Readability of financial reports and the adoption of IFRS

Purpose: Financial reports should present clear and easily comprehensible information to investors, yet no prior studies have examined financial report readability after the adoption of IFRS. Therefore, this study examines the impact between readability, firm performance and IFRS in Australia by assessing: (1) if the introduction of IFRS affects readability of financial reports, (2) the association between readability and firm performance under principles-based standards, and (3) whether the introduction of IFRS will alter the relationship between readability and performance. Originality: The uniqueness of this study opposed to other studies regarding readability of financial reports is that it extends the financial report readability literature and aims to shed light on the effect of adopting IFRS by examining its impact on the readability of financial reports. It also contributes to understanding the issues associated with effective communication, and therefore, extends to the global discussion on the economic consequences of adopting IFRS. Key literature / theoretical perspective: Financial reporting, IFRS Design/methodology/approach: This paper uses complexity of financial reports (Fog index) and number of words (Length) as proxies to measure financial reports readability. Findings: Results indicate that financial reports are significantly longer and more readable after adopting IFRS. This suggests that length and readability are not mutually exclusive, where it is possible to have longer financial reports that are easier to read. Second, there is no significant association between readability and firm performance under principle-based standards in Australia, signifying managerial manipulation is not apparent under this approach. Finally, the introduction of IFRS did not alter the complexity of financial reports based on performance. However, it affects the relationship between length and performance, where manipulation exists prior to IFRS and disappears after the adoption takes place. Research limitations/implications: A limitation of this study is its reliance on readability formula that is based on simple assumption, thus, the analysis is restricted to printed material in the form of sentences. Practical and Social implications: This study is important to both preparers and users of financial reports.2 page(s