Chapter 8: Perceptions of the Benefits of Adopting IFRSs
8.2 Perspectives on the benefits of IFRSs, based on ‘common sense’ ideas
8.2.2 Faithful Representation (Reliability) and Transparency: Disclosures and fair
8.2.2.2 Disclosures and information overload
Another point raised here is that reliability, and especially transparency, is increased due to the provision of more detailed information by financial reports, according to IFRSs. Even though in the IFRSs financial statements results and figures are more aggregated, further analysis is provided in the notes. It is claimed that information is presented in a more analytical and thorough way. The provision of more disclosures ‘justifies’ the various accounting treatments, and is considered important, while users can more easily understand the way accounting figures and results are measured and accounted [ACT1].
‘IFRSs have enabled, for example, construction industries to recognise income separately in departments and to make it clear where income came from. Auditors became stricter, yet, not as strict as the American PCAOB (Public Company Accounting Oversight Board), as the Capital Market Commission became more demanding. IFRSs result in improved disclosures while the difference between 2005 and 2009 is apparent [ACD3]
‘The Annex [part of the financial statements according to the GGAP] is insufficient and problematic as it does not provide detailed information. For example, there is a company with 80 subsidiaries all over the world; IAS 14 on segmental reporting describes how it should be applied in primary and secondary sectors. Even if companies do not provide complete information, it is still better than before.’ [ACD2]
‘The notes in the financial statements under IFRSs explain every number in sections, showing where figures derived from or why there were changes.’ (AUD2).
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‘The GGAP used to be an A3 sheet with all the financial statements and at the back you had the Annex which was useless, as it included minimal information. However, users were used to this and extracted all the information they wanted easily.’ [AUD4]
According to one company’s accountant, companies that prepare financial statements under IFRSs have increased their disclosure to external users lacking inside information, a comment that appears to reflect the argument raised in the literature that IFRSs reduce the risks that arise from information asymmetry among investors (e.g. Armstrong et al., 2010). Transparent and reliable financial information is associated with information that is clear and readily understandable or information that is not opaque or vague.
‘Annual reports as prepared according to IFRSs are beneficial to external stakeholders as they provide more information. This better quality information is not necessarily provided by financial statements, for instance the statement of financial position, but from the notes.’
[ACD1]
‘IFRSs are more informative, and although they have inherent assumptions and uncertainties they provide better and more information than the CBR.’ [MA2]
The provision of more information is generally, a feature that interviewees recognise. ‘The companies identify weaknesses, problems and costs by reporting under IFRSs, which were not obvious and clear in the past... There is information that was not disclosed in the past. It used to be an A3 sheet and now it is a report of 100 pages!’ [ACD2]
The usefulness of the IFRSs is related to the amount and quality of disclosures. A bank manager went even further, arguing that the information in the annual reports, and particularly in notes, is so analytical that there is no need for an auditor’s opinion. On the other hand, some preparers regard the Annex of balance sheet and profit and loss statements as a sufficient complement to those financial statements that provide additional explanatory information in order to determine the true financial condition and results of companies. Notes are more analytical but at the same time require ‘a lot of effort’ in order to find information that is sometimes the Annex is described as preferable and more effective for users.
‘Financial statements under GGAP provide banks with clearer and more analytical information and thus, we can ‘approach’ the company more easily.’ [BA1]
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The consolidation of financial reports and more disclosures are claimed to facilitate those companies that operate internationally. The improved transparency and representation faithfulness of financial statements is considered, similar to the comparability that was considered earlier, as useful for decision- making for both the management of companies, as well as the external users of financial statements. High-quality information is thought to be of benefit as companies have potentially more financing opportunities internationally, encouraging better resource allocation decisions.
‘...it is theoretically correct that the adoption of IFRSs will lead to greater extroversion, will offer alternative sources of funds and will normally lead to some companies’ growth.’ [BA2]
Meanwhile, accounting practitioners and professionals, who are knowledgeable about IFRSs are currently broadly unable to discern any direct link between the alleged improved quality of IFRSs financial statements and the extroversion of companies; and where it has occurred, companies’ operational internationalisation and international financing opportunities do not appear to be that extensive. The impact of IFRSs on the companies’ financial statement is not understood and cannot be determined with confidence.
‘Some companies have used IFRSs, in order to be sold. For others, it didn’t offer anything or much. The extroversion is not determined by accounting…’ [AUD5]
The provision of more information is also related to the general trend among companies on the capital markets to disclose information about their financials to capital providers though annual reports to maintain their reputation and credibility with investors, rather than being a result of the adoption of IFRSs:
‘The market has become more organised, companies provide better information and there are more foreign analysts covering the Greek market, in comparison with the availability of information six to seven years ago. It is important that Greek analysts can compare their analyses with the ones conducted by foreign analysts. Thus, it is a combination of factors and it is difficult to tell to what degree IFRSs have benefited Greece. The market is not the same as it was 10 years ago - companies have started becoming more extrovert (before the economic crisis).’ [FA3]
Interviewees, occasionally, relate the reliability and transparency of financial statements with the ability of standards to minimise the managers’ ability to manipulate financial results.
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However, most of the interviewees raised concerns about the capacity of the IFRSs for earnings manipulation.