Financial statement comparability in the extractive industry

Abstract

PURPOSE : This paper aims to investigate financial statement comparability in the extractive industry. This paper focuses on the extractive industry because International Financial Reporting Standards (IFRS) contain limited guidance on the accounting treatment for exploration and evaluation (E&E) costs and IFRS 6 – Exploration for and Evaluation of Mineral Resources allowed firms to continue with existing divergent accounting treatment of E&E costs. DESIGN/METHODOLOGY/APPROACH : The authors use data from Australia, a country that adopted IFRS in 2005 with a large extractive industry. They also compare changes in cross-country comparability around the IFRS adoption date between Australian firms and adopters relative to Australian firms and non-adopters to better isolate changes in comparability that are attributable to the adoption of IFRS from other sources that are not related to the adoption of IFRS. The authors measure comparability consistent with De Franco et al. (2011) where financial statements are comparable when two firms produce similar accounting amounts for similar economic events. FINDINGS : For non-extractive industry firms, the authors find the comparability of financial statements of Australian firms increased with other adopters and that this increase was relatively greater than the increase with non-adopter firms. This evidence is consistent with comparability benefits associated with the adoption of IFRS. However, for extractive industry firms, the authors do not find a significantly greater increase in the comparability of financial statements of Australian firms with adopters relative to the increase with non-adopters, suggesting that the increase is likely not associated with the adoption of IFRS. In additional analysis, they find that following IFRS adoption non-extractive Australian firms have greater within-country comparability relative to extractive Australian firms, while there was no difference in the pre-adoption period. ORIGINALITY/VALUE : The evidence suggests that the divergent practices for E&E costs under IFRS 6 and the lack of an accounting standard that deals with matters relating to the extractive industry hinder the comparability of financial statements in this industry.