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Mandatory IFRS Adoption and Complexity of Annual Report Narratives: Financial Information and Financial Jargon

Lookup NU author(s): Dr Ekaete Efretuei


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Accounting literature has documented the pervasiveness of complex accounting narratives and its adverse economic consequences, normalised as an inherent characteristic of financial reporting. On the other hand, International Financial Reporting Standards (IFRS) was introduced to enhance reporting efficiencies and improve communication in financial reporting. IFRS has been widely accepted around the world and is still being adopted/considered for adoption, however, knowledge of its impact on narrative complexity remains limited. This study proposes to study the impact of the IFRS regulation on narrative disclosures to document evidence on how regulation affects disclosure complexity. Using the mandatory adoption EU regulation, it specifically examines if IFRS adoption in 2005 increased the pervasiveness of narrative complexity at the word level. To study this, it decomposes word complexity into two components: information (common complexity) and obfuscation (uncommon complexity) by applying theoretical assumptions from the Incomplete Revelation Hypothesis and the term weighting concept of the information retrieval literature. The preliminary results find evidence of a significant increase in the complexity of narratives with IFRS adoption in 2005 and this increase is associated with common complexity. Based on the assumptions of the theoretical model, the observations indicate that applying IFRS increases complex disclosures that investors are more likely to comprehend. The study uses narrative disclosures to provide supporting evidence that IFRS application appears to reduce information extraction cost. This evidence can be applied in accounting narrative complexity studies specifically using the identified components of word complexity to investigate the economic consequences of IFRS associated complexity.

Publication metadata

Author(s): Efretuei E

Publication type: Conference Proceedings (inc. Abstract)

Publication status: Published

Conference Name: American Accounting Association Annual Meeting

Year of Conference: 2018

Acceptance date: 04/06/2018

Notes: Global Emerging Scholars Research Workshop