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

Abstract

We investigate whether the comparability of the financial statements change following the switch from International Financial Reporting Standards (IFRS) in substance (the content of IFRS) to IFRS in substance and form (IFRS as issued by the IASB). Therefore, while the substance of the accounting standards remain 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 word-for-word the same as IFRS prior to the adoption of IFRS as issued by the IASB in 2005. We compare South African firms with two different groups, namely other mandatory IFRS adopters and non-adopters. We find evidence of an increase in comparability of financial statements of South African firms with both adopters and non-adopters. In addition, we find a global increase in 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 benefits from the accounting amounts of firms from other adopting countries becoming more comparable to the accounting amounts of South African firms.

Keywords: IFRS adoption, comparability, substance, form, accounting quality

JEL Classification: M41, G14, G15, F42