Managerial Auditing Journal

The impact of international financial reporting standards: does size matter?

John Goodwin Kamran Ahmed
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John Goodwin Kamran Ahmed, (2006),"The impact of international financial reporting standards: does size
matter?", Managerial Auditing Journal, Vol. 21 Iss 5 pp. 460 - 475
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MAJ
21,5 The impact of international
financial reporting standards:
does size matter?
460
John Goodwin
School of Accounting and Law, RMIT University, Melbourne, Australia, and
Kamran Ahmed
School of Business, La Trobe University, Bundoora, Australia

Abstract
Purpose – This study seeks to examine the impact of Australian equivalents to international
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financial reporting standards (A-IFRS) on the accounts of small-, medium- and large-sized firms.
Design/methodology/approach – For 135 listed Australian entities, the half-yearly accounts
ended 30 June 2005 are examined to identify the effects of A-IFRS. Data are gathered on the change in
major balance sheet and income statement elements, the major reconciling items and earnings
variability.
Findings – Findings show that more than half of small firms have no change in net income or equity
from A-IFRS, and that there is an increase in the number of adjustments to net income and equity with
firm size. The study also finds that A-IFRS has increased net income for small- and medium-sized
firms. Equity has increased (decreased) under A-IFRS for small (large) firms. Small firms experience
higher earnings variability than medium-sized or large firms under A-IFRS.
Research limitations/implications – The sample is limited to 31 December reporting date firms
and not all A-IFRS must be complied with when firms restate their comparatives.
Practical implications – Analysts, auditors and other account users should be aware that the
effects of A-IFRS are correlated with firm size.
Originality/value – This is the first Australian empirical paper on the effects of A-IFRS. It raises
doubts about the contentions of some that A-IFRS will have widespread adverse effects on firms’ accounts.
Keywords Financial reporting, Accounting standards, Small enterprises, Medium-sized enterprises,
Large enterprises, Australia
Paper type Research paper

The objective of this study is to examine the impact of Australian equivalents to

Managerial Auditing Journal
Vol. 21 No. 5, 2006
pp. 460-475
q Emerald Group Publishing Limited
0268-6902
DOI 10.1108/02686900610667247
International Financial Reporting Standards (A-IFRS) on the accounts of small-,
medium- and large-sized firms. More specifically, this study seeks to answer the
following four questions:
(1) How onerous is the transition to A-IFRS?
(2) How have net income, assets, liabilities and equity changed under A-IFRS?
(3) Why has net income and equity changed under A-IFRS?
(4) Is net income more variable under A-IFRS?
The authors acknowledge the helpful comments from Max Aiken, Richard Heaney, Alex Martin,
participants at the October 2005 Emerging Issues Discussion Group at the AASB and the
anonymous reviewers. Any errors remain the authors’ responsibility.
 The motivation for this research is the recent debate among auditors, regulators, the International
accounting bodies, firms and other commentators on the impact of A-IFRS on different financial
types of firms, and the lack of empirical data on contentions made in that debate.
Public comments speculating on the impact on firms of the transition to A-IFRS reporting
date back to at least 1997, when the Australian Federal Government released the
CLERP 1 discussion paper[1]. However, in recent times, the extent of public debate has
increased. For example, in early 2005, 25 submissions were made to the Parliamentary 461
Joint Committee on Corporations and Financial Services (hereafter the Committee)
inquiry into Australian accounting standards detailing different views on the effects of
A-IFRS. A common theme in much of the recent comment is that firm size is an
important discriminatory variable. In the present paper, we measure size by total
assets at financial year end.
Some argue that smaller-sized entities should be allowed more time to implement
A-IFRS because those entities are relatively under-prepared and less able to access the
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requisite accounting skills. For example, the Australian Institute of Company Directors
(AICD, 2004, p. 6) echoed small business’ concerns on the transition to A-IFRS in a
discussion paper submitted to the Committee. In that paper it is stated that smaller
companies are at “. . . a greater disadvantage in moving to IFRS than larger
companies”. Thirteen supporting reasons are given but the thrust of the argument is
that the costs on smaller entities do not justify the benefits from A-IFRS. For example,
it is stated in the discussion paper that “. . . It is the cost of restatement of the past that
will fall heaviest on smaller companies . . . ” (AICD, 2004, p. 6). The Institute of
Chartered Accountants in Australia also supported some relief for small- and
medium-sized entities in its submission to the Committee (ICAA, 2005, p. 2). These
arguments appear to have persuaded the Committee to support account lodgement
relief for smaller entities (see for example, Senator Wong’s (2005) speech in the Senate).
However, submissions from second tier accounting firms generally disagree with this
line of thinking. Pannel Kerr Forster (PKF, 2005, p. 1), for example, in arguing against a
delay in the transition to A-IFRS for small- and medium-sized entities, state:
It is unlikely that most small and medium sized Australian companies will need to establish
new or complex systems . . .
This view is also held by Pitcher Partners and the National Institute of Accountants
(Pitcher Partners, 2005, pp. 1-2; NIA, 2005, p. 2). We provide evidence relevant to this
debate on the onerousness of A-IFRS on firms, for three different firm size groups.
Concerns have also been raised on the materiality of the impact of A-IFRS and
predictions have been made of the effects on the accounts. For example, the head of the
Australasian investor relations association, Ian Matheson, said in June 2005:
In some cases, the IFRS changes will have a material bearing on the companies’ reported
results . . . (Buffini, 2005).
Wayne Cameron, Technical Director of RSM Bird Cameron claimed that generally
small firms balance sheets will be weakened by A-IFRS and that except for intangibles
“. . . the SMEs are caught just as much as the big boys” (Andrews, 2005). Conversely,
the chairman of the Australian Accounting Standards Board (AASB)[2] David Boymal,
stated in February 2005:
 MAJ I think most of [the SMEs] are in for a pleasant surprise that it was not such an onerous thing
as they were first led to believe – with a few exceptions (Andrews, 2005).
21,5
The former chairman of the AASB, Keith Alfredson has a similar view to that of
Boymal (Alfredson, 2005, p. 2). We report the percentage changes for key account totals
for small, medium and large firms and provide reasons for those changes, to shed light
on this aspect of the debate.
462 Many commentators have claimed that earnings variability will increase under
A-IFRS for small- and medium-sized enterprises (SMEs). For example, Wayne Basford,
National Technical Director of RSM Bird Cameron, said that the new standards will
cause many SMEs to experience substantially more volatility (Andrews, 2005). Firms
also predict increases in their earnings variability. In Tasmania Mines Ltd’s 2004
Annual Report, it is stated that increased variability may result from changes to the
residual value determination under the A-IFRS depreciation standard (Tasmania
Mines Ltd, 2004, Note 38). Additionally, it is stated in Oriental Technologies Ltd’s 2004
Annual Report that the prescription to discount cash flows when measuring
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recoverable amount is likely to increase earnings variability (Oriental Technologies

Ltd, 2004, Note 1(r)). On the other hand some A-IFRS, such as AASB 120 may reduce
earnings variability (AASB, 2004d). That standard requires grants used for asset
acquisitions to be recognised in income over the life of the asset. Presently under
A-GAAP, several R&D-intensive firms recognise that income up front (Electrometal
Technologies Ltd, 2004). Whether earnings variability has changed under A-IFRS for
specific firm sizes is an important question that this study also seeks to answer.
Our study provides evidence on the impacts of A-IFRS, with specific reference to
the abovementioned four research questions, for 135 disclosing entities that have
31 December annual reporting dates. We divided our sample into three groups of
45 firms based on total assets at financial year end, and classified them as small,
medium and large firms. The results indicate that more than half of small firms have
no change in net income or equity from A-IFRS, and that there is an increase in the
number of adjustments to net income and equity with firm size. We also find that
A-IFRS has increased net income for small- and medium-sized firms. The impact on
large firms is negligible. Equity has increased (decreased) under A-IFRS for small
(large) firms. The impact on medium-sized firms is negligible. The highly material
changes to net income and balance sheet elements are limited to a relatively small
number of firms irrespective of size. Small firms experience higher earnings variability
than medium-sized or large firms under A-IFRS. These results should assist interested
parties to focus on those entities where the A-IFRS effects are expected to be important.

Brief review of AASB 1 requirements

Under AASB 1, reconciliations from A-GAAP to A-IFRS are required for net income
and equity (AASB, 2004a). Specifically, paragraphs 39 and 45 require disclosing
entities with a 31 December year end, to provide reconciliations to A-IFRS net incomes
for their 2004 year and 2004 half-year net incomes under A-GAAP, and to their
A-GAAP equity at 1 January 2004, 30 June 2004 and 31 December 2004.
We mainly use the full year (2004) reconciliations and equity at the most recent date,
namely 31 December 2004 in this study. In our analyses of earnings variability,
however, we also use half-year earnings and earnings changes to improve robustness
of the results.
 There is no prescribed format for the reconciliations but AASB 1, requires an International
explanation of: financial
. . . how the transition from previous GAAP to A-IFRS affected its reported financial position, reporting
financial performance and cash flows (AASB, 2004a, paragraph 38).
Further, paragraph 40 states that the reconciliation:
. . . shall give sufficient detail to enable users to understand the material adjustments to the 463
balance sheet and income statement . . . .
In our reading of the reconciliations we were able to ascertain the reasons for the
reconciling items for the sample firms.

Data
We selected all firms with a 31 December financial year end from Aspect Huntley Pty
Ltd’s Finanalysis database which gave a total of 197 firms. Thirty-four firms were
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deleted because they used non-Australian GAAP and 26 because the accounts were not
available. The sample was further reduced by two firms who restated under A-IFRS in
foreign currency. The final sample comprises 135 firms which we partition into three
groups based on total A-GAAP assets at 31 December 2004. Table I shows descriptive
statistics for the final sample.

Results – onerousness of A-IFRS

In this section, we examine the question of how onerous is the transition to A-IFRS for
small, medium and large firms. There is no established measure of onerousness and a
number of measures are possible, such as the change in audit fees and questionnaire
responses. Owing to lack of data and time constraints, we use the number of
reconciling items and the percentage of firms that have changes in their net income and
equity as our two measures. These measures are likely correlated with the cost of

Small (n ¼ 45) Medium (n ¼ 45) Large (n ¼ 45)

($m) ($m) ($m)

Net income
Mean 21.69 3.66 148.54
Median 20.79 0.29 40.06
Total assets
Mean 7.12 61.94 4,379.92
Median 6.20 47.01 751.47
Market value of equity
Mean 14.83 99.15 2,395.25
Median 8.76 47.60 549.21
Notes: Net income, assets and market value numbers are millions. Net income is A-GAAP net income
for the year ended 31 December 2004. Assets is A-GAAP-measured total assets at 31 December 2004.
Market value is measured at 31 December 2004. Small firms have total assets within the bottom
one-third of the sample based on total assets at 31 December 2004. Medium firms are within the Table I.
middle one-third of the sample based on total assets at 31 December 2004. Large firms are within Descriptive statistics for
the top one-third of the sample based on total assets at 31 December 2004 the samples
 MAJ compliance with A-IFRS. By reconciling items, we mean those descriptors used by
21,5 firms in their net income and equity reconciliations required under AASB 1 (AASB,
2004a). For example, reversal of goodwill amortisation and impairment of property are
counted as two reconciling items.
Table II shows the percentage of firms that had no change in net income or in equity
and the mean (median) numbers of reconciling items for each size group. The results
464 for net income (Panel A) indicate a monotonic decrease in the percentage of firms that
have no change under A-IFRS. Only two large firms (about 4 per cent) have no change
in net income, but 58 per cent (26 of 45) small firms have no change in net income.
A similar decline is observed for equity reported in Panel B. These percentages indicate
that most small firms are unaffected by the different recognition and measurement
rules under A-IFRS.
The table also shows that the average number of reconciling items is 0.8 (median ¼ 0)
for all small firms and 2.0 (median ¼ 2.0) for those small firms that had a net income
change. There is an increase in these means and medians with firm size. These results
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suggest the change to A-IFRS is less onerous for small firms, which is consistent with the
comments of some.

Results – effects on net income, assets, liabilities and equity

In this section, we examine the contention of the materiality and direction of the effect
of A-IFRS on net income for the 2004 year and on assets, liabilities and equity at
31 December 2004. We first calculate the percentage change from A-GAAP to A-IFRS
for each firm, and then the mean and median of those changes for each size group.
Since, losses are coded as negative numbers in the Finanalysis database, the absolute
value of the A-GAAP number is used as the base for the percentage calculations to
avoid confounding results.
Table III shows the grand means and medians of each firm’s percentage change in
net income, assets, liabilities and equity, for all firms and for those firms that have
changes in those items. The table also shows the percentage of A-IFRS numbers that

Small Medium Large

Panel A – net income

Percentage no change 58 11 4
All firms – mean 0.8 2.2 4.6
All firms – median 0.0 2.0 5.0
Change firms – mean 2.0 2.4 4.6
Change firms – median 2.0 2.0 5.0
Panel B – equity
Percentage no change 53 16 2
All firms – mean 0.8 2.0 4.4
All firms – median 0.0 2.0 4.0
Change firms – mean 1.8 2.4 4.5
Change firms – median 2.0 2.0 4.0
Table II.
Reconciling items for net Notes: Percentage no change is the percentage of firms that have no change in net income or equity
income and equity for from A-IFRS. The mean (median) is the mean (median) of the number of reconciling items. Change
small, medium and large firms are those firms that disclose a change in net income for the 2004 year or equity at 31 December
firms 2004 by applying A-IFRS
 International
Small Medium Large
financial
Panel A – net income reporting
All firms – mean 55.5 7.7 0.0
All firms – median 0.0 0.1 0.0
Change firms – mean 131.4 8.6 0.0
Change firms – median 6.2 1.8 0.0 465
A-IFRS , A-GAAP 36.8 42.5 51.2
Panel B – assets
All firms – mean 2 0.8 2 0.8 2 1.9
All firms – median 0.0 0.0 0.0
Change firms – mean 2 1.7 2 1.1 2 2.1
Change firms – median 0.6 0.1 2 0.2
A-IFRS , A-GAAP 20.0 35.6 46.7
Panel C – liabilities
All firms – mean 1.1 250.8 17.4
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All firms – median 0.0 0.0 5.1

Change firms – mean 5.4 537.4 20.0
Change firms – median 1.4 1.0 5.9
A-IFRS , A-GAAP 6.7 8.9 8.9
Panel C – equity
All firms – mean 2.0 2 5.9 2 19.6
All firms – median 0.0 0.0 2 7.5
Change firms – mean 4.3 2 7.0 2 17.7
Change firms – median 0.2 2 1.0 2 7.6
A-IFRS , A-GAAP 22.2 51.1 77.8
Notes: Mean (median) change is the mean (median) of the percentage changes in that financial
statement item for each firm. Change firms are those firms that disclose a change in net income for the Table III.
2004-year or total assets, liabilities or equity at 31 December 2004 from applying A-IFRS. Percentage effects of
A-IFRS , A-GAAP is the percentage of A-IFRS numbers that are less than A-GAAP numbers for those A-IFRS on various
firms that have different A-IFRS and A-GAAP numbers for net income, assets, liabilities or equity financial statement items

are less than their A-GAAP counterparts. Looking first at net income (Panel A), the
results show that for small firms, the mean increase in net income from A-IFRS is
about 55 per cent. Given that about 58 per cent of small firms have no change in net
income (reported in Table II), the percentage change for those firms that report a
different net income under A-IFRS to that reported under A-GAAP is a lot higher at
about 131 per cent. Reasons for this change and the changes for medium- and
large-sized firms are covered in the next section. There is a decline in these means with
firm size as there is with the medians. The average medium-sized firm also experiences
an increase in net income (mean ¼ 7.7 per cent, median ¼ 0.1 per cent). There is no
bias upward or downward for large firms. The A-IFRS , A-GAAP is the percentage
of firms with a change in net income that report lower net income under A-IFRS, and
indicates that about 37 (63) per cent of small firms had lower (higher) net income under
A-IFRS. There is a monotonic increase in these percentages with size indicating
A-IFRS has a decreasing directional bias on net income with size.
With respect to assets, all size groups have a mean decline but the percentages are
small, ranging up to about 2 per cent for large firms. About 20 per cent of small firms
have an asset decrease and this percentage increases with firm size. Nevertheless, most
firms from each group experience an asset increase. Consistent with this are the
 MAJ medians for small- and medium-sized firms that have changes that are both positive
21,5 and all three percentages for A-IFRS , A-GAAP are less than 50 per cent.
Liabilities reported in Panel C have increased for all three size groups and again, an
increase with firm size is generally evident. The large mean for medium-sized firms is
due to one firm changing its liabilities from about $800,000 to about $29m under
A-IFRS, which is an increase of over 3,500 per cent[3]. Over 90 per cent of firms that
466 report a change have a liability increase for all three-size groups (the percentages for
A-IFRS , A-GAAP are all less than 10). It is evident that A-IFRS has changed total
liabilities more often and by larger amounts than total assets, irrespective of firm size.
The mean increase to equity for small firms that change equity is about 4 per cent.
By contrast, the mean decrease to equity for medium and large firms is about 7 and
18 per cent, respectively. Medians show a similar increasing trend in the negative
effects on equity. Primary reasons for these results are covered in the next section.
About 78 per cent of small firms have an increase to equity and this percentage
decreases with size. About 78 per cent of large firms have an equity decrease.
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In sum, we find the most detrimental effects of A-IFRS on net income and equity are
in large firms. The equity declines for medium and large firms are driven by liability
increases. Total assets have not changed materially for any size group. Small firms’
accounts show an overall healthier financial position under A-IFRS compared with
A-GAAP.

Major items changing net income and equity

The most common reasons for changes to net income and equity are examined in this
section. We build on the previous section by explaining why, in broad terms, earnings
and equity have changed for our three size groups. To undertake this analysis, the
AASB 1-required reconciliation in the notes to the 2005 half-year accounts are used to
gather the data for each firm. Table IV shows the mean and median percentage
changes in A-GAAP net income for the top ten most common items affecting net
income and Table V shows the same information for equity. In each case, we calculate
the firm-specific percentage change as discussed in the previous section but the grand
mean and median in Tables IV and V are only for those firms that report a change for
that item. For instance, the average percentage increase to A-GAAP 2004 annual net
income for the five small firms that report a tax adjustment is 183 per cent and it is
33 per cent for equity at 31 December 2004.

Income tax
Small firms have the largest mean and median increase in net income from application
of the tax accounting standard, AASB 112 (AASB, 2004c). The main reason for this is
the recognition of deferred tax assets from tax losses that were unrecognised under
A-GAAP due to the more stringent recognition test in AASB 1020 (AASB, 1989). In our
sample, small firms reporting large tax benefits and tax assets tend to have low profits
and equity resulting in a mean (median) percentage increase to A-GAAP equity of
about 33 (36). With respect to large firms, the tax effect of asset write-downs is the most
common reason. One firm accounts for about half of the 10 per cent mean increase
to net income for large firms, by recognising the tax benefit on a highly material
impairment loss. That firm also accounts for most of the mean impairment loss for
large firms of about 79 per cent reported below.
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Mean Median
N Small Medium Large Small Medium Large
Small Medium Large (per cent) (per cent) (per cent) (per cent) (per cent) (per cent)

Income tax 5 17 33 183 4 10 86 2 1

Share-based payments 5 19 26 217 213 28 2 11 24 21
Goodwill 6 19 21 220 15 58 13 12 5
Restoration provisions 5 6 18 26 21 23 24 20.2 21
Impairment 2 7 9 212 6 2 79 2 12 23 219
FX translation 4 4 9 4 19 26 2 27 0.04
Intangibles 4 5 8 13 29 25 8 0.3 22
Superannuation 0 2 13 2 0.4 1 20.4 1
Financial instruments 1 3 9 21 233 2 32 21 0.1 0.1
Revenue recognition 2 4 7 210 85 21 2 10 20.3 21
Other 4 11 31 88 25 27 2 24 21 20.2
Total 38 97 184 131.4 8.6 2 0.02 6.2 1.8 20.03
Notes: Means and medians are the means and medians of the percentage changes in 2004-year A-GAAP net income from that particular reconciling item.
The base for calculating the percentage is the absolute value of A-GAAP net income for the 2004-year
International

reporting
financial

for small, medium and

the most significant items

large firms
A-GAAP net income from
Percentage change in
467

Table IV.
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firms
21,5

468
MAJ

Table V.
Percentage change in

small, medium and large

A-GAAP equity from the
most significant items for
Mean Median
N Small Medium Large Small Medium Large
Small Medium Large (per cent) (per cent) (per cent) (per cent) (per cent) (per cent)

Income tax 5 17 33 33 0 24 36 1 21
Goodwill 6 18 21 18 2 0 5 2 1
Restoration provisions 5 7 18 27 0.4 22 23 2 0.1 21
Impairment 3 9 12 214 216 29 2 19 2 13 24
Intangibles 5 5 11 241 28 2 18 21 0 21
Financial instruments 2 5 13 0.1 219 2 19 0 0 0
FX translation 3 7 9 10 24 22 2 21 0
Share-based payments 2 2 14 224 0.29 24 2 24 0 21
Superannuation 0 2 15 20.04 2 0.4 2 0.04 20.30
Revenue recognition 2 3 7 21 25 22 21 0 21
Other 3 13 29 212 1 22 22 0 0
Total 32 88 182 4.3 27.0 2 17.7 0.2 2 1.0 27.6
Notes: Means and medians are the means and medians of the percentage changes in 2004-year A-GAAP equity from that particular reconciling item. The
base for calculating the percentage is the absolute value of A-GAAP equity for the 2004-year
 Share-based payments International
For share-based payments, there is a monotonic decrease in means and medians with financial
firm size for net income indicating this accounting is more material for small firms.
Adjustments to equity also show a percentage decline with firm size. Since, the reporting
accounting for the expense is equity neutral there are fewer equity adjustments overall.
There are fewer adjustments for small and medium firms, as equity adjustments are
mainly for de-recognition of loans to employees for share purchases. Such loans 469
are now debited to equity under AASB 2 and are more prevalent in large firms, as
might be expected (AASB, 2004b).

Goodwill
One firm with an increase in its net income of about 1,250 per cent from reversal of
goodwill amortisation, accounts for much of the large mean of 220 per cent for small
firms. Without that firm the grand mean is about 12 per cent. As we report impairment
separately, it is, therefore, expected that all size categories experience average
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increases to income and equity for goodwill. Goodwill amortisation and assets are less
material with increases in firm size, hence the decline in median percentages for net
income and equity.

Restoration provisions
About 65 per cent of the firms with restoration provision adjustments are from
the extractive industries. Despite the frequency of this item, its amount is only above
5 per cent of net income and equity for small firms. Most firms are under-providing for
future restoration and rehabilitation according to the standard, evidenced by the
negative medians for all three size groups.

Impairment
Write-downs due to impairment are the largest median percentage change for net
income and for equity for large firms and are quite large for small and to a lesser extent
medium firms. Most effects are negative as expected. The positive mean for medium
firms shown in Table IV, is due to the reversal of a previous write-down which is
permitted under AASB 136, except for goodwill (AASB, 2004e). The extractive
industries are the most common industry group represented at about 39 per cent of
firms and these firms have the largest write downs.

FX translation
FX translation mainly comprises changes to the functional currency of foreign
subsidiaries and recognition of foreign exchange gains/losses directly in reserves for
firms that previously used the temporal method under A-GAAP, with the latter reason
being the more material of the two. For example, the large mean for medium firms for
net income is mainly due to three firms with a net income increase of about 60 per cent
and one with a decrease of about 35 per cent.

Intangibles – other than goodwill

The negative adjustments to equity for small firms are mainly due to derecognitions of
large R&D assets, giving the large mean decrease of 41 per cent. With respect to large
firms, the mean decrease of 18 per cent is mainly caused by derecognition of customer
 MAJ acquisition costs and the reversal of previous revaluations. There is a corresponding
21,5 positive effect on net income for the small firms as the amortisation is also derecognised.

Superannuation
Adjustments for superannuation are quite a common adjustment for large firms but
not medium or small firms. It is noteworthy that while the effects from the standard’s
470 requirements to recognise the net surplus/deficit from defined benefits plans are
negative, they are about 1 per cent or less of net income and of equity. This indicates
that while a number of firms were unfunded at 31 December 2004 according to the
standard, most adjustments are immaterial.

Financial instruments
The large negative means and medians for net income and equity relate to
reclassification of equity as debt for three listed trusts, with the result that each of these
firms has a 100 per cent fall in net income and equity.
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Revenue recognition
In most cases, A-IFRS has resulted in delayed recognition of revenue and the associated
cost of sales, causing net income and equity to fall when a profit on sale is recognised
under A-GAAP. Hence, most adjustments across all sizes are negative except for the
large mean for medium-sized firms. That mean is due to the transfer of a large loss
(revenue and cost of sales) from 2004 to 2005 by one property development firm.

Other
The other category mainly comprises changes due to investments, lease accounting
and adjustments for property plant and equipment. The large percentage increase for
net income for small firms is due to one firm recognising a gain on a previously
recognised deferred liability that is part of a lease transaction.
In sum, it is evident that A-IFRS has had some highly material effects on net income and
equity but that these effects are concentrated in a few firms with particular characteristics.
Examples include intangible-intensive small firms and small firms with tax-losses, which
each have net income and equity increases, and large firms recognising deferred tax
liabilities on impairment losses which have equity decreases from A-IFRS.

Variability of net income

To answer the question of whether net income is more variable under A-IFRS, we
examine the standard deviation and interquartile range of earnings scaled by market
value at the start of the earnings measurement interval[4]. An F-test for difference in
variances between each of the pairs of earnings numbers is conducted and the p-values
from those tests are reported. As standard deviations are sensitive to outliers, the
interquartile range, which is the range between the 25th and 75th percentiles, is also
used. Both full- and half-year earnings levels and half-year earnings changes are
examined to increase robustness of the analysis. Since, the 2004 earnings are not fully
A-IFRS compliant[5], we also measure the variability of 2005 half-year earnings level
and its change, and compare those numbers with the earnings numbers for the same
corresponding periods for 2004. We recognise that time-series variation may affect
inferences from this latter analysis but this limitation is unavoidable here.
 The results are presented in Table VI. The standard deviations of earnings and International
p-values shown in Panel A, reveal that for small firms, earnings variability is financial
significantly higher under A-IFRS for both the 2004 year and 2004 last half-year
earnings change ( p-values ¼ 0.00 and 0.01, respectively). The standard deviation for reporting
the 2004 half-year earnings is also higher under A-IFRS but it is insignificant.
Conversely, the 2005 A-IFRS half-year earning’s standard deviation is 0.19 and it is
significantly less variable than the corresponding period’s A-IFRS earnings the 471
previous year of 0.43, reported in the row above ( p-value ¼ 0.00). It is also significantly
less variable than the A-GAAP earnings for this period of 0.39, also reported in the row
above ( p-value ¼ 0.00). The 2005 half-year earnings change is also less under A-IFRS
but is insignificant. The interquartile ranges shown in Panel B, generally do not
support the standard deviation results, with the one exception being the 2004 half-year
earnings change. Outliers may explain the inconsistencies.
Examination of the data reveals one firm accounts for much of the significant and
higher standard deviations under A-IFRS. Removal of this firm does not change
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inferences from the interquartiles ranges but gives standard deviations of 0.18 and 0.19
for the A-GAAP and A-IFRS 2004 earnings. These differences are insignificant.
Removal of that firm also gives standard deviations of 0.40 for A-GAAP and A-IFRS
2004 half-year earnings changes and this difference is insignificant. The 2004 last
half-year earnings change remains significantly higher under A-IFRS after removal.
Much of the higher earnings variability in small firms, therefore, is due to one firm.
With respect to medium-sized firms, a different picture emerges. The standard
deviation of the 2005 half-year earnings of 0.27, is more significant than both the 2004
half-year standard deviations in the row above ( p-values ¼ 0.00 and 0.00,
respectively). The 2005 half-year earnings change standard deviation is also larger
and more significant than A-GAAP earnings at the 1 per cent level. Other standard
deviations are insignificant.
However, the interquartile ranges are inconsistent with these two significant
standard deviations. For instance, the interquartile range for the 2005 half-year is lower
under A-IFRS (0.06) than under A-GAAP for the corresponding period (0.07), and lower
than under A-IFRS for the corresponding period (0.07). The interquartile range for 2005
half-year earnings change is also less than the 2004 half-year earnings change. These
results suggest that earnings volatility is lower under A-IFRS.
Again, outliers may be the cause for these inconsistencies. Examining the data set
reveals a small number of large values for A-IFRS. Removal of one observation from
the 2005 half-year earnings, and the largest from each of the two comparative earnings,
gives the same standard deviation under A-IFRS for 2005 of 0.11 compared with a
standard deviation for 2004 half-year A-GAAP (A-IFRS) earnings of 0.11 and 0.10. The
differences are not significant. The three interquartile ranges are similar at about 0.6.
Removal of two large positive values and one negative value for A-IFRS earnings for
the 2005 half-year change, gives a lower but insignificant standard deviation under
A-IFRS ( p-value ¼ 0.29)[6]. The interquartile range does not change. Excluding a
small number of observations, there is evidence of a decrease in earnings variability
under A-IFRS as measured by both the standard deviation and range. Overall, we
conclude there is weak evidence of a decline in earnings variability. As for small firms,
the increases in earnings variability are for a small number of firms.
 Downloaded by Ohio University At 11:32 22 June 2016 (PT)

21,5

472
MAJ

Table VI.

under A-IFRS and

A-GAAP for small,
Earnings variability

medium and large firms

Small Medium Large
A-GAAP A-IFRS A-GAAP A-IFRS A-GAAP A-IFRS

Panel A – Standard deviation

2004 year earnings 0.18 0.26 0.26 0.24 0.50 0.61
p-value 0.00 0.31 0.10
2004 half-year earnings 0.39 0.43 0.16 0.15 0.28 0.31
p-value 0.28 0.38 0.24
2005 half-year earnings 0.19 0.27 0.20
p-value * 0.00 0.00 0.00 0.00 0.02 0.00
2004 last half-year earnings D 0.22 0.32 0.27 0.26 0.10 0.10
p-value 0.01 0.43 0.49
2004 half-year earnings D 0.46 0.15 0.11
2005 half-year earnings D 0.41 0.52 0.07
p-value 0.22 0.00 0.00
Panel B – interquartile range
2004 year earnings 0.18 0.17 0.16 0.15 0.08 0.09
2004 half-year earnings 0.09 0.07 0.07 0.07 0.05 0.03
2005 half-year earnings 0.10 0.06 0.03
2004 last half-year earnings D 0.07 0.14 0.04 0.05 0.04 0.05
2004 half-year earnings D 0.05 0.07 0.03
2005 half-year earnings D 0.09 0.04 0.03
Notes: Earnings numbers are scaled by the market value of equity at the start of that earnings measurement interval; *p-values in this row are for the
F-tests conducted on a comparison with the 2005 half-year earnings standard deviation and each of the standard deviations in the earnings row above
 The results for large firms show mixed evidence. The 2004 year earnings is International
significantly more variable under A-IFRS ( p-value ¼ 0.10), which is supported by the financial
higher interquartile range of 0.09 versus 0.08 under A-GAAP. However, the 2005
half-year earnings is significantly less variable than both the 2004 half-year A-GAAP reporting
and A-IFRS earnings. The interquartile ranges are not inconsistent with these results.
A significantly lower A-IFRS earnings is also evident for 2005 half-year earnings
change and the interquartile range is the same. We interpret these results as mixed 473
evidence that earnings variability has changed for large firms under A-IFRS.
In summary, our strongest evidence that earnings variability is higher under
A-IFRS is for small firms for fully-compliant (2005) A-IFRS half-year earnings and the
2004 earnings change. We find some evidence that earnings variability has decreased
under A-IFRS, especially for medium-sized firms. The evidence is mixed for large
firms. The higher variability under A-IFRS is concentrated in a small number of firms
materially affected by A-IFRS regardless of firm size. The large increases in earnings
variability predicted by some are not common in this study’s data.
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Conclusion
Our analyses suggest that the transition to A-IFRS has not been onerous for small
firms. Most small firms are unaffected by A-IFRS and those that are affected have
fewer changes to make to net income and to equity than both medium- and large-sized
firms. There is an increasing trend in both the percentage of firms affected by A-IFRS
and the number of changes to net income and to equity with firm size. We conclude
that the transition A-IFRS has not been onerous for small firms.
Our results also indicate that the average small firm has a net income and an equity
increase from A-IFRS. Subsequent analyses reveal that the primary reason for these
increases is tax benefits and deferred tax assets from tax losses, recognised under the
less stringent recognition rules and reversal of goodwill amortisation. A-IFRS has not
had a material affect on total assets for the average firm, but has increased liabilities
for all firm sizes. Large firms have the biggest percentage increase in liabilities and
consequently the biggest percentage decrease in equity. Impairments is the main
material adjustment for large firms.
Finally, we find modest support for the contention that earnings variability for small
firms has increased from A-IFRS, consistent with some commentators. This increase is
in 2005 when the accounts are fully A-IFRS compliant and for half-year earnings change
for the last half of 2004. The results for medium-sized and large firms are mixed with
some indicating a variability decrease, especially for medium-sized firms. Since, most
small firms are unaffected by A-IFRS the changes in earnings variability are due to a few
firms that have large changes in (scaled) net income. We conclude that A-IFRS has not
had as detrimental affect on small firms as on medium and large firms.
A possible limitation of this study is the generalisability of the results in certain
circumstances since we use the reconciliations required in AASB 1 and only 31 December
balance date firms. A select number of A-IFRS such as AASB 139 (AASB, 2004f), do not
have to be applied retrospectively. Hence, our analyses of the impact of A-IFRS on the
accounts exclude those standards not applied retrospectively. Additionally, banks are
not included in our sample and some contend banks will have higher earnings
variability under A-IFRS (Moullakis, 2005). If banks have higher variability, our results
on variability may not be generalisable for large firms in particular.
 MAJ Notes
21,5 1. Two advantages claimed at that time were that high-quality and internationally-accepted
accounting standards will improve the comparability of accounts and Australian firms will
be able to access international capital markets at a lower cost.
2. The AASB is a public sector body which issues accounting standards applicable for
Australian firms.
474 3. There is no percentage of comparable magnitude for assets or for equity because for that
firm, total assets and equity began from large A-GAAP bases of about $114m and $113m,
respectively, meaning that the percentage change from A-IFRS is a lot less for those two
elements.
4. For brevity, earnings and net income are used interchangeably in this paper.
5. One can argue that the 2005 earnings are not fully A-IFRS compliant because of transition
rules for accounting for defined benefits superannuation, for example. Nevertheless, the
standard arguably most likely to increase variability is AASB 139 Financial Instruments,
and that standard must be applied from 1 January 2005.
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6. We also removed the three largest by absolute value, A-GAAP numbers.

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Further reading
Andrews, B. and Heathcote, A. (2005), “Snapshots: green light for IFRS”, Business Review Weekly,
February, pp. 89-90.

Corresponding author
John Goodwin can be contacted at: john.goodwin@rmit.edu.au

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