Substance and Form Adoption of International Financial Reporting Standards and Financial Statement Comparability: Evidence from South Africa

Abstract

We investigate whether the comparability of financial statements changes after a switch from International Financial Reporting Standards (IFRS) in substance (i.e., content of IFRS) to IFRS in both substance and form (i.e., IFRS as issued by the IASB). While the substance of the accounting standards remains the same, form is added to the adoption in that it is now formally referred to as “IFRS as issued by the IASB.” We use data from South Africa, a country whose local generally accepted accounting practices (GAAP) was the same, word-for-word, as IFRS prior to the adoption of IFRS as issued by the IASB in 2005. We compare South African firms with firms in other countries, divided into two groups: mandatory IFRS adopters and non-adopters. We find evidence of increased comparability of financial statements of South African firms with both adopters and non-adopters. Furthermore, we find a global increase in the comparability of firms’ financial statements, consistent with market changes unrelated to IFRS adoption. However, an incremental increase in the comparability of financial statements of South African firms with the adoption of IFRS relative to non-adopting firms is consistent with benefits from South Africa’s addition of form to its existing in-substance adoption of IFRS. This increased comparability is also consistent with the benefits observed in the accounting amounts of firms from other adopting countries becoming more comparable with those of South African firms.

International Accounting Standards and their Impact on the Banking Sector Performance

“…The evidence presented here lends credence to the concept that the implementation of IAS can have a beneficial effect on the financial performance of banks in developing nations. In particular, the findings indicate that financial institutions that have fully accepted IAS are more likely to have higher levels of profitability, liquidity, and asset quality than those that have either partially adopted the standards or have not adopted them at all (Singh & Jan, 2021).…”

The role of audit styles in financial statement comparability: South African evidence

“…3 Firm i's accounting function is represented by α i and β i , and similarly, that of firm j is represented by α j and β j . To determine how similar the accounting functions and thus the comparability of firms i and j are, each firm's Earnings is estimated by applying the accounting functions of both firm i and firm j to the same economic events (Return) of both firm i and firm j (Smith et al, 2021;Yip & Young, 2012):…”

“…3 It is a requirement that a firm listed on the JSE publishes annual financial statements within 3 months of its financial year-end (Johannesburg Stock Exchange Limited, 2016). Consistent with Barth et al (2012) andNeel (2017), this return window is used in order for the share price to reflect the financial statement information and is similar to the return window used by Smith et al (2021) who also used South African data. 4 Including SameF_DiffO in Equation 10 to control for audit firm style does not alter the results.…”