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The study problem
The above discussion suggests that there are benefits from the adoption of IFRS even in countries with local GAAP of similar quality to IFRS. However, it also draws attention to the difficulty of separating the effects attributable to IFRS from factors unrelated to the decision to adopt IFRS. It seems likely that any benefit from the adoption of IFRS in countries with local GAAP of similar quality to IFRS may be attributable to increased comparability, rather than quality. However, because the accounting amounts determined under local GAAP would be similar to those prepared in terms of IFRS, the source of such increased comparability is not clear.
Sources of benefits around the IFRS adoption period can be either directly related to the IFRS adoption decision or to concurrent changes unrelated to the IFRS adoption decision. I first consider sources of benefits that relate directly to the IFRS adoption decision. In a country with local GAAP of similar quality to IFRS, it is likely that the amounts in the financial statements themselves will not differ substantially from the amounts determined in accordance with IFRS. However, it is possible that global investors’ perception of the quality of those amounts could change in instances where the IFRS “label” is better known than the local GAAP. Adopting IFRS in full would then eliminate any concerns that investors might have regarding differences between local GAAP and IFRS. This argument could imply that the market is not efficient. However, based on the limited attention hypothesis of Hirshleifer and Teoh (2003:342), one can argue that IFRS adoption in countries already using high quality standards similar to IFRS makes it more salient to investors that those countries are reporting in terms of high quality accounting standards, thereby reducing their information acquisition and processing costs. I refer to this source as the IFRS “label” change.
Secondly, in considering the sources of comparability changes, it is important to remember that comparability implies that the financial statements of one firm is measured relative to the financial statements of another firm. Accordingly, any changes made to the accounting amounts of other firms in other countries can affect the comparability of a firm that have not made any changes. The second source of changes in comparability that relates to IFRS adoption is the adoption of IFRS by other countries, and I refer to this source as network benefits.
Changes made to the accounting amounts of comparable firms can also be unrelated to the IFRS adoption decision. For firms that have not adopted IFRS, convergence to IFRS or other improvements to standards applied by those firms could alter their accounting amounts. Changes made to IFRS standards around the time of IFRS adoption are unrelated to the IFRS adoption decision per se, but could affect the accounting amounts of IFRS adopters (Capkun, Collins & Jeanjean 2016:357). Changes in the institutional environment, such as enforcement changes, can also occur around the time of IFRS adoption. A number of countries have made enforcement changes at the same time as adopting IFRS, which makes it difficult to separate the effects of the change in standards from those of the change in enforcement (Leuz & Wysocki 2016:585).
Lastly, it is possible that changes unrelated to the financial reporting environment could affect the markets and how the markets view comparability. Leuz and Wysocki (2016:585) argue that these changes could include other regulatory changes, changes in technology or other market shocks. Barth et al. (2012:88) raise the possibility that increased globalisation as a result of increased global foreign investment can also lead to increased comparability of financial statements.
To disentangle the effects of the sources that relate to IFRS adoption from the effects of sources unrelated to IFRS adoption requires a setting where some of these sources were constant. Thus, firstly, the research question of my study requires a setting where the switch from local GAAP to IFRS resulted in few changes to standards and to the resulting amounts in the financial statements prepared in terms of those standards. Secondly, because the literature shows that enforcement is associated with IFRS adoption benefits, the study also calls for a setting where enforcement of standards remained relatively unchanged over the IFRS adoption period. Brüggemann et al. (2013:22) suggest that single country studies provide opportunities to control better for concurrent changes that might also have an impact on the capital markets, and that are difficult to control in cross-country studies. Chen and Schipper (2016:272-273) also believe that country-specific analyses of the effects of IFRS adoption can provide a better understanding of the mechanisms that
provide the observed results. By understanding what happens in a specific country with the adoption of IFRS and comparing the outcomes to those in other countries with different outcomes would make it possible to predict better what would happen if IFRS were to be adopted somewhere else. The current cross-country studies are unable to make such predictions, as the differences between the countries are not considered in detail.
The South African case
The adoption of IFRS in South Africa provides a suitable setting for my study. In South Africa, the adoption of IFRS resulted in the replacement of one set of high quality standards, South African Generally Accepted Accounting Practice (SA GAAP), with another set of high quality accounting standards, IFRS.5 According to the South African Institute of Chartered Accountants (SAICA), at the time of the adoption of IFRS, the South African standards were, word for word, the same as IFRS (SAICA 2004), since South Africa’s accounting standards were already harmonised with IFRS in 1995 (IFRS Foundation 2015). Moreover, from 2003, all IFRS standards issued by the IASB were adopted in South Africa without any amendments (SAICA 2003). The South African case is therefore different from that of most other countries that adopted IFRS, because some other countries replaced lower quality domestic accounting standards with higher quality IFRS.6 This fact limits the possibility of extending the results of prior studies of mandatory IFRS adoption in other countries to countries that already applied high quality accounting standards prior to the adoption of IFRS. My study provides an opportunity to distinguish between quality and comparability, because the quality of the standards can be expected to be high across the IFRS adoption period in the South African case.
Because the literature shows that enforcement is associated with the benefits of IFRS adoption, the study also calls for a setting where the enforcement of standards remained relatively unchanged over the IFRS adoption period. Christensen et al. (2013:155) found that South Africa did not make any substantive changes in enforcement between 2001 and 2009.
The literature has further shown that IFRS adoption benefits are greater in countries with strong institutional environments. South Africa’s auditing and reporting environments have consistently been ranked in the top 20 in the World Economic Forum’s (WEF’s) global competitiveness reports (2002-2008), suggesting a strong financial reporting environment. South Africa’s stock exchange, the Johannesburg Stock Exchange (JSE),8 is the largest stock exchange in Africa and the 19th largest stock exchange in the world, based on market capitalisation (JSE 2013). The JSE has also been ranked in the top 20 in the WEF’s global competitiveness reports (2003-2008) in terms of the regulation of the securities exchange.
South Africa therefore provides for a suitable setting to focus on possible changes in comparability following the adoption of IFRS, because the pre-existing quality of accounting standards is considered to be high. In addition, South Africa has a strong financial reporting environment and there were no changes in enforcement at the time and following the adoption of IFRS.
In addition, the South African setting provides an opportunity to distinguish between possible sources of changes in comparability after the adoption of IFRS. The accounting amounts of South African firms are unlikely to have been affected by IFRS adoption, and it is likely that they remained unchanged. Hence, any increase in the comparability of financial statements relating to IFRS adoption must either stem from changes in the markets’ perceptions regarding the comparability of South African firms’ financial statements (“label” benefits), or alternatively from changes in the financial statements of comparable firms from countries that adopted IFRS (network benefits), or both. To distinguish between these two sources of comparability changes, I assess separately the comparability between the financial statements of South African firms and those of adopters, and between those of South African firms and those of non-adopters.9 To investigate the possibility that changes in the comparability of financial statements of South African firms are unrelated to IFRS adoption, I also consider changes in the comparability of financial statements of South African firms relative to changes in the comparability of financial statements of non-adopters globally. In Section 1.4, I explain how I use these separate comparisons to disentangle the sources of changes in the comparability of financial statements.
CHAPTER 1: INTRODUCTION
1.1 Background
1.2 The study problem
1.3 The South African case
1.4 Main hypotheses
1.5 Research design
1.6 Summary of findings
1.7 Contribution
1.8 Structure of the thesis
CHAPTER 2: SOUTH AFRICAN ACCOUNTING ENVIRONMENT
2.1 Introduction
2.2 The history of accounting standards in South Africa
2.3 SA GAAP versus IFRS
2.4 South African institutional environment
2.5 Conclusion
CHAPTER 3: LITERATURE REVIEW
3.1 Introduction
3.2 Introduction to the adoption of IFRS
3.3 Hypotheses development: Comparability
3.4 Conclusion
CHAPTER 4: RESEARCH DESIGN
4.1 Introduction
4.2 Research strategy
4.3 Initial sample selection and data collection
4.4 Research design
4.5 Conclusion
CHAPTER 5: COMPARABILITY RESULTS
5.1 Introduction
5.2 Initial sample
5.3 Comparability sample: CompEarn
5.4 Descriptive statistics: CompEarn
5.5 Multivariate results: Earnings-return measures
5.6 Comparability sample: CompAccr
5.7 Descriptive statistics: CompAccr
5.8 Multivariate results: Accruals-cash flow measures
5.9 Conclusion
CHAPTER 6: ADDITIONAL ANALYSES
6.1 Introduction
6.2 Comparability and GAAP differences
6.3 Potential industry differences
6.4 Other market changes
6.5 Conclusion: Additional analyses
CHAPTER 7: ACCOUNTING QUALITY
7.1 Introduction
7.2 Prior research
7.3 South African context
7.4 Research design
7.5 Sample
7.6 Descriptive statistics
7.7 Results
7.8 Conclusion
CHAPTER 8: CONCLUSION
8.1 Introduction
8.2 Background to my study
8.3 Findings
8.4 Contribution
8.5 Implications
8.6 Limitations
8.7 Suggestions for future research
8.8 Concluding remarks
REFERENCES
