Accounting and Finance 48 (2008) 847870

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Journal compilation

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Blackwell Publishing Ltd Oxford, UK ACFI Accounting and Finance 0810-5391 1467-629x The Authors Journal compilation 2008 AFAANZ XXX

ORIGINAL ARTICLES

P. D. Palmer P. D. Palmer

Disclosure of the impacts of adopting Australian
equivalents of International Financial Reporting Standards

Philip D. Palmer

Flinders Business School, Flinders University, Adelaide, 5042, Australia

Abstract

This study investigates two disclosure variables (

Extent

and

Quality

) in relation
to compliance with paragraph 4.1 (b) of AASB 1047

Disclosing the Impacts of
Adopting Australian Equivalents to International Financial Reporting Standards

.
Using a sample of 150 Australian listed rms, I nd that the extent and quality
of disclosure is inuenced by rm size, leverage and auditor rm size, with the
latter variable being the most signicant. In general, the results suggest that many
companies might have relied on sample disclosures provided by their auditors,
perhaps limiting both quality and intent. Additionally, the ultimate usefulness
of broad and imprecise standards might be questionable. Smaller companies
might also require more guidance and assistance with their preparation for the
adoption.

Key words

: Voluntary disclosure; Mandatory disclosure; Agency theory;
International accounting standards

JEL classication

: M41

doi

:

10.1111/j.1467-629x.2008.00262.x

1. Introduction

This paper investigates the quality and quantity of disclosures made in
compliance with AASB 1047

Disclosing the Impacts of Adopting Australian
Equivalents to International Financial Reporting Standards

(Australian Account-
ing Standards Board, 2004). As a means of keeping stakeholders informed of the
likely impact of adoption of Australian Equivalents of International Financial

The author would like to thank Peter Gerhardy, Bruce Gurd, Matthew Tilling, Carol Tilt,
Bryan Howieson, Ian Zimmer (Deputy Editor) and an anonymous referee for their helpful
input, comments and feedback on this paper.

Received 28 April 2006; accepted 20 December 2007 by Ian Zimmer (Deputy Editor)

.
848 P. D. Palmer/Accounting and Finance 48 (2008) 847870

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Reporting Standards (AIFRS), the AASB released AASB 1047. The standard
applied to annual and interim reporting periods ending on or after 30 June 2004
to rst time adoption of AIFRS. AASB 1047 was of major signicance as it
required companies to disclose their level of preparedness leading up to the
adoption of AIFRS, and what they consider the impacts of adoption to be. The
objective of the standard was to ensure users of nancial reports have information
about the impact of adoption, as well as information concerning how companies
are preparing for adoption.
The scope of the present study is limited to paragraph 4.1 (b) of AASB 1047,
which requires a narrative explanation of the key differences in accounting
policies that are expected to arise from adopting AIFRS. An explanation of how
the transition to AIFRS is being managed, required under paragraph 4.1 (a) of
AASB 1047, is therefore not considered in the current study.
The transition to AIFRS has been perhaps the most signicant event affecting
nancial reporting in Australia for some time. The adoption of AIFRS is a once
in a generation change (PricewaterhouseCoopers, 2004); the biggest account-
ing disruption ever, eclipsing by far the introduction of the goods and services
tax in 2000 (Haswell and McKinnon, 2002, p. 9). Costs to companies in terms
of time and resources in preparing for the change were highly signicant (Ham,
2002) and in some cases the cost of preparation was expected to be in the tens
of millions of dollars (Moullakis, 2004). It was also expected that changes to
reported prot might consequently affect the ability to pay dividends, generate
a need to revise prot incentive schemes and impact on loan covenants (Pound,
2004) as well as possible adverse share price reactions (Dodd and Sheehan,
2004, p. 66).
This study demonstrates the effectiveness of a particular regulatory policy
by showing the extent and quality of disclosures made in complying with the
requirements of the standard. Additionally, the exploratory focus on the quality
of disclosure demonstrates the role of AASB 1047 in helping users of nancial
statements to cope with the change; that is, the quality of what is being disclosed
being just as important as the quantity of disclosure.
However, it is generally accepted that accounting rms, and particularly the
Big Four rms, develop so-called boilerplate disclosures for clients to adopt
in response to major new or amended disclosure requirements (e.g. Ramsay
cited in Maiden, 2002). Sample AIFRS reports are available from some of the
Big Four auditors. If it is the case that companies are using boilerplate dis-
closures to comply with AASB 1047, then the disclosures might not provide an
accurate reection of the impact of adopting AIFRS on the companies, or their
preparedness for adoption. Rather, the disclosures might, at least in part, reect
what the audit rm perceives as the areas where impacts are likely to be greatest
and the minimum required to garner the Australian Securities and Investments
Commissions acceptance. The danger of this practice is that companies might
not fully comprehend the requirements of AIFRS or have fully investigated the
impact on the company, potentially leading to problems when adoption occurs.
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Additionally, some disclosures that have simply been reproduced might be irrele-
vant to the circumstances of the company (National Institute of Accountants, 2005).
These factors might have implications for the quality of disclosures made to
comply with AASB 1047 and could result in the users of nancial reports,
including the shareholders, being misled (National Institute of Accountants,
2005). Furthermore, smaller companies might have fewer resources in place to
prepare for the adoption of AIFRS; therefore, this makes it more difcult for
them to cope with the demands of the change. This might result in disclosures
of lower quality for smaller companies.
The study seeks to investigate these issues by considering what corporate
characteristics (size, auditor size, industry, protability and leverage), if any,
appear to be not only related to the extent of disclosure, but also the quality of
disclosure. The remainder of the paper proceeds as follows. Section 2 provides
the theoretical background for the study and develops the hypotheses. Section 3
outlines the research methods used to test the hypotheses. Section 4 reports the
studys results. Section 5 concludes the study by discussing the implications of
the research ndings, the potential limitations of the study and considering
future areas of research.

2. Prior literature and hypothesis development

Prior investigations (e.g. Ernst & Young, 2005; Jubb, 2005) of disclosures
made under AASB 1047 nd that the most frequently cited expected accounting
policy differences because of adoption of AIFRS, in order of frequency, are:
AASB 112

Income Taxes

AASB 136

Impairment of Assets

AASB 2

Share-based Payment

AASB 132 and 139

Financial Instruments: Presentation and Disclosure

and

Financial Instruments: Recognition and Measurement

AASB 3

Business Combinations

(Jubb, 2005)
Additionally, Ernst & Young (2005) report that those accounting issues
expected to have a high impact on prot or equity are:
Share-based payments
Impairment of assets
Income taxes
Dened benet superannuation plans
The present study extends these preliminary surveys by examining the relation-
ship between extent and quality of disclosure and rm specic variables.
Previous disclosure studies have provided strong support for the relationship
between corporate characteristics and disclosure levels; however, the theoretical
basis for such a relationship is unclear (Wallace

et al

., 1994, p. 44). Beattie (2005)
suggests that positive accounting theorists have sought to move on from
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explaining accounting policy choices to explaining voluntary disclosure choices.
Agency costs are frequently cited as an explanation of why companies might
disclose nancial information (e.g. Chow and Wong-Boren, 1987; Hossain and
Adams, 1995) as such disclosures assist principals to monitor the activities of
their agents (Jensen and Meckling, 1976). In the case of the adoption of AIFRS
the amount and nature of information released by each company is determined
by the company (agent) and not prescribed by AASB 1047. Therefore, the extent
and quality of disclosure are in effect voluntary and a means whereby agents
can minimize agency costs.
In the disclosure literature, many expressions such as adequate (Singhvi and
Desai, 1971), comprehensiveness (Wallace

et al

., 1994) and depth (Naser

et al

.,
2002) have been used to describe the quality of disclosure. However, in most
cases quality of disclosure was only used in the sense of measuring the number
of items disclosed.
Studies that investigate both the quantity and quality of disclosure base the
measurement of quality on the depth of information; that is, on consideration
of whether the disclosure improves a users understanding of the nancial
statements (Wallace

et al

., 1994). Quality is difcult to dene and measure in
nancial accounting information and quality in relation to narrative accounting
disclosures is complex, context-sensitive and subjective (Beattie

et al

., 2004,
p. 229). The aspect of quality that is being investigated and measured in this study
is the perceived informativeness of the disclosure. Further detail regarding the
operationalizing of this measure of a quality score is detailed in Section 3.3.1.
Given the limited investigation of quality in any real sense in the prior litera-
ture, this part of the study is exploratory and, therefore, caution should be exer-
cised in interpreting the results.

2.1. Corporate size and disclosure

Corporate size is consistently found to be signicantly and positively related
to the extent of disclosure (Lang and Lundholm, 1993; Clarkson

et al

., 2003).
Larger companies are more likely to have the resources in place to prepare for
an event such as the adoption of AIFRS (Ahmed and Nicholls, 1994; Hossain
and Adams, 1995) and are likely to have a higher level of internal reporting to
keep senior management informed of progress and, therefore, are likely to have
relevant information available (Owusu-Ansah, 1998). Jones and Higgins (2006)
report that larger rms tend to have greater knowledge of the expected nancial
reporting impacts of adopting AIFRS, and are generally more advanced in the
implementation process than smaller rms. Additionally, larger companies are
likely to come under more scrutiny from nancial analysts (Hossain and Adams,
1995) and shareholders (Cooke, 1989) than smaller companies, leading to pressure
for better disclosure. Therefore, it is expected that larger rms will make more
disclosures and disclosures of better quality.
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H

1

: The extent of disclosure by companies complying with AASB 1047 is greater
for larger companies.
H

2

: The quality of disclosure by companies complying with AASB 1047 is
greater for larger companies.
2.2. Industry and disclosure

A number of studies investigate the relationship between a companys
industry membership and the extent of disclosure (e.g. Cerf, 1961; Owusu-
Ansah, 1998). Because of their unique features companies from a particular
industry group might have different disclosure levels compared to other
industries (Wallace

et al

., 1994). Although this study is limited to disclosures
that affect all rms in the sample (as detailed in Section 3.3.1) it is expected
that different industries will be impacted to a greater or lesser extent by the
adoption of AIFRS. Therefore, it is expected that there will be differing levels
of the extent and quality of disclosure.

H

3

: The extent of disclosure by companies complying with AASB 1047 differs
between industries.
H

4

: The quality of disclosure by companies complying with AASB 1047 differs
between industries.
2.3. Protability and disclosure

The protability of a company is also regularly included in disclosure studies
and hypothesized to be positively associated with the extent of a companys
disclosure (Inchausti, 1997; Owusu-Ansah, 1998). The adoption of AIFRS has
the potential to impact on the reported prots of Australian companies (Pound,
2004), and the majority of companies surveyed by Jones and Higgins (2006)
anticipate a negative impact from adoption of AIFRS and, therefore, potential
negative impacts on share prices (Dodd and Sheehan, 2004). Furthermore,
where a negative impact on protability is anticipated companies are found to
place higher importance on the issues surrounding adoption and how they could
communicate their continued underlying protability to their shareholders (Jones
and Higgins, 2006). Therefore, it is expected that more protable companies
will have a greater extent and quality of disclosure than less protable rms.

H

5

: The extent of disclosure by companies complying with AASB 1047 is greater
for companies with higher protability levels.
H

6

: The quality of disclosure by companies complying with AASB 1047 is
greater for companies with higher protability levels.
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2.4. Leverage and disclosure

Several studies investigate the relationship between leverage (book value of
debt to shareholders equity or book value of debt to total assets) and disclosure,
concluding that companies with a high level of leverage disclose more inform-
ation (Inchausti, 1997). This is because a company with a higher gearing level has
a greater obligation to satisfy the needs of its long-term creditors for information
(Wallace

et al

., 1994). The adoption of AIFRS has the potential to impact on the
balance sheet (Goodwin and Ahmed, 2006), which might in turn impact debt
covenants with consequences for stakeholders (Ormrod and Taylor, 2004). There-
fore, it is expected that companies with greater levels of debt have a greater extent
and quality of disclosure to explain possible changes to their balance sheets.

H

7

: The extent of disclosure made to comply with AASB 1047 is higher for
companies with a greater proportion of debt in their capital structure.
H

8

: The quality of disclosure made to comply with AASB 1047 is higher for
companies with a greater proportion of debt in their capital structure.
2.5. Auditor size and disclosure

Companies with sound corporate governance are likely to be preparing for
the impending adoption of AIFRS and, therefore, are in a position to be able to
provide detailed disclosures regarding their adoption programme. Clarkson

et al

. (2003) argue that better corporate governance will positively inuence the
extent of disclosure. External audits play a strong corporate governance role
and are instrumental in supporting transparent nancial reporting (Ashbaugh
and Wareld, 2003). In this study auditor size is used to capture the corporate
governance aspect of the disclosures.
The use of larger auditors can be an indication of higher-quality audits and
enhanced credibility and nancial accounting disclosures (Bushman

et al

.,
2004). It has been suggested that the contents of annual reports are not only
audited but also inuenced by auditors (Wallace

et al

., 1994) and the larger and
better known the auditor, the greater inuence they might be able to exercise
(Firth, 1979). Therefore, companies represented by the big international audi-
tors are likely to provide more detail in their annual reports than companies that
are not (Wallace

et al

., 1994). Many companies are expected to rely heavily on
their auditors for advice regarding the adoption of AIFRS and that the larger the
rm the greater will be the involvement of the auditor (Jones and Higgins,
2006). Therefore, it is expected that there will be a positive relationship
between auditor size and the extent and quality of disclosure.

H

9

: The extent of disclosure made to comply with AASB 1047 is greater for
companies that use a larger (Big Four) audit rm than those that use a smaller
audit rm.
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H

10

: The quality of disclosure made to comply with AASB 1047 is greater for
companies that use a larger (Big Four) audit rm than those that use a smaller
audit rm.

3. Research design

3.1. Sample selection

As the study is concerned with company characteristics that might affect the
quantity and quality of disclosures made by Australian companies, the relevant
population of the study was all companies listed on the Australian Stock
Exchange (ASX). As the study was conducted in 2005 the study used those
entities listed as at 31 December 2004 with balance dates on or between 30
June 2004 and 31 December 2004. A nal random sample of 150 companies
was selected.

1

3.2. Data source

The disclosures made to comply with AASB 1047 will be in narrative form
in the notes accompanying companies nancial reports, accessed from the
Connect 4 Database.

3.3. Measurement of the variables

The dependent variable in the present study is the extent and quality of
disclosures. Because of the variability of disclosures, the present study focused
on one mandatory disclosure item and measured the extent and quality of that
disclosure. AASB 1047 disclosures have the advantage of being discretely and
easily identied and isolated in the notes of the annual report and, hence, the
extent of disclosure can be directly measured. Table 1 reports the number of
sentences devoted to each of the AASB Accounting Standards that are men-
tioned by companies in their disclosures made to comply with AASB 1047,
broken down by their Global Industry Classication Standard (GICS) two-digit
industry sector codes.

2

Table 1 reveals that the 150 companies making up the
sample used in this study devoted 2956 sentences to disclosures relating to
specic accounting standards.

1

A minimum nal sample size of 150 was desired for testing individual predictors in stand-
ard multiple regression (Tabachnick and Fidell, 2001). Trusts, companies without GICS
classication or sector codes, with negative equity, using international accounting stand-
ards, suspended or delisted or not reporting between the dates covered by the requirements
of AASB 1047 were not included in the sample.

2

GICS is a joint Standard & Poors/Morgan Stanley Capital International product that aims
to standardize industry classications and denitions (Australian Stock Exchange, 2005).

8
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Table 1
Accounting standards referred to in AASB 1047 disclosures in annual reports of sample companies (by
number of sentences)
AASB Energy Materials Industrials
Consumer
discretionary
Consumer
staples
Health
care Financials
Information
technology
Telecom-
munication
services Utilities Total
10 15 20 25 30 35 40 45 50 55
% % % % % % % % % % %
2

a

13 8 113 11 58 14 48 13 23 17 58 22 30 12 36 17 15 22 3 12 397 13
3 0 0 47 4 64 15 62 17 10 7 24 9 15 6 14 7 11 16 0 0 247 8
6 34 21 131 12 0 0 0 0 0 0 0 0 0 0 10 5 0 0 0 0 175 6
101 0 0 0 0 0 0 0 0 0 0 0 0 1 0 0 0 0 0 0 0 1 0
108 0 0 14 1 0 0 1 0 0 0 0 0 3 1 3 1 0 0 0 0 21 1
112

a

26 16 181 17 88 21 59 16 22 16 39 14 59 24 43 21 14 21 4 15 535 18
116 0 0 30 3 22 5 11 3 0 0 7 3 1 0 0 0 3 4 0 0 74 3
117 0 0 3 0 0 0 0 0 0 0 5 2 0 0 0 0 0 0 0 0 8 0
118 0 0 0 0 0 0 3 1 3 2 0 0 3 1 4 2 0 0 0 0 13 0
119 3 2 21 2 10 2 12 3 3 2 13 5 0 0 0 0 0 0 0 0 62 2
120 0 0 0 0 6 1 0 0 0 0 6 2 0 0 0 0 0 0 0 0 12 0
121 4 2 13 1 16 4 12 3 5 4 0 0 0 0 0 0 0 0 0 0 50 2
127 0 0 2 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 2 0
128 0 0 4 0 1 0 10 3 0 0 0 0 0 0 0 0 0 0 0 0 15 1
131 5 3 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 5 0
132 1 1 1 0 3 1 0 0 0 0 0 0 0 0 2 1 0 0 0 0 7 0
136

a

34 21 187 18 63 15 67 19 25 19 52 19 30 12 37 18 22 32 8 31 525 18
137 13 8 69 7 2 0 0 0 3 2 0 0 0 0 2 1 0 0 0 0 89 3
138

a

3 2 46 4 18 4 34 9 4 3 35 13 26 11 28 14 3 4 3 12 200 7
139

a

26 16 195 18 74 17 42 12 37 27 30 11 70 28 28 14 0 0 8 31 510 17
140 0 0 0 0 0 0 0 0 0 0 0 0 8 3 0 0 0 0 0 0 8 0
162 100 1057 100 425 100 361 100 135 100 269 100 246 100 207 100 68 100 26 100 2956 100

a

Indicates the standards analysed in the current study.
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To draw valid conclusions about why rms might have disclosed more or less
than others, or have disclosures of a greater or lesser quality, the effect of
adopting AIFRS must be equal across the sample. Otherwise it might be the
case that some rms are more (less) effected by the adoption of AIFRS than
others and, therefore, disclose more (less) as a result. Therefore, disclosures
investigated in this study are limited to those that affect all the rms in the
sample, highlighted in Table 1.

3

These results are similar to those reported in earlier studies considering
AASB 1047 disclosures (Ernst & Young, 2005; Jubb, 2005), which found
similar accounting issues were the most frequently cited.
The analysis in the current study considers the total extent of disclosures
as well as the quality of disclosures; that is, inferences are drawn from what
companies have disclosed in their notes. Therefore, the unit of analysis for this
study is sentences, which is the preferred unit of analysis if a meaning is to be
inferred (Gray

et al

., 1995), with the total number of sentences giving the
extent of disclosure concerning the adoption of AIFRS by each company in the
study. Each sentence was given a qualitative score, based on the perceived
informativeness of the information disclosed. Scores were awarded from 1 to
4 based on a scale where the greater the specicity of the information, the
more useful it is deemed to be and, hence, of greater quality.

4

The rating
scheme used in this study is outlined in Table 2.

5

Having completed the rating of sentences, the qualitative score for each
company was then totalled.

6

3.3.1. Independent variables

Prior studies have adopted different measures of corporate size; however,
Ahmed and Nicholls (1994, p. 65) state that there is no overriding theoretical
reason to select one variable rather than another. The current study adopts total

3

Although Table 1 indicates no rms in the Telecommunication Services sector mention
AASB 139 as being relevant to them, this is more likely to be due to the small number of
rms in that sector. AASB 139 was still included in the study because of its signicant
impact on the other nine sectors.

4

A similar (four-point) scale is used by Clarkson

et al

. (2003) when considering compa-
nies voluntary disclosures concerning the year 2000 systems issue.

5

The coding rules and the coding of a sample of companies was reviewed by an independ-
ent accounting researcher.

6

An initial version of the paper used a quality score per sentence by dividing the total qual-
ity score by the number of sentences. In the present paper, the quality score used is the total
quality score, acknowledging that there is likely to be some interaction between the dimen-
sions of extent and quality. Statistical results obtained under the alternate measure of quality
were not materially different to those reported here.
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assets as a measure of corporate size.
7
The 150 companies included in the study
are classied according to Sector, being the broadest classication, to avoid
the problem of sparse cells. A
2
-test was conducted to ensure the sample was
representative of the population. The results indicate that there is no statistical
difference between the sample and population with respect to industry classica-
tion (
2
statistic = 5.5565, p = 0.783).
7
Size has also been measured as net sales (e.g. Cooke, 1989) and market capitalization (e.g.
Chow and Wong-Boren, 1987).
Table 2
Coding rules used as the basis for the qualitative score applied to each sentence of disclosure
Rating Criteria Examples
Ratings apply in relation to specic standards
1 Applies where the sentence identies issues
specically relevant to the company; for
example, detailing the existing accounting
policy or practice of the company, or detailing
the accounting policy or practice under the
new standard. However, no indication of the
impact of the change in accounting policy or
practice is mentioned in a sentence rated with
a score of 1.
In terms of pending AASB 136 Impairment
of Assets, the recoverable amount of an asset
will be determined as the higher of fair value
less costs to sell and value in use.
2 Indicates disclosure of some impact on the
company without necessarily specifying what
that impact will be. This indicates that there
will be some change in policy or practice that
will impact on revenues, expenses, assets,
liabilities and/or equity, but the extent of
the impact has not yet been determined.
Additionally, sentences that stated there
might be some impact were included in
this rating.
Under AASB 2 Share Based Payments, the
company will be required to determine the
fair value of options issued to employees as
remuneration and recognise an expense in the
Statement of Financial Performance.
For 3 or 4 the sentence must explicitly state that there will or will not be an impact
3 Applies where a sentence gives details
about the impact of adopting Australian
International Financial Reporting Standards
and gives an indication of the nature and
direction of the impact.
The recognition of the share-based
compensation expense will decrease the
consolidated entitys prot in future.
4 Has the same criteria as 3, with the additional
requirement that the dollar value of the
expected change is provided. Sentences with
scores of 3 or 4 then give an indication of the
direction of the change.
The maximum deferred tax liability that might
be required to be recorded in relation to this is
approximately $A20 445 000.
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As the industry variable is categorical, dummy variables are used in the
regression analysis, with the Energy sector used as the reference group.
8
Return
on equity (e.g. Inchausti, 1997) and Return on assets (e.g. Raffournier, 1995)
are used as measures of protability in this study and Debt to assets (e.g.
Alsaeed, 2005) and Debt to equity (e.g. Wallace et al., 1994) are used as a
measure of leverage. Auditor is classied as being either a member of the Big
Four (Deloitte Touche Tohmatsu, Ernst & Young, PricewaterhouseCoopers and
KPMG), or Other. A dummy variable (1, 0) is used in the regression analysis
where the dummy variable takes the value of 1 if the company is audited by one
of the Big Four rms.
3.4. Statistical tests
Both univariate and multivariate methods are used to test the hypotheses
developed above. Pearson productmoment correlation coefcients are used
to investigate the relationship between the explanatory variables, and an
independent-sample t-test is used to examine the relationship between industry
and the dependent variables. Between groups analysis of variance (anova) tests
are conducted to test differences in the medians of the dependent variables for
companies audited by different accounting rms. The multivariate test used in
this study is standard multiple regression.
4. Results
4.1. Descriptive statistics
Table 3 contains the descriptive statistics for the dependent variables (Panel A)
and the non-categorical independent variables (Panel B) dened in the previous
section.
The skewness and kurtosis coefcients of all the variables included in Table 3
indicate departures from normality, with the exception of Debt to assets, which
is only slightly positively skewed.
9
Additionally, the KolmogorovSmirnov one-
sample test statistics for all of the variables, apart from Debt to assets, are all
signicant, suggesting violation of the assumption of normality. To bring the
variables closer to normality for the purpose of the regression analysis trans-
formation of the variables was undertaken.
8
The Industry Sectors represented in the study and their distributions are detailed in Panel
C of Table 3.
9
Foster (1986) suggests that a benchmark for suspecting positive and negative skewness is
a skewness coefcient of greater than 0.50 or less than 0.50, respectively. Likewise, Foster
(1986) suggests that a kurtosis coefcient of greater than 1.0 or less than 1.0 indicate a
violation from normality.
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Table 3
Descriptive statistics for the dependent variables extent and quality of disclosure and independent variables size, leverage, protability, industry and auditor:
untransformed data
Panel A: Dependent
variables Panel B: Non-categorical independent variables
Extent Quality Assets
Debt to
assets
Debt to
equity
Return on
assets
Return on
equity
Valid observations 150 150 150 150 150 150 150
Minimum 0 0 299 779 0.01 0.01 2.39 3.69
Maximum 48 61 10 286 400 000 0.95 17.27 0.79 0.90
Mean 11.54 15.52 412 801 296 0.3153 1.0470 0.10 0.1297
Standard deviation 8.985 11.680 1 268 576 884 0.25080 2.295 0.3555 0.57158
Skewness 1.661 1.382 4.784 0.631 4.721 2.659 3.399
Kurtosis 3.595 2.381 28.077 0.487 25.285 13.051 17.629
KolmogorovSmirnov statistic 2.008 1.840 4.736 1.517 3.994 2.257 2.298
p-value (two-tailed) 0.001 0.002 0.000 0.020 0.000 0.000 0.000
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Panel C: Categorical independent variables
Industry sector Auditor
Frequency Percentage Frequency Percentage
Energy 9 6.0 Deloitte Touche Tohmatsu 18 12.0
Materials 49 32.7 PricewaterhouseCoopers 19 12.7
Industrials 19 12.7 KPMG 18 12.0
Consumer discretionary 18 12.0 Ernst & Young 29 19.3
Consumer staples 6 4.0 Other 66 44.0
Health care 12 8.0 Total 150 100.0
Financials 17 11.3
Information technology 13 8.7
Telecommunication 5 3.3
Utilities 2 1.3
Total 150 100.0
Extent is the number of sentences disclosed by a company. Quality is the quality score of the disclosures based on the coding rules outlined in Table 3.
Assets is obtained from the annual report and used as a measure of the size of the company. Debt to assets is the total liabilities divided by total assets (obtained
from the annual report and used as a measure of leverage). Debt to equity is the total liabilities divided by total equity (obtained from the annual report and used
as a measure of leverage). Return on assets is prot divided by assets (obtained from the annual report and used as a measure of protability). Return on
equity is prot divided by equity (obtained from the annual report and used as a measure of protability).
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Table 4
Descriptive statistics for the dependent variables Extent and Quality of disclosure and non-categorical independent variables size, leverage and protability:
transformed data
Panel A: Dependent
variables Panel B: Non-categorical independent variables
Extent Quality Assets
Debt to
assets
Debt to
equity
Return on
assets
Return on
equity
Valid observations 150 150 150 150 150 150 150
Minimum 0 0 5.48 0.11 1.90 0.24 0.18
Maximum 6.93 7.81 10.01 0.97 1.24 1.00 1.00
Mean 3.13 3.632 7.50 0.5079 0.4987 0.5439 0.5191
Standard deviation 1.33 1.53 0.9497 0.240 0.69282 0.087 0.11
Skewness 0.101 0.012 0.591 0.023 0.040 0.657 0.421
Kurtosis 0.825 0.503 0.027 1.176 0.583 6.755 3.779
KolmogorovSmirnov statistic 1.037 0.878 1.044 1.415 1.084 1.385 1.073
p-value (two-tailed) 0.232 0.423 0.226 0.037 0.191 0.043 0.200
Extent is the number of sentences disclosed by a company (square root transformation applied). Quality is the quality score of the disclosures based on the
coding rules outlined in Table 3 (square root transformation applied). Assets is obtained from the annual report and used as a measure of the size of the company
(logarithmic transformation applied). Debt to assets is total liabilities divided by total assets (obtained from the annual report and used as a measure of leverage;
square root transformation applied). Debt to equity is total liabilities divided by total equity (obtained from the annual report and used as a measure of leverage;
logarithmic transformation applied). Return on assets is prot divided by assets (obtained from the annual report and used as a measure of protability; reect
and inverse transformation applied). Return on equity is prot divided by equity (obtained from the annual report and used as a measure of protability; reect
and inverse transformation applied).
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Tabachnick and Fidell (2001) suggest that consideration should be given to
transformation of variables in all situations unless there is some valid reason
not to; for example, difculty of interpretation of the transformed variables.
Many of the disclosure studies considered in this study have applied logarithmic
and square root transformations to the variables of interest (e.g. Ahmed and
Nicholls, 1994; Wallace et al., 1994; Hossain and Adams, 1995; Raffournier,
1995). Cohen and Cohen (1983) suggest that there might be more than one trans-
formation that will assist in correcting for failure of the assumption of normality.
In the present study, each variable was transformed using square root and log
transformations and negatively skewed variables were reected before calcula-
tion of their inverse.
10
The transformed variable with the distribution that was
closest to normal was selected for inclusion in the parametric tests. Table 4 con-
tains the descriptive statistics for the transformed variables.
As can be seen from Table 4 the departures from normality, reected in the
skewness and kurtosis coefcients, is less for all of the transformed variables
than for the corresponding raw variables, except for Debt to assets, where the
skewness coefcient has decreased but the kurtosis coefcient has increased
over that of the raw variable. For most of the transformed variables, with the
exceptions of Quality and Debt to equity, some departure from normality is still
evident. However, applying a 0.05 level of signicance in the Kolmogorov
Smirnov tests, the only variables for which the null hypothesis of normality is
rejected is Debt to assets and Return on assets, which have probability levels
associated with them of 0.037 and 0.043, respectively.
4.2. Univariate tests
Correlation analysis was used to test the relationship between the transformed
dependent variables, the transformed non-categorical independent variables and
the dichotomous categorical independent variables. Table 5 shows the relevant
Pearson productmoment correlation coefcients.
As can be seen from the rst column of the table the correlation coefcients
between Extent and the independent non-categorical variables are signicant
11
10
A variable is reected by nding the largest score in the distribution and adding one to it
to form a constant that is larger than any score in the distribution. A new variable is then
created by subtracting each score from the constant. Therefore, a variable with negative
skewness is converted to one with positive skewness before transformation (Tabachnick and
Fidell, 2001). The reection of a variable normally requires that the interpretation of it be
reversed, or the variable re-reected after transformation (Tabachnick and Fidell, 2001).
However, calculating the inverse of the variables after reecting itself acts as a reection;
hence, no reversal of interpretation is required.
11
Cohen (1988) suggests that correlations of 0.100.29 are small, 0.300.49 are medium
and 0.501.0 are large.
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Table 5
Pearson correlation coefcients for the variables in the model
Ext Qual As DA DE RA RE Aud En Ma In Cd Cs H F It Ts U
Ext 1.00
Qual 1.00
As 0.36*** 0.31*** 1.00
DA 0.30*** 0.26*** 0.56*** 1.00
DE 0.29*** 0.25*** 0.55*** 0.99*** 1.00
RA 0.09 0.06 0.38*** 0.15** 0.12 1.00
RE 0.14** 0.11 0.41*** 0.18** 0.16* 0.95*** 1.00
Aud 0.41*** 0.39*** 0.46*** 0.18** 0.18* 0.20*** 0.25*** 1.00
En 0.06 0.06 0.01 0.06 0.06 0.11 0.12 0.05 1.00
Ma 0.01 0.02 0.07 0.35*** 0.36*** 0.05 0.06 0.04 0.17** 1.00
In 0.06 0.06 0.07 0.24*** 0.24*** 0.06 0.02 0.06 0.10 0.27*** 1.00
Cd 0.01 0.01 0.19** 0.23*** 0.21*** 0.12 0.05* 0.01 0.10 0.26*** 0.14** 1.00
Cs 0.04 0.03 0.05 0.14** 0.13 0.03 0.10 0.03 0.05 0.14** 0.08 0.08 1.00
H 0.12 0.16** 0.01 0.08 0.06 0.13 0.11 0.06 0.08 0.21*** 0.11 0.11 0.06 1.00
F 0.08 0.10 0.02 0.01 0.03 0.09 0.06 0.02 0.09 0.25*** 0.14** 0.13 0.07 0.11 1.00
It 0.05 0.01 0.22*** 0.01 0.03 0.04 0.07 0.11 0.08 0.22*** 0.12 0.11 0.06 0.09 0.11 1.00
Ts 0.05 0.08 0.04 0.01 0.01 0.04 0.06 0.02 0.05 0.13 0.07 0.07 0.04 0.06 0.07 0.06 1.00
U 0.00 0.01 0.10 0.19** 0.20*** 0.07 0.17** 0.01 0.03 0.08 0.04 0.04 0.02 0.03 0.04 0.03 0.02 1.00
** and *** denote signicance at the 0.05 and 0.01 levels (one-tailed), respectively. Pearson correlations are adjusted automatically by spss when variables are
dichotomous. Ext (Extent) is the number of sentences disclosed by a company (square root transformation applied). Qual (Quality) is the quality score of the
disclosures based on the coding rules outlined in Table 3 (square root transformation applied). As (Assets) is obtained from the annual report and used as a
measure of the size of the company (logarithmic transformation applied). DA (Debt to assets) is total liabilities divided by total assets (obtained from the annual
report and used as a measure of leverage; square root transformation applied). DE (Debt to equity) is total liabilities divided by total equity (obtained from the
annual report and used as a measure of leverage; logarithmic transformation applied). RA (Return on assets) is prot divided by assets (obtained from the annual
report and used as a measure of protability; reect and inverse transformation applied). RE (Return on equity) is prot divided by equity (obtained from the
annual report and used as a measure of protability; reect and inverse transformation applied). Aud (Auditor) is a dummy variable (1 when a Big Four auditor
is used (Deloitte Touche Tohmatsu, Ernst & Young, PricewaterhouseCoopers or KPMG); 0 otherwise). En, energy sector; Ma, materials sector; In, industrials
sector; Cd, consumer discretionary sector; Cs, consumer staples sector; H, health sector; F, nancial sector; It, information technology sector; Ts,
telecommunication services sector; U, utilities sector. Dummy variables used.
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at the indicated levels,
12
are all positive, and of the hypothesized sign except for
one of the transformed measures of protability. Using Cohens (1988) guide-
lines, the correlation between Extent and Size and Extent and Leverage is
medium, but small for Protability. Therefore, it appears that some support for
Hypotheses 1 and 7 is provided by this test, that larger companies and com-
panies with more debt in their structure disclose more information. The test
appears to provide limited support for Hypotheses 5, that more protable
companies disclose more information.
However, it is the correlation coefcient between Extent and the independent
categorical variable Auditor that is the most signicant, providing support for
Hypothesis 9, that auditor size impacts on the extent of disclosure.
The correlation coefcients do not support the hypothesis relating to the
expected relationship between the dependent variable Extent and the explana-
tory variable Industry.
While the dependent variable Extent measures the amount of disclosure, the
dependent variable Quality is the total informativeness score awarded to each
company. Table 5 also contains the Pearson productmoment correlation co-
efcients for the transformed dependent variable Quality and the transformed
independent variables included in this study. As can be seen from the second
column of the table there is medium support (using Cohens (1988) guidelines)
for Hypothesis 2, that larger companies have a greater quality score and limited
support for Hypothesis 8, that companies with more debt in their structure have
a greater quality score. However, consistent with the extent result, it is the size
of the companys auditor that has the strongest relationship with the quality
of disclosure, providing support for Hypothesis 10. The correlation coefcients
do not support the hypothesis relating to the expected relationship between the
dependent variable Quality and the explanatory variables for protability or
Industry.
Table 5 indicates that there is a medium (up to 0.560) correlation between
Assets and all of the other non-categorical independent variables, reecting that
size probably captures most of other inuences because of a high correlation
with many variables (Raffournier, 1995, p. 275). Additionally, as would be
expected, there is a signicant correlation between Debt to assets and Debt to
equity and Return on assets and Return on equity. The rst pair of variables
both measure leverage, and the latter pair measure protability. The existence
of interaction between the independent variables indicates that multivariate
analysis is required to account for such relationships. Any single multivariate
analysis will only include one of the independent variables measuring leverage
and protability.
12
Probability values of 0.050 or better are regarded as signicant for the purpose of this
study.
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anova tests were conducted to further explore the impact of auditor size on
the extent and quality of disclosure. The results of the anova tests are pre-
sented in Panel A of Table 6.
The results of the anova tests indicate that there is a statistically signicant
difference at the p < 0.0001 level in Extent and Quality scores for the different
groups of auditors. The effect size, calculated using eta squared was 0.257 for
Extent and 0.243 for Quality, which in Cohens (1988) terms are considered
large. Therefore, when taken as a group there is a signicant difference in the
Extent and Quality scores between the Big Four and Other. The tests pro-
vide evidence to support Hypotheses 9 and 10, that on average, companies
audited by bigger auditors have higher Extent and Quality scores.
Post-hoc comparisons using the Tukey HSD test indicate that for Extent and
Quality, the mean score for Other was only statistically different to that of
Deloitte Touche Tohmatsu and Ernst & Young. Panel B of Table 6 displays the
means and standard deviations for the auditors for both Extent and Quality.
Table 6
Investigation of the impact of auditor size on the extent and quality of disclosure and post-hoc
comparison of variations between the Big Four auditors
Panel B: Auditor mean and standard deviation for dependent variables Extent and Quality
Panel A: Analysis of variance test results
Sum of squares Degree of freedom Mean square F Probability
Extent
Between groups 67.75 4 16.938 12.538 0.000
Within groups 195.88 145 1.351
Total 263.63 149
Quality
Between groups 84.76 4 21.189 11.620 0.000
Within groups 264.40 145 1.824
Total 349.16 149
Auditor Number
Extent Quality
Mean Standard deviation Mean Standard deviation
Big Four
Deloitte Touche Tohmatsu 18 3.84 1.38 4.45 1.51
PricewaterhouseCoopers 19 2.97 0.76 3.39 0.92
KPMG 18 3.05 1.16 3.53 1.36
Ernst & Young 29 4.20 1.21 4.84 1.29
Other 66 2.52 1.16 2.96 1.41
Total 150
Extent is the number of sentences disclosed by a company (square root transformation applied).
Quality is the quality score of the disclosures based on the coding rules outlined in Table 3 (square root
transformation applied). Other is an auditor other than the Big Four.
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It is interesting to note that the rankings for the auditors are the same for
extent and quality of disclosure. One company could have a higher extent of
disclosure than another, but these additional words might not necessarily
improve a readers understanding (Wallace et al., 1994), but might just be pad-
ding. The fact the rankings for extent and quality are the same indicates this is
not the case in this study, but the additional disclosures have potentially
improved the readers understanding of the impact of adoption of AIFRS. This
indicates that in disclosure studies of this type the quality of information being
disclosed is equally important as the extent of disclosure.
The relationship between the dependent variables and the categorical explan-
atory variable Industry was investigated using the independent-samples t-test.
The results indicate that it is not possible to reject the null hypothesis of no
difference in the extent of information disclosed across the different industry
sectors; that is, the evidence does not support Hypothesis 3 or Hypothesis 4, that
the extent or quality of disclosure will be different for companies in different
industries.
13
4.3. Multivariate tests
Multiple regression analysis was used for multivariate testing of the hypo-
theses. Each of the transformed dependent variables, Extent and Quality, was
regressed against the transformed independent variables of Size, Leverage and
Protability. The dummy variable for Auditor and dummy variables for Industry
Sectors were also included. The results of these regressions are reported in
Table 7.
14
4.3.1. Extent
The multiple regression model is highly signicant (p 0.001).
15
The coef-
cient of determination (adjusted R
2
) indicates that 19 per cent of the variation
in the dependent variable is explained by variation in the independent variables.
13
The non-parametric alternative KruskalWallis test was conducted on the raw data, with
the results being consistent with the t-test results.
14
Both models use the transformed variable Return on assets as the measure of protability
and Debt to assets as the measure of leverage. The regressions on both of the dependent
variables were re-estimated using the alternative measure for protability of Return on
equity and the alternative measure for leverage of Debt to equity. The results of these addi-
tional tests were not different in any signicant way from the results reported in Table 7.
15
Both regression models reported were tested for heteroscedacity and multicollinearity.
Neither was found to be a signicant factor affecting the reliability of the results. Tolerance
Ination Factors (VIF) are also reported in Table 7 with none being over 5, which Hair et al.
(2003) suggest would be the maximum VIF value before multicollinearity becomes a factor.
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Table 7
Regression of size, leverage, protability, industry and auditor on extent and quality of disclosure by
companies complying with AASB 1047
Explanatory variable Coefcient t-statistic Signicance
Variance
ination
factor
Panel A: Dependent variable: Extent
Constant 0.564 0.574
Assets 0.111 1.015 0.312 2.216
Debt to assets 0.233 2.260 0.025 1.951
Return on assets 0.110 0.137 0.891 1.250
Auditor 0.316 3.744 0.000 1.313
Materials 0.173 1.114 0.267 4.426
Industrials 0.064 0.510 0.611 2.901
Consumer discretionary 0.021 0.168 0.867 2.771
Consumer staples 0.056 0.588 0.558 1.672
Health care 0.175 1.593 0.114 2.210
Financials 0.002 0.015 0.988 2.581
Information technology 0.081 0.718 0.474 2.350
Telecommunication services 0.006 0.061 0.951 1.523
Utilities 0.019 0.229 0.819 1.276
R
2
= 0.190; F = 3.686; p = 0.000; n = 150
Panel B: Dependent variable: Quality
Constant 1.077 0.284
Assets 0.082 0.740 0.461 2.216
Debt to assets 0.201 1.922 0.057 1.951
Return on assets 0.032 0.385 0.701 1.250
Auditor 0.321 3.751 0.000 1.313
Materials 0.164 1.040 0.300 4.426
Industrials 0.069 0.539 0.591 2.901
Consumer discretionary 0.046 0.366 0.715 2.771
Consumer staples 0.056 0.576 0.566 1.672
Health care 0.210 1.890 0.061 2.210
Financials 0.012 0.101 0.920 2.581
Information technology 0.114 0.994 0.322 2.350
Telecommunication services 0.035 0.379 0.706 1.523
Utilities 0.003 0.040 0.968 1.276
R
2
= 0.168; F = 3.307; p = 0.000; n = 150
Extent is the number of sentences disclosed by a company (square root transformation applied).
Quality is the quality score of the disclosures based on the coding rules outlined in Table 3 (square root
transformation applied). Assets is obtained from the annual report and used as a measure of the size of
the company (logarithmic transformation applied). Debt to assets is total liabilities divided by total
assets (obtained from the annual report and used as a measure of leverage; square root transformation
applied). Return on assets is prot divided by assets (obtained from the annual report and used as a
measure of protability; reect and inverse transformation applied). Auditor is a dummy variable (1 when
a Big Four auditor is used (Deloitte Touche Tohmatsu, Ernst & Young, PricewaterhouseCoopers or
KPMG); 0 otherwise). Materials, Industrials, Consumer discretionary, Consumer staples, Health care,
Financials, Information technology, Telecommunication services and Utilities are dummy variables
representing industry sectors as detailed in Panel C of Table 5.
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The computed R
2
statistic indicates that the explanatory power of the model is
moderate, but is similar to those reported in the other disclosure studies. The
coefcients for Auditor and Leverage are statistically signicant (p 0.001 and
p 0.05). Of the two statistically signicant variables, Auditor (beta = 0.316) is
making the strongest unique contribution to explaining the dependent variable,
when the variance explained by all other variables in the model is controlled for
(compared to Debt to assets with a beta of 0.233). The results provide evidence
to support Hypotheses 7 and 9, that companies with more debt in their capital
structures and those audited by bigger auditors disclose more information.
4.3.2. Quality
The multiple regression model for Quality is highly signicant (p 0.001).
The coefcient of determination (adjusted R
2
) indicates that 16.8 per cent of the
variation in the dependent variable is explained by variation in the independent
variables, indicating that the explanatory power of the model is moderate. The
coefcient for Auditor is statistically signicant (p 0.001) and of the variables
(beta = 0.321) is making the strongest unique contribution to explaining the
dependent variable, when the variance explained by all other variables in the
model is controlled for. The signicance of the coefcient for Leverage is close
to acceptance (p = 0.057). The results provide evidence to support Hypothesis
10, that companies audited by bigger auditors have disclosures of a higher quality
and there is limited support for Hypothesis 8, that companies with more debt in
their capital structures have disclosures of a higher quality.
5. Conclusions
The present study is particularly important given the signicance of the adop-
tion of AIFRS and the uncertainty surrounding adoption. Size tends to dominate
other variables in most disclosure studies investigating the relationship between
levels of disclosure and corporate characteristics. However, the present study
conducted in an Australian setting and using the introduction of AIFRS as an
opportunity for investigating disclosure, nds that in this case the size of a com-
panys auditor is making the strongest contribution to the extent of disclosure.
The present study also explores the quality of disclosure and nds that,
consistent with the extent of disclosure, auditor size is making the strongest
contribution to the quality of disclosure; that is, the auditor effect is consistent
across both extent and quality of disclosure. It might be the uniqueness of the
disclosure being examined that partly explains the results of this study being
inconsistent with the results of previous disclosure studies that mainly nd size
to be the most signicant inuence on the extent of disclosure. The results
suggest that many companies might have relied extensively, if not solely, on
example disclosures provided by their auditors as a means of meeting the
requirements of AASB 1047.
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If it is the case that companies have relied on sample disclosures provided
by their auditor then the disclosures might not provide an accurate reection of
the impact of adopting AIFRS on them, or their preparedness for adoption.
Furthermore, where the requirements of such a standard are broad and open to
interpretation, companies might be tempted to use boilerplate disclosures or
be inclined to disclose the minimum amount to meet the requirements of the
standard and satisfy regulators. Therefore, the information provided might be of
doubtful value to nancial statement users; that is, it might not provide relevant
and reliable information which is of assistance in the decision-making of users.
The present study is subject to some limitations. First, the creation of a
disclosure index requiring the awarding of a quality score to each sentence, as
detailed in Section 3.3.1, involves a level of subjectivity. However, as outlined,
actions were taken to overcome this problem. Second, as Section 3.1 details,
the number of companies in the sample does not allow the companies to be
classied into a more specic classication than the 10 GICS industry sectors.
This provides an opportunity for further investigation of the research question
utilizing a larger sample, allowing industry to be classied into more specic
categories than the 10 sectors used in the current study. An additional direction
for future research is to investigate the actual impact of the requirements of
specic standards on companies with a particular focus on those standards that
have been identied in Section 4.1 as potentially impacting most broadly across
the sample and those that are identied as having the largest potential impact on
the reported prots and retained earnings of companies. This research would
provide more detailed insights into the results of the current study.
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