Effects of changes in financial statement aggregation under IFRS on the behaviour of non-professional and professional information users

ABSTRACT

This study investigates the effects of the degree of financial statement aggregation and footnote disclosures under IFRS on the judgements of information users with different knowledge levels. A quasi-experiment is conducted with Korean MBA students and CPAs as surrogates for non-professional and professional users, respectively. The results suggest that changes in the level of aggregation of financial statements influence the judgements of non-professional but not professional information users. Neither the judgements of non-professional users nor those of professional users are affected by footnote disclosures. The findings of this study highlight the need for companies to improve the presentation format of their financial statements to better convey relevant information to users.

KEYWORDS:

• Financial statement changes
• footnote disclosure
• IFRS
• judgement

JEL CLASSIFICATION:

• C93
• H30
• M41

Acknowledgments

We acknowledge helpful comments and suggestions by Kevin Kim from the University of Memphis, and Sook-Min Kim from Solbridge International School of Business at the 2016 Korean Accounting Association Summer International Conference.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ This study extends the experiment of Yoo and Shim (2016) to professional users to compare the judgements of information users with different knowledge levels. Yoo and Shim (2016) investigate the effects of financial statement aggregation and footnote disclosures on non-professional investors’ judgements and decisions. They find that the presentation format of financial statements has statistically significant effects on the judgements but not the decisions of non-professional investors. In addition, footnote disclosures are found to have no significant effect on the judgements and decisions of non-professional investors.

² Paragraph 30A of Exposure Draft ED/2014/1 Disclosure Initiative, International Accounting Standard Board.

³ The authors of this study received IRB approval from the university where the experiment was conducted.

⁴ Two important points should be noted regarding information users’ ability to search for and process information. First, it is possible that non-professional users with extremely low levels of knowledge and experience may not be able to acquire and process relevant information even from disaggregated financial statements. However, the participants surrogating for non-professional users in this study are MBA students who are enrolled in or have completed a financial statement analysis course. These MBA students are selected as surrogates because they are expected to acquire and integrate information similarly to non-professional investors. Therefore, even if limited, we expect that they have the ability to acquire and process relevant information from disaggregated financial statements. Second, even though non-professional users can find relevant information from disaggregated financial statements, they will require more resources to acquire and process this information than professional information users. Since this study investigates the effects of ‘changes’ in financial statement aggregation on the judgements of non-professional and professional users and thus focuses on the trends in the judgements of each of the two groups under two different conditions (disaggregated vs. aggregated), this study does not necessarily assume that the two groups of participants have the same ability to obtain information under the disaggregated condition.

⁵ At the time the experiment was designed, the highest R&D capitalization ratio achieved by one of the companies within the industry in which Company A is engaged was 4.7%.

⁶ This is consistent with the arguments of the International Accounting Standards Board (IASB) that disclosing too much irrelevant or immaterial information on the face of statements may obfuscate useful information (e.g., R&D expenses).