Accounting and Finance 46 (2006) 629 652

S. ORIGINAL 4 46 Jones, 0810-5391 Accounting ARTICLE ACFI A. D. Higgins/Accounting and Finance and New xxxxxx Oxford, UK and Finance Association of Australia46 (2006) Zealand Blackwell Publishing Ltd

Australias switch to international nancial reporting standards: a perspective from account preparers
Stewart Jones, Alison D. Higgins
Discipline of Accounting, University of Sydney, Sydney, 2006, Australia

Abstract This study reports the ndings of a structured telephone survey on adoption of international nancial reporting standards (IFRS) from 60 rms drawn from among Australias top 200 corporations. Although we nd evidence of strong systematic variation in survey responses with factors such as rm size, industry background and expected impacts on nancial performance, the general results indicate that many respondents have not been well prepared for the transition and are generally very sceptical about the claimed benets of IFRS as enunciated in the governments Corporate Law Economic Reform Program. The results have implications to other international reporting jurisdictions, particularly the European Union, where adoption of IFRS is already underway. Key words: Corporate law economic review program; International accounting standards; Senior nancial executives; Surveys JEL classication: M41, G18, F23 doi: 10.1111/j.1467-629x.2006.00186.x

1. Introduction and study objectives Australia and the European Union (EU) are among a growing number of reporting jurisdictions in the developed world to commit (more or less fully) to

Alison D. Higgins was an Honours student with the Discipline of Accounting, University of Sydney in 2003. This research is based on her Honours thesis. Alison is currently a nancial analyst at St. George Bank. We would like to thank two anonymous referees for many useful comments and the invaluable feedback from the many senior nancial executives who agreed to participate in the survey. We are grateful for nancial assistance from the Discipline of Accounting and Business Law at the University of Sydney for this project. Received 27 May 2005; accepted 11 November 2005 by Robert Faff.

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the adoption of international nancial reporting standards (IFRS).1 The EUs support for IFRS initially came from the European Commissions report Accounting Harmonization: A New Strategy vis--vis International Harmonization, which outlines the basis for its conclusions and recommendations. The main motivation is that although the Fourth and Seventh Company Law Directives2 provide a basis for harmonized accounts for individual companies and groups of companies in the EU, they do not meet the more rigorous disclosure requirements elsewhere in the world, particularly accounting standards issued by the US Financial Accounting Standards Board (FASB).3 Australias move to IFRS is motivated by similar considerations outlined in the EC (1995) report, but has resulted from a more far reaching corporate reform program initiated by the Commonwealth government under the auspices of the Corporate Law Economic Reform Program (CLERP) (March 1997). First ofcial mention of the governments plan to move Australia to IFRS came from CLERP No. 1 Accounting Standards: Building International Opportunities for Australian Business (1997, pp. 1112). More recently, CLERP No. 9 Corporate Disclosure: Strengthening the Financial Reporting Framework was released (September 2002) and recommended that IFRS be adopted en bloc by the Australian Accounting Standards Board (AASB) by January 2005, in line with the EUs timetable.4 Momentum for the adoption of IFRS in Australia has also been galvanized by strong support for the proposal by key private sector regulators, such as the Australian Stock Exchange (ASX)5 and by the Financial Reporting Council (FRC).6 The CLERP proposals on IFRS have proven highly controversial in Australia (as have the ECs 1995 recommendations in Europe) and a spirited debate on
1 The focus of this study is on Australian equivalents of IFRS (AIFRS) not IFRS per se. Although there are some differences between AIFRS and IFRS, such as the removal of the proportionate consolidation method from IAS 28, the standards are virtually identical in most cases. 2

Company law harmonization is based on Article 54(3)(g) of the EC Treaty. The Fourth Council Directive (78/660/EEC) of 25 July 1978 requires all limited liability companies to prepare annual accounts. The Seventh Council Directive (83/349/EEC) of 13 June 1983 requires a parent company to prepare, in addition to its individual accounts, consolidated accounts and a consolidated annual report. See section 1.2 of the report.

3 4

To ensure consistent application of AIFRS, CLERP No. 9 (p. 105) further recommended that Australia adopt, from January 2005, ofcial interpretations of IFRS issued by the IASBs International Financial Reporting Interpretations Committee.

See CLERP 1, Section 5.5.3, and Section 4.3.2 of the ASX Submission to the Commonwealths Government Inquiry into the Financial System, September 1996 (known as the Wallis Report, March 1997).

6 Recommendations for the adoption of IFRS also emerged from several high-prole government inquiries in Australia (such as the Wallis Report into Australias Financial System, March 1997) and the Royal Commission Report on the failure of the HIH insurance company (HIH Royal Commission, 2003).

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the pros and cons of harmonization has since emerged both in Australia and Europe (see e.g. Cairns, 1997; Flower, 1997; Nobes, 1998; Fearnley and Hines, 2003; Jones et al., 2004). In the Australian context, one of the main concerns is that the Treasury Department did not consult extensively with the academia and business interests or major professional associations on an ostensibly radical and far-reaching reform proposal (Jones et al., 2004). Although the major professional accounting bodies have since endorsed the adoption of IFRS,7 there has generally been much opposition to the proposal from a variety of business, academic and professional interests (see, as examples, Press Release of Australian Society of CPAs, 2 June 1998; Collett et al., 1998; Emenyonu and Adhikari, 1998, pp. 2432; Zeff, 1998; Brown and Tarca, 2001). Many of these concerns relate to the potential loss of autonomy and legitimacy in national standard setting and widespread perceptions that IFRS are of lower quality than local Australian accounting standards (Jones and Wolnizer, 2003; Walker and Jones, 2003). Many of the claimed benets for adopting IFRS proposed by the government in its CLERP initiatives, such as improving access to international capital markets, reducing the cost of capital, improving communication with investors and enhancing the quality of accounting standards, have also been persistently questioned in published works (Brown and Clinch, 1998; Collett et al., 1998; Dunk and Kilgore, 2000; Haswell and McKinnon, 2003; Lonergan, 2003). Furthermore, Australias program of rapid adoption of IFRS equivalent standards might be premature if other major capital markets, such as the USA, do not also follow suit (see Press Release of Australian Society of CPAs, 2 June 1998; Zeff, 1998; Jones et al., 2004). A motivation for the present study is that although there has been considerable academic and professional debate on the adoption of IFRS equivalent standards in Australia, much of this published works are anecdotal and/or analytical, rather than empirical. Of the empirical research undertaken to date, very little has been directed at the business community (account preparers) who are primarily responsible for implementing IFRS. The major research issue of the present study is to examine the justications of regulators for the adoption of IFRS with perceptions of reality about the reforms from the business community. Are the views of the government, and private sector regulators (such as the ASX and FRC) consistent with respondent reporting entities now charged with the legal responsibility (and nancial cost) of implementing the standard setting reforms? This research issue is important as failure to address these questions could potentially undermine the governments reform initiative on IFRS in the longer term. For instance, the present study indicates that the government has not been effective in selling the message on IFRS to the business community (even among the larger rms), and many respondents are not convinced about the value of the reforms. Furthermore,
7

For example, see CPA Australias submission to the Parliamentary Joint Committee on Corporations and Financial Services inquiry into Australian accounting standards, January 2005 (http://www.cpaaustralia.com.au).

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as indicated by the survey responses, some IFRS are proving more problematic than others in terms of acceptance and implementation. In addition to illuminating commercial attitudes to the adoption of IFRS in Australia, our results can also assist concerned parties to better assess some of the internal and external nancial reporting impacts of IFRS, which can affect key stakeholder groups as well as a range of internal functions and responsibilities within organizations. Furthermore, the results are relevant to other international reporting jurisdictions, particularly the EU and South Africa, where the process of IFRS implementation commenced in January 2005, and in New Zealand where adoption of IFRS is planned from January 2007. The ndings can also add to a growing body of international published works, which can assist regulators and policy-makers to better assess how well IFRS are being received by the business communities of countries that promote IFRS adoption; identify respondent attributes (such as rm size, nancial performance and industry characteristics) that are most driving support (or lack of it) for IFRS; as well as pointing to particular issues and controversies facing the implementation of IFRS around the world. 1.1. Research hypotheses/questions In the context of this background (and the published works discussed below), this study seeks to examine, inter alia, the following hypotheses and research questions:8 Hypotheses: H1: The extent of knowledge of IFRS is greater for larger rms. H2: The implementation of IFRS will have a more signicant impact on a wider range of organizational functions, responsibilities and/or departments for larger rms. H3: The higher the perceived impact of IFRS on nancial performance, the more important IFRS rate as a business priority. Questions: Q1: Which IFRS will most impact on Australian accounting practices and how are they likely to affect nancial position and performance reported to internal and external users? Q2: Do Australian companies support the adoption of IFRS, and how do they rate the claimed benets of IFRS as stated in the CLERP?
8

The research hypotheses and questions serve different roles in this study. Whereas the hypotheses explore structured relationships between explanatory variables and survey responses, the questions are exploratory in nature and attempt to provide some descriptive evidence on prevailing commercial attitudes and opinions to IFRS in Australia.

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A number of explanatory variables are expected to have a potential impact on survey responses to the IFRS question. Specically, the study explores the impact of such variables as rm size, knowledge ratings and expected nancial reporting impacts of IFRS, rm performance, industry background and overseas stock exchange listings as factors that can potentially explain systematic variation in survey responses. Firm size is expected to be an important explanatory variable because it has been widely used in published works as a proxy for political cost (Watts, 1992). The explanatory linkages between accounting policy choices and rm size have been demonstrated in the sizeable literature (see e.g. Ball and Foster, 1982; Brown, 1994). Although correlations between rm size and commercial attitudes to IFRS cannot be directly linked to the political costs issue, published works on political processes indicate that accounting information might have a signicantly greater impact on the resource allocation decisions of users in respect of larger rms than for smaller rms (see Brown, 1994). Furthermore, as noted by Jones and Ratnatunga (1997), larger rms report to a greater concentration of external users who can inuence the allocation of scarce resources. Given that nancial statements have greater economic consequences for larger rms, larger rms are expected to be more susceptible to the nancial reporting impacts of IFRS. This is also implied in the CLERP reforms, as larger rms are expected to be the major economic beneciaries of IFRS in terms of, inter alia, securing greater access to international capital markets and lower cost of capital (see Haswell and McKinnon, 2003; Miller, 2003; Jones et al., 2004). This leads to at least two a priori expectations relevant to the rm size variable. First, larger rms are more likely to devote greater time and resources to the IFRS implementation issue. Hence, we expect larger rms to have greater knowledge of IFRS, including their likely nancial reporting impacts relative to smaller rms. Second, given the potentially greater economic consequences (and technical challenges) associated with IFRS implementation for larger rms, we also expect that the scale of the IFRS implementation task will be signicantly greater for larger rms. We quantify this by assessing how many functions, responsibilities and/or departments are likely to be involved with IFRS implementation within an organization: such as the investor relations department (to communicate the economic and nancial reporting impacts of IFRS changes to the investment community and capital markets); the information technology department (as the technical implementation of IFRS in larger rms is likely to be more extensive and complex, potentially requiring new, upgraded and/or modied accounting systems); human resources department (potentially for additional staff/consultants to assist with the implementation process) and external auditors (as the assurance/ verication process for IFRS nancial reports are likely to be more extensive and involved for larger rms). We also examine the extent to which the board of directors/ chief executive ofcer (CEO), the organizations accounting and nance division, and the executive compensation committee will be involved in IFRS implementation to gauge the breadth and scale of the exercise for a typical ASX 200 company. The Authors

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The potential impacts on nancial performance of respondent rms might also be a factor inuencing survey responses. The adoption of IFRS is likely to have a differential impact on the reported results and nancial position of different companies and industries. For example, IAS 32 and IAS 39 dealing with nancial instruments will be particularly relevant to the nancial reporting of rms in the nancial services sector (such as banks, nance houses and insurance companies) (Gray, 2003). Some respondents might be more concerned than others about the perceived economic consequences of these impacts, which could affect attitudes towards and opinions of IFRS. We expect higher ratings of IFRS as a business priority to be positively associated with respondent rms whose reported performance will most likely be affected by the introduction of these standards. In addition to the hypotheses stated above, we also consider other potentially important explanatory variables that could inuence survey responses. For instance, whether respondent companies are listed on an overseas stock exchange could also inuence some survey responses, as these rms might be better placed to evaluate the claimed benets of IFRS (particularly in relation to improving access to capital markets and attracting equity nance at lower cost). Furthermore, attitudes towards IFRS might also be affected by a rms current level of nancial performance. For instance, a poorly performing company might be more adverse to the adoption of IFRS relative to a better performing company, potentially because of the added cost of implementation and/or because the nancial reporting impacts of IFRS might further compound the rms reported performance. The remainder of this paper is organized as follows. Section 2 discusses the research method. Section 3 presents the results and discussion. Finally, the conclusions are presented. 2. Research method 2.1. Sample selection and data collection This study examines commercial attitudes and opinions to the adoption of IFRS by senior nancial executives of leading Australian companies. Data were collected through a structured telephone survey using Dillmans Total Design Method (1978).9 The survey focused primarily on experienced and qualied nancial executives because these respondents are expected to have the greatest knowledge and expertise relevant to the technical requirements and nancial reporting implications of accounting standards. Furthermore, the selected respondents invariably
9

There are several advantages to the telephone method over mail surveys, which are discussed in Dillman (1978) and Salant and Dillman (1994). There are also disadvantages. For example, a common criticism is that telephone surveys might not be representative of the population (because of a proportion of the population having unlisted numbers or not having telephones) (see also Groves et al., 1988). This is clearly not an issue for the current survey as all ASX public companies are legally required to have listed phone numbers in Australia.

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had a key role in overviewing IFRS implementation within their respective organizations. A listing of the ASX 200 was obtained from the September 2003 issue of the Market Comparative Analysis, published by the ASX. The ASX 200 Australian companies were selected for this study as collectively these rms represent more than 97 per cent of the market capitalization of the ASX (Huntley Publications, 2003). Furthermore, as previously stated, larger companies are expected to be the major beneciaries of IFRS, particularly in terms of improved access to foreign capital markets and cost of capital savings emphasized in the CLERP. The name of the chief nancial ofcer (CFO) or nance director, including company contact details, was initially obtained from the ASXs corporate website. These details were subsequently conrmed through telephone contact with the corporation. In many cases, respondents received an email copy of the survey before the scheduled interview to allow them more time to consider the questions. The majority of surveys were completed within a 3 week period. Of the companies listed on the ASX 200, 30 rms were eliminated from the sample because their participation was deemed unsuitable.10 Of the remaining 170 companies in the sample, 60 respondents participated fully in the survey, yielding a response rate of 35 per cent. Of the companies that did not participate, 60 companies did not respond at all to the survey invitation, despite follow-up emails and telephone messages in the week following initial contact with the organization.11 Given the relatively high number of non-respondents, the results of this study could potentially be affected by non-response error. Although testing for this form of survey error can be more problematic with telephone interviews than for mail surveys, we found that a comparison of the early interviews with later interviews revealed no statistically signicant differences across the majority of survey questions. Finally, a range of nancial performance variables were collected from each respondents annual report using the AspectHuntleys Financial Analysis Database (2003), a leading nancial statement product in Australia. Traditional nancial variables and ratios included rate of return, earnings, operating cash ow, leverage, liquidity and turnover. 2.2. Survey instrument The survey consisted of 40 questions, comprising both closed-form and open-form questions.12 The survey was implemented in late October 2003. The

10

For example, some companies were related to other entities listed on the ASX or the CFO had recently resigned and no replacement had been found at the time the survey was being administered.

11 Of the rms who responded to our inquiries but were unwilling to participate, 14 rms advised us that the CFO was temporarily unavailable but there was no suitable replacement available to complete the survey; 8 rms indicated it was not company policy to respond to surveys; and a further 28 companies indicated they did not have the time to complete the survey, or simply did not wish to. 12

A copy of the survey instrument is available upon request to the rst author.

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average phone interview took between (approximately) 20 and 30 min. Questions were related to demographic and background details including position title, nancial reporting experience and qualications. Other questions were related to the level of knowledge and understanding of IFRS; current preparation activities being made for the adoption of IFRS; expected impacts of IFRS on nancial position and protability; planned communication strategies with key stakeholder groups; and ratings on the costs and benets of adopting IFRS. Two survey questions (3.4 and 3.5) were based on a previous survey instrument by PricewaterhouseCoopers (2003, p. 28) while the researchers developed all other questions as these needed to be tailored to the specic research issues of this project. Most closed-form questions were rated on a 5 point Likert attitudinal scale, ranging from strongly agree to strongly disagree, or excellent to poor. The survey was pretested on a number of academics for face validity and content. 2.3. Reliability of the instrument The homogeneity of the survey and the degree to which all items measured one factor was established using Cronbachs alpha (Cronbach, 1951). When these items were subjected to Cronbachs alpha, the standardized alpha reliability coefcient was greater than 0.77. This very high reliability level indicates that the survey was likely to have strong internal validity (Cohen et al., 1988). 3. Results and discussion This section presents the empirical results, including respondent background details and survey ndings on each of the research hypotheses/questions identied above. 3.1. Respondent background Of the 60 respondent rms, the position title of respondents included CFOs (n = 16), group nancial controllers (n = 12), general managers of nance or nance directors (n = 22), nancial reporting managers or chief accountants (n = 14), IFRS project managers (n = 5), company secretaries (n = 2) and a group tax manager (n = 1). Respondents generally had considerable nancial reporting experience, with 80 per cent of respondents (n = 48) indicating that they had reporting experience of greater than 10 years. The average period of time respondents had been with their rms was 4.78 years. All respondents had undergraduate degrees, and all had professional membership with either of the two major accounting bodies in Australia (CPA Australia or the Institute of Chartered Accountants in Australia). Finally, 38.3 per cent of respondents (n = 23) had postgraduate qualications. The accounting background and qualications of respondents reduces the likelihood of respondent error and provides us with a level of assurance that respondents had sufcient technical The Authors

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Table 1 Industry background of respondent rms N Alcohol and tobacco Banks and nance houses Building materials Chemical Computer software and Internet Developers and contracts Diversied industrials Energy Food and household Gold Health care and biotechnology Infrastructure and utilities Insurance Investment and nancial services Media Miscellaneous industrials Paper and packaging Property trusts Retail Telecommunications Tourism Transportation Total 2 6 1 1 1 3 4 4 1 2 5 8 3 6 4 1 1 2 2 1 1 1 60

accounting knowledge, expertise and experience to competently answer the interview questions. In terms of the size of respondent companies, the market capitalization of these rms ranged from $A213m to $A37 043m. The mean market capitalization was $A2969m. Furthermore, respondent rms were also drawn from a broad range of sectors. These sector groups are summarized in Table 1. 3.2. Results on research hypotheses/questions H1: The extent of knowledge of IFRS is greater for larger rms. Respondents were asked to rate their knowledge of IFRS and the likely nancial reporting impacts of these standards. They were also asked to rate the knowledge and understanding of IFRS by accounting staff within their companies. The results indicate that 50 per cent (n = 30) of respondents rated their knowledge to be either poor or fair, with only 10 per cent of respondents rating their knowledge as excellent. These results are largely consistent with professional The Authors

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surveys undertaken in 2002 (Ernst and Young, 2002), which suggests at rst glance that knowledge of IFRS had not improved among Australias leading companies at the time of this survey, despite the looming 2005 deadline. More than 63 per cent (n = 38) of respondents rated their accounting staff as having only poor or fair knowledge of IFRS. However, although many respondents did not rate their own knowledge of IFRS very highly, it became evident through the interviewing process that many respondents proved to have a fairly good understanding of the standards and were generally aware of the major reporting differences between IFRS and the pre-2005 AASB standards, as well as their likely nancial reporting implications.13 Further analysis of results using a univariate analysis of variance (anova)14 revealed a positive association between knowledge ratings and rm size (F = 2.718, p = 0.060) at the 5 per cent critical level. Post hoc tests (using paired t-tests) indicate that the greatest difference in ratings was between the top 25 per cent and bottom 25 per cent of rms based on market capitalization (mean difference of 1.444, p = 0.01). This nding can be potentially explained by the fact that larger rms were more likely to devote greater time and resources to the IFRS implementation task. There is further support for this contention insofar as the largest rms in the sample were found to be signicantly more advanced in the implementation process than smaller rms (F = 3.09, p = 0.04). The survey results suggested that, on average, rms in the top 25 per cent of the sample (based on market capitalization) were 9 months more advanced in the implementation process than the bottom 25 per cent of rms. Means and standard deviations of knowledge ratings and rm size are provided in Table 2. Further analysis of results indicate that the poorest knowledge ratings were associated with rms who had only been involved with the implementation process for 6 months or less (F = 4.182, p = 0.01). Furthermore, respondents with higher knowledge ratings of IFRS were found to be less supportive of Australias decision to adopt IFRS as domestic reporting standards (F = 2.418, p = 0.07) and generally less optimistic about the benets of IFRS. This result suggests that not only is commercial opinion generally opposed to the CLERP proposals, but informed opinion appears to be particularly negative.15

13 Lack of knowledge of IFRS tended to be more related to the specic technical detail of some standards.

Univariate anova is a statistical technique used to determine if differences in group means are due to standard error or to some systematic effect; that is, the effect of the independent variable (Hair et al., 1995). The anova results reported in the study were also examined with a non-parametric equivalent test (a KruskalWallis H-test) and the results were found to be qualitatively similar in most cases. The nancial reporting experience of respondents, including their professional accounting afliation (whether they were members of CPA Australia or the ICAA), was found to have little impact on survey responses.
15

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Table 2 The relationship between rm size and respondent knowledge ratings Firm size and knowledge ratings >$A3000m >$A1000m <$A3000m <$A1000m >$A500m <$A500m Total
a

N 9 10 10 9 38

Meana 2.33 2.90 3.30 3.78 3.08

SD 1.00 1.20 1.16 1.09 1.19

Lower mean scores indicate higher ratings of knowledge (i.e. 1 = excellent, 5 = poor). SD, standard deviation.

Table 3 Ratings on the functions and responsibilities affected by the implementation of IFRS Functions Board of directors and CEO Accounting/nance department Executive compensation committee Investor relations department Human resource department Information technology department External auditors
a

N 60 60 60 60 60 60 60

Agree/strongly (%) 83.3 93.3 43.3 90.0 25.0 51.7 96.7

Meana 2.08 1.35 2.63 1.73 3.57 2.80 1.27

SD 0.137 0.098 0.156 0.116 0.107 0.146 0.082

Lower mean scores indicate higher ratings of agreement (i.e. 1 = strongly agree; 5 = strongly disagree). CEO, chief executive ofcer; IFRS, international nancial reporting standard; SD, standard deviation.

H2: The implementation of IFRS will have a more signicant impact on a wider range of organizational functions, responsibilities and/or departments for larger rms. To gauge the signicance and scale of the IFRS implementation task to a typical ASX 200 rm, the survey explored a range of organizational functions, responsibilities and/or departments likely to be affected by the 2005 transition, including the board of directors and CEO, accounting and nance division, executive compensation committee, investor relations department, human resource department, information technology department, and the external auditors. Table 3 reports the frequency, means and standard deviations of responses on these questions. Overall, Table 3 suggests that the majority of respondents perceived that the transition to IFRS will have a substantive impact across a range of responsibilities within the organization: with external auditors, the investor relations department, the accounting and nance division, and the board of directors/CEO expected by respondents to be the most heavily involved in the process (in rank order from Table 3). The Authors

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It is noteworthy that the investor relations department featured so prominently among respondents in the IFRS implementation process. This might have reected a more general concern among respondents with the potentially adverse nancial reporting impacts of IFRS (as discussed under Question 1 results below, the majority of respondents were expecting the conversion to IFRS to have a negative nancial impact on reported results). It was clear from the qualitative responses of several respondents that IFRS will create economic consequences serious enough to warrant greater communication and involvement with key stakeholders. As one respondent explained: In order to convey the impact of the changes to the broader community, to investors, analysts, they will need to be conversant with the changes. Several respondents even suggested that the major involvement of the board of directors and CEO with IFRS implementation will be in the communication of the nancial reporting impacts to both internal stakeholders and the capital markets more generally. Further analysis of results reveals that larger rms were expecting signicantly greater involvement from the investor relations department than smaller rms (F = 4.26, p = 0.063). Post hoc tests (using paired t-tests) indicate that the greatest difference in ratings on this question was between the top 25 per cent and bottom 25 per cent of rms based on market capitalization. These results tend to conrm, at least from the perception of respondents, that conversion to IFRS will be associated with more pronounced economic consequences for larger rms. External auditors rated as the most important party to be involved in the IFRS process, either as independent consultants assisting in the IFRS implementation process, or as the rms auditor required to sign off on the nancial statements. For some respondents, the auditors would be instrumental we dont have a big team, so theyll be pretty heavily involved. However, other respondents will rely less on external auditors: Ill do a lot myself and theyll be ticking off what I give them. Another respondent indicated that the external auditors would be affected by the changes, but they will not be used extensively in the transition process, stating: A lot of the audit rms are touting for business, and I believe they are blowing it out of proportion. I dont think its as big and bad and complicated as they are making it out to be. We also nd that the expected involvement of external auditors was greatest among the top 25 per cent of rms based on market capitalization relative to the bottom 25 per cent of rms (F = 2.42, p = 0.09). Other organizational functions and responsibilities where the largest rms in the sample expected a signicantly greater involvement in the IFRS implementation task included the information technology department (F = 4.18, p = 0.041) and the human resources department (F = 3.76, p = 0.07). Firm size was also found to be a signicant factor in terms of the expected involvement of the boards of directors and CEO (F = 3.12, p = 0.07), but not in terms of the involvement of the accounting and nance division, nor of the executive compensation committee. The Authors

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H3: The higher the perceived impact of IFRS on nancial performance, the more important IFRS rates as a business priority. The survey delved into how the IFRS implementation question rated as a business priority by a typical ASX 200 Australian company. Approximately 32 per cent of respondents rated the IFRS implementation task as one of their top business issues, with another 30 per cent rating it as an important strategic issue but not a critical one. A further 38.3 per cent of respondents perceived IFRS to be an important technical issue, but not an issue of strategic importance to the organization. No respondents rated the IFRS issue as the top business priority at the time of the survey. However, these results are not altogether surprising considering that Australian public companies were faced with, in addition to IFRS implementation and broader aspects of the CLERP reforms, at least two other major regulatory compliance developments over this period: the introduction of the ASX Corporate Governance Listing Rules in March 200316 and the introduction of the tax consolidation regime (July 2002).17 Hence, survey responses on the IFRS priority issue might need to be interpreted in the context of some potential regulatory overload experienced (and certainly expressed) by respondents at this time. We nd that higher ratings on the IFRS business priority issue was not signicantly associated with factors such as rm size, nancial performance or industry background. However, the anova results revealed that higher ratings of IFRS as a business priority was highly correlated with respondent rms who perceived that IFRS will have a signicant impact on their protability (F = 3.212, p = 0.003) but not on their nancial position (F = 1.606, p = 0.21). This result appears to be supported in other areas of the survey. For instance, we nd that higher ratings of IFRS as a business priority was also associated with respondent rms who perceived IFRS will have the greatest impact on performance measures for evaluating operating activities (F = 3.12, p = 0.04); performance measures to evaluate employees and executives (F = 6.12, p = 0.001) and executive compensation contracts (F = 2.82, p = 0.09), but to a lesser extent on corporate governance practices and debt covenants. Further analysis revealed that ratings on IFRS as a business priority was not signicantly associated with respondent ratings of the perceived economic benets of IFRS identied in the survey. Overall, these results tend to reinforce the notion that respondents were more motivated by concerns with the bottom
16

On 31 March 2003, the ASX Corporate Governance Council issued Principles of Good Corporate Governance and Best Practice Recommendations. Listing rule 4.1 requires every public company to provide a statement disclosing the extent to which the entity has followed best practice recommendations set by the Council during the reporting period.

The Ralph Committee on the Review of Business Taxation recommended the adoption of a consolidation regime in its nal report of July 1999, and the measure was ofcially announced by the Minister for Revenue on 7 February 2002.

17

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line considerations of IFRS rather than with gaining any particular economic or nancial reporting benets identied by the CLERP. Q1: Which IFRS will most impact on Australian accounting practices and how are they likely to affect nancial position and performance reported to internal and external users? Table 4 provides a breakdown of respondent ratings of IFRS that were expected to have the greatest impact on existing Australian nancial reporting practices, and where respondents perceived the major differences in reporting practices will occur. Using a 2-test, we nd statistically signicant differences in ratings across IFRS (2 = 29.714, p = 0.00), reecting differences in the degree of importance attached to each IFRS by respondents. In the far right column, the industry concentration of respondent rms is provided across each IFRS. Not surprisingly, Table 4 indicates that IFRS will have their greatest reporting impact in areas where there are currently no existing Australian standards, most notably the recognition and measurement of nancial instruments (IAS 39) and the nancial reporting of intangible assets (IAS 38). As expected, concerns with IAS 39 among respondents mainly centred on the volatility of reported prots, particularly for rms in the nancial services and energy sectors, which typically engage in extensive hedging transactions. Concerns with IAS 38 focused mainly on the de-recognition of intangibles (that do not qualify as assets under IAS 38), including the write-down to cost of intangibles previously revalued, which can signicantly impact on the nancial position of affected companies (see also Tabakoff, 1999; Ernst and Young, 2002a; Bufni, 2003; Lonergan, 2003). ED 2 Share-based Payment (now IFRS 2) was also frequently cited by respondents as a potentially controversial standard. IFRS 2 requires the expensing of share options (which requires valuing the options at market values). At the time of this survey there were no requirements for either the measurement or the disclosure of the value of such benets, notwithstanding that the Australian Securities and Investments Commission (ASIC) recommends that entities include the fair value of options in the nancial reports (see ASIC Media Release 03202 Valuing options for directors and executives, 30 June 2003). However, at the time of the survey, many entities had elected to disclose the details of options only and not their market values, stemming largely from uncertainty as to the method of valuation to be used.18
18 IFRS 2 recognizes that in many cases market prices are not available for options granted to employees (terms and conditions of traded options usually do not apply). If traded options with similar terms and conditions do not exist, IFRS 2 explains that the fair value of the options granted can be estimated by applying an option pricing model (e.g. Black Scholes model). However, the BlackScholes model comes with many limitations; for instance, it is based on a European call option (i.e. the option cannot be exercised before the expiry date). Expected volatility and other model inputs are also assumed to be constant over the options life.

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Table 4 Ratings on the key IFRS that will most impact on existing Australian nancial reporting practices IFRS IAS 32 and IAS 39 Coverage Financial instruments N 40 % 66.6 Major differences between IFRS and Australian practice No current AASB standard on recognition and measurement of nancial instruments. Major concerns from respondents: Mixed measurement model approach of IAS 39 and use of market values for certain hedge transactions. No current AASB standard on intangibles. General asset measurement and recognition principles apply in Australia. Major concerns from respondents: IAS 38 prohibits recognition of internally generated intangibles and limits capacity to revalue identiable intangible assets. Intangible assets with a nite useful life must be amortized over that useful life. Intangibles with an indenite life are not amortized but are subject to impairment test criteria set out in IAS 38. IAS 12 adopts a balance sheet concept of deferred tax. Major concern from respondents: The income statement approach is still being adopted by some companies in Australia (at the time of the survey) under the 1989 version of AASB1020. IAS 12 is very complex with numerous inconsistencies with AASB 1020. Major concerns from respondents: IFRS 3 disallows amortization of purchased goodwill, but is required under pre-2005 AASB standards. Instead, purchased goodwill is to be subject to an annual impairment test as required in IAS 36. Major concern from respondents: Asset impairment tests under IAS 36 generally more prescriptive and robust, and apply to more classes of assets than Australian requirements. No current AASB standard on recognition and measurement of share-based payments. Major concern from respondents: Uncertainly over market valuation methodologies to determine the expense for options. Industry concentration

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Banks, nance houses; insurance; energy

IAS 38

Intangibles

25

41.7

Media; banks, nance houses; diversied industrials

IAS 12

Income tax

21

35

Banks and nance houses; energy; infrastructure and utilities

IAS 22 (now IFRS 3)

Business combinations, goodwill Recoverable amount of non-current assets and impairment of assets Share-based payment

16

27

Evenly spread across all industries

IAS 16 and IAS 36 ED 2 (now IFRS 2)

14

23.3

Energy; gold; diversied industrials Health care and biotechnology; banks and nance houses; retail; tourism; diversied industrials

11

18.3

643

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Table 4 (continued) IFRS IAS 19 Coverage Employee benets N 9 % 15 Major differences between IFRS and Australian practice Major concern from respondents: AASB standards do not cover dened benet plans. IAS 19 permits the corridor approach which is currently not permitted by the AASB. Major concern from respondents: Rehabilitation expenditure in mining companies will need to be recognized upfront rather than incrementally. Major concern from respondents: The amended AASB 1023 requires new and extensive disclosures that go beyond the current Australian requirements. AASB provides a more consistent and uniform basis for valuation of insurance contracts. No current AASB standard. Major concern from respondents: Under IAS 40 changes in fair value are reported in the prot and loss statement, houses whereas application of Australian standards would require reporting through asset revaluation reserves. Industry concentration Evenly spread across all industry groups. IAS 37 ED 5 (now IFRS 4) Provisions, contingent liabilities and contingent assets Insurance contracts 5 8.3 Energy; gold; banks and nance houses Banks and nance houses; insurance 6 10 IAS 40 Investment property 4 6 Property trusts; developers and contractors; banks and nance AASB, Australian Accounting Standards Board; IFRS, international nancial reporting standard.

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Table 5 Ratings on whether international nancial reporting standards will have a signicant impact on nancial position and performance Financial position N Strongly agree Agree Dont know Disagree Strongly disagree 6 25 3 26 0 % 10.0 41.7 5.0 43.3 0.0 Meana = 2.82 (1.11) Financial performance N 13 24 2 20 1 % 21.7 40.0 3.30 33.3 1.70 Mean = 2.53 (1.21)

Lower mean scores indicate higher ratings of agreement on 15 Likert scale. Standard deviations in parentheses.

Respondents were also asked to indicate whether they expected the adoption of IFRS to signicantly impact on their performance and nancial position. The responses are summarized in Table 5. Approximately 52 per cent of respondents indicated that they agreed or strongly agreed that the introduction of IFRS will have a signicant impact on nancial position (2 = 35.8, p = 0.00), and a greater number of respondents, approximately 62 per cent, agreeing or strongly agreeing that IFRS will have a signicant impact on nancial performance (2 = 32.16, p = 0.00). Furthermore, a statistically signicant number of respondents, 48.4 per cent (n = 31), indicated that they expect protability to be negatively impacted by the introduction of IFRS, with only 12.9 per cent expecting a positive impact (2 = 9.87, p = 0.041). Approximately 37.8 per cent (n = 14) of respondents expected a positive impact on nancial position, whereas 13.5 per cent expected a negative impact (2 = 18.21, p = 0.00).19 Most respondents attributed the expected negative impact on nancial position to increased liabilities associated with the recognition of dened benet plans; the reclassication of some nancial instruments as liabilities rather than equity; and from the write-off of intangibles assets (expected to be considerable in some industries, such as media). The removal of the amortization of purchased goodwill under IFRS 3 (previously IAS 22) was the most cited reason by respondents for expecting a positive impact on protability, whereas requirements

19

We nd that none of these ratings are statistically associated with rm size, a rms current level of nancial performance, knowledge ratings of IFRS or industry background.

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Table 6 Ratings on whether international nancial reporting standards are likely to have an impact on internal performance indicators and contracts Agree/strongly agree (%) 45.0 58.3 43.3 Neutral (%) 8.3 1.7 3.3 Disagree/strongly disagree (%) 46.6 40 53.3

N Executive compensation contracts 60 Debt covenants 60 Performance measures for 60 evaluating employees and executives Performance measures for 60 evaluating operating performance Corporate governance issues 60
a

Meana SD 3.02 2.72 3.07 1.20 1.11 1.13

31.7 40.0

5 5

63.3 55

3.35 3.10

0.97 1.05

Lower mean scores indicate higher ratings of agreement (i.e. 1 = strongly agree; 5 = strongly disagree). SD, standard deviation.

to expense share-based payments was the most cited reason for expecting a negative impact on reported prots.20 To assess entity-wide implications of changes in nancial results reported under IFRS, respondents were also asked to rate their level of agreement whether the conversion to IFRS will impact on key internal performance indicators and contracts, including executive compensation contracts, debt covenants, operating performance measures, and corporate governance issues within their organizations. The frequencies, means and standard deviations of responses are reported in Table 6. We found that a signicant minority of respondents had been actively reviewing the potential impact of IFRS in these areas. Some rms surveyed were even intending to recast their 30 June 2003 nancial statements under IFRS, to deliver a sense of the dollar impact from the international standards implemented collectively. Other respondents were planning to have the systems in place to produce a shadow set of accounts for 2004 under IFRS, which will facilitate any necessary adjustments to executive compensation contracts, debt covenants and business performance measures.
20 In terms of the qualitative comments from respondents, opinion was sharply divided over the anticipated nancial reporting repercussions of IFRS. One respondent stated: reported position may change because some hybrid instruments will change from equity to debt, but it wont change where they sit in the structure, as theyll still act as equity but will be reported as debt. Another said: Underlying protably wont change a scrap, but reported protability will dramatically change. We have a large amount of goodwill on our books, so suddenly not amortising it, will have a dramatic impact on our protability, but thats articial. Another stated: reported prot will be impacted, but our organization wont be any different 31 December 2004 or 1 January 2005 we wont be any more or less protable, it will just be a change to the prot we report, and how people understand that gure. However, on the other side of the spectrum, one respondent stated: I know David Tweedie says analysts will see through the changes and understand what the differences are, but thats rubbish.

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The majority of respondents suggested that executive compensation contracts will remain the same under IFRS, but where conditional entitlements are linked to reported protability, a clear separation will need to be made between protability improvements relating to operational performance and those resulting from the introduction of IFRS. Some respondents were even considering alternative remuneration schemes that would avoid potential volatility factors resulting from the introduction of IFRS. However, more respondents indicated that debt covenants would likely be affected by IFRS changes. Several respondents had already discussed the possible impacts on their debt covenants with their banks, and planned to renegotiate the contracts if necessary. Furthermore, approximately 40 per cent of respondents (n = 24) agreed or strongly agreed that IFRS will have a signicant impact on corporate governance practices. Respondents largely attributed this potential impact to the increased disclosure requirements under IFRS, particularly of share-based payments and the stricter monitoring of the value of intangibles and non-current assets under IFRS. Q2: Do Australian companies support the adoption of IFRS, and how do they rate the claimed benets of IFRS stated in the CLERP? In the nal section of the survey, respondents were asked to rate whether the benets of adopting IFRS outweighed the costs of implementation. They were also asked to rate a number of specic benets of IFRS enunciated in the governments CLERP reforms. Only 38 per cent (n = 23) of respondents either agreed or strongly agreed that the benets of adopting IFRS would outweigh the costs of transition. Approximately 47 per cent (n = 28) of respondents disagreed or strongly disagreed with this proposition, with 15 per cent of respondents (n = 9) uncertain (2 = 22.5, p = 0.00). The responses to this question appeared to be quite uniform across the survey, and were not found to be strongly associated with factors such as industry sector, rm size or nancial performance. However, although the quantitative results were not statistically signicant, the qualitative responses suggest that smaller rms were more troubled by the introduction of IFRS than larger rms. A representative comment was stated by one company as follows: The costs will outweigh benets for us, because were not big enough to attract international capital, and thats the case for 90% of the companies on the ASX. And most of the capital comes from US, and the US dont care whether we conform to Australian or international standards, so it wont make a difference. Many respondents were vocal in their criticisms of the CLERP agenda on harmonization, particularly over the generally inadequate consultation between the government and the business community on the CLERP proposals. One respondent said: I dont agree with the introduction in such a random and presumptuous way there could have been more discussion. Others believed that adoption of IFRS will put Australia out of step with other major capital markets around the world (particularly the US market). One respondent explained: Australias The Authors

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Table 7 Ratings on the whether there will be economic benets to be gained from adopting international nancial reporting standards Strongly Disagree/ agree/ Dont strongly agree (%) know (%) disagree (%) Meana SD 8.3 13.3 3.3 6.6 11.7 56.7 75.0 75.0 60.0 66.7 3.27 3.27 3.62 3.32 3.62 0.15 0.11 0.13 0.14 0.12

N Increased access to overseas capital markets Reduced cost of capital Ability to produce one set of reports for overseas stock exchange More transparent and understandable standards Improved quality of nancial reports
a

60 35.0 60 11.7 60 21.6 60 33.4 60 21.7

Lower mean scores indicate higher ratings of agreement on 15 Likert scale. SD, standard deviation.

largest capital market is the US, if we dont get FASB and SEC on board, well still need to do our reconciliations to US generally accepted accounting principles (GAAP), and the whole exercise is pointless. Another said: its a fallacy that IFRS are a set of international standards they are a set of European accounting standards . . . weve only harmonized with half the world, and I dont know if thats the right half to harmonize with. The quality of IFRS was criticized by many, with one respondent stating: Australian standards are a league above the international standards while another respondent stated: there is an inconsistency within the international accounting standards there really isnt any logical framework there. Finally, respondents were asked to rate a number of specic benets of IFRS identied in the governments CLERP reforms. The frequencies, means and standard deviations of these results are reported in Table 7. It is clear from Table 7 that a signicant majority of respondents either disagreed or strongly disagreed that their companies would reap any signicant economic benets from adopting IFRS. The generally negative results on the economic benets of IFRS are captured in many of the qualitative comments of respondents. In relation to improved access to international capital, a representative comment was It is a question of where you sit within your industry, your credit ratings and commercial issues which will inuence your access to international capital. Adoption of IFRS wont make one iota of difference. On the issue of reducing cost of capital, a typical response was nanciers will rate the business on the business, not on any particular accounting standards, with another saying the cost of capital is based on how you will perform and what you do with the money, its not based on the accounting. Some respondents stated that international capital markets and investors are sophisticated enough to see through accounting differences, and many respondents (particularly those already having listings on foreign stock exchanges) believe that Australian accounting standards are already accepted and understood on foreign exchanges. The Authors

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Furthermore, contrary to the claims of CLERP, many respondents stated that IFRS are actually more complex and less understandable than Australian accounting standards. One respondent said: Australian standards are far more concise and understandable than the international accounting standards. Another said: there is still plenty of scope in (IFRS) for interpretation, manipulation and dishonesty. IAS 39 was frequently cited as an accounting standard lacking transparency and understandability. One respondent said that IAS 39 is going to produce some crazy results by introducing an incredible amount of volatility, and thats not going to help anyone. Another respondent went so far as to say quality is going to go downhill before it gets better because I think its going to be gibberish (under IFRS) that comes out for a couple of years. A noteworthy association in the results was found between respondent rms who had an overseas stock exchange listing, and their ratings of support for the adoption of IFRS.21 It was found that rms with overseas listings were associated with lower ratings of support for the adoption of IFRS (F = 3.030, p = 0.08) and generally lower ratings of the benets of IFRS. This result could suggest that access to international capital markets currently enjoyed by Australian rms was not hindered by the use of local Australian reporting standards. Furthermore, because most Australian rms listed on overseas capital markets are in the USA, the result tends to corroborate the qualitative comments of several respondents that compliance with IFRS is possibly less relevant and benecial to these rms because they must reconcile their accounts with US GAAP irrespective of whether Australian companies adopt IFRS or not.22 4. Conclusions The decision of the Financial Reporting Council to adopt IFRS equivalent standards as domestic reporting standards from January 2005 has provoked spirited debate in Australia. Many concerns with the proposals relate to the potential loss of autonomy and legitimacy in national standard setting and widespread perception that IFRS are of lower quality than the pre-2005 Australian accounting standards. Furthermore, many of the claimed benets for adopting IFRS stated in the CLERP have been persistently challenged in the published literature. However, much of this literature is anecdotal and/or analytical, rather than empirical. Our ndings reveal that a number of rms were only in the very formative stages of the implementation process at the time of the survey, with many other rms yet to start the process at all. Larger rms tended to have greater knowledge of IFRS including their expected financial

Other factors, such as rm size and nancial performance, were not found to be signicantly associated with respondent ratings of the perceived economic benets of IFRS.
22 This is notwithstanding a recent initiative of the SEC to issue a roadmap for the acceptance of IFRS in the USA (see Nicolaison, 2005).

21

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reporting impacts, and were generally more advanced in the implementation process than smaller rms. Furthermore, the degree to which IFRS rated as a business priority was found to be strongly associated with the perceived impacts that these standards were expected to have on the nancial performance of respondent companies. The survey results also reveal that there is some uncertainty among respondents about how IFRS would impact on their internal operations and external nancial reporting, although a number of respondents had a general sense of how their rms protability and nancial position would be affected by the conversion to IFRS. Predictably, those IFRS expected to have the greatest impact on existing nancial reporting practices were in areas where there is currently no equivalent Australian accounting standard (most notably the measurement and recognition of nancial instruments, intangible assets and sharebased compensation). By and large respondents perceived that the IFRS transition issue was a signicant business priority that would involve a number of functions and responsibilities within the organization, particularly the external auditors, the investor relations department, the accounting and nance division, and the board of directors/CEO. We nd a strong correlation between rm size and the expected involvement of these and other functions, which suggests that the overall breadth and scale of the IFRS implementation task will be signicantly greater for larger companies. Although the survey results indicate that the costs of converting to IFRS are likely to be signicant for most respondent rms, the perceived benets of these standards were far less clear. The many claimed benets for adopting IFRS touted in the governments CLERP agenda were not supported by the majority of respondents. In fact, interest in IFRS by respondents appeared to be more motivated by bottom line concerns than with any specic macroeconomic benet or nancial reporting enhancement identied in the CLERP. Indeed, many respondents were openly cynical about these supposed benets, and many others were highly critical of the entire CLERP agenda on IFRS. Such criticisms were particularly noticeable from smaller companies in the sample. This raises further concerns about the relevance of IFRS to the 1500 or so public companies listed on the ASX that are outside the ASX top 200 rms (as of November 2005). If the current survey results are a guide, the CLERP proposals appear to require the great majority of public companies to engage in a potentially costly conversion exercise with potentially little or no direct benet. The overall conclusion is that the governments rapid timetable for the wholesale adoption of IFRS is not only precipitate and perhaps misplaced, but is also unlikely to deliver substantive benets to the majority of Australian reporting entities. The limitations of this study must also be considered. The major limitation relates to the sample size. With only 60 respondents, this sample size might limit the external validity of the studys ndings. However, a response rate of 35 per cent drawn from the top 200 Australian listed companies is considered adequate The Authors

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for this study. The study is also subject to all the usual biases associated with interviews (such as interviewer bias) identied in the literature (Dillman, 1978; Salant and Dillman, 1994). However, for the purposes of this study, we have little way of quantifying the impacts of such potential biases. A direction for future research is to compare the current ndings to other reporting jurisdictions that have also committed to the adoption of IFRS, most notably the EU. Such research can assist policy-makers to better assess how well IFRS are being received by the business communities of countries that support the adoption of these standards; identifying respondent characteristics and attributes that are most inuencing support (or lack of it) for IFRS (such as rm size, nancial performance or industry factors); as well as directing regulators to particular issues and controversies facing the broader implementation of IFRS around the world. Future research could also be extended to listed companies outside the ASX top 200, and Australian public sector and not-for-prot reporting entities. The general indication so far is that these entities are likely to be even more sceptical about the prospect of adopting IFRS than the rms surveyed in this study. A longitudinal study of the same respondents 2 or 3 years hence will also provide an interesting point of contrast with the current results. References
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