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PAR
22,2

IFRS in New Zealand: effects on

nancial statements and ratios
Warwick Stent, Michael Bradbury and Jill Hooks

92

School of Accountancy, Massey University, Auckland, New Zealand

Abstract
Purpose The purpose of this paper is to examine the nancial statement impacts of adopting NZ
IFRS during 2005 through 2008.
Design/methodology/approach The effects of NZ IFRS on the nancial statements and ratios of
rst-time adopters of NZ IFRS for a stratied random sample of 56 listed companies is analysed. In
total, 16 of these were early adopters and 40 of which waited until adoption of NZ IFRS became
mandatory. The analysis of the nancial statement impact of NZ IFRS is conducted in the context of
the accounting choice literature.
Findings The results show that 87 per cent of rms are affected by NZ IFRS. The median and
inter-quartile ranges indicate that for most rms the impact of NZ IFRS is small. However, the
maximum and minimum values indicate the impact can be large for some entities. The impact has
considerable effects on common nancial ratios.
Research limitations/implications The usual limitations applicable to small samples apply.
Practical implications The ndings may be useful to regulators and policy makers reviewing
nancial reporting requirements.
Originality/value This study is the rst to offer a comprehensive empirical analysis of the effect
of adopting IFRS on nancial statements in New Zealand, as well as on selected key ratios of interest
to nancial analysts. The data used are more recent than most IAS or IFRS studies around the world
and are stratied to allow for comparison between voluntary/early adopters and mandatory/late
adopters.

Keywords Financial reporting, International standards, Management ratios, New Zealand

Paper type Research paper

1. Introduction
This paper examines the impact of international nancial reporting standards (IFRS)
on the nancial statements of New Zealand listed companies. Specically, we
document the impact of NZ IFRS on the following nancial statement elements: assets,
liabilities, equity, revenues and expenses. We then examine the nancial statement
impact of NZ IFRS analysed by accounting standard (e.g. nancial instruments,
income taxes). Finally, we examine the impact of NZ IFRS on some common nancial
ratios.
Daske et al. (2008) note that the adoption of IFRS by over 100 countries is one of the
most signicant changes in world accounting history[1]. They also note that empirical
evidence on the consequences of mandatory IFRS is in its infancy and emphasise the
need for further evidence.

Pacic Accounting Review

Vol. 22 No. 2, 2010
pp. 92-107
q Emerald Group Publishing Limited
0114-0582
DOI 10.1108/01140581011074494

The authors would like to extend their thanks to participants at a Massey University research
workshop, especially Asheq Rahman, for helpful suggestions. Warwick Stent gratefully
acknowledges nancial support from the New Zealand Institute of Chartered Accountants and
the Accounting and Finance Association of Australia and New Zealand.

This paper makes several contributions to the literature. It is the rst to offer a
comprehensive analysis of the nancial statement effects of adopting IFRS in New
Zealand. Similar to Hung and Subramanyam (2007), we report detailed nancial
statement effects of adopting IFRS. This contribution may be useful to regulators and
policy makers that are currently reviewing the application of IFRS for smaller entities
in New Zealand. Second, studies examining the value relevance of IFRS (e.g. Daske
et al., 2008; Hung and Subramanyam, 2007; Barth et al., 2008) have found mixed results.
A pre-requisite for IFRS to have value relevance is that IFRS must impact nancial
ratios. Hence, a focus of this study is the impact of IFRS on common nancial ratios.
Furthermore, the potential impact of IFRS on ratios, will not only impact the
assessment of value relevance but also analysts credit decisions (e.g. credit scoring
models such as Altman, 1968) and contracting decisions by rms that employ nancial
ratios (e.g. debt covenants, compensation contracts). Third, this study is partitioned to
allow for comparison, between voluntary early adopters and mandatory late adopters,
of the nancial statement effects of NZ IFRS. Understanding the impact of NZ IFRS is
an important rst step in seeking a deeper understanding of the motivations of early
adopters of IFRS in New Zealand. Fourth, the investigation period covers scal years
commencing on, or after, 1 January 2005 through to 30 September 2008. This provides
more recent information on the impact of IFRS than is included in most recent studies.
This is an important consideration in view of the signicant, frequent and continuing
amendments to IFRS since the 2005 stable platform was achieved. Fifth, most studies
examine the switch to IFRS where previous GAAP was known to differ signicantly
from the international standards, whereas old NZ GAAP is perceived to be relatively
similar. Contrary to expectations, the analysis of effects in such a setting indicates that
IFRS information still conveys new information (Christensen et al., 2007). In summary,
this paper makes a number of contributions with regard to the impact of IFRS
adoption.
The paper proceeds as follows. Section 2 provides background information on the
New Zealand adoption of IFRS. Section 3 briey reviews the theory and recent
literature relevant to the impact of IFRS on nancial statements. Section 4 contains a
description of the sample selection and data. Section 5 describes and discusses the
results and Section 6 provides a summary and conclusion.

2. Background on the adoption of NZ IFRS

In 1974, the rst of a new series of accounting standards issued by the New Zealand
Society of Accountants (i.e. SSAP 1 Disclosure of Accounting of Policies) carried the
International Accounting Standards Committee crest (Bradbury, 1998). However, even
that standard contained modications. Furthermore, in the following years, New
Zealand developed its own standard setting agenda with regard to accounting issues.
A decision was taken by the Financial Reporting Standards Board (FRSB)[2] in 1997
to base new accounting standards on International or Australian accounting standards.
These were modied to ensure sector neutrality and consistency with other New Zealand
pronouncements (Bradbury and van Zijl, 2006). On 21 October 2002, the Accounting
Standards Review Board (ASRB) proposed that listed issuers in New Zealand should
adopt IFRS and on 19 December 2002 they announced that adoption of IFRS was to be
mandatory for reporting entities in New Zealand for periods beginning on or after
1 January 2007. Unlike the European Union, Australia and many other countries which

IFRS in New
Zealand

93

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94

opted for mandatory adoption in 2005, the ASRB allowed early adoption for periods
beginning on or after 1 January 2005 (Bradbury and van Zijl, 2006).
On 12 September 2007 the ASRB announced it had decided to delay mandatory
adoption of NZ IFRS for small companies that met specied criteria, pending a
government review of nancial reporting requirements for small- and medium-sized
companies, which was to be commenced during mid-2008. A possible outcome of this
review is that many entities may no longer be required by law to prepare
GAAP-compliant nancial statements (Sealy-Fisher, 2007). This review therefore has
major implications for a large number of New Zealand businesses. The ndings of this
paper may be informative to policy makers conducting this review.
Since the ASRBs announcement in 2002, there has been much in the way of
comment by various authors, professional bodies, accounting rms and commercial
entities, about the impact of adopting IFRS (e.g. Dunstan, 2002; Ernst & Young, 2004).
It is widely accepted that adopting IFRS may have signicant implications.

3. Theory and literature

Fields et al. (2001) provide a review of the accounting choice literature up until the
1990s. We therefore begin with a summary of their review, followed by a review of
more recent studies related to the impact of IFRS.
3.1 Summary of a review of accounting choice literature up until the 1990s
Fields et al. (2001) refer to three main categories of motivations for accounting choice:
contracting, asset pricing and inuencing external parties. They note that in general,
researchers nd that efcient contracting incentives are effective in contractual
arrangements, namely that managers select accounting methods to increase
compensation (the bonus hypothesis) and to avoid breaching debt covenants (the
debt hypothesis). In their opinion the literature leaves some uncertainty as to whether
these choices are made opportunistically or for value-maximising purposes. Asset
pricing, concerns the economic consequences of accounting information on share
prices (market value of equity) and cost of capital. Fields et al. (2001) state that ndings
related to accounting choices being made for their effect on share prices are generally
unconvincing, mainly because of competing hypotheses, such as market efciency and
contracting. They note that results are mixed as to whether increased levels of
disclosure results in decreased cost of capital. The political cost hypothesis suggests
that accounting choices are made to avoid transfers of wealth to external parties.
Evidence from this research indicates that accounting choices are made to reduce or
defer taxes. However, the stock market effects of these actions is mixed.

3.2 Recent studies relating to impact of IFRS

This section briey reviews more recent empirical studies examining the nancial
statement effects of adopting IFRS (e.g. Daske et al., 2008; Lee et al., 2008; Barth et al.,
2008; and Hung and Subramanyam, 2007).
Daske et al. (2008) examine the economic consequences of mandatory IFRS adoption
for a large sample of rms across 26 countries covering scal years ending on, or after,
1 January 2001 through to 31 December 2005. Their ndings indicate that IFRS
adoption appears to be associated with positive economic consequences for market
liquidity, cost of capital, and rm value. These capital market effects are most

pronounced for voluntary adopters, both in the year when they switch and again later,
when IFRS becomes mandatory. They caution that the initial impact is likely to be due
to self-selection and that the mandatory impact will be affected by omitted variables
such as concurrent improvements to securities laws, regulatory enforcement, rm
governance, and reporting incentives. Support for the view that factors other than IFRS
contribute signicantly to capital market effects is evident in other studies (e.g. Lee
et al., 2008; Barth et al., 2008).
Lee et al. (2008) nd, across a sample of 17 European countries, that the cost of
capital only reduced in countries with high reporting incentives and enforcement.
Barth et al. (2008) nd that adoption of IFRS is associated with higher accounting
quality. They study rms from 21 countries applying IAS between 1994 and 2003 and
nd that there is less evidence of earnings management, more timely loss recognition
and more value relevance of accounting information for their sample rms than for a
matched sample of rms applying non-US domestic GAAP.
Hung and Subramanyam (2007) examine the nancial statement effects of adopting
IAS during 1998 2002. They measure nancial statement effects by direct comparison
of nancial statements prepared under both IAS and German GAAP (referred to as
Handelsgesetzbuch or HGB). They also contend that studies of the effects of IAS
based on pre-1998 nancial statements are unlikely to be representative. The core IAS
standards were completed in 1998 and removed the choice of partial adoption (i.e.
cherry picking) of IAS by requiring full implementation of IFRS. Hung and
Subramanyam (2007) present two sets of analyses. First, the major accounting
differences between HGB and IAS are analysed. They nd that the adoption of IAS
resulted in . . . widespread and signicant changes to deferred taxes, pensions,
property, plant and equipment, and loss provisions (Hung and Subramanyam, 2007,
p. 625). Overall, total assets and book value of equity were found to be signicantly
larger under IAS than under HGB, while variations in book value and net income were
found to be signicantly higher. Second, they examine the value relevance of book
values and net income, as well as the timeliness of income information. There is no
evidence that IAS improves value relevance of book value or net income. There is weak
evidence suggesting that IAS income has increased asymmetric timeliness (i.e. IAS
incorporates bad news into income in a more timely manner than HGB).
These recent studies nd mixed results for value relevance of IFRS. Barth et al.
(2008), nd more value relevance and Hung and Subramanyam (2007) nd no evidence
that IFRS improves value relevance. Daske et al. (2008) note an increase in equity
valuations but only if they account for the possibility that the effects occur prior to the
ofcial adoption date. This echoes comments by Fields et al. (2001) that ndings
related to the share price effect of accounting choices are generally unconvincing. In
assessing the value relevance of IFRS, a pre-requisite is that the adoption of IFRS
should have a signicant impact on nancial statements and common nancial
statement ratios. Hence, the objective of this study is to provide descriptive evidence of
the impact of IFRS.
The study that is most relevant to ours is Hung and Subramanyam (2007). They
make a case for a country-specic approach, which considers the direct effects of
adopting IAS for the same set of rm years. Such an approach would help to overcome
problems associated with comparing across countries with different institutional
arrangements, as well as controlling for time-series differences. We improve on their

IFRS in New
Zealand

95

PAR
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96

analysis as we use the mandatory IFRS/local GAAP reconciliations (now an IFRS 1

requirement), while their study relies on voluntary IAS/local GAAP reconciliation
disclosures. Hence, their study is likely to have a self-selection bias. Hung and
Subramanyam (2007) are only able to observe book value reconciliation information
(i.e. equity adjustments) for 57 rms; and net income reconciliation (i.e. prot at end
of prior period adjustments) for 31 rms in their sample of 80 rms.
Also, the investigation period for this paper is more current than Hung and
Subramanyam (2007). As noted earlier, this is important in view of the signicant, and
on-going amendments to IFRS since the stable platform was achieved in 2005. Hung
and Subramanyam (2007) consider the adoption of IFRS where German GAAP was
known to differ signicantly from IAS, whereas old New Zealand GAAP is perceived
to be relatively similar. Christensen et al. (2007) nd that in spite of IFRS being
relatively similar to UK-GAAP, the IFRS reconciliations contained information that
analysts considered relevant for rm valuation and that rms opportunistically tended
to delay unfavourable reconciliations.

4. Sample selection and data

Figure 1 reports the outcome of our sample selection procedures. We begin with all 161
companies listed on the New Zealand Stock Exchange (NZX) on 1 March 2007. We then
stratify these into early and late adopters of NZ IFRS.
Early adopters (EA) are the reporting entities that chose to adopt NZ IFRS for periods
beginning on or after 1 January 2005, but before it became mandatory (periods beginning
on or after 1 January 2007). Selection as an EA is only made once the . . . explicit and
unreserved statement of compliance . . . with NZ IFRS has been sighted in a rst
full-year set of nancial statements[3]. Our procedures identify an initial set of 48 EA. The
remaining total of 113 non-EA forms our initial population of Late Adopters (LA). These
are reporting entities listed on the NZX, which chose to wait until periods beginning on or
after 1 January 2007, when it became mandatory to adopt NZ IFRS. We lose 12

Figure 1.
Effect of sample selection
criteria

observations where companies delisted from the NZX after 1 March 2007, resulting in a
reduced population of 101 LA. We conrm that they are LA by ensuring that the . . .
explicit and unreserved statement of compliance . . . with NZ IFRS appears for the rst
time in a rst full-year set of nancial statements beginning on or after 1 January 2007.
For the 48 EA (Panel B), observations are discarded because the entity uses GAAP
other than NZ IFRS (four observations); uses a functional currency other than NZ
dollars (2); has no prior year nancial statements available as the rst year of listing on
the NZX is also rst year of application of NZ IFRS (1); or has no reconciliation because
NZ IFRS was adopted from its rst year of operation (1).
As the data are hand collected from nancial statements and footnotes, we make a
random selection, of approximately 40 per cent, from each of the EA and LA
populations. This results in a sample of 56 observations, comprising 16 EA and 40 LA.
Our sample size is a trade off between the cost of collecting information and the
benets of a larger sample.
We gather two sets of nancial statements for all observations: the rst full-year NZ
IFRS nancial statements and the year prior to adoption of NZ IFRS. Information on the
adjustments made to the pre-NZ IFRS year gures are extracted from the NZ IFRS/old
NZ GAAP reconciliations. NZ IFRS 1 requires comparatives to be restated and reconciled
in the rst year of adopting NZ IFRS. The reconciliations varied considerably in format
and level of detail supplied and it was important to determine and separate out which
nancial statement elements were impacted by NZ IFRS, the amounts involved and the
accounting standards to which these impacts should be attributed.
Table I reports descriptive statistics of the sample rms. In this table we report old
NZ GAAP gures (i.e. OLD GAAP) as this is the base from which we measure the
differences due to the adoption of NZ IFRS. The mean total assets gure is $772.1
million, mean total equity is $477.6 million and mean net prot is a loss of $149.2
million. The sample data are not normally distributed and for the most part are
leptokurtic and positively skewed. This results in the median being a better indicator
of central tendency than the mean. We therefore rely on non-parametric tests to analyse
statistical differences in our sample data.

IFRS in New
Zealand

97

5. Results
5.1 Descriptive statistics: impact of NZ IFRS
Descriptive statistics of the impact of NZ IFRS for the nancial statement elements (as
per the NZ Framework) are presented in Table II.

Total assets
Mean
Standard deviation
Minimum
25 percentile
Median
75 percentile
Maximum
Note: n 56

772,084
1,702,230
164
20,254
92,099
438,948
8,991,425

Total liabilities
294,827
730,193
12
4,616
25,419
180,240
3,825,819

Total equity
477,627
1,289,398
2 95
17,978
48,794
277,410
8,738,489

Total revenue
303,610
671,058
6
9,871
52,234
320,901
4,297,000

Net prot
2 149,191
1,279,233
2 9,542,816
76
3,140
35,722
214,000

Table I.
Descriptive statistics
($000) of sample under
OLD GAAP

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98

Panel A: magnitude of change a

Mean
Standard deviation
Minimum
25 percentile
Median
75 percentile
Maximum
Panel B: sign of changes (%)
Negative
Positive
No change

Table II.
Impact of NZ IFRS on
nancial statement
elements

Panel C: statistical tests b

Z statistic
p-value (two-tailed)

Total
assets

Total
liabilities

Total
equity

Total
revenue

Net
prot

0.031
0.206
20.640
0.000
0.002
0.020
1.230

0.216
0.714
0.000
0.000
0.027
0.151
5.130

2 0.070
0.582
2 3.440
2 0.046
2 0.005
0.012
2.130

0.134
0.713
20.990
20.012
0.000
0.010
3.950

0.127
0.468
2 1.000
2 0.008
0.024
0.149
1.930

25
55
20
2.940
0.003

4
75
21
5.713
0.000

57
30
13
2.173
0.030

41
36
23
0.199
0.842

Notes: n 56; aThe change is estimated as (NZ IFRS/OLD GAAP) 1; bThe reported test statistic is
a Wilcoxon test for equality of matched pairs

Panel A of Table II reports the magnitude of change in a particular nancial statement

element due to the adoption of NZ IFRS. It is measured as: NZ IFRS/OLD GAAP - 1.
For example, the mean (median) change in total assets due to the adoption of NZ IFRS
is 3.1 per cent (0.2 per cent). Panel B reports the number of increases, decreases and no
changes. The adoption of NZ IFRS results in an increase in assets for 55 per cent (31/56)
of the observations, a decrease for 25 per cent of observations and 20 per cent remain
unchanged. Panel C reports Wilcoxon tests for difference in the distribution of a
variable for matched pairs. That is, each rm is compared with itself for differences
between OLD GAAP and NZ IFRS. The general increase in total assets due to the
adoption of NZ IFRS is statistically signicant at the 0.01 level.
Table II reveals that the largest impact of NZ IFRS is for liabilities, where 75 per
cent of observations (42/56) report an increase in liabilities and only 4 per cent report a
decrease. The impact of NZ IFRS is widespread as 87 per cent of rms are affected.
That is, only 13 per cent of rms have no changes to equity or net prot. Overall, the
impact of NZ IFRS signicantly increases assets, liabilities and net prot, but
decreases equity. The impact on revenue is not signicant at conventional levels. The
inter-quartile range for most elements is small indicating that for most rms, the
impact of NZ IFRS is small. However, the maximum and minimum values indicate that
the effect of NZ IFRS can be quite substantial for some rms. For example, the
inter-quartile range for net prot is 0.157 (0.149 (2 0.008)) and the range is 2.930
(1.930 (2 1.000)).

5.2 Descriptive statistics: impact of NZ IFRS analysed by early (late) adopters and by
small (large) entities
Table III reports the impact of NZ IFRS on nancial statement elements analysed by
early and late adopters. This Table is similar in presentation to Table II.

32
55
13
2.522
0.012

Net
prot

0.169 0.5132 0.9302

0.0090.0020.1821.930

2.013 0.035
335315

Late adopters
(n
0.169
40)
0.83720.99020.0250.0000.016
404318
Total
3.950
Total
Total
liabilities

20.040
0.66223.44020.04420.0040.00
582815
02.130

equity
revenue

0.238 0.8100.0000.0000.0350.1805.
130
37325

Totalassets 0.057

Net
prot

99

4.762 0.000

2.626 0.009
0.21820.0600.0000.0020.0231
255323
.230

0.021

1.136 0.256
0.32221.00020.0030.0720.140
31636
0.540

Early adopters
0.048 0.1692 0.0902
(n 16)
0.0030.0000.0000.600
441938
Total
Total
Total
liabilities

Notes: aThe
change is
0.286 0.775
estimated as
(NZ
IFRS/OLD
GAAP) 1;
bThe reported
1.513 0.130test statistic is
a Wilcoxon
test for
equality of
matched pairs

IFRS in New
Zealand

2 0.144 0.3072 1.0002 0.1432

0.0260.0140.040

equity

3.570 0.721

2.101 0.036
56386

revenue
0.161 0.4010.0000.0000.0120.1251.
590
68113

3.170 0.002

of change a2
0.035
0.1622 0.6402
Panel C: statistical tests
Totalassets
0.0110.0070.0150.040
bZ statistic
Panel B: sign of
0.847
changesNegative
p-value (two-tailed)
Panel A:
25
0.397
magnitudeMeanStandarddeviationMini
Positive
mum25 percentileMedian75
63
percentileMaximum
No change
13

Table III.
Impact of NZ IFRS on
nancial statement
elements

PAR
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100

The impact of NZ IFRS on EAs is signicant for total liabilities (at the 0.01 level) and
equity (at the 0.05 level). Total assets, revenue and net prot are not statistically
different under NZ IFRS compared to OLD GAAP. On the other hand, total assets and
total liabilities of LAs are signicantly higher (at the 0.01 level), as is net prot (at the
0.05 level). Total equity and total revenue are not statistically different under NZ IFRS.
The minimums are generally much lower and maximums much higher for the LAs as
compared to the EAs. These results are consistent with early adopting rms being
those rms on which NZ IFRS have a lower impact.
We performed a similar analysis (untabulated) by small and large rm, using the
median gure for total assets under OLD GAAP as our cut-off point (i.e. small
, $92,099,000 , large). We nd that the impact of NZ IFRS on the small rms is not
signicant, at conventional levels, for any nancial statement elements except total
liabilities (at the 0.01 level). This contrasts strongly with the ndings for the large
rms, where the impact of NZ IFRS is found to be signicant for all nancial statement
elements except total revenue. Total assets and total liabilities are signicant at the
0.01 level, and total equity and net prot at the 0.05 level for the large rms. Minimum
and median gures, as well as the proportion of positive sign changes are generally
much higher for the large rms than for the small rms. Thus, small listed rms are
less affected by NZ IFRS than large listed rms.

5.3 Descriptive statistics: impact of NZ IFRS by accounting standards

Table IV reports the impact of the adoption of NZ IFRS analysed by the accounting
standard that caused the accounting change and is similar to Tables II and III, except
that it is presented in landscape to provide sufcient detail. In Table IV we report the
balance sheet impact as well as the income statement impact, separately showing
increases and decreases in revenues and expenses.
The data for this analysis are extracted from the NZ IFRS/OLD GAAP
reconciliations required by NZ IFRS 1. The most informative reconciliations provide
full balance sheets (at date of transition and at end of prior period) and an income
statement (at end of prior period), each of which disclose OLD GAAP, NZ IFRS and
reconciliation adjustments for every line item in these nancial statements, together
with detailed notes explaining the adjustments, with specic reference to the relevant
NZ IFRS standards. Less informative reconciliations simply reconcile Equity (at date of
transition and at end of prior period) and Prot (at end of prior period) under OLD
GAAP to NZ IFRS, showing material adjustments with relatively little in the way of
detailed explanation and more general references to NZ IFRS rather than specic
standards.
As NZ IFRS comprises in excess of 40 standards, we restrict the tables presented in
this paper to separate consideration of only those standards that have non-zero effects
on 10 per cent or more of our total sample.
The most striking feature of Table IV is that, with the exception of the income tax
impact on equity, the median observation is zero across all nancial statements
elements and accounting standards. All but three of the 25th percentiles are also zero.
The last column in Table IV reports the percentages of no change. The range of no
impact is from 57 per cent to 100 per cent. This indicates that for most rms a specic
standard of NZ IFRS has no impact. However, the minimums and maximums indicate
that a specic NZ IFRS can be very material for a small number of rms.

% no
change

5798847781779974647784618999981001008385817090

IFRS in New
Zealand

%
negative 713752021221328301008613152

101
Maximum
% 26113161421124242131181100996158
$000
positive
101,3003,00094,38413,700545,59318,0021,287664,84189,7004,00094,384243,00
0133,0004,0004,1300035,3941,0365,81028,2601,000

75th
percentile
$000

3180035410703,1541870000000

000110

Median
00000000000250000000000
$000

25th
percentile
$000

0000000002107022,63300000000260

Minimum268,00021,04926,89821,599217,44521,00002243,0002543,736218,00226,898266
$000 3,457292,04002174002118,0002158294,382241,70621,134

(NZ IAS 32/39)(NZ IAS 19)(NZ IFRS 3)(NZ IAS 12)(NZ IAS 32/39)(NZ IAS
19)(NZ IFRS 3)(NZ IAS 12)(NZ IAS 32/39)(NZ IAS 19)(NZ IFRS 3)(NZ IAS
12)(NZ IAS 32/39)(NZ IAS 19)(NZ IFRS 3)(NZ IAS 12)(NZ IFRS 2)(NZ IAS
32/39)(NZ IAS 19)(NZ IFRS 3)(NZ IAS 12)(NZ IFRS 2)

Financial instrumentsEmployee benetsBusiness combinationsIncome

taxesFinancial instrumentsEmployee benetsBusiness combinationsIncome
taxesFinancial instrumentsEmployee benetsBusiness combinationsIncome
taxesFinancial instrumentsEmployee benetsBusiness combinationsIncome
taxesShare base paymentsFinancial instrumentsEmployee benetsBusiness
combinationsIncome taxesShare based payments

AssetsAssetsAssetsAssetsLiabilitiesLiabilitiesLiabilitiesLiabilitiesEquityEquityEq
Note: n 56
uityEquityRevenues/incomeRevenues/incomeRevenues/incomeRevenues/income
Revenues/incomeExpensesExpensesExpensesExpensesExpenses

Table IV.
Impact of NZ IFRS by
nancial statement
element and accounting
standard

PAR
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102

Further analysis of Table IV shows that the adjustments under NZ IAS 32 and 39
(nancial instruments) are the most frequent, with 33 per cent non-zero observations
affecting assets, 19 per cent affecting liabilities, 36 per cent affecting equity, and 28 per
cent affecting net prot (11 per cent revenues and 17 per cent expenses). Furthermore,
the impact is both positive and negative, but the positive impact is typically more than
twice as frequent as the negative impact. These ndings are consistent with
expectations noted in Ernst & Young (2004, p. 1) who predicted that nancial
instruments would be the . . . area most heavily impacted by the move to IFRS. Hung
and Subramanyam (2007) report a relatively infrequent 23 per cent adjustment
observations for nancial instruments in their sample, 16 per cent of which were
positive. This is consistent with the results of Berkman et al. (1997), who nd that New
Zealand rms are large users of nancial instruments relative to US rms.
The signicant increase in liabilities under NZ IFRS noted in Table II can be
attributed mainly to NZ IAS 12 Income Taxes. This standard increases liabilities in 24
per cent of the observations, decreases equity in 28 per cent of the observations and
increases assets in 16 per cent of the observations. The impact on current year prots
is, however, mixed with Table IV showing both increases and decreases in expenses of
15 per cent. The income tax adjustments for our sample are due mainly to deferred tax
differences, which arise because NZ IAS 12 adopts a balance sheet approach, which
is signicantly different to the income statement approach formerly used under OLD
GAAP. While the inter-quartile range for the impact of NZ IAS 12 on equity is $2.6
million the range is $906 million. These results provide an insight as to the variation in
impact of the deferred tax adjustments across the sample rms, as well as a reminder
that these adjustments may be both book value increasing and decreasing.
These ndings are consistent with the expectation that the amount of deferred tax
assets and liabilities reported in the balance sheet would increase (Ernst & Young,
2004). Our results reveal that the increases are considerably larger and more frequent
for liabilities than for assets. These ndings are also consistent with those of Hung and
Subramanyam (2007). However, they report frequencies of 95 per cent of observations
affecting liabilities and 81 per cent affecting net prot. This supports the view that old
NZ GAAP is relatively closer to NZ IFRS than German GAAP was to IAS.
Employee Benets (under NZ IAS 19) also contribute to the signicant increase in
liabilities under NZ IFRS. Liabilities increase and equity decreases for 21 per cent of the
observations as a result of a number of new requirements under NZ IAS 19. For
example, employers are required to recognise an asset or liability in respect of any
employee dened benet plans; they are also required to accrue for both vested and
non-vested employee benets such as long service leave and sick leave. Hung and
Subramanyam (2007) report that employee benets are the second most frequent
adjustment in their sample at 72 per cent; of which 67 per cent result in negative
adjustments for equity.
Business Combinations increase equity and assets by 13 per cent and decrease
expenses also by 13 per cent. These adjustments arise mainly as a result of the
requirements in NZ IFRS 3 that goodwill should not be amortised, but should be
subject to impairment testing. The predominance of increases in assets (and hence also
in equity) and decreases in expenses are consistent with expectations expressed in the
Ernst & Young (2004) report. Hung and Subramanyam (2007) report similar results for
their sample.

Share-based payments are the last category of adjustments, which have non-zero
effects on 10 per cent or more of our total sample. These adjustments affect only
expenses, increasing them for 8 per cent of observations and decreasing them for 2 per
cent of observations. The minimum and maximum values indicate that these
adjustments are relatively small in comparison to the other adjustments.
5.4 The effect of NZ IFRS on key ratios
Table V presents results of our analyses into the effect of NZ IFRS on key ratios, which
serve as proxies for variables that may inuence or be of interest to analysts. We
choose ve key ratios[4]:
(1) return on equity (net prot to equity);
(2) return on assets (net prot to total assets);
(3) leverage (total liabilities to equity)
(4) asset turnover (revenue to total assets); and
(5) return on sales (net prot to revenue).

These ratios reect the main ratios in the Du Pont analysis[5].

Under NZ IFRS the median return on equity increases from 9.2 per cent to 11.9 per
cent (see Panel A). Return on equity increases for 64 per cent of observations and
decreases for 25 per cent of observations (see Panel B). The change in this ratio is
signicant at the 0.01 level. The median return on assets increases from 4.7 per cent to
5.0 per cent (56 per cent increase and 33 per cent decrease). The large impact of NZ
IFRS on liabilities has an effect on leverage. Median leverage increases from 60.2 per
cent to 69.7 per cent (64 per cent increase and 24 per cent decrease). The differences for
leverage are statistically signicant at the 0.01 level. The median for asset turnover
decreases from 78.1 per cent to 69.5 per cent reecting the general increase in total
assets under NZ IFRS (30 per cent increase and 57 per cent decrease). The median for
return on sales increases from 5.8 per cent to 6.2 per cent (66 per cent increase and 25
per cent decrease). The differences for return on sales are statistically signicant at the
0.01 level.
Table V indicates, rst, that the no-change effect of NZ IFRS on nancial ratios is
small (9 to 13 per cent). Second, the impact of NZ IFRS does not simply result in a
uniform jump in nancial statement ratios but has a rm-specic effect. For some
rms a particular ratio may increase, while for other rms that ratio may decrease.
In Panels C and D of Table V we analyse the changes in nancial ratios resulting
from the move to NZ IFRS for early adopters and late adopters. The results are similar
to Panel A in the sense that for most ratios the percentage of ratio increases is almost
always twice that of decreases. However, changes in return on assets, leverage and
asset turnover are not statistically signicant (at conventional levels) for early
adopters. For late adopters the increase in leverage is signicant at the 0.01 level.
Return on equity and return on sales are signicant for both early and late adopters at
the 0.05 level. In general, results are more strongly signicant for late adopters than for
early adopters.
We perform a similar analysis (untabulated) on small and large rms, using the size
criterion in section 5.2. The trends for ratios discussed for Panel A hold for both the
small and the large rms, but are more pronounced for the large rms. The proportion

IFRS in New
Zealand

103

PAR
22,2

104

ROS
NZ
IFRS

ROSOLD
GAAP

ATO
NZ
IFRS
ATOOLD
GAAP

LEV
NZ
IFRS
LEVOLD
GAAP

ROA
NZ
IFRS
ROAOLD
GAAP

ROE
NZ
IFRS
ROEOLD
GAAP

0.901
256692.7180.007
2198.451
2194.218
0.847
1,440.356
1,440.4930.000
210,781.270 210,781.2700.196
20.020
20.014
0.695
0.058
0.062
573013
1.472
2.0640.039
0.135
0.138
2.720
1.680
1.0461.1790.0000.2310.7811.510
3.030
7.030

256962.1130.035

256510
2.4350.015

632513
0.6590.510

553313
1.1930.233

246413
0.6771.19826.2700.3770.6971.17
3.2780.001
92.670

276771.6010.109

236315
2.7680.006

276771.4750.140

355313
1.0970.272

207371.9770.048

286013
2.1970.028

0.6371.11426.2700.3100.6021.12
82.760
20.0900.61223.85020.0230.0500
335611
.1030.320
1.7360.083

Notes: Key ratios are

dened as follows: ROE
is return on equity
which equals net prot
divided by book value
of equity; ROA is return
on assets, which equals
netprot divided by
total assets; LEV is
leverage, which equals
total liabilities divided
by book value of equity;
ATO is asset turnover,
which is revenue to total
assets;ROS is return on
sales, which is net prot
to revenue. a ratios
under OLD GAAP and
NZ IFRS are reported,
rather than the change
to these ratios, for ease
ofreference to base
gures. b The reported
test statistic is a
Wilcoxon test for
equality of matched
pairs

20.0930.56723.34020.0130.0470
.1160.320

256411
0.2501.40122.0500.0300.1190.21
2.9950.003
79.730

0.0851.56125.5800.0210.0920.23
19.730
Panel A: ratio comparisons (all observations) aMeanStandard deviationMinimum25 percentileMedian75
percentileMaximumPanel B: number of changes and statistical tests(all observations) bDecreases
(%)Increases (%)No change (%)Z statisticp-value (two-tailed)Panel C: number of changes and
statistical tests(early adopters) bNegative (%)Positive (%)No change (%)Z statisticp-value (twotailed)Panel D: number of changes and statistical tests(late adopters) bNegative (%)Positive (%)No
change (%)Z statisticp-value (two-tailed)

Table V.
Descriptive statistics on
key ratios

of positive sign changes are generally much higher for the large rms than for the
small rms. We nd that the impact of NZ IFRS on the small rms is relatively
insignicant only asset turnover (at 0.05) and return on sales at (0.10) show
signicant change at conventional levels. This again contrasts strongly with the
ndings for the large rms, where the impact of NZ IFRS is found to be signicant for
all ratios except asset turnover. Return on equity and leverage are signicant at the
0.01 level, while return on assets and return on sales are signicant at the 0.05 level for
the large rms. These results are consistent with earlier ndings relating to nancial
statement elements, indicating that small listed rms are less signicantly affected by
NZ IFRS than large listed rms.
The results suggest that the impact of NZ IFRS on ratios is both extensive and
complex. Analysts will not be able to apply a simple transformation of OLD GAAP
ratios to NZ IFRS. This has implications for the cost of nancial analysis, the cost of
valuations and the use of ratios in contracting. Furthermore, there are differences
between early and late adopters. This is consistent with early adopters self-selecting
based on rm specic characteristics and the nancial consequences of adoption.

6. Summary and conclusion

In this paper we examine the impact of NZ IFRS on nancial statement elements
(assets, liabilities, equity, revenues/income and expenses/losses) and on key nancial
ratios. The results show that NZ IFRS affects 87 per cent of entities in our sample and
for most nancial statement elements the changes are statistically signicant. The
median and the inter-quartile range indicate that the impact of the move to NZ IFRS is,
for most entities, very small. However, the minimum and maximum values indicate
that the impact can be material for some companies.
The nancial statement element most affected by the move to NZ IFRS is liabilities
(increases for 75 per cent of companies), followed by equity (decreases for 57 per cent of
companies). Income taxes and employee benets are the main reasons for the increases
in liabilities. Financial instruments are the most common reason for increases in assets
(26 per cent of observations). They impact both positively and negatively on assets and
liabilities. The net effects of these nancial instruments impacts are that observations
for equity increase twice as frequently as they decrease. The results are generally
consistent with the expected impacts of IFRS (Ernst & Young, 2004). However, in some
instances they differ from the impact of IFRS in Germany (Hung and Subramanyam,
2007). In particular, adjustments for nancial instruments were more frequent in NZ.
The move to NZ IFRS also has a considerable impact on common nancial
statement ratios. The median for each of four ratios increases under NZ IFRS (return on
equity, return on assets, leverage and return on sales) and decreases for the remaining
ratio investigated (asset turnover). This has implications for nancial analysis,
valuation and credit decisions and contracting agreements that employ accounting
ratios.
Our results are important for accounting policy makers who have deferred the
application of NZ IFRS for smaller rms (Sealy-Fisher, 2007). They indicate that some
rms will be signicantly affected by the adoption of NZ IFRS the current
differential reporting exemption for deferred tax, for example, would therefore be a
major concession if NZ IFRS were to be adopted by smaller rms. Our results also
indicate that small listed rms are less signicantly affected by NZ IFRS than large

IFRS in New
Zealand

105

PAR
22,2

106

Bradbury, M. and van Zijl,

(2006),IfDue
processrms
and the
of IFRS
in New
Zealand,limited benets
listedT. rms.
non-listed
areadoption
similarly
affected,
it suggests
IFRS in New
Australian Accounting
Review,little
Vol. 16
No. 39,
86-94. information) as a result of smaller rms moving to
(relatively
change
in pp.
nancial
Christensen, H.B., Lee,NZ
E. and
Walker,
(2007), Do
reconciliations
convey recently released by Zealand
IFRS.
This M.
perspective
is IFRS/UK-GAAP
relevant to the discussion
documents
new information?,the
paper
presented
at
the
SSRN
eLibrary,
available
at:
http://ssrn.com/
Ministry of Economic Development (2009) and the ASRB (2009), regarding a
paper997800
proposed new statutory framework for nancial reporting in New Zealand and in
Daske, H., Hail, L., Leuz, C. and Verdi, R. (2008), Mandatory IFRS reporting around the world:
particular
toconsequences,
the Ministry ofJournal
Economic
Development
(2009,
early evidence on the
economic
of Accounting
Research,
Vol. p.
4612) conclusion that
.
.
.the
requirements
to
prepare
nancial
statements
should
be
removed for all but the
No. 5, pp. 1085-142.
107
cent
that arenancial
issuers, reporting
large and/or
do not
Dunstan, K.L. (2002), 1-2
Theper
case
for of
thecompanies
use of international
standards
in have
New separation [of
and management].
Furthermore,
the impact
of NZ IFRS on nancial ratios
Zealand, a briengownership
paper prepared
on behalf of the New
Zealand Securities
Commission,
Centre for Accounting
Governance
and Taxation
Research
School of Accounting
indicates
that there
is no simple
transformation
that will and
make OLD GAAP ratios
Commercial Law Victoria
University
Wellington.
comparable
with of
NZWellington,
IFRS ratios.
This has implications for accountants, advisors,
Ernst & Young (2004),bankers
IFRS Impact
Report, Ernst
and managers
of &Young,
rms thatSouthampton.
are required to adopt NZ IFRS.
Fields, T.D., Lys, T.Z. andFinally,
Vincent,our
L. (2001),
on accounting
choice,
Journal
resultsEmpirical
show thatresearch
the impact
of NZ IFRS
on early
and late adopters is
of Accounting and Economics, Vol. 31 Nos 1-3, pp. 255-307.
quite different. This suggests that early adopters have self-selected and that future
Hung, M. and Subramanyam, K.R. (2007), Financial statement effects of adopting international
research might examine the causes and consequences of early adoption. It also
accounting standards: the case of Germany, Review of Accounting Studies, Vol. 12 No. 4,
suggests possibilities for research that could reveal insights into accounting choices
pp. 623-57.
and their association
withonopportunism
Lee, E., Walker, M. andconcerning
Christensen,IFRS
H.B. adoption
(2008), Mandating
IFRS: its impact
the cost of (including the
possibility
of earnings
management)
equity capital in Europe,
No. RR105,
ACCA,
Manchester. and value maximising behaviour.
Ministry of Economic Development (2009), The statutory framework for nancial reporting
discussion document, Wellington, September.
Sealy-Fisher, V. (2007), FRSB developments, Chartered Accountants Journal of New Zealand,
Vol. 86 No. 9, pp. 45-6.
Notes
1. International Accounting Standards (IAS) were signicantly developed and renamed after
2001 to become IFRS. For convenience, we simply refer to IFRS to include both IAS and
IFRS. When the context is more specic we use IAS.
2. The FRSB develops accounting standards which are then submitted to the ASRB, a
statutory body that has legal authority to review and approve the standards.
Corresponding author 3. This statement is required in terms of NZ IFRS 1 First Time Adoption of New Zealand
Warwick Stent can be contacted
at: w.j.stent@massey.ac.nz
Equivalents
to International Financial Reporting Standards.
4. It is normal to use EBIT (earnings before interest and taxation) in estimating return on
assets. However, the OLD GAAP/NZ IFRS reconciliations only provide details for net prot.
Hence we are unable to estimate EBIT. Similarly, we are unable to estimate an Altman-type
Z score model.
5. In the Du Pont analysis return on sales and asset turnover are components of return on
assets. Return on assets and leverage are components of return on equity.
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