRS, Goodwin et al. (2008) reported no incremental increase in value relevance under the new GAAP system. These studies test the value relevance of aggregated measures – book value of equity – in contrast to the present study, which examines the magnitude adjustment to retained earnings and distinguishes cumulative effect adjustments attributable to pronouncement differences and management discretionary choices.

Two UK studies provide evidence that accounting information from the IFRS 1 reconciliations can either reflect value-relevant information for shareholders (Horton and Serafeim, 2010) or wealth transfers between lenders and shareholders (Christensen et al., 2009). There are some notable differences between the UK studies by Horton and Serafeim (2010) and Christensen et al. (2009) and the present study. First, the study by Christensen et al. (2009) used an intertemporal approach that compares characteristics of accounting amounts, e.g. value relevance for firms before and after IFRS adoption. The present study examines the IFRS 1 reconciliation for the year of transition as this is an opportunity to observe the application of management discretionary choices and the financial magnitude of remeasurement to IFRS. Second, in the study by Horton and Serafeim (2010), the preselected standards are specific to the UK country context as these standards represent the six main differences between UK GAAP and IFRS. The present study examines all standard differences reported by firms in the sample. Finally, both UK studies examine periodic income reconciliations. The present study examines the reconciliation of retained earnings at transition. The IFRS 1 reconciliation of retained earnings at transition reveals the application of IFRS including management discretionary choices that establish accounting policies affecting future earnings.

By examining the year of transition for French firms, Cormier et al. (2009) provides evidence of management incentives in electing optional exemptions. Their findings demonstrate that mandatory IFRS equity adjustments associated with strategic management implementation of optional exemptions were value relevant. There are some notable differences between Cormier et al. (2009) and the present study. First, although Cormier et al. (2009) examines the effect of optional exemption choices, the choices are pre-selected based on the country context – France. In sample, the present study examines all optional exemption choices elected by management. Further, French GAAP was among the most divergent from IFRS, reported under a stakeholder-oriented accounting system and experienced many concurrent institutional changes during the transition to IFRS. In contrast, the present study is conducted in the Canadian context. CA GAAP was converging with IFRS for several years prior to mandatory adoption [Accounting Standards Board (AcSB), 2006]. Canada used a shareholder-oriented accounting model similar to IFRS. Finally, Canada did not experience concurrent institutional changes.

A more recent study by Barth et al. (2014) examines mandatory adopters of IFRS in Europe. Net income adjustments were deemed value relevant to investors. In a subset of financial and non-financial firms, the adjustment to net income relating to IAS 39 Financial Instruments was found to be value relevant only to financial firms. A key difference between the present study and Barth et al. (2014) is the examination of equity adjustments in contrast with periodic income adjustments. Equity adjustments, as demonstrated in the present study, can be decomposed into magnitude measurements of standard-to-standard differences and management discretionary choices, which are then tested for value relevance.

3. Research design

The research design consists of eight regression models that test fluctuations in investment behavior as a function of varying measures of IFRS adjustments at aggregated and disaggregated levels, including magnitude measurements of pronouncements and management choices. The following explanation is a narrative of the disaggregation process as depicted in Figure 1. Numerical references in the text correspond to the numerical references in Figure 1.

Specifically, testing commences with the adjustment to equity and proceeds with the adjustment to retained earnings. Using hand-collected data from the IFRS 1 disclosures, the adjustment to retained earnings is then decomposed into two measures: adjustment to retained earnings related to standard-to-standard differences and adjustment to retained earnings related to management discretionary choices that are explicitly listed in IFRS 1[5]. We further disaggregate these measures into noncomponent switching and component switching. Noncomponent switching represents remeasurements of assets and liabilities with a corresponding adjustment to retained earnings[6]. Component switching represents material reclassifications among equity components that are primarily derived from discretionary choices made by management as permitted under IFRS 1. In the study, we observed adjustments which could be classified as component switching, noncomponent switching and certain standards when applied had a component and noncomponent switching effect. For example, a standard with a component and noncomponent switching effect is IAS 19 Employee Benefits. If management elects to eliminate unamortized actuarial gains (losses), the reclassification adjustment (component switching) would decrease (increase) accumulated other comprehensive income and with a respective increase (decrease) to retained earnings. The net effect of the component switch would have no overall effect on total equity. If pension obligations are adjusted to adhere to IAS 19 Employee Benefits, any increase to the pension benefit obligation would result in a charge to retained earnings (noncomponent switching).

These material reclassifications are concealed at the aggregated level of book value of equity. Ultimately, the standard-to-standard differences – noncomponent switching and component switching – as well as management discretionary choices – noncomponent switching and component switching – are disaggregated into magnitude measurements of specific pronouncements and choices. Through disaggregation, this study provides magnitude measurements of standard application (by standard) and choices selected (by choice).

3.1 Sample and data

Data for this study are directly extracted from financial reports posted to the Canadian repository as required by the Canadian Securities Administrator for publicly accountable enterprises – Systems for Electronic Document Analysis and Retrieval (SEDAR). Firm financial reports were examined for explicit IFRS adoption language[7] in the audit opinion letter, financial statement note on the “basis of presentation” and financial statement note disclosure for IFRS 1. The population of mandatory adopters was identified from Research Insight. An examination of mandatory adopters mitigates the self-selection bias associated with voluntary adopters (Cormier et al., 2009). Further, studies that examine voluntary adopters incur difficulties in distinguishing results that are attributable to the application of IFRS and results that represent incentives for voluntary adoption (Barth et al., 2014). All data were hand-collected from the 2011 first-quarter financial reports. Only calendar year firms were selected from the population of Canadian mandatory adopters to avoid confounding effects on inferences. All non-Canadian amounts were converted to Canadian currency. IFRS 1 reconciliation data were collected for 396 firms. Of the 396 firms, 79 firms did not have adequate share-price data for tests of value relevance. The final sample consists of 317 publicly accountable enterprises. Table I presents a breakdown of the sample.

3.2 Variables of interest

Table II presents the dependent and independent variables of interest. The dependent variable for all models is market reaction (SCAR). Market reaction is measured by computing the daily abnormal returns (DAR) and the cumulative abnormal returns (CAR). DAR represents the difference between actual stock performance and the expected stock performance on a daily basis. Similar to Horton and Serafeim (2010), abnormal returns from day −5 to day +5 are calculated as the prediction errors from the OLS model. Day 0 represents the day each firm posted first quarter financial reports to SEDAR. In this study, the risk adjusted returns are computed for every firm rather than using a market adjusted model as in Horton and Serafeim (2010); this limits confounding effects and captures firm-specific changes in share price. The expected risk adjusted returns equation is derived from the Sharpe-Linter capital asset pricing model[8] (Sharpe, 1964; Linter, 1965). The abnormal return is the unexpected risk adjusted return. CARs represent the cumulative or sum of abnormal returns over a window of time. Because of the differential trading activity across small and large firms, an SCAR[9] is used as the dependent variable, so that the CAR is measured relative to its own variance (Cuthbertson et al., 2010).

The independent variables represent a disaggregation of the adjustment to equity (book value) at the time of transition. All independent variables are scaled by weighted average shares outstanding. At the highest level of aggregation, the first independent variable is the adjustment to the book value of equity (Adjustment to Equity). The adjustment to equity is disaggregated into the adjustment to retained earnings as reported (Adjustment to Retained Earnings). This initial disaggregation is critically important because the adjustment to retained earnings represents the cumulative effect of IFRS. When a firm transitions to IFRS, all assets and liabilities are restated under the new standard. IFRS 1 requires all adoption adjustments to be retrospectively applied as an adjustment to retained earnings. Therefore, the need for an examination of the cumulative changes to retained earnings, particularly at the time of transition to IFRS, is necessary (Whittington, 2008). Studies examining retained earnings reveal policy choices and the application of a new standard(s) (Horton and Serafeim, 2010; Christensen et al., 2009). Management discretionary policy choices elected in the year of adoption persist several years after implementation of IFRS (Kvaal and Nobes, 2012).

The adjustment to retained earnings is then decomposed into two measures: adjustment to retained earnings related to standard-to-standard differences (Adjustment to Retained Earnings_Standard) and adjustment to retained earnings related to management discretionary choices which are explicitly listed in the standard, IFRS 1 (Adjustment to Retained Earnings_Choice).

The preceding measures: Adjustment to Retained Earnings_Standard and Adjustment to Retained Earnings_Choice are further decomposed into noncomponent switching (Adjustment to Retained Earnings_Standard_NCS; Adjustment to Retained Earnings_Choice_NCS) and component switching (Adjustment to Retained Earnings_Standard_CS; Adjustment to Retained Earnings_Choice_CS). Component switching (CS) represents material equity reclassifications. Noncomponent switching (NCS) represents remeasurements of assets and liabilities with a corresponding adjustment to retained earnings. Adjustment to Retained Earnings_Standard_NCS represents pure[10] remeasurement of assets and liabilities to IFRS with a corresponding adjustment to retained earnings. When decomposed, the Adjustment to Retained Earnings_Standard_NCS represents magnitude measurements of specific pronouncement differences that remeasure assets and liabilities: IAS 2, IFRS 6, IAS 12, IAS 16, IAS 17, IAS 18, IAS 19, IAS 21, IAS 23, IAS 27, IAS 28, IAS 36, IAS 37, IAS 38, IAS 39, IAS 40, IAS 41 and EIC 146 Flow-Through Shares. Adjustment to Retained Earnings_Standard_CS is disaggregated into magnitude measurements of the following specific standards that result in equity reclassifications: IAS 21, IAS 27, IAS 39 and EIC 146 Flow-Through Shares. Adjustment to Retained Earnings_Choice_NCS is decomposed into the specific management discretionary choices as permitted by IFRS 1 that remeasure assets and liabilities: Fair value or revaluation as deemed cost (FVPPE), Decommissioning liabilities (Decomm), Business combinations (BC), Cumulative translation differences (CumTrans) and Employee benefits (EB). Adjustment to Retained Earnings_Choice_CS is decomposed into the specific management discretionary choices as permitted by IFRS 1 that result in equity reclassifications: IFRS 2, Cumulative translation differences (CumTrans) and Employee benefits (EB).

Based on prior literature (Horton and Serafeim, 2010; Cormier, 2013), three control variables are included in every model: industry, size and first quarter earnings surprise. Consistent with research conducted in the Canadian context (Cormier, 2013; Blanchette and Desfleurs, 2011; Blanchette et al., 2011) and the prevalence of the extractive industries in Canada, industry is a binary variable coded one for firms that are classified in the extractive industries and zero for all other industries. Size is measured by total assets as reported under IFRS. First quarter earnings surprise is the difference between earnings per share as reported by CA GAAP and IFRS on the transition date.

3.3 Models

The following eight regression models test Canadian market reaction against the transitory effects of IFRS at every level of equity disaggregated. The objective of the models is to discern if we learn more about market reaction to IFRS by examining associations with particular standards or management discretionary choices that would otherwise be concealed at the aggregate level.

The first model tests market reaction as a function of the highest level of aggregation: adjustment to equity.

(1) SCAR=α+β1Adjustmentto Equity+β2Industry+β3Size+β4Surprise+

The second model tests market reaction as a function of the adjustment to retained earnings:

(2) SCAR=α+β1AdjustmenttoRetained Earnings+β2Industry+β3Size+β4Surprise+

The third model tests market reaction as a function of the adjustment to retained earnings at the transition date, decomposed into an aggregated magnitude measurement of pronouncement differences and discretionary choices made by management upon the implementation of and as permitted by IFRS 1:

(3) SCAR=α+β1AdjustmenttoRetained EarningsStandard+β2Adjustmentto Retained EarningsChoice+β3Industry+β4Size+β5Surprise+

The fourth model tests market reaction as a function of the adjustment to retained earnings at the transition date, decomposed into a magnitude measurement of pronouncement differences and discretionary choices by noncomponent (NCS) and component switching (CS):

(4) SCAR=α+β1Adjustment to Retained Earnings_Standard_NCS+β2Adjustment to Retained Earnings_Standard_CS+β3Adjustment to Retained Earnings_Choice_NCS+β4Adjustment to Retained Earnings_Choice_CS+β5Industry+β6Size+β7Surprise+

The fifth model tests market reaction as a function of the adjustment to retained earnings at the transition date decomposed by specific pronouncement differences, which remeasure assets and liabilities to IFRS. This model represents a pure asset and liability remeasurement by standard:

(5) SCAR=α+β1IAS2+β2IFRS6+β3IAS12+β4IAS16+β5IAS17+β6IAS18+β7IAS19+β8IAS21+β9IAS23+β10IAS27+β11IAS28+β12IAS36+β13IAS37+β14IAS38+β15IAS39+β16IAS40+β17IAS41+β18FlowThruShs+β19Industry+β20Size+β21Surprise+

The sixth model tests market reaction as a function of the adjustment to retained earnings at the transition date, decomposed by specific pronouncement differences that resulted in component switching adjustments among equity components:

(6) SCAR=α+β1IAS21+β2IAS27+β3IAS28+β4IAS39+β5FlowThruShs+β6Industry+β7Size+β8Surprise+

The seventh model tests market reaction as a function of the adjustment to retained earnings at the transition date decomposed by specific management discretionary choices that remeasure assets and liabilities:

(7) SCAR=α+β1FVPPE+β2Decomm+β3BC+β4IFRS2+β5CumTrans+β6EB+β7Industry+β8 Size+β9 Surprise+

The final model tests market reaction as a function of the adjustment to retained earnings at the transition date decomposed by specific management discretionary choices that resulted in component switching adjustments among equity components:

(8) SCAR=α+β1FVPPE+β2Decomm+β3BC+β4IFRS2+β5CumTrans+β6EB+β7Industry+β8 Size+β9 Surprise+

If the disaggregation of the preceding models demonstrates statistical significance, additional testing will be performed to statistically examine incremental changes in R2 results from selected models. The effect size of the incremental increase in R2 will be tested using a partial (alternative) F test [11] (Cohen et al., 2002).

4. Findings

4.1 Descriptive statistics

Table III summarizes a count of the signing of adjustments to equity components at the aggregate (Panel A) and disaggregated levels by standard (Panel B) and choice (Panel C). Panel A presents the frequency of signing of adjustments to equity components. A negative adjustment indicates a decrease to the account, no adjustment indicates that there was no adjustment to the equity component as a result of the transition to IFRS, and a positive adjustment indicates an increase to the account. As presented in Table III: Panel A, in sample, the majority of firms experienced a decrease in book value of equity (n = 225) and a decrease in retained earnings (n = 235) as a result of the transition to IFRS. The majority of firms experienced no adjustments to share capital or accumulated other comprehensive income as a result of the transition to IFRS. It is not surprising that the majority of firms (n = 321) experienced adjustments to retained earnings, whether negative (n = 235) or positive (n = 86) considering IFRS 1 mandates the cumulative effect of IFRS be charged to retained earnings. Further, the fact that an overwhelming majority of firms experiencing a downward adjustment to retained earnings upon the adoption of IFRS prompts further investigation to determine if these negative adjustments are from the changeover in GAAP systems or management discretionary choices.

Table III: Panel B disaggregates the adjustments into the frequency of negative adjustment, no adjustment or positive adjustment by specific standards. The remeasurement required by IFRS 2 Share-based payments resulted in the most negative adjustments (n = 118) reported by firms. Share-based payments represent a company acquisition or receipt of goods and services in exchange for an equity-based payment. Upon transitioning to IFRS, these share-based payments must be revalued to fair value and expensed, which may account for the frequency of negative adjustments to retained earnings. IAS 12 Income taxes resulted in the most frequent occurrences of positive adjustments (n = 100) experienced by firms. The negative adjustments to retained earnings triggered by the changeover to IFRS 2 Share-based payments creates a deferred tax asset that requires a positive offsetting adjustment to retained earnings. Another deferred tax implication resulting from share-based payments occurs when there is an increase in an equity option’s intrinsic value (the difference between the fair value and exercise price of the share). A deferred tax asset will therefore arise which represents the difference between a tax base of the employee’s services received to date and the carrying amount, which normally will effectively be zero. The recognition of a deferred tax asset will result in a positive adjustment to retained earnings. As presented in Panel B, the majority of firms experienced no adjustments related to the transition to IFRS. This could be explained by CA GAAP converging with IFRS prior to the mandated adoption date. At the firm level, financial reporting may have been transitioning to IFRS leading up to the mandated adoption date. Therefore, in the year of adoption, firms would not report cumulative effect adjustments resulting from the transition to IFRS.

Table III: Panel C presents a count of the disaggregation of adjustments by management discretionary choices or elections permitted under IFRS 1. Negative adjustments or management discretionary choices that decreased retained earnings were the most frequent adjustments. The optional exemption choices related to decommissioning liabilities (n = 81) and eliminating cumulative translation differences (n = 79) resulted in the most frequent negative adjustments to retained earnings. Firms electing to exercise the optional exemption related to decommissioning liabilities included in the cost of property, plant and equipment are required to measure the decommissioning liability (asset retirement obligation under CA GAAP) at the date of transition. Although entities have been accounting for asset retirement obligations under CA GAAP, the way in which the obligation is measured differs between CA GAAP and IFRS. Under CA GAAP, the obligation is based on legal obligations while IFRS also includes constructive obligations. Remeasurements increase a firm’s liabilities with an offsetting decrease to retained earnings. Although both CA GAAP and IFRS use the current rate method for translations of foreign operations, IFRS 1 permits an exemption to reset or “zero out” any cumulative translation balance in accumulated other comprehensive income with an offsetting adjustment to retained earnings. The effect of this optional exemption, when exercised, is only observable by decomposing the transitory adjustments to retained earnings.

Table IV: Panel A presents a firm count of optional exemption choices[12] elected by management. Optional exemption elections were obtained from the notes to the financial statements, specifically in the IFRS 1 note disclosure. As displayed in Table IV: Panel A, the majority of the firms elected the optional exemption for Business combinations (291) and Share-based payments (290). These exemptions are similar in that, if exercised, firms do not have to retrospectively restate financial statements. The next most frequent choice elected by management as permitted under IFRS 1 was related to Cumulative Translation Differences (n = 142). When this election is made, the cumulative translation balance for all foreign operations is reset to zero at the date of transition. “Zeroing-out” the cumulative foreign currency translation balance by transferring the amount from one component of equity – Accumulated OCI – to another component of equity – Retained Earnings – may have no bearing on future cash flows; however, if an entity is considering a future disposition of a foreign operations, the balance of the foreign-currency translation account could potentially offset any gain or create or potentially increase a loss. The election to eliminate that balance upon conversion avoids such consequences.

Another frequent exemption observed in the study relates to Fair Value or Revaluation as Deemed Cost (n = 117), which is a choice made by management that permits a one-time revaluation of property, plant and equipment on an item-by-item basis to fair value. The new deemed cost becomes the new cost basis for impairment testing, depreciation and business valuation. This election serves as a means for the firm to increase the carrying value of assets without any cost to the entity, increase borrowing capacity and change the entity’s future cash flows. In sample, another frequently exercised exemption relates to Borrowing costs (n = 111). This exemption permits entities to use the transitional provisions of IAS 23 Borrowing Cost which allows firms to choose the date either the later of January 1, 2009, the date of transition to IFRS or an earlier date to apply capitalization of borrowing costs relating to all qualifying assets. This may require a revaluation in the actual cost of property, plant and equipment as previously recorded under CA GAAP. Decommissioning Liabilities (n = 109) was also frequently exercised by firms in the study. This exemption permits firms to measure the decommissioning liability, also known as asset retirement obligations, at the date of transition rather than retrospectively recalculating the decommissioning liability and the related impact on the cost of the related asset and accumulated depreciation.

As presented in Table IV: Panel B, the mean and median number of optional exemption choices by firms were similar at 3.25 and 3, respectively. According to IFRS 1.40, optional exemption choices are a required disclosure in the first quarter of the year of adoption.

Table V presents the descriptive statistics of the dependent variable (Panel A), the aggregate independent variables (Panel A) and the disaggregated independent variables (Panels B through E). All aggregated and disaggregated adjustments were scaled by a weighted average of shares outstanding. As demonstrated by the means and medians, firm size and the IFRS adjustment effects vary substantially within the sample. Table V: Panel A displays descriptive data for the dependent variable, the aggregated independent variables and the control variables with the exception of industry. Based on the North American Industry Classification System, sample firms represented the following industries: extractive (56 per cent); construction, manufacturing and transportation (23 per cent); wholesale and retail trade (3 per cent); and finance, insurance, service and public administration (18 per cent)[13].

Table V: Panels B and C present descriptive statistics by the specific standard decomposed into adjustments that remeasured assets and liabilities with a corresponding charge to retained earnings (NCS) and adjustments that reclassified amounts among equity components (CS). Variability in size of the sample firms is apparent throughout the results. Panels D and E of Table V present descriptive statistics by specific management discretionary choices decomposed into adjustments that remeasured assets and liabilities with a corresponding charge to retained earnings (NCS) and adjustments that reclassified amounts among equity components (CS). With the exception of Employee Benefits (CS) (Panel E), all management discretionary choices elected, on average, result in a decrease to retained earnings.

4.2 Model results

Table VI presents the regression results from the eight models commencing with Panel A which displays a summary of the model results for all eight models at varying levels of disaggregation. The presentation of model results commences with the most aggregated measurement of adjustments resulting from the transition to IFRS – the adjustment to book value of equity (Table VI: Panel B – Model 1 with the model results of all levels of disaggregation presented in Table VI: Panels C – I. A summary of the panel presentations from Table VI and related models are as follows:

The remainder of this section presents model results at varying levels of decomposition and the related discussion of those results.

As presented in Table VI: Panel B, Model 1: Adjustment to Equity, which tests market reaction as a function of the adjustment to the book value of equity controlled for industry, size and earnings surprise, is significant (p = 0.001) with an adjusted R2 of 4.6 per cent. As presented in Panel B, the coefficient on Adjustment to Equity is negative and significant (B = −0.085, p = 0.022). This suggests that the market responds positively to IFRS remeasurements that decrease the book value of equity.

As presented in Table VI: Panel C, Model 2: Adjustment to Retained Earnings, which tests market reaction to the retrospective cumulative effect of IFRS controlled for industry, size and earnings surprise, is significant (p = 0.001) with an adjusted R2 of 4.5 per cent. Panel C presents the coefficient on Adjustment to Retained Earnings, which is also negative and significant (B = −0.053, p = 0.026). Although these results demonstrate a statistically significant incremental association between market reaction and the adjustments to equity and retained earnings, the results do not permit insights as to specific standards or choices related to the IFRS transition that are prompting a market reaction. These insights are provided by the model results presented in Panels D-I.

As presented in Table VI: Panel D, Model 3: Adjustment to Retained Earnings by Standard and Choice disaggregates the retrospective cumulative effect of IFRS into two magnitude measurements of standard differences between IFRS and CA GAAP and management discretionary choices as permitted by IFRS 1. Model 3 is significant (p < 0.001) with an adjusted R2 of 5.3 per cent. At this level of disaggregation, we learn from the results in Panel D that only the coefficient on Adjustment to Retained Earnings_Choice is significant and negative (B = −0.150, p = 0.008). This finding suggests that the market favors management discretionary choices that may reduce retained earnings and bypass future charges to income. This observation is similar to evidence provided by Cormier, Demaria, LaPointe-Antunes and Teller’s 2009 study First-Time Adoption of IFRS, Management Incentives and Value-Relevance: Some French Evidence. Although the coefficient on Adjustment to Retained Earnings_Standard does not demonstrate statistical significance, it is possible that this result could be explained by the offsetting of the specific underlying standards that may behave differently. In a 2007 study of required disclosures, Schipper illustrates the offsetting effects of SFAS No. 132 and SFAS No. 132R Employers Disclosures about Pensions and Other Postretirement Benefits and the necessity for disaggregation to assess earnings quality and prediction. More specifically, Schipper concluded that disaggregation in the research design was necessary to disentangle the offsetting effects of positive and negative adjustments. Similar to Schipper’s (2007) observations, we also observed financial adjustments related to varying standards with opposite effects on retained earnings. For example, the revaluation of an asset to fair value may increase the asset and retained earnings; however, asset impairments would decrease assets and retained earnings. The net increase and decrease adjustment to retained earnings would result in an offsetting effect that can only be revealed when the standards are disaggregated.

As presented in Table VI: Panel E, Model 4: Adjustment to Retained Earnings by Standard and Choice_CS and NCS decomposes the former two magnitude measurements into component switching and noncomponent switching. As previously defined, component switching represents adjustments that reclassify amounts among equity components. Noncomponent switching represents adjustments that remeasure assets and liabilities with a corresponding charge to retained earnings. Model 4 is significant (p = 0.001) with an adjusted R2 of 5.6 per cent. The incremental increase in adjusted R2 suggests that we learn more about market behavior and associations with the IFRS transition as we disaggregate the magnitude adjustment to equity. From Panel E, the significant coefficient on Adjustment to Retained Earnings by Choice_ NCS (B = −0.237, p = 0.002) provides further evidence that the market favors management strategic decisions using IFRS 1 to remeasure assets and liabilities with a corresponding decrease to retained earnings. According to Cormier et al. (2009), optional exemption choices with a negative impact on equity may lead to an increase in future net income. Their examination of 107 French firms, using univariate statistics, the authors identified optional exemption choices with a negative impact on equity. Observations related to these optional exemption choices were aggregated and tested for value relevance. Findings from the study indicated negative equity adjustments were positively associated with changes in share-price data. The statistical significance of the coefficient Adjustment to Retained Earnings by Choice_ NCS suggests that the market is aware of the optional exemption choices and responds favorably to the strategic use of IFRS 1 by management.

As presented in Table VI: Panel F, Model 5: Pure Asset and Liability Remeasurement_Standard_NCS decomposes the independent variable, Adjustment to Retained Earnings_Standard_NCS into magnitude measurements of the specific standards that represent remeasurement of assets and liabilities resulting from the transition to IFRS. Model 5 is significant (p < 0.001) with an adjusted R2 of 9.7 per cent. Panel F presents the significant coefficients on IAS 16 Property, Plant and Equipment (PP and E) (B = 0.420, p = 0.018), IAS 36 Impairment of Assets (B = −0.932, p < 0.001), IAS 38 Intangible Assets (B = 1.213, p = 0.049). From these findings we learn about the specific standards that alter investor behavior. At the aggregated level of Adjustment to Equity or Adjustment to Retained Earnings, we can only observe the market favorably responding to adjustments that decrease these equity components. However, upon disaggregation we observe that the market reaction to the underlying standards that comprise the aggregated adjustments depends upon the specific standard’s effect on the financial statements. For example, the coefficient on IAS 16 Property, Plant and Equipment is significant and positive, which indicates that the market favors remeasurements of assets to fair value. The coefficient on IAS 36 Impairment of Assets is significant and negative. This indicates that the market reacts positively to a write-down of assets that results in a corresponding adjustment to decrease retained earnings. Accordingly, the market responds favorably to the remeasurement of assets that enhance the quality of financial reporting. The perceived increase in the quality of financial reporting is consistent with prior research (Barth et al., 2008). Finally, the coefficient on IAS 38 Intangible Assets is significant and positive. Again this indicates the market favors remeasurement under the IFRS GAAP system. The offsetting of the significant positive and negative coefficients presented in Panel F may explain the lack of statistical significance for the coefficient on Adjustment to Retained Earnings_Standard as observed in Model 3, Table VI: Panel D. Overall, the results of applying Model 5 demonstrate that disaggregation provides a more comprehensive understanding of market reaction and associations with transitory effects of IFRS.

As presented in Table VI: Panel G, Model 6: Standards_CS decomposes the independent variable, Adjustment to Retained Earnings_Standard_CS into magnitude measurements of the specific standards that result in reclassifications among equity components. Model 6 is significant (p = 0.004) with an adjusted R2 of 4.6 per cent. In Panel G, the coefficient on IAS 27 Consolidated and Separate Financial Statements is significant and negative (B = −4.820, B = −0.129, p = 0.020). The positive market reaction associated with a decrease in retained earnings related to IAS 27 could be interpreted as the market again responding favorably to the perceived enhancement of quality in financial reporting. Specifically, investors may perceive the consolidation or separate financial statements as required under IAS 27 as an improvement in financial reporting from the former GAAP system.

As presented in Table VI: Panel H, Model 7 decomposes the independent variable Adjustment to Retained Earnings_Choice_NCS into the specific management discretionary choices that result in remeasurement of assets and liabilities (NCS). Model 7: Adjustment to Retained Earnings by Choice_NCS is significant (p < 0.001) with an adjusted R2 of 6.6 per cent. The coefficient on IFRS 2 Share-based payments is significant and positive (B = 1.808, p = 0.031). As defined in the Section 4. Findings – Descriptive Statistics, share-based payments represent liabilities for goods or services in exchange for equity instruments or cash. Upon adoption of IFRS, share-based payments that are not vested are to be valued at the fair value of each tranche of a share-based award rather than a single pool, as under CA GAAP (BDO Canada, 2010). This finding indicates that the market favors IFRS accounting treatment of share-based payments in that the application of the optional exemption election decreases firm obligations and increases equity. The coefficient on Employee Benefits is significant and negative (B = −0.297, p = 0.002). Upon transitioning to IFRS, management can elect to eliminate past service costs and any unamortized actuarial gains (losses) immediately with an offsetting charge to retained earnings. This strategic management decision negates future expenses, thereby increasing future net income.

As presented in Table VI: Panel I, Model 8: Adjustment to Retained Earnings by Choice_CS decomposes the independent variable Adjustment to Retained Earnings_Choice_CS into the specific management discretionary choices that result in reclassifications among equity components (CS). Model 8: Adjustment to Retained Earnings by Choice_CS is significant (p = 0.006) with an adjusted R2 of 3.9 per cent. As presented in Panel I: Model 8, we observe the coefficient on IFRS 2 Share-based payments as significant and negative (B = −1.920, p = 0.031). This indicates that the market favors IFRS accounting treatment of share-based payments which decreases retained earnings while increasing contributed capital. Of course, the offsetting effects of this entry (increase to contributed capital and decrease to retained earnings) has no effect on total equity.

4.3 Testing differences in R2

In the preceding presentation of Models 1-8, summarized in Table VI: Panel A, the disaggregated models demonstrated incremental increases in Adjusted R2 and R2. Referencing Table VI: Panel A, using the findings from Models 2 and 5, as the models are disaggregated, the power of the test is diminished because of the increase in degrees of freedom (df) (Model 2: df = 4; Model 5: df = 21); yet, the model exhibits a 5.2 per cent increase in Adjusted R2 and a 10 per cent increase in R2 (Model2 R2 = 0.057 to Model5 R2 = 0.157). To test the effect size of the incremental increase in R2 from Model5 and Model2, a partial (alternative) F test (Cohen et al., 2002) is used. The change in R2 is 0.10 (Model5 R2 0.157 – Model2 R2 0.057) and is significant p < 0.001 F (17, 317) = 34.994 with a medium effect size = 0.119. The results from these findings suggest that disaggregated measures provide an enhanced understanding of market reaction and explanatory power related to the standards and choices tested.

5. Conclusion: Contributions, limitations and future research

Studies which examine the implementation and application of accounting standards at the time of transition are particularly important. Research has examined how the recasting of financial reports following IFRS implementation sets the stage for future financial reporting (Christensen et al., 2009). Similarly, the implementation provides valuable insight into management’s choice of accounting policies, both before and after IFRS adoption (Cormier et al., 2009). The present study decomposed equity into magnitude measurements of pronouncement differences and management discretionary choices. The transitory effects of IFRS were tested for value relevance at every level of decomposition to discern if we learn more about the market’s reaction to IFRS that would otherwise be concealed at the aggregate level. Finally, incremental increases in the R2 of select regression models were tested for statistical significance to determine if the disaggregation of the adjustment to equity provides enhanced explanatory power.

This study provides five main contributions to IFRS research. First, evidence from this study demonstrates the value of disaggregated measures to obtain a more comprehensive understanding of market reaction and associations with the transitory effects of IFRS. All eight models demonstrated statistical significance in explaining the variation in market reaction. This finding advances IFRS research and responds to the call for models with decomposed variables of the book value of equity (Brüggemann et al., 2013). The results from this study also answer the call for research that examines adjustments to the book value of equity at the time of transition to IFRS (Whittington, 2008).

Second, the present study provides evidence of the market’s reaction to pronouncement differences and management’s discretionary choices, which extends research conducted by Christensen et al. (2009), Horton and Serafeim (2010) and Cormier et al. (2009), as these studies limited their research design to examining standard-to-standard differences or choices made under IFRS 1. As evidenced by the findings of the present study, these choices are valued by shareholders as they represent the adoption and implementation of accounting policies that will be used to prepare future IFRS financial reports.

Third, this study contributes to the literature on both mandatory accounting changes and IFRS by providing evidence that the implementation of a GAAP system is not a monolithic event. A GAAP system change whether it be a single standard or adoption of a new reporting system (such as IFRS) involves a remeasurement of the financial statements that is determined by the new standard(s) and strategic management decisions. Our findings provide evidence that these variables independently and in combination trigger a market reaction.

Fourth, this study contributes to literature on value relevance by identifying accounting adjustments, specific standards and management discretionary choices that alter market behavior. Model results suggest that we gain a more comprehensive understanding of the specific standards that alter market behavior and how the market responds to both positive and negative cumulative adjustments to retained earnings. For example, evidence from the study demonstrates that IFRS pronouncement differences that remeasure assets either resulting in positive (IAS 16) or negative adjustments (IAS 38) are favored by the market. This finding suggests a perceived enhancement in financial reporting under IFRS and is consistent with prior research (Barth et al., 2008). This study provides evidence that decomposing equity components and further disaggregating adjustments into magnitude measurements of the specific standards and management discretionary choices allows us to explain the positive market reaction to negative adjustments to retained earnings. The positive reaction to negative equity adjustments by the market suggests that the market perceives IFRS as an enhanced financial reporting mechanism. Findings from the study also suggest that the market favors management discretionary choices that decrease retained earnings and increase future net income (Cormier et al., 2009). For example, results from this study demonstrate a positive market reaction associated with negative adjustments to equity related to IFRS 1 Employee Benefits. Firms in the study elected to charge accumulated actuarial losses to retained earnings. By exercising this exemption, the firms avoid future decreases in net income by eliminating the need to amortize unrecognized losses.

Fifth, this study provides evidence of a GAAP system changeover to IFRS in North America from a country context most resembling the USA. Examining the transitory effects of IFRS in the Canadian context avoids the confounding effects of examining IFRS adoption concurrently with other regulatory changes (Pope and McLeay, 2011).

This study also has five main implications for regulators, standard-setters and practitioners. First, this study provides evidence that the way in which we examine the IFRS transition has significant bearing on our ability to comprehensively understand systematic changes to financial reporting. Further, our results provide evidence that the decomposition of equity significantly enhances our ability to assess IFRS as a reporting vehicle. Second, as previously mentioned, this study provides evidence of the IFRS transition in a country context which parallels the USA. Evidence from the study may provide the US regulators and practitioners valuable insight as to the transitory effects of IFRS. Third, as stated in the Conceptual Framework for Financial Reporting [IASB; Financial Accounting Standards Board (FASB), 2010] “The objective of general purpose financial reporting is to provide financial information about the reporting entity that is useful to existing and potential investors.” Results from this study provide evidence of specific accounting standards (IFRS 6, IAS 16, IAS 21, IAS 27, IAS 36, IAS 38) and management discretionary choices (IFRS 2, IAS 19) that inform IASB and FASB as to accounting information which is relevant to investor stakeholders. Fourth, this study provides evidence of the magnitude and frequency of exemption choices which compromise the IFRS reporting system. These findings confirm speculative concerns expressed by the ICAEW in its 2007 report regarding the implementation of IFRS in the EU. Finally, evidence from this study extends the research conducted by Schipper (2007). The positive and negative adjustments and coefficients presented in the descriptive statistics and model results, respectively, exhibit the offsetting effects of standard implementation on retained earnings.

This study provides numerous opportunities for future research. An exploration of the correlation of changes in share-price data with disaggregated measures in varying country contexts of firms adopting IFRS or other standard implementations could be studied. Pair matching similar country contexts such as market-oriented economies to compare accounting information which influences investors would be beneficial to determine if investor reaction to the information is unique to a particular country context or more universal. Researchers could use behavioral research to test the importance of certain types of information disclosure and disaggregation to specific stakeholders in the context of country culture. Multiple case study research using a mixed method approach could be used to examine the IFRS transition of specific subset of companies to provide contextual insight. The effect of management discretionary choices elected during a GAAP system changeover could be examined in the context of a firm’s future cash flows. Associations of pronouncement differences and management discretionary choices with fluctuations in share price data could be examined by market exchange to stratify large and small capital market reaction. As demonstrated by the present study, the recasting of assets and liabilities to conform to IFRS results in a deferred tax effect. The tax effect triggered by the transition to IFRS could be explored within and among tax jurisdictions. Finally, because the transition to IFRS is a significant disclosure enhancing event, the “readability” of the disclosures related to the reconciling items that comprise the magnitude adjustments to retained earnings at the time of transition to IFRS could be examined.

Our study is not without limitations, given the geographic restrictions of the study within Canada, the results may not be generalizable to other country contexts. Secondarily, the timing of the study may again cause the study not to be generalizable over various time periods. Third, owing to the concentration of extractive industries within Canada, a different composition of industries may present alternative results. Finally, as has been discussed in the methodology, value-relevance research designs using abnormal returns of stock prices may suffer from correlated omitted variables because stock price fluctuations incorporate varying information across firms (Soderstrom and Sun, 2007; Holthausen and Watts, 2001), suggesting that if omitted values are correlated with included variables, the parameters of the model may be incorrect and the coefficients on the variables may be biased.

*Noncomponent switching represents remeasurements of assets and liabilities with a corresponding adjustment to retained earnings. **Component switching represents material reclassifications among equity components: contributed capital, retained earnings and accumulated other comprehensive income which are primarily derived from discretionary choices made by management as permitted under IFRS 1. These adjustments are concealed at the aggregated level of book value of equity because the adjustments net to zero at stockholders’ equity. In the final disaggregation, the standard-to-standard differences – noncomponent switching and component switching as well as management discretionary choices – noncomponent switching and component switching are decomposed into magnitude measurements of specific pronouncements and choices listed above.

Figures

The disaggregation of the IFRS cumulative effect adjustment to retained earnings

Figure 1.

The disaggregation of the IFRS cumulative effect adjustment to retained earnings

The disaggregation of the IFRS cumulative effect adjustment to retained earnings

Figure A1.

The disaggregation of the IFRS cumulative effect adjustment to retained earnings

The disaggregation of the IFRS cumulative effect adjustment to retained earnings

Figure A2.

The disaggregation of the IFRS cumulative effect adjustment to retained earnings

Breakdown of sample

Observations
Calendar year 515
Excluded owing to:
Not a calendar year −13
Defunct −3
1st year operations −10
Missing data −36
US GAAP −36
Did not adopt −13
Real estate trusts −8
396
Inadequate share price data −79
Final sample 317

Variables of interest

Dependent variable Defined
SCAR Standardized cumulative abnormal return
Independent variables Defined
Adjustment to equity Adjustment to equity at the transition date as reported
Adjustment to retained earnings Adjustment to retained earnings as reported
Adjustment to retained earnings_standard Adjustment to retained earnings related to standard-to-standard differences
Adjustment to retained earnings_choice Adjustment to retained earnings related to management discretionary choices
Adjustment to retained earnings_standard_NCS Adjustment to retained earnings related to standard-to-standard differences – noncomponent switching
Adjustment to retained earnings_standard_CS Adjustment to retained earnings related to standard-to-standard differences – component switching
Adjustment to retained earnings_choice_NCS Adjustment to retained earnings related to management discretionary choices – noncomponent switching
Adjustment to retained earnings_choice_CS Adjustment to retained earnings related to management discretionary choices – component switching
IFRS2 Share-based payments
IFRS6 Exploration for and evaluation of mineral resources
IAS11 Construction contracts
IAS12 Income taxes
IAS16 Property, plant and equipment
IAS17 Leases
IAS18 Revenue recognition
IAS19 Employee benefits
IAS21 The effects of changes in foreign exchange rates
IAS23 Borrowing costs
IAS27 Consolidated and separate financial statements
IAS28 Investments in associates
IAS36 Impairment of assets
IAS37 Provisions, contingent liabilities and contingent assets
IAS38 Intangible assets
IAS39 Financial instruments: Recognition and measurement
IAS40 Investment property
IAS41 Agriculture
FlowThruShs EIC 146 flow through shares
FVPPE IFRS 1: Fair value or revaluation as deemed cost
Decomm IFRS 1: Decommissioning liabilities
BC IFRS 1: Business combinations
CumTrans IFRS 1: Cumulative translation differences
EB IFRS 1: Employee benefits
Industry Industry
Size Firm size by total assets as measured under IFRS
Surprise First quarter earnings surprise
Note:

All adjustments are at the transition date for each individual firm. All independent variables are scaled by weighted average shares outstanding

Frequency of signing of adjustments

Negative (%) No adjustment (%) Positive (%)
Panel A: Frequency of signing of adjustments to equity components
Adjustments
 Adjustment to equity 225 57 120 30 51 13
 Adjustment to retained earnings 235 59 75 19 86 22
 Adjustment to share capital 42 11 295 74 59 15
 Adjustment to accumulated other comprehensive income 45 11 262 66 89 22
Panel B: By adjustment to retained earnings by standard
Standard
 IFRS 2 share-based payments 118 30 204 52 74 19
 IAS 2 inventory 0 0 395 100 1 0
 IFRS 6 exploration and evaluation of mineral resources 40 10 348 88 8 2
 Flow through shares 49 12 334 84 13 3
 IAS 12 income taxes 64 16 232 59 100 25
 IAS 16 property, plant and equipment 49 12 321 81 26 7
 IAS 17 leases 13 3 368 93 15 4
 IAS 18 revenue recognition 13 3 373 94 10 3
 IAS 19 employee benefits 22 6 365 92 9 2
 IAS 21 foreign exchange rates 23 6 358 90 15 4
 IAS 23 borrowing costs 19 5 370 93 7 2
 IAS 27 consolidated and separate financial statements 5 1 387 98 4 1
 IAS 28 investment in associates 6 2 378 95 12 3
 IAS 36 impairment of assets 39 10 345 87 12 3
 IAS 37 provisions, contingent liabilities and contingent assets 47 12 339 86 10 3
 IAS 38 intangible assets 12 3 380 96 4 1
 IAS 39 financial instruments 44 11 323 82 29 7
 IAS 40 investment property 0 0 388 98 8 2
 IAS 41 agriculture 1 0 395 100 0 0
Panel C: By adjustment to retained earnings by management discretionary choice
Choice permitted under IFRS 1
 Fair value or revaluation as deemed cost 18 5 364 92 14 4
 Decommissioning liabilities included in cost of PP and E 81 20 299 76 16 4
 Cumulative translation differences 79 20 284 72 33 8
 Business combinations 8 2 382 96 6 2
 Employee benefits 44 11 342 86 10 3
Note:

n = 396

Optional exemption choices

Optional exemptions Observations
Panel A: Optional exemptions by firm count
Business combinations 291
Share-based payment transactions 290
Cumulative translation differences 142
Fair value or revaluation as deemed cost 117
Borrowing costs 111
Decommissioning liabilities 109
Employee benefits 70
Leases 58
Deemed cost of oil and gas assets 52
Compound financial instruments 21
Designation of previously recognized financial instruments 13
Assets and liabilities of subsidiaries, jointly controlled entities and associates 5
Deemed cost for operations subject to rate regulation 4
Fair value measurement of financial assets or liabilities at initial recognition 4
Insurance contracts 3
Investment in subsidiaries, jointly controlled entities and associates 2
Transfers of assets from customers 2
Service concession arrangements 1
Total number of optional exemption choices made by sample firms 1,295
Panel B: Descriptive statistics of optional exemptions
Mean number of optional exemption choices by firm 3.25
Median number of optional exemption choices by firm 3
Maximum 11
Minimum 0
Standard deviation 1.94

Descriptive statistics

Variables Observations Mean Median Maximum Minimum SD
Panel A: Dependent variable and aggregate independent variables of interest
Standardized cumulative abnormal return 317 −0.026 −0.071 2.842 −2.265 0.808
Adjusted to equity 396 −0.358 −0.003 3.320 −10.485 1.236
Adjustment to retained earnings as reported 396 −0.313 −0.004 41.154 −8.775 2.457
Adjustment to retained earnings_standard 396 −0.078 0.000 35.048 −8.210 2.004
Adjustment to retained earnings_standard_NCS 396 −0.164 0.000 3.499 −8.210 0.947
Adjustment to retained earnings_standard_CS 396 0.086 0.000 38.404 −1.540 1.932
Adjustment to retained earnings_choice 396 −0.236 0.000 6.107 −7.623 0.942
Adjustment to retained earnings_choice_NCS 396 −0.155 0.000 1.321 −7.628 0.628
Adjustment to retained earnings_choice_CS 396 −0.080 0.000 7.716 −5.085 0.661
Earnings surprise 396 0.030 0.000 6.652 −1.513 0.425
Total assets as measured under IFRS 396 5,279,117,248 36,751,320 406,000,000,000 1,386 30,639,942,254
Variables Mean Median Maximum Minimum SD
Panel B: Standards_noncomponent switching (NCS) n = 396
IAS 2 inventory 0.000 0.000 0.073 0.000 0.004
IFRS 6 exploration and evaluation of mineral resources −0.014 0.000 0.418 −2.200 0.133
IAS 12 income taxes 0.026 0.000 2.694 −2.010 0.283
IAS 16 property, plant and equipment −0.008 0.000 2.002 −3.438 0.253
IAS 17 leases 0.003 0.000 0.586 −0.296 0.048
IAS 18 revenue recognition −0.008 0.000 2.565 −3.847 0.242
IAS 19 employee benefits −0.030 0.000 0.343 −3.366 0.270
IAS 21 foreign exchange rates −0.001 0.000 0.124 −0.273 0.022
IAS 23 borrowing costs −0.016 0.000 0.111 −1.603 0.124
IAS 27 consolidated and separate financial statements 0.006 0.000 2.931 −0.585 0.152
IAS 28 investment in associates 0.002 0.000 0.398 −0.419 0.038
IAS 36 impairment of assets −0.060 0.000 2.588 −8.122 0.509
IAS 37 provisions, contingent liabilities and contingent assets −0.017 0.000 0.584 −1.414 0.120
IAS 38 intangible assets 0.000 0.000 0.273 −0.190 0.018
IAS 39 financial instruments −0.061 0.000 1.473 −6.447 0.492
IAS 40 investment property 0.015 0.000 3.781 0.000 0.199
IAS 41 agriculture 0.000 0.000 0.000 −0.067 0.003
flow through shares −0.001 0.000 0.000 −0.073 0.006
Panel C: Standards_Component Switching (CS) n = 396
IAS 19 employee benefits 0.000 0.000 0.000 −0.005 0.000
IAS 21 foreign exchange rates −0.001 0.000 0.212 −0.288 0.019
IAS 23 borrowing costs 0.000 0.000 0.000 0.000 0.000
IAS 27 consolidated and separate financial statements −0.004 0.000 0.040 −1.540 0.077
IAS 28 investment in associates 0.000 0.000 0.021 0.000 0.001
IAS 39 financial instruments 0.094 0.000 38.404 −0.511 1.930
IAS 40 investment property 0.000 0.000 0.000 0.000 0.000
Flow through shares −0.003 0.000 0.321 −0.345 0.027
Panel D: IFRS 1 Choices_Noncomponent Switching (NCS) n = 396
Fair value or revaluation as deemed cost −0.018 0.000 1.321 −1.872 0.187
Decommissioning liabilities included in cost of PP and E −0.036 0.000 0.297 −2.756 0.188
Business combinations −0.017 0.000 0.478 −5.533 0.288
Cumulative translation differences −0.005 0.000 0.029 −1.143 0.061
Employee benefits −0.071 0.000 0.496 −7.641 0.454
IFRS 2 share-based payments −0.009 0.000 0.192 −0.639 0.055
Panel E: IFRS 1 Choices_Component Switching (CS) n = 396
Cumulative translation differences −0.084 0.000 7.716 −5.085 0.659
Employee benefits 0.000 0.000 0.131 −0.039 0.007
IFRS 2 share-based payments −0.003 0.000 0.321 −0.345 0.027
Notes:

Where Standard represents the disaggregation of the adjustment to retained earnings into a magnitude measurement by standard. Where Choice represents the disaggregation of the adjustment to retained earnings into a magnitude measurement by management discretionary choice. Where NCS represents noncomponent switching or adjustments that remeasured assets and liabilities with a corresponding charge to retained earnings. Where CS represents equity component switching or adjustments which reclassified amounts among equity components. Where NCS represents noncomponent switching or adjustments that remeasured assets and liabilities with a corresponding charge to retained earnings. Where CS represents equity component switching or adjustments which reclassified amounts among equity components. Where NCS represents noncomponent switching or adjustments that remeasured assets and liabilities with a corresponding charge to retained earnings. Where CS represents equity component switching or adjustments which reclassified amounts among equity components.

Summary of regression results

Model n = 317 df F R2 Adj R2
Panel A:Summary of model results
1 Adjustment to equity 4 4.838 0.058 0.046***
2 Adjustment to retained earnings 4 4.746 0.057 0.045***
3 Adjustment to retained earnings by standard and choice 5 4.560 0.068 0.053***
4 Adjustment to retained earnings by standard and choice_CS and NCS 7 3.681 0.077 0.056***
5 Pure asset and liability remeasurement_standard_NCS 21 2.623 0.157 0.097***
6 Standards_CS 8 2.888 0.070 0.046***
7 Choice_CS 9 3.489 0.093 0.066***
8 Choice_NCS 6 3.121 0.057 0.039***
n = 317 Variables
Panel B: Adjustment to equity
Model 1: SCAR = α + β1Adjustment to Equity + β2Industry + β3Size + β4Surprise + ∈
Adjustment to equity −0.085** (−2.310)
Industry −0.184** (−1.973)
Size 0.002* (1.834)
Surprise 0.081 (0.847)
Adjusted R2 0.046
Panel C: Adjustment to retained earnings
Model 2: SCAR = α + β1 Adjustment to retained earnings + β2Industry + β3Size + β4Surprise + ∈
Adjustment to retained earnings −0.053** (−2.232)
Industry −0.203** (−2.202)
Size 0.002 (1.491)
Surprise 0.322*** (2.410)
Adjusted R2 0.045
n = 317 Variables
Panel D: Adjustment to retained earnings disaggregated by standard and choice
Model 3: SCAR = α + β1Adjustment to retained earnings_standard + β2Adjustment to retained earnings_choice + β3Industry + β4Size + β5Surprise + ∈
Adjustment to retained earnings_standard −0.020 (−0.677)
Adjustment to retained earnings_choice −0.150*** (−2.683)
Industry −0.184** (−1.997)
Size 0.001 (0.694)
Surprise 0.269** (1.981)
Adjusted R2 0.053
Panel E: Adjustment to retained earnings disaggregated by standard/choice and NCS/CS
Model 4: SCAR = α + β1 Adjustment to retained earnings_standard_NCS + β2Adjustment to retained earnings_standard_CS + β3 Adjustment to retained earnings_choice_NCS + β4Adjustment to retained earnings_choice_CS + β5Industry + β6Size + β7 Surprise + ∈
Adjustment to retained earnings_standard_NCS −0.062 (−1.301)
Adjustment to retained earnings_standard_CS −0.027 (−0.671)
Adjustment to retained earnings_choice_NCS −0.237*** (−3.063)
Adjustment to retained earnings_choice_CS −0.048 (−0.463)
Industry −0.174* (−1.862)
Size 0.002 (1.061)
Surprise 0.189 (1.234)
Adjusted R2 0.056
n = 317 Variables
Panel F: Pure asset and liability remeasurement by standard_NCS
Model 5: SCAR = α + β1IAS2 + β2IFRS6 + β3IAS12 + β4IAS16 + β5IAS17 + β6IAS18 + β7IAS19 + β8IAS21 + β9IAS23 + β10IAS27 + β11IAS28 + β12IAS36 + β13IAS37 + β14IAS38 + β15IAS39 + β16IAS40 + β17IAS41 + β18FlowThruShs + β19Industry + β20Size + β21Surprise + ∈
IAS 2 inventory −2.602 (−0.247)
IFRS 6 exploration and evaluation of mineral resources 0.542* (1.725)
IAS 12 Income taxes 0.275* (1.677)
IAS 16 Property, plant and equipment 0.420*** (2.372)
IAS 17 Leases 0.753 (0.721)
IAS 18 Revenue recognition −0.023 (−0.127)
IAS 19 Employee benefits −0.100 (−1.202)
IAS 21 Foreign exchange rates −0.172 (−0.412)
IAS 23 Borrowing costs 0.884 (0.308)
IAS 27 Consolidated and separate financial statements −5.786 (−0.495)
IAS 28 Investment in associates 8.796 (1.133)
IAS 36 Impairment of assets −0.932*** (−3.794)
IAS 37 Provisions, contingent liabilities and contingent assets 2.036 (1.104)
IAS 38 Intangible assets 1.213** (1.978)
IAS 39 Financial instruments 0.390 (1.495)
IAS 40 Investment property −1.716 (−1.569)
IAS 41 Agriculture 0.070 (0.442)
Flow through shares −0.181 (−0.908)
Industry −0.145 (−1.559)
Size 0.004*** (2.754)
Surprise 0.062 (0.631)
Adjusted R2 0.097
Variables
Panel G: Adjustment to retained earnings by standard_CS
Model 6: SCAR = α + β1IAS21 + β2IAS27 + β3IAS28 + β4IAS39 + β5FlowThruShs + β6Industry + β7Size + β8Surprise + ∈
IAS 21 Foreign exchange rates 2.737* (1.698)
IAS 27 Consolidated and separate financial statements −4.820** (−2.331)
IAS 28 Investment in associates −0.908 (−0.046)
IAS 39 Financial instruments −13.434 (−0.351)
Flow through shares −0.040 (−1.150)
Industry −0.195** (−2.093)
Size 0.003** (2.139)
Surprise 0.282* (1.766)
Adjusted R2 0.046
Panel H: Adjustment to retained earnings by Choice_NCS
Model 7: SCAR = α + β1FVPPE + β2Decomm + β3BC + β4IFRS2 + β5CumTrans + β6EB + β7Industry + β8Size + β9Surprise + ∈
Fair value or revaluation as deemed cost −0.223 (−0.978)
Decommissioning liabilities included in cost of PP and E −0.285 (−1.292)
Business combinations 0.034 (0.032)
IFRS 2 share-based payments 1.808** (2.166)
Cumulative translation differences −2.312 (−1.217)
Employee benefits −0.297*** (−3.202)
Industry −0.187** (−2.013)
Size 0.003** (1.945)
Surprise 0.059 (0.621)
Adjusted R2 0.066
Panel I: Adjustment to retained earnings by choice_CS
Model 8: SCAR = α + β1IFRS2 + β2CumTrans + β3EB + β4Industry + β5Size + β6Surprise + ∈
IFRS 2 share-based payments −1.920* (−1.707)
Cumulative translation differences −0.089 (−1.013)
Employee benefits 4.696 (0.802)
Industry −0.207** (−2.233)
Size 0.002 (1.171)
Surprise 0.176 (1.509)
Adjusted R2 0.039
Notes:

Where Standards represent the disaggregation of the adjustment to retained earnings into a magnitude measurement by standard. Where Choice represents the disaggregation of the adjustment to retained earnings into a magnitude measurement by management discretionary choice. Where NCS represents noncomponent switching or adjustments that remeasured assets and liabilities with a corresponding charge to retained earnings. Where CS represents equity component switching or adjustments which reclassified amounts among equity components. All variables are share weighted, t-statistics in parentheses are based on robust standard errors.

***

,

**

,

*

significance denoted at the 1, 5 and 10% levels, respectively

Notes

1.

The construct of market reaction is examined through tests of value relevance. Value relevance tests for a statistical association between fluctuations in stock prices and accounting information. Significant statistical associations are interpreted as accounting information that alters investor behavior or is valued by investors (shareholders). See Section 2. Context and Literature Review, subsection Market Reaction – Studies of Value Relevance for further discussion.

2.

The change in the book value of equity resulting from the application of IFRS is a synthesis (Cazavan-Jeny and Jeanjean, 2009) of management discretionary choices, material reclassifications and GAAP-to-GAAP differences.

3.
4.

Prior to 2005, the development of Canadian accounting standards was highly influenced by the United States (Colapinto 2005; Milburn and Skinner 2001). The Canadian Accounting Standards Board (AcSB) initiative was to harmonize Canadian standards with US GAAP (Colapinto 2005) prior to the decision to adopt IFRS.

5.

The list of IFRS 1 mandatory exceptions and optional exemptions are provided in Appendix 1.

6.

Refer to Appendix 2 for an example disclosure.

7.

8.

E(Rit) =   ∝ +β1E(Rmt) where the expected risk adjusted return for every company in period t, is the Rm, expected market return for every company in period t. The alpha and beta of each firm are prepared using a time series regression, which collects historical data over a trading year which represents the current company structure to project future performance.

9.

SCARi = CARi/σ^CARi2 where SCARi is distributed as student’s-t, with (T1-T0-2) degrees of freedom and can be used to test the null of zero CAR for any return of i (Cuthbertson et al., 2010).

10.

Pure is defined as a remeasurement of assets and liabilities resulting from pronouncement differences between CA GAAP and IFRS with a corresponding adjustment to retained earnings as mandated by IFRS 1.

11.

Effect size f2=R2(Model5)R2(Model2)(1R2(Model5))

Effect size of 0.01 is small, 0.09 is medium and 0.25 is large. (Cohen, 1988).

F = f2 (N − k(Model5) − 1).

12.

Mandatory exceptions and optional exemption choices are presented in Appendix 1.

13.

Untabulated.

14.

As previously discussed in the section: Research design, disaggregation by standard represents a magnitude measurement by specific IFRS standard. Disaggregation by choice represents a magnitude measurement by a management discretionary choice. Noncomponent switching represents adjustments that remeasured assets and liabilities with a corresponding charge to retained earnings. Component switching represents reclassifying adjustments to equity accounts.

Appendix 1. Mandatory exceptions and optional exemptions financial reporting in Canada under IFRS

Figure A1

Appendix 2. Example of IFRS 1 disclosure

Figure A2

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Further reading

Ball, R., Robin, A. and Wu, J.S. (2003), “Incentives versus standards: properties of accounting income in four East Asian countries”, Journal of Accounting and Economics, Vol. 36 No. 1, pp. 235-270.

International Accounting Standards Board (2001a), IAS 38 Intangible Assets, IASB, London.

International Accounting Standards Board (2001b), IAS 12 Income Taxes, IASB, London.

International Accounting Standards Board (2001c), IAS 37 Provisions, Contingent Liabilities, and Contingent Assets, IASB, London.

International Accounting Standards Board (2002), IAS 19 Employee Benefits, IASB, London.

International Accounting Standards Board (2003a), IAS 39 Financial Instruments: Recognition and Measurement, IASB, London.

International Accounting Standards Board (2003b), IAS 16 Property, Plant and Equipment, IASB, London.

International Accounting Standards Board (2003c), IAS 1 Presentation of Financial Statements, IASB, London.

International Accounting Standards Board (2003d), IAS 2 Inventories, IASB, London.

International Accounting Standards Board (2003e), IAS 17 Leases, IASB, London.

International Accounting Standards Board (2004a), IFRS 1 First-time Adoption of International Financial Reporting Standards, IASB, London.

International Accounting Standards Board (2004b), IFRS 2 Share-based Payment, IASB, London.

International Accounting Standards Board (2004c), IFRS 3 Business Combinations, IASB, London.

Liu, C. (2011), “IFRS and US-GAAP comparability before release no. 33-8879: some evidence from US-listed Chinese companies”, International Journal of Accounting & Information Management, Vol. 19 No. 1, pp. 24-33.

Supplementary materials

IJAIM_26_1.pdf (20 MB)

Acknowledgements

This research is derived from Theresa DiPonio Hilliard’s dissertation at Georgia State University, USA. The authors are grateful to Erv Black, Carol Ann Frost, Laura Swenson, Dick Riley, Joe Callaghan and participants and an anonymous reviewer at the 2015 AAA International Accounting Section Midyear Conference for their valuable comments and suggestions.

Corresponding author

Theresa Hilliard can be contacted at: theresahilliard@outlook.com