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Lookup NU author(s): Dr Ekaete Efretuei
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Accounting literature has documented the pervasiveness of complex accounting narratives and its economic consequences such as market delays in extracting information from narratives. Consequently, International Financial Reporting Standards (IFRS) was introduced to enhance reporting efficiencies and improve communication in financial reporting. However, extant studies have suggested that the introduction of IFRS has increased narrative complexity, because of its demands for more reporting. Bearing in mind that accounting complexity can either be informative and useful (enhancing understanding) or non-informative and therefore causing obfuscation, this study performed a rigorous empirical study to shade light on which of the two types of complexities in accounting narratives may be affected by IFRS application. Using the framework and setting of IFRS adoption, it decomposes complexity into two components: information (common complexity) and obfuscation (uncommon complexity) by using a word list adjusted component of the fog index. The results find evidence that IFRS adoption in 2005 has increased in accounting narratives common complexity, which investors are likely to understand (information), but it does not necessary increase obfuscation. This evidence adds to wider evidence around IFRS benefits and can be applied in accounting narrative complexity studies specifically using the identified components of complexity to investigate the economic consequences of IFRS associated complexity. This complexity decomposition is novel in the narrative literature and contributes to the debate on the use of the fog index, while also demonstrating increased comparability of IFRS reports.
Author(s): Efretuei E, Usoro A, Koutra C
Publication type: Online Publication
Publication status: Submitted