the mandatory adoption of international financial reporting standards and financial statement ...

224 Pages·2017·3.43 MB·English

THE MANDATORY ADOPTION OF

INTERNATIONAL FINANCIAL REPORTING STANDARDS

AND FINANCIAL STATEMENT COMPARABILITY:

SOUTH AFRICAN EVIDENCE

by

Christelle Smith

Thesis submitted in fulfilment of the requirements for the degree

PhD Accounting Sciences

in the

Department of Accounting

in the

FACULTY OF ECONOMIC AND MANAGEMENT SCIENCES

at the

UNI VERSITY OF PRETORIA

Supervisor: Prof. E.R. Venter

Co-supervisor: Prof. M. Stiglingh

March 2017

© University of Pretoria
DECLARATION

I, Christelle Smith, declare the following:

 I understand what plagiarism entails and am aware of the University’s policy in
this regard.

 I declare that this assignment is my own, original work. Where someone else’s

work was used (whether from a printed source, the Internet or any other source)

due acknowledgement was given and reference was made according to

departmental requirements.

 I did not copy and paste any information directly from an electronic source (e.g.,

a web page, electronic journal article or CD ROM) into this document.

 I did not make use of another student’s previous work and submit it as my own.

 I did not allow and will not allow anyone to copy my work with the intention of

presenting it as his/her own work.

 The language in this thesis was edited by Dr Idette Noomé (DLitt English).

Christelle Smith 31 March 2017

Signature Date

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ACKNOWLEDGEMENTS

I wish to thank a number of people and institutions who contributed to the completion
of my study:

 Prof. Elmar Venter, my supervisor – for your continuous support and guidance

throughout the process. Your prompt and invaluable feedback every time

made the completion of my study so much easier. Thank you for sharing your

passion for research and accounting. You truly are a role-model to young

academics.

 Prof. Madeleine Stiglingh, my co-supervisor – for making time in your busy

schedule to provide your input. Thank you for your guidance, advice and

encouragement throughout my study. It was a privilege to have worked with

you on this.

 The University of South Africa – for providing me with funding to pursue the
completion of my doctoral study on a full time basis.
 Prof. Mary Barth and Prof. Steven Cahan – for making time to discuss my
study during their visits to South Africa.
 My colleagues in the Department of Financial Governance – for your interest
and support throughout the process.

 Dr Idette Noomé – for language editing the final document.

 My parents, André and Elwee Meyer – for your love and support throughout

my life and for giving me the opportunities in life which enabled me to be

where I am today.

 My children, Louise and Jandré – for being there with your smiles and hugs

and taking my mind off my study when I most needed it.

 My husband, André – for always believing in me and supporting me every step

of the way. I would not have been able to complete this without your love and

encouragement.

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ABSTRACT

THE MANDATORY ADOPTION OF

INTERNATIONAL FINANCIAL REPORTING STANDARDS AND

FINANCIAL STATEMENT COMPARABILITY:

SOUTH AFRICAN EVIDENCE

by

Christelle Smith

SUPERVISOR: Prof. E.R. Venter

CO-SUPERVISOR: Prof. M. Stiglingh

DEPARTMENT: Department of Accounting

DEGREE: PhD Accounting Sciences

In this study, I examine whether the mandatory adoption of International Financial

Reporting Standards (IFRS) in a country where local Generally Accepted Accounting

Principles (GAAP) is of similar quality to IFRS is associated with changes in the

comparability of financial statements. I also investigate the sources of any changes in

the comparability of financial statements.

I use data from South Africa, where, word for word, prior to the mandatory adoption

of IFRS, local GAAP was the same as IFRS, and enforcement remained unchanged.
I use two different measures of comparability, one based on accounting data
(accruals-cash flow measure) and the other based on both accounting data and
market data (earnings-return measure). I compare South African firms with two
different groups, namely other mandatory IFRS adopters and non-adopters.

My data show evidence of an increase in the comparability of the financial

statements of South African firms with those of both adopters (both measures) and

non-adopters (the earnings-return measure) following the mandatory adoption of

IFRS. In additional analysis, I found a global increase in the comparability of firms’

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financial statements that is consistent with market changes unrelated to IFRS
adoption as one of the sources of the increase in comparability. Moreover, an
incremental increase in the comparability of the financial statements of South African

firms after the mandatory adoption of IFRS, relative to the increase in the

comparability of the financial statements of non-adopting firms, is consistent with

benefits from using the IFRS “label” and with the expanded IFRS network as sources

of increased comparability.

Key words: IFRS; comparability; “label” benefits; network benefits

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CONTENTS

Declaration ............................................................................................................... i
Acknowledgements .................................................................................................. ii
Abstract ................................................................................................................... iii
List of acronyms and abbreviations .......................................................................... xii

CHAPTER 1: INTRODUCTION ................................................................................. 1

1.1 Background ................................................................................................... 1

1.2 The study problem ......................................................................................... 4

1.3 The South African case ................................................................................. 7
1.4 Main hypotheses ........................................................................................... 9

1.5 Research design.......................................................................................... 10

1.6 Summary of findings .................................................................................... 12

1.7 Contribution ................................................................................................. 15

1.8 Structure of the thesis .................................................................................. 16

CHAPTER 2: SOUTH AFRICAN ACCOUNTING ENVIRONMENT ......................... 17

2.1 Introduction .................................................................................................. 17
2.2 The history of accounting standards in South Africa ................................... 17

2.3 SA GAAP versus IFRS ................................................................................ 19

2.4 South African institutional environment ....................................................... 22

2.4.1 Introduction ........................................................................................... 22

2.4.2 Legal tradition ....................................................................................... 24

2.4.3 Legal enforcement ................................................................................ 25

2.4.4 Financial reporting environment ............................................................ 27
2.4.5 Changes in the enforcement of accounting standards .......................... 31

2.5 Conclusion ................................................................................................... 32

CHAPTER 3: LITERATURE REVIEW ..................................................................... 34

3.1 Introduction .................................................................................................. 34

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3.2 Introduction to the adoption of IFRS ............................................................ 34

3.2.1 Changes in the reporting environment .................................................. 36

3.2.2 Financial reporting effects ..................................................................... 38

3.2.3 Capital market effects ........................................................................... 42

3.2.4 Other market changes .......................................................................... 45

3.2.5 The South African case ......................................................................... 46

3.3 Hypotheses development: Comparability .................................................... 48
3.3.1 Comparability measured relative to another firm or country
(network benefits) ................................................................................. 50
3.3.2 IFRS “label” change in South Africa ...................................................... 52

3.3.3 Comparability between South Africa and IFRS adopters ...................... 54

3.3.4 Comparability between South Africa and non-adopters ........................ 55

3.4 Conclusion ................................................................................................... 58

CHAPTER 4: RESEARCH DESIGN ........................................................................ 59

4.1 Introduction .................................................................................................. 59

4.2 Research strategy ....................................................................................... 59
4.3 Initial sample selection and data collection .................................................. 59

4.4 Research design.......................................................................................... 61

4.4.1 Hypotheses ........................................................................................... 61

4.4.2 Background to comparability measures ................................................ 62

4.4.3 Calculation of comparability measures ................................................. 64

4.4.4 Regression analysis .............................................................................. 67

4.5 Conclusion ................................................................................................... 71
CHAPTER 5: COMPARABILITY RESULTS ............................................................ 72

5.1 Introduction .................................................................................................. 72

5.2 Initial sample ............................................................................................... 72

5.3 Comparability sample: CompEarn ............................................................... 74

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5.4 Descriptive statistics: CompEarn ................................................................. 74

5.4.1 CompEarn: Pre-IFRS adoption period .................................................. 75

5.4.2 CompEarn: Post-IFRS adoption period ................................................. 76

5.4.3 CompEarn: Differences between the pre-adoption and

post-adoption periods ........................................................................... 77

5.4.4 CompEarn: Other descriptive statistics ................................................. 78

5.5 Multivariate results: Earnings-return measures ........................................... 79

5.5.1 Earnings-return measures: Change for adopters from the

pre-adoption to the post-adoption period .............................................. 81

5.5.2 Earnings-return measures: Change for non-adopters from the
pre-adoption to the post-adoption period .............................................. 82

5.5.3 Earnings-return measures: Adopters versus non-adopters ................... 84
5.5.4 Earnings-return measures: Summary ................................................... 85

5.6 Comparability sample: CompAccr ............................................................... 86

5.7 Descriptive statistics: CompAccr ................................................................. 86

5.7.1 CompAccr: Pre-IFRS adoption period ................................................... 87

5.7.2 CompAccr: Post-IFRS adoption period ................................................. 88

5.7.3 CompAccr: Differences between the pre-adoption and

post-adoption periods ........................................................................... 89

5.7.4 CompAccr: Other descriptive statistics ................................................. 90
5.8 Multivariate results: Accruals-cash flow measures ...................................... 91
5.8.1 Accruals-cash flow measures: Change for adopters from the
pre-adoption period to the post-adoption period ................................... 92

5.8.2 Accruals-cash flow measures: Change for non-adopters from
the pre-adoption period to the post-adoption period ............................. 94

5.8.3 Accruals-cash flow measures: Adopters versus non-adopters ............. 95

5.8.4 Accruals-cash flow measures: Summary .............................................. 96

5.9 Conclusion ................................................................................................... 98

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CHAPTER 6: ADDITIONAL ANALYSES ............................................................... 113

6.1 Introduction ................................................................................................ 113

6.2 Comparability and GAAP differences ........................................................ 114

6.2.1 Prior research ..................................................................................... 114

6.2.2 Research design ................................................................................. 117

6.2.3 Results ................................................................................................ 119

6.2.4 Conclusion: GAAP differences ............................................................ 121
6.3 Potential industry differences .................................................................... 122

6.3.1 Mining industry differences ................................................................. 123

6.3.2 Mining industry: Research design and results..................................... 124

6.3.3 Results excluding the mining industry ................................................. 127

6.3.4 Conclusion: Industry differences ......................................................... 129

6.4 Other market changes ............................................................................... 129

6.4.1 Research design: Non-adopters’ comparability................................... 132
6.4.2 Results: Non-adopters’ comparability ................................................. 133

6.4.3 Research design: South Africa versus non-adopters’ comparability ... 135

6.4.4 Results: South Africa versus non-adopters’ comparability .................. 136

6.4.5 Conclusion: Other market changes ..................................................... 139

6.5 Conclusion: Additional analyses ................................................................ 140

CHAPTER 7: ACCOUNTING QUALITY ................................................................ 151

7.1 Introduction ................................................................................................ 151
7.2 Prior research ............................................................................................ 152
7.3 South African context ................................................................................ 155

7.4 Research design........................................................................................ 157

7.4.1 Accounting quality measures .............................................................. 158

7.4.2 Earnings smoothing ............................................................................ 160

7.4.3 Managing earnings towards a target ................................................... 163

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7.4.4 Timely loss recognition ....................................................................... 164

7.5 Sample ...................................................................................................... 164

7.6 Descriptive statistics .................................................................................. 165

7.7 Results ...................................................................................................... 166

7.7.1 Earnings smoothing ............................................................................ 166

7.7.2 Managing towards a target ................................................................. 166

7.7.3 Timely loss recognition ....................................................................... 167
7.8 Conclusion ................................................................................................. 168

CHAPTER 8: CONCLUSION ................................................................................. 174

8.1 Introduction ................................................................................................ 174

8.2 Background to my study ............................................................................ 175

8.3 Findings ..................................................................................................... 177

8.4 Contribution ............................................................................................... 181

8.5 Implications ............................................................................................... 183
8.6 Limitations ................................................................................................. 183

8.7 Suggestions for future research ................................................................ 184

8.8 Concluding remarks ................................................................................... 187

REFERENCES ....................................................................................................... 188

APPENDIX A: IFRS: EFFECTIVE DATES AND AMENDMENTS .......................... 202

APPENDIX B: SAMPLE COUNTRIES ................................................................... 205

APPENDIX C: VARIABLE DEFINITIONS ............................................................... 206

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