https://orcid.org/0000-0002-9267-9588
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Abstract
We analyse the impact of the introduction of IFRS 11 on the comparability of accounting information. IFRS 11 eliminated proportionate consolidation as an alternative to accounting for interests in joint ventures. Our sample comprises 2,059 firms with interests in joint ventures from 26 countries over the period 2005–2016. Overall, the comparability of accounting information decreased after the adoption of IFRS 11, but the effect is not uniformly distributed internationally. Further analysis of the information disclosed by the venturers in the notes indicates that the increase in disclosure requirements proposed by IFRS 12 may not fully mitigate the consequences of the elimination of proportionate consolidation in IFRS 11.
Acknowledgements
This research was developed under the IAAER, IASB and KPMG Research Programme ‘Informing the IASB Standard Setting Process’ (Round 6). We are grateful for helpful comments and feedback we received from all participants of this research programme, especially the Programme Advisory Committee, composed of Mary Barth, Katherine Schipper, Donna Street, Ann Tarca, Anne McGeachin, Holger Erchinger and Paul Munter. We are grateful to the editors of Accounting and Business Research, Mark Clatworthy, Juan Manual García Lara, and Edward Lee, for supporting this research, to the Guest Editors of the IASB/ABR Research Forum, Peter Joos, Per Olsson and Alfred Wagenhofer, to the discussant (Katherine Schipper) and to the anonymous reviewer, for their valuable comments and suggestions.
Disclosure statement
No potential conflict of interest was reported by the author(s).
Supplemental data
Supplemental data for this article can be accessed http://doi.org/10.1080/00014788.2022.2050171.
Notes
1 An example is the environmental disaster that occurred in Brazil in 2015, with the rupture of the tailing dams of Samarco S.A. (a joint venture), given that the joint venturers (Vale S.A. and BHP Billiton) are being held jointly responsible for Samarco’s operations and liabilities, even without prior legal obligation.
2 More detailed information by country and by industry is available at https://lpcs.fea.usp.br/wp-content/uploads/2022/01/Appendix-A-additional-information.pdf
3 Some of the variables used in our model, such as Leverage and ROA, are affected by how firms accounted for their interests in joint ventures, whether by proportionate consolidation or by the equity method. Although net income and equity are generally the same in both reporting methods, the assets, liabilities, revenue and expenses reported by firms are higher by proportionate consolidation than by the equity method. Seeking to deal with this challenge, to measure Leverage and ROA we used the average of the years 2014–2016 (i.e., the years after the adoption of IFRS 11), given that during these years all firms used the same accounting method to measure their interests in joint ventures (equity method).
4 A detailed illustrative example of how the Accounting System Comparability metric was computed in this research is available at https://lpcs.fea.usp.br/wp-content/uploads/2022/01/Appendix-B-comparability-metric.pdf
5 Although this approach is not frequently used by previous literature, we believe that it is extremely important in this research, considering the nature of our database, given that our sample is composed of some very economically unstable countries, in which currency and inflation fluctuations are very strong.
6 In robustness tests, we re-estimate the comparability models using a totally balanced panel (6,052 observations, being 3,026 from the pre-period and 3,026 from the post-period) and the results are the same, that is, the comparability of accounting information decreased after the adoption of IFRS 11. However, the number of firm pairs that had an increase in comparability is higher using this balanced panel (0 for the price model; 93 for the return model; and 198 for the cash flow model).
7 Percentage of the population that are Christian and the percentage of the population that are Muslim (Association of Religion Data Archives).
8 Human development index (United Nations Development Programme).
9 Cultural dimensions power distance, uncertainty avoidance, individualism, masculinity, long-term orientation, and indulgence (Hofstede).
10 The ratio between (i) domestic credit provided by financial sector (% of GDP) and (ii) Market capitalisation of listed firms (% of GDP). Indicators greater (smaller) than 1 means that the country is financed more through financial institutions (capital markets), being thus bank-oriented (market oriented) (World Bank).
11 Commom law (Australia, Canada, Ireland, New Zealand and United Kingdom); civil law (Germany, Belgium, Brazil, Chile, Denmark, Spain, Finland, France, Netherlands, Italy, Mexico, Norway, Poland, Sweden and Turkey); mixed countries (South Africa, Philippines, Hong Kong, Kuwait, Malaysia, Nigeria and Sri Lanka).
12 Percentage of shares owned by the largest shareholder. This variable was first collected for all listed firm and then we computed the average by country, transforming it into a country-level variable (Worldscope).
13 Protecting monitory investors index (World Bank).
14 Factor extracted through a factor analysis based on the six world governance indicators, namely, voice and accountability, political stability and absence of violence, government effectiveness, regulatory quality, rule of law, and control of corruption (World Bank).
15 Index ranging from -10 (autocracy) to +10 (democracy) (Center for Systemic Peace).
16 Deferred tax recognised in the income statement divided by the net income before tax. This variable was first calculated for all listed firm and then we computed the average by country, transforming it into a country-level variable (Worldscope).
17 Foreign direct investment scaled by gross domestic product (World Bank).
18 Consumer price index (World Bank).
19 We performed the cluster analysis using the Gower Distance and the Ward agglomeration method. For those variables that vary over time, we calculated the average for the years 2005-2016.
20 We used cultural and institutional variables (country-level variables) to estimate the cluster analysis, given that the accounting practices used by firms are influenced by the environment in which the firm operates. However, if other variables were used, both the composition and the number of clusters that were identified could be different and, therefore, the results of the cross-cluster comparability analysis could also be different.
21 Given that IFRS 11 and IFRS 12 were issued in 2011, some firms anticipated their effects, both replacing proportionate consolidation by the equity method and disclosing the financial information about interests in joint ventures in the notes. Therefore, the data presented in this analysis are from 2011 to 2016.
22 More detailed information by country is available at https://lpcs.fea.usp.br/wp-content/uploads/2022/01/Appendix-A-additional-information.pdf
23 More detailed information by country and by industry is available at https://lpcs.fea.usp.br/wp-content/uploads/2022/01/Appendix-A-additional-information.pdf
24 We used total liabilities instead of the total assets given that the total liabilities allowed us to better assess the materiality of the joint venture and the effect it can have on the venturer’s financial statements. Regarding the total assets, in order to estimate the accounting amounts that would be reported by proportionate consolidation, in addition to adding the proportional assets of the joint ventures, it is necessary to eliminate the investment account. Therefore, this mixed effect could affect the measurement of the materiality of the joint venture.