Impact of IFRS adoption on earnings qualityPreliminary evidence from New Zealand

Abstract

We provide preliminary evidence on the impact of early adoption of NZ IFRS on earnings quality in New Zealand. We analyse IFRS adjustments for comparative financial statements reported in the first annual report under NZ IFRS. We also use two metrics of earnings quality: (a) discretionary accruals from the cross-sectional version of Jones (1991) model, and (b) the likelihood of reporting net loss. Our sample consists of 331 firm-years from 2003-2007. Our analysis of IFRS adjustments reveals non-conservative bias of NZ IFRS vis-a-vis pre-IFRS NZ GAAP. However, we fail to find statistically significant difference in earnings quality between IFRS firm-years and non-IFRS firmyears, and between pre-adoption years and post-adoption years for early adopters.

Keywords: IFRS, Earnings quality

1. Introduction We investigate the impact of IFRSs adoption on earnings quality in New Zealand (NZ). In recent years IFRSs adoption has been one of the most significant events in financial reporting having global consequences. In compliance with the EU regulation, European listed firms started preparing their consolidated financial statements using IFRSs since 2005. Australia adopted IFRSs with effect from 2005 and NZ followed suit with mandatory adoption by NZ entities for periods starting on or after January 1, 2007, with the option of voluntary adoption for periods commencing on or after January 1, 2005 (ASRB 2004, para 20). There is a gradually developing literature on determinants and consequences of switch from national accounting standards to either IFRS or US GAAP. Most of the studies on switch to IFRS or US GAAP focus on European firms. Findings of these studies cannot be generalised to other settings 1

as prior research (e.g., Ball et al., 2003, Soderstrom and Sun, 2007) shows that accounting quality depends not only on accounting standards but also on, inter alia, legal and political environment, and financial reporting incentives. NZ is different from continental European countries in many respects. First, pre-IFRS NZ GAAP is different from national accounting standards of continental Europe. For example, in terms of accounting classification, NZ falls in the Anglo-Saxon Accounting (ASA) group, which is different from continental European system. Unlike the continental European system which is creditors-oriented, both ASA and IFRSs share the same investors-oriented approach to standards setting (Nobes, 2003)1. Furthermore, pre-IFRS NZ GAAP had been harmonized with IFRS for quite some time. Second, NZ is a common law country and has one of the strongest investor protection regimes (Hope et al. 2008). Third, its national culture is less secretive than most other continental European countries (Hope et al. 2008). Thus findings of studies on IFRS adoption in Europe cannot be generalized to NZ and the impact of IFRS adoption on earnings quality in NZ is an open empirical question. To control for possible self-selection bias, adopt three research strategies. First, we analyse IFRS adjustments for comparative period presented in the first annual report under NZ IFRS. Second, we compare IFRS firm-years with non-IFRS firm-years during 2005-2007. Third, we compare preadoption period with post-adoption period during 2003-2007 for early adopters. For comparing IFRSfirms years with non-IFRS firm-years during 2005-2007 and pre-adoption period with post-adoption period during 2003-2007, we use two measures of earnings quality: (a) discretionary accruals estimated using cross-sectional Jones (1991) model, and (b) the likelihood of reporting net loss. Using a sample of 331 firm-years from 2003-2005, we find: (a) NZ IFRS have non-conservative bias compared with pre-IFRS NZ GAAP, and (b) no significant difference in earnings quality between IFRS firm-years and non-IFRS firm-years, and between pre-adoption period and post-adoption period of early adopters. Our paper contributes to the debate on the adoption of IFRS. The preliminary evidence presented in this paper cast some doubt on the benefits of adopting IFRS in NZ as far as earnings quality is

See Nobes (2003: 100-102) for a discussion of how ASA has influenced the development of IFRSs.

concerned. It also shows that impact of IFRS adoption on earnings quality is not likely to be uniform in all settings. Of particular importance is the nature of pre-IFRS GAAP. However, a full assessment of net benefits of NZ IFRS adoption will have to wait for some more time and take into account, in addition to earnings quality impacts, impact on cost of capital, benefits from harmonization of accounting, and costs of switching to NZ IFRS. The rest of the paper is organized as follows. Section 2 surveys the literature on the consequences of IFRS adoption, section 3 briefly discusses the differences between pre-IFRS NZ GAAP and NZ IFRS, and section 4 discusses research design. We discuss measures of earnings quality in section 5 and data and sample in section 6. Results are discussed in section 7 and the final section contains conclusions.

2. Consequences of IFRS adoption

There are different streams of IFRS literature. One steam investigates the impact of IFRS adoption on earnings quality. For example, Cuijpers and Buijink (2005) find that voluntary adopters of IFRSs and US GAAP have higher analysts following, higher analyst earnings forecast error and abnormal stock return volatility and not lower cost of equity capital. Gassen and Sellhorn (2006) find significant differences between voluntary adopters of IFRS and German-GAAP firms: IFRS firms have more persistent, less predictable and more conditionally conservative earnings. Barth et al. (2007) compare earnings management for firms from 21 countries that voluntarily switch to IAS with firms that use domestic accounting standards. They find that after IAS adoption, firms have higher variance of changes in net income, a higher ratio of variance of changes in net income to variance of changes in cash flows, higher correlation between accruals and cash flows, lower frequency of small positive net income, and higher frequency of large losses. They also find greater value relevance for IAS earnings. In contrast, Van Tendeloo and Vanstraelen (2006) find that IAS firms have more discretionary accruals and a lower correlation between accruals and cash flows. Hung and Subramanyam (2007) compare the value relevance of IAS and German GAAP by regressing stock prices on book values and net incomes. Though they do not find significant 3

differences in R-squared under two standards, book values of equity have a higher coefficient under IAS and net incomes have a higher coefficient under German GAAP. In contrast, by regressing return on earnings, Bartov et al (2005) find a higher coefficient on IAS and US GAAP earnings than German GAAP earnings. The inconsistent result in Bartov et al. (2005) could be caused by the omission of book value from their regression and different samples. Comprix et al (2003) identify 11 dates between 200 and 2002 that signal the likelihood or timing of IAS adoption in the EU. They find positive stock market reaction to news that increases the likelihood of IFRS adoption. Armstrong et al. (2007) identify 16 events between 2002 and 2005 that may change the likelihood of adoption of IFRS in EU and find positive (negative) investor reaction to events that increased (decreased) the likelihood of IFRSs adoption in Europe. Another stream examines the cost of capital consequences of IFRS adoption. For example, Leuz and Verrecchia (2000) find that voluntary adopters of IAS or US GAAP have lower bid-ask spreads and higher stock turnover ratios though the difference between IAS and Us GAAP is not statistically significant. In contrast, Daske (2006) fails to find lower cost of equity capital for German firms adopting IFRS or US GAAP voluntarily. We argue that the above findings cannot be generalized to NZ. One important aspect that determines the impact of IFRS is the pre-IFRS GAAP. In the next section, we discuss briefly the differences between pre-IFRS NZ GAAP and NZ IFRS.

3. Comparison between pre-IFRS NZ GAAP and NZ IFRS

Though IFRS and pre-IFRS New Zealand (NZ) GAAP share the same investor protection approach and, hence, are broadly similar, there are some differences between IFRS and pre-IFRS NZ GAAP. Bradbury and van Zijl (2005:14-17) note some important differences between the two sets. There were two sources of differences: (a) differences between IFRSs and corresponding FRSs, and (b) gaps in the then FRSs. Differences regarding the treatment of income tax and accounting for revaluation changes to property, plant and equipment are examples of the first source of differences.

As to the second source of differences, there were no FRS corresponding to IAS 38 (Intangibles), IAS 19 (Employees benefits) and IFRS 2 (Share based payment). In brief, (Bradbury and van Zijl 2005) note major differences between the two sets of GAAP in the following areas 1. Accounting for changes in accounting policies and errors 2. Income tax: IAS 12 adopts the balance sheet approach while SSAP adopts the income statement approach. 3. Revaluation of property, plant and equipment (PPE): IAS 16 requires the revaluation changes to be accounted for on an individual assets basis, while under FRS 3 such changes are accounted for on a class of assets basis. 4. There was no FRS corresponding to IAS 19. 5. There was no comprehensive FRS corresponding to IAS 39. Thus, there was considerable variation in reporting practice. Classification of hybrid securities and measurement of financial instruments, including derivatives, will change. 6. Accounting for goodwill, discount on acquisition and restructuring provision will change. 7. There was no comprehensive FRS corresponding to IAS 38. But NZ practice had been to recognize intangibles that have a cost or value that can be measured reliably. In contrast, IAS 38 prohibits the recognition of internally generated goodwill, internally generated brands, mastheads, customer lists, and similar items. 8. Accounting for biological assets may change. IAS 41 requires fair value accounting for agriculture, with the change in fair value taken to income. 9. There was no FRS corresponding to IFRS 2. Some aspects of NZ IFRS may increase the volatility of reported income. Three examples are accounting for goodwill and fair value accounting for biological assets and financial instruments. Goodwill which was amortized under pre-IFRS NZ GAAP, cannot be amortized but will have to tested annually for impairment. Biological assets will have to be measured at fair value, with the fair value movement taken to income. Similarly, most financial instruments, including derivatives, will

have to be measured at fair value, with the fair value movement taken to either income or equity. However, the net impact of switch to NZ IFRS on income is not clear a priori.

4. Research design

One potential difficulty of examining the impact of NZ IFRS on earnings quality is the selfselection bias. Since the early adopters had the choice to defer the adoption of IFRS till the year starting after January 1, 2007, early adoption is voluntary. Thus, any difference in earnings quality may be the result not of NZ IFRS adoption but of factors that motivated their decision to adopt NZ IFRS early. Thus, it is important to control for self-selection bias. However, it could be argued that early adoption in NZ is not voluntary in the same sense as voluntary adoption of IFRS by many European countries. Early adoption in NZ is in response to the decision of ASRB to mandate IFRS from years starting after January 1. To control for self-selection bias, we take three strategies. First, we examine the magnitude of IFRS adjustment made in the comparative financial statements. NZ IFRS 1 regulates the first-time adoption of NZ IFRS. According to NZ IFRS 1, the first-time adopter is to apply NZ IFRS retrospectively and has to explain how the transition from previous GAAP to NZ IFRSs affected its reported financial position, financial performance and cash flow (para 39). To achieve this, the entitys first IFRS financial statements is required to provide reconciliations of equity reported under previous GAAP to equity under IFRS at the date of transition and the end of latest period presented in the entitys most recent annual financial statements under previous GAAP and reconcile profit or loss reported under previous GAAP for the latest period in the entitys most recent annual financial statements to its profit or loss under NZ IFRS for the same period (para 38). Thus, we have financial statements of the same firm for the same year prepared according to two sets of GAAP- pre-IFRS NZ GAAP and NZ IFRS. This provides us with an opportunity to investigate the impact of IFRS adoption on financial statement items and allows us to use the firm and year as their own control. However, there is one caveat to this. NZ IFRS 1 allows certain exemptions to full retrospective application of NZ IFRSs and prohibits retrospective application of some aspects of some NZ IFRSs. Thus, the IFRS 6

adjustment will reflect the difference between IFRS and NZ GAAP only to the extent of retrospective application of IFRS. Second, we compare early adopters with non-adopters during 2005-2007. Early adoption starts in 2005 and end in 2007. We employ a cross-sectional research design. Self-selection bias is particularly important in this research design. Since we cannot employ a matched pair design due to our small sample size, we examine whether there is any difference in factors between early adopters and nonadopters that early studies find influence IFRS adoption. Since 2004 is the last year before voluntary adoption starts, we examine differences between early adopters and non-adopters in 2004. Third, we compare differences in earnings quality for early adopters between pre-adoption and post-adoption periods. Thus, the early adopters serve as their own control.

5. Measures of earnings quality

For analysis of IFRS adjustments, we examine the sign and magnitude of IFRS adjustments for profit, equity, liabilities and total assets. Since both pre-IFRS NZ GAAP and NZ IFRS are used in preparing the financial statements for the same firm and for the same year, we examine whether NZ IFRS increase or decrease the amounts of reported profit, equity, liability, and assets. A decrease (i.e., negative IFRS adjustment) in profit and assets and an increase (i.e., positive IFRS adjustment) in liability will be consistent with NZ IFRS being more conservative than pre-IFRS NZ GAAP since one interpretation of conservatism is that it requires a higher reliability threshold for income and assets and lower reliability threshold for expenses and liabilities (Watts, 2003). For other analyses (i.e., comparing early adopters with non-adopters during the 2005-07 period and comparing pre-adoption period with post-adoption period for early adopters), we use accrual quality and the likelihood of reporting net loss as measures of earnings quality.

5.1 Accrual quality

Different models are used in the literature to estimate discretionary accruals. We estimate discretionary accruals using the following cross-sectional Jones (1991) model because its data requirement is less than other models2 and, as reported in section 7, revenue and PPE, two independent variables in Jones (1991) model, are less affected by switch to IFRS.3 TACC/TA = [1/TA] +1 [ REV/TA] + 2 [PPE/TA] + (1)

where TACC is total accruals, estimated as net profit minus cash flows from operations, TA is total assets, REV is change in revenue, and PPE is property, plant & equipment. However, some firms did not report CFO in some years, especially before 2004. In those cases, we calculate TACC indirectly using the following formula: TACC = (CA-CASH) (CL- CPLTD) DEP (2)

where TACC is total accruals, CA is total current assets, CASH is cash and cash equivalent, CL is total current liabilities, CPLTD is the current portion of long-term debt, and DEP is the amount of depreciation and amortization. Discretionary accruals are measured by residuals from Jones (1991) model. Following prior research (e.g., Becker, DeFond, Jiambalvo, & Subramanyam, 1998; Francis, Maydew, & Sparks, 1999; Krishnan, 2003), we use both absolute value of residuals and signed residuals from Jones (1991) model to measure accrual quality. To measure the impact of IFRS adoption on accrual quality, we run the following two regression models for 2005-07: ABSDACC = + 1 DIFRS + 2 LOGTA + 3 [TL/TA] + 4 [ABSTACC/TA] + 5 [CFO/TA] + 6 DBIG4 + Year Fixed Effects + Industry Fixed Effects + (3)

SIGNEDDACC = + 1 DIFRS + 2 LOGTA + 3 [TL/TA] + 4 [ABSTACC/TA] + 5

Jones (1991) model does not require any lead and lagged data. Other models (e.g., the Dechow-Dichev (2002) model) require more data. 3 IFRS permits revaluation of PPE and pre-IFRS NZ GAAP permitted revaluation of PPE and revaluation of PPE was a common accounting practice in NZ even before switch to IFRS.
2

[CFO/TA] + 6 DBIG4 + Year Fixed Effects + Industry Fixed Effects + (4)

where ABSDACC is absolute value of residuals and SIGNEDDACC is signed residuals from the Jones (1991) model, DIFRS is the dummy variable that takes 1 if financial statements are prepared using NZ IFRS and 0 otherwise, LOGTA is the natural log of total assets, TL/TA is total liabilities deflated by total assets, ABSTACC/TA is absolute total accruals deflated by total assets, CFO/TA is cash flows from operations deflated by total assets, DBIG4 is the dummy variable that takes 1 if the auditor is a Big 4 auditor and 0 otherwise, and Year Fixed Effects and Industry Fixed Effects are dummy variables for years and industries. For comparing pre-adoption years with post-adoption years for early adopers, we run the following models: ABSDACC = + 1 DPOSTIFRS + 2 LOGTA + 3 [TL/TA] + 4 [ABSTACC/TA] + 5 [CFO/TA] + 6 DBIG 4 + Year Fixed Effects + Industry Fixed Effects + (5)

SIGNEDDACC = + 1 DPOSTIFRS + 2 LOGTA + 3 [TL/TA] + 4 [ABSTACC/TA] + 5 [CFO/TA] + 6 DBIG 4 + Year Fixed Effects + Industry Fixed Effects + (6)

where DPOSTIFRS is a dummy variable that takes 1 if the years financial statements are prepared using NZ IFRS and 0 otherwise. Definitions of other variables in models (5) and (6) are as in models (3) and (4). In models (3)-(6), we control for size (LOGTA), leverage (TL/TA), absolute value of total workings capital (ABSTACC), cash flows from operations (CFO) and Big 4 auditors (DBIG4), because prior research (e.g., Becket et al., 1998) finds that these variables are associated with discretionary accruals.

5.2 Loss avoidance

Our second measure of earnings quality is the probability of reporting losses. Burgstahler and Dichev (1997) show that firms manage earnings to avoid reporting losses. Reporting net loss is consistent with conservatism, which is a desirable property of earnings from the contracting perspective. Hence, we use the probability of reporting losses as our second measure of earnings quality. To assess the impact of NZ IFRS adoption on the likelihood of reporting net loss, we run the following logistic regression: DNETLOSS (=1) = + 1 DIFRS + 2 LOGTA + 3 TL/TA + 4 GROWTH + 5 DBIG 4 + Year Fixed Effects + Industry Fixed Effects + (7)

For comparing post adoption years with pre-adoption years for early adopters, we run the following model: DNETLOSS (=1) = + 1 DPOSTIFRS + 2 LOGTA + 3 TL/TA + 4 GROWTH + 5 DBIG4 + Year Fixed Effects + Industry Fixed Effects + (8)

where DNETLOSS is the dummy variable that takes 1 if there is net loss and 0 otherwise, DIFRS is the dummy variable that takes 1 if financial statements are prepared using NZ IFRS and 0 otherwise, LOGTA is the natural log of total assets, TL/TA is total liabilities deflated by total assets, GROWTH is change in revenue this year deflated by last years revenue, DBIG4 is the dummy variable that takes 1 if the auditor is a Big 4 auditor and 0 otherwise, Year Fixed Effects and Industry Fixed Effects are dummy variables for years and industries, and DPOSTIFRS is a dummy variable that takes 1 if the years financial statements are prepared using NZ IFRS and 0 otherwise.

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In models (7) and (8), we control for size (LOGTA), leverage (TL_TA) and Big 4 auditor (DBIG4) because Francis and Wang (2008, 178) find that size, leverage and Big 4 auditors4 are associated with the probability of reporting loss. Though Francis and Wang (2008, 178) find no significant association between growth and the probability of reporting loss, we control for revenue growth (GROWTH) because growth may affect the likelihood of reporting loss.

6. Data and sample

For analysis of IFRS adjustments, we identify 32 non-financial firms that early-adopt NZ IFRS. Out of these, two report that transition to IFRS had no impact on financial statements items of the comparative period. Our analysis is based on the remaining thirty early adopters. The list of firms is in the Appendix A. We collect data on early adopters and IFRS adjustments from annual reports which are available from NZ Deep Archive. For cross-sectional analysis, we collect financial statements data from OSIRIS and data on listing status, shareholder ownership and auditor from NZ Deep Archive. Our cross-sectional sample selection starts with the non-financial listed companies covered by OSIRIS. OSIRIS covers 112 nonfinancial listed firms in NZ. We collect data for 2002-2007. However, we drop firms from our sample if we do not have data on model parameters for at least 2004 and one of the three years from 20052007. This ensures that we have data for at least one year before voluntary adoption is permitted and one year during the voluntary adoption period. The sample selection procedures resulted in a final sample of 331 firm-years and are described in Panel A of Table 1. Panel B shows industry-wise breakdown of our sample firms and panel C shows sample firms according to years.

Table 1 about here

Francis and Wang (2008, 17) report evidence consistent with the Big Four auditor imposing loss reporting on their clients in high investor protection regimes. However, Francis and Wang (2008) present mixed evidence on the impact of the Big four auditor on loss reporting in weak investor protection regimes.

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7. Results

7.1. Descriptive statistics

Table 2 reports descriptive statistics for variables used in analyses in this paper. Panel A presents descriptives for 2005-2007 for two groups of firm-years: firm-years in which financial statements are prepared using NZ IFRS and firm-years during which financial statements are prepared using preIFRS NZ GAAP and panel B presents descriptives for early adopters only for two periods: preadoption period and post-adoption period. As can be seen, the two groups of firm-years are significantly different in terms of size (LOGTA) only. Size is significantly greater during IFRS firmyears than in the non-IFRS firm-years and, for early adopters, significantly increases during the postadoption period compared with the pre-adoption period.

Table 2 about here

7.2. Analysis of IFRS Adjustments

7.2.1. Exemptions taken

As mentioned in section 4 above, NZ IFRS 1 allows certain exemptions to full retrospective application of NZ IFRSs and prohibits retrospective application of some aspects of some NZ IFRSs. Many early adopters elect to use some of these exemptions. For example, Restaurant Brands new Zealand Limited, Tourism Holdings Ltd. and EBOS Group elect not to apply NZ IFRS to past business combinations. The Sky City Entertainment Group, the Sky Network Television, Nupplex Industries Limited, Contact Energy, Telecom Corporation of New Zealand and Tourism Holdings Ltd. elect not to apply NZ IAS 32 and 39 to restatements. Some early adopters (e.g., the Sky City Entertainment Group, New Zealand Refining Co. etc.) choose to use fair value as deemed cost.

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Michael Hill International elects not to apply NZ IFRS 2 to equity instruments issued prior to November, 2002. Thus, the difference in financial statement items is not fully attributable to differences in GAAP.

7.2.2. Impact on accounting policies

Following Nz IFRS 1, the impact of IFRS adoption on accounting policies of early adopters is discussed into four categories. (a) Recognition (b) De-recognition (c) Re-classification (d) Measurement

Recognition

(i)

Derivatives: All derivatives are recognised at fair value and the fair value movement is taken to the income statement or equity depending on the effectiveness of the hedge. Turners & Growers Limited, Steel & Tube Holdings, New Zealand Refining Co. and Restaurant Brands New Zealand Limited fair value derivative financial instruments.

(ii)

Share-based payments: Just Water International Limited and Life Pharmacy Ltd measure options to directors and executives at fair value at the grant date and recognise over the vesting period. Prior to NZ IFRS, recognition of a charge to expense and increase in equity for share-based payment was not required.

De-recognition

(i)

Intangibles: The Sky Network Television de-recognises program rights, capitalised overhead installation costs, capitalised costs of channel development and satellite service 13

development. Abano Healthcare Group and Restaurant Brands New Zealand Limited write off internally generated intangibles. Tenon Limited reverses some capitalised costs in relation to in-store merchandising and market development. (ii) Provision for doubtful debts: Teamtalk Ltd reverses a general provision for doubtful debts. Under NZ IAS 39 impairment of debtors is only recognised when objective evidence is available that a loss event has occurred at the balance sheet date. Provisioning which takes into account expectation of probable future losses is no longer allowed. (iii) Revenue: Michael Hill International defers revenue received in advance from lay-by transaction until lay-by sales is fully completed. Restaurant Brands New Zealand Limited also defers a portion of revenue recognised under previous GAAP. EBOS defers sales revenue prior to installation. Millennium& Copthorne Hotels New Zealand Limited changes its revenue recognition policy for sale of real estate.

Re-classification

(i)

Convertible notes: Abano Healthcare Group reclassifies convertible notes in accordance with NZ IAS 32 which requires the debt component of convertible notes to be recognised as a liability and the residual amount to be recognised as equity, representing the option component. Under previous GAAP, convertible notes were recognised as equity.

(ii)

Software assets: Hellaby Holdings Limited, Steel and Tube Holdings, and New Zealand Refining Co. re-classify software from PPE to intangibles.

(iii)

Biological assets: Tourism Holdings Ltd. re-classifies penguins and sea life from PPE to biological assets.

(iv)

Equity investments: Turners & Growers re-classifies equity investments (previously classified as investments) as investments in associates and equity account for it.

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(v)

Investment: The Sky City Entertainment Group re-classifies PPE as investment property. Investment properties are not depreciated and are required to be fair valued each year, with the movement in fair value taken to the income statement.

Measurement

(i)

Goodwill: It is no longer amortised. Rather it is subject to annual impairment test. Thus, goodwill amortization is written back. Hellaby Holdings Limited, Restaurants Brands New Zealand Limited, EBOS Group reverse goodwill amortization. In accordance with NZ IAS 38, EBOS impairs indefinite life intangibles.

(ii)

Employee benefits: Under previous GAAP long service liability was recognized when it vested. Now it is accrued on an actuarial basis. Turners & Growers, Steel & Tube Holdings, Abano Healthcare Group and Briscoe Group, among others, create provision for long service leave. Hellaby and Briscoe create sick leave provision.

(iii)

Deferred tax: NZ IFRS requires the use of the balance sheet approach while pre-IFRS NZ GAAP required the application of income statement approach. All changes in measurement of assets and liabilities impact deferred tax asset and liability.

(iv)

Biological assets: These assets are measured at fair value less estimated point of sale costs under NZ IAS 41. The movement in fair value is taken to income. These assets were previously measured at cost. Turners & Growers Limited fair values its biological assets.

(v)

Investments. Prior to NZ IFRS, investment was measured at cost. Now they are measured at fair value less estimated point-of-sale costs. South Port New Zealand Limited and Northland Port Corporation Limited fair value investments.

(vi)

Provision for cost of restoring sites: Michael Hill International creates a provision for the cost of restoration of certain sites when the lease term expires. . Under previous GAAP, the cost of rectification was recognised as an expense when incurred. Under NZ IFRS, a provision is made on the basis of the discounted cash flow of the expected future make

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good commitments. New Zealand Refining Co. and Millennium & Copthorne Hotels New Zealand Ltd create provision for restoration costs. There are some other differences. For example, under pre-IFRS NZ GAAP downward revaluation of assets below cost could be set off against revaluation reserve of other assets within the same asset class. This is not permitted under NZ IFRS and is taken directly to the income statement.

7.2.3. Impact on profit, equity, assets and liability

Table 3 presents the magnitude of IFRS adjustments for 30 early adopters. As the last column of Table 3 shows, for the majority of early adopters, the magnitudes of profit, liability and total assets are higher under NZ IFRS than under pre-IFRS NZ GAAP. For example, profit for the period is higher under NZ IFRS than under pre-IFRS NZ GAAP for 22 of the 30 firms. The corresponding figures are 28 and 24 for liability and total assets, respectively. For equity, there are equal numbers of positive and negative IFRS adjustments. As for the magnitude, the mean (median) difference in profit between pre-IFRS NZ GAAP and NZ IFRS is NZ $4.041 million (NZ $0.438 million). To put the figures in perspective, the mean profit under pre-IFRS NZ GAAP is NZ $ 65.208 million. Thus, the mean profit adjustment is 6.197% of the mean profit figure under pre-IFRS NZ GAAP. The corresponding percentages for liability and total assets are 8.151% and 2.077%, respectively. t tests show that the mean profit and liability adjustments are significantly different from zero. Subject to the caveat discussed in section7.2.1., the directions and magnitudes of IFRS adjustments indicate the non-conservative bias of NZ IFRS compared with pre-IFRS NZ GAAP.

Table 3 about here

We also examine whether variance of NZ IFRS profit is greater than that of pre-IFRS NZ GAAP. Some aspects of NZ IFRS (e.g., annual impairment test requirement of goodwill and non-permission 16

of goodwill amortization, fair value measurement requirements of share-based payments, derivatives, biological assets and investments, etc.) may cause the variance of NZ IFRS profit to be greater than that of pre-IFRS GAAP profit though the net effect of all NZ IFRS requirements on profit variance is not clear. The variance of [pre-IFRS NZ GAAP profit/TA] and [NZ IFRS profit/TA] is the same, 0.038.

7.3. Comparison of early adopters with non-adopters

Voluntary adoption is allowed for period starting after January 1, 2005 and is mandatory for periods starting on or after January 1, 2007. We treat 2005-2007 as the post-adoption period. In this section, we compare early adopters with non-adopters during this period.

7.3.1. Discretionary accruals

Table 4 presents the results of running cross-sectional variation of Jones (1991) model for 20052007. Panel A shows that the maximum Pearsonian correlation is -0.517, which is between 1/TA and REV/TA and the maximum Spearmans correlation is -0.297, which is between PPE/TA and REV/TA. Thus, multicollinearity is not a serious problem. Untabulated Variance Inflation Factors (VIFs) also confirms this. The maximum VIF is 1.372. Residual plot analysis does not reveal any serious problem of heteroscedasticity. Panel B shows that the adjusted R-squared is 0.145 and the Fstatistic is 12.403 which is significant at less than 1 percent. The signs of REV/TA and PPE/TA are consistent with those in Jones (1991)5 and PPE/TA is significant at less than 1 percent.

Table 4 about here

Jones (1991) runs firm-specific regressions of her model. Table 4 in Jones (1991) shows that the mean (median) coefficient is 0.035 (-0.008) REV/TA and -0.033 (-0.030) for PPE/TA. Thus at least 50 % of firmspecific regressions in Jones (1991) have negative signs of REV/TA.

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Table 5 presents the results of regressing discretionary accruals (both absolute and signed) on DIFRS and other control variables. When ABSDACC is the dependent variable, adjusted R-squared is 0.815 and the overall model is significant at less than 1 percent. However, the coefficient of DIFRS is 0.000, indicating that there is virtually no difference in absolute discretionary accruals between financial statements prepared using IFRS and those prepared using pre-IFRS NZ GAAP. ABSTACC/TA and CFO/TA are significant at less than 1%. Similar results are observed when the dependent variable is SIGNEDDACC except that the sign of ABSTACC/TA is negative. Correlation matrix in Panel A and untabulated VIFs reveal no serious multicollinearity problem.

Table 5 about here

7.3.2. Loss Avoidance analysis

Table 6 reports the results of loss avoidance analysis for all firm-years during 2005-2007. The coefficient of the variable of interest, DIFRS, is 0.381 and is not significant even at 10%. Only the coefficient of TL/TA is significant at less than 5%. However, the overall model is not significant. The maximum Pearsonian correlation is 0.302, which is between LOGTA and DBIG4. The maximum Spearmans correlation is 0.297. Thus, multicollinearity does not pose any serious problem.

Table 6 about here

One problem with cross-sectional analysis of voluntary adoption of IFRS is the possible selfselection bias. Since the early adopters could have deferred the adoption of NZ IFRS, the early adopters may have self-selected themselves. Thus, any difference in earnings quality between voluntary adopters and non-adopters might be the result not of accounting rules differences but of other factors that induced early adopters to adopt IFRS early. Though we do not observe any significant difference in earnings quality (i.e., discretionary accruals and the likelihood of reporting

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net loss) between early adopters and non-adopters during 2005-2007, we check whether there is any difference between early adopters and non-adopters in terms of factors that may induce early adoption of NZ IFRS. Since 2004 is the last year before early adoption is permitted, we run logistic regression of IFRS adoption using data for 2004. We run the following logistic regression: Prob (DNZIFRS = 1) = logit ( + 1 LOGTA + 2 CLOSEHELD + 3 DAUSLISTING) (9) Where DNZIFRS is 1 if the firm adopts NZ IFRS early and 0 otherwise, LOGTA is the natural log of total assets, CLOSEHELD is the percentage of outstanding shares owned by top 10 shareholders and DAUSLISTING is a dummy variable that takes 1 if the firm is listed on Australia Stock Exchange and 0 otherwise. We include size (LOGTA), concentration of share ownership (CLOSEHELD) and listing on Australian Stock Exchange (DAUSLISTING) because prior research (e.g., Ashbaugh, 2001; Cuijpers and Buijink, 2005; Gassen and Sellhorn, 2006) shows that size, concentration of share ownership, and listing on foreign stock exchanges are associated with voluntary adoption of IFRS by European firms.6 Untabulated results show that the overall model is not significant and none of the coefficients is significant at conventional levels.

7.4. Pre-adoption and post-adoption periods- early adopters

In this section we compare pre-adoption period with post-adoption period for early adopters. In design, each early adopter acts as its own control. As reported in Table 7 (panel B) and 8, the variable of interest, POSTIFRS, is significant neither in discretionary accruals analysis nor in loss avoidance analysis.

Table 7 about here Table 8 about here

6

Prior research (e.g., Ashbaugh, 2001; Cuijpers and Buijink, 2005; Gassen and Sellhorn, 2006) also shows the following factors associated with voluntary adoption of IFRS in Europe: (a) number of stock exchanges on which the firm is listed, (b) raising money in the share market, and (c) extent of foreign operations. We do not have adequate data on these variables for our sample firms .

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8. Conclusion

We investigate the impact of early adoption of NZ IFRS on earnings quality in NZ. To achieve this objective, we analyse (a) IFRS adjustments reported by early adopters for comparative financial statements in the first annual report according to NZ IFRS, (b) compare early adopters with nonadopters during 2005-2007, and (c) compare post-adoption period with pre-adoption period for early adopters. We use two measures of earnings quality: (a) discretionary accruals (both absolute and signed) from cross-sectional version of Jones (1991) model, and (b) the likelihood of reporting net loss. Our sample comprises 331 firm-years from 2003-2007. In analysis of IFRS adjustments, we find that NZ IFRS has a non-conservative bias vis-a-vis preIFRS GAAP. However, we find no significant difference in discretionary accruals and the likelihood of reporting net loss between early adopters and non-adopters and between post-adoption and preadoption periods for early adopters. These preliminary results differ from those in prior literature (e.g., Cuijpers & Buijink 2005, Gassen & Sellhorn 2006, Van Tendeloo & Vanstraelen 2006, Barth et al. 2007). Prior research finds that, on the whole, voluntary adoption of IFRS improves earnings quality in European setting. The difference between pre-IFRS NZ GAAP and pre-IFRS GAAP in European countries may explain this difference. 7 As explained in section 1, pre-IFRS NZ GAAP shares an investor orientation with IFRS while pre-IFRS GAAP in continental Europe is mostly creditor-oriented. Our results suggest that adoption of IFRS will not have the same impact on earnings quality in all settings. Finally, one caveat is in order. Our sample size is small and early adopters have been preparing financial statements under NZ IFRS only for a maximum of three years. A complete analysis will have to wait until all NZ firms prepare financial statements using NZ IFRS.

As we mention in section 1, there are other differences between NZ and continental European countries. Examples are origin of the legal system (common aw versus code law), extent of investor protection, extent of secrecy in national cultures, etc.

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References Accounting Standards Review Board (ASRB). (2004). Release 8 The Role of The Accounting Standards Review Board and The Nature of Approved Financial Reporting Standards. Available at http://www.asrb.co.nz/default.asp?p=3 Armstrong, C., Barth, M. E., Jagolinzer, A. D. & Riedl, E. J. (2007). Market reaction to the adoption of IFRS in Europe. Available at SSRN: http://ssrn.com/abstract=903429 Ashbaugh, H. (2001). Non-US firms accounting standard choices. Journal of Accounting & Public Policy, 20: 129-153. Ball, R., Robin, A. & Wu., J. (2003). Incentives versus standards: Properties of accounting income in four East Asian countries. Journal of Accounting and Economics, 36: 235-270. Barth, M. E., Landsman, W. R. & Lang, M. H. (2007). International accounting standards and accounting quality. Working Paper, Standford University and University of North Carolina at Chapel Hill. Available at http://ssrn.com/abstract=1029382 Bartov, E., Goldberg, S., & Kim, M. (2005). Comparative value relevance among German, US, and International Accounting Standards: a German stock market perspective. Journal of Accounting, Auditing and Finance, 20(2): 95-119. Becker, C. L., Defond, M. L., Jiambalvo, J., & Subramanyam, K. R. (1998). The effect of audit quality on earnings management. Contemporary Accounting Research, 15(1): 1-24. Burgstahler, D., & Dichev, I. (1997). Earnings management to avoid earnings decreases and losses. Journal of Accounting & Economics, 24(1): 99-129. Bradbury, M. & van Zijl, T. (2005). The New Zealand Financial Reporting Framework. John Wiley & Sons Australia, Ltd:Qld. Comprix, J., Muller, K., & Stanford, M. (2003). Economic consequences from mandatory adoption of IASB standards in the European Union. Working Papers, Arizona State University, Pennsylvania State University, and Texas Christian University. Cuijpers, R. & Buijink, W. (2005). Voluntary adoption of non-local GAAP in the European Union: A study of determinants and consequences. European Accounting Review, 14 (3): 487-524. Daske, H. (2006). Economic benefits of adopting IFRS or US-GAAP Have the expected cost of equity capital really decreased? Journal of Business Finance & Accounting, 33(3) & (4): 329- 373. Dechow, P., & Dichev, I. (2002). The quality of accruals and earnings: The role of accrual estimation errors. The Accounting Review, 77(Supplement): 35-59. Francis, J. R., Maydew, E. L., & Sparks, H. C. (1999). The role of big 6 auditors in the credible reporting of accruals. Auditing: A Journal of Practice and Theory, 18 (2):17-34. Francis, J. R. & Wang, D. (2008). The joint effect of investor protection and Big 4 audits on earnings quality around the world. Contemporary Accounting Research, 25 (1): 157-91. Gassen, J. & Sellhorn, T. (2006). Applying IFRS in Germany- Determinants and consequences. Available at SSRN: http://ssrn.com/abstract=906802 Hope, O.-K., Kang, T., Thomas, W., & Yoo, Y. K. (2008). Culture and auditor choice: A test of the secrecy hypothesis. Journal of Accounting Public Policy, 27: 357-373. Hung, M. & Subramanyam, K. R. (2007) Financial statement effects of adopting International Accounting Standards: The case of Germany, Review of Accounting Studies, 12: 623-657. Jones, J. J. (1991). Earnings management during import relief investigation. Journal of Accounting Research, 29 (2): 193-228. Krishnan, G. V. (2003). Does Big 6 Auditor industry expertise constrain earnings management? Accounting Horizons, 17 (Supplement): 1-16. Leuz, C. & Verrecchia, R. (2000). The economic consequences of increased disclosure. Journal of Accounting Research, 38 (supplement): 91-124. Nobes, C. (2003). On the myth of Anglo-Saxon financial accounting: A comment. The International Journal of Accounting, 38: 95-104. Soderstrom, N. S. & Sun, K. J. (2007). IFRS adoption and accounting quality: A review. European Accounting Review, 16(4): 675-702. Van Tendeloo, B. & Vanstraelen, A. (2005). Earnings management under German GAAP versus IFRS, European Accounting Review, 14(1): 155-80. Watts, R. L. (2003). Conservatism in accounting Part I: Explanations and implications. Accounting Horizons, 17 (3): 207-221. 22

Appendix A List of early adopters used in IFRS adjustment analysis

Serial number 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30

Name of early adopters Abano Healthcare Group Limited Briscoe Group Limited Cer Group Limited Contact Energy Limited Cynotech Holdings Limited Ebos Group Ltd Finzsoft Solutions Limited Fletcher Building Limited Hellaby Holdings Limited Just Water International Limited Life Pharmacy Limited Lyttelton Port Company Limited Michael Hill International Limited Millennium & Copthorne Hotels New Zealand Limited New Image Group Limited New Zealand Refining Co Ltd Northland Port Corporation (Nz) Limited Nuplex Industries Limited Restaurant Brands New Zealand Limited Sky City Entertainment Group Limited Sky Network Television Limited South Port New Zealand Limited Steel & Tube Holdings Limited Taylors Group Limited Teamtalk Limited Telecom Corporation Of New Zealand Limited Tenon Limited Tourism Holdings Limited Turners & Growers Limited Wakefield Health Limited

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Appendix B Tables

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Table 1 Panel A: Sample derivation Listed companies covered by OSIRIS Less financial companies Companies for which data are not available on Osiris Non-financial companies for which data are available on Osiris Less companies for which data are not available on Osiris Less companies for which data on listing status, auditor and share ownership are not available on NZ Deep Archive. Less number of firms that adopted IFRS before 2005 Less 1 year for each sample firm for calculating accruals Final sample IFRS firms Firms 136 23 113 1 112 28 84 14 70 1 69 69 30 Firm-years

579 104 475 69 406 6 400 69 331 145

Panel B. Industry-wise breakdown Industry Basic Materials Consumer Goods Consumer Service Healthcare Industrials Oil & Gas Technology Telecommunications Utilities Total

Firms 2 17 16 7 16 1 4 3 3 69

Firm-years 10 79 78 35 76 5 20 13 15 331

Panel C. Year-wise breakdown of sample Year 2003 2004 Firm-years 61 69

2005 69

2006 68

2007 64

Total 331

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Table 2 Panel A Descriptive statistics: All firm-years during 2005-2007 Variables IFRS firm-years NON-IFRS firm-years Mean Standard n Mean Standard deviation deviation TACC/TA 1/TA REV/TA PPE/TA ABSDACC SIGNEDDACC LOGTA TL/TA ABSTACC/TA CFO/TA DBIG4 DNETLOSS GROWTH -0.037 0.018 0.147 0.623 0.066 0.001 5.157 0.484 0.073 0.099 0.92 0.08 0.183 0.098 0.033 0.283 0.240 0.065 0.094 1.668 .166 0.075 0.108 0.274 0.274 0.298 50 50 50 50 50 50 50 50 50 50 50 50 50 -0.037 0.047 0.108 0.599 0.062 0.001 4.533 0.479 0.065 0.092 0.89 0.06 1.720 0.094 0.131 0.693 0.245 0.071 0.094 1.759 0.214 0.078 0.138 0.309 0.238 13.213

n 151 151 151 151 151 151 151 151 151 151 151 151 151

t-statistics for difference in means 0.017 -1.563 0.385 0.623 0.432 0.056 2.201** 0.136 0.642 0.339 0.529 0.506 -0.821

Panel B Descriptive statistics for early adopters only during 2003-2007 Variables Pre-adoption years Mean Standard deviation -0.064 0.065 0.159 0.620 0.066 -0.007 4.323 0.440 0.080 0.079 0.86 0.09 2.599 0.102 0.179 0.903 0.290 0.074 0.099 1.858 0.219 0.090 0.258 0.346 0.294 16.629 Post-adoption years Mean Standard deviation -0.037 0.018 0.147 0.623 0.070 0.017 5.157 0.484 0.073 0.099 0.92 0.08 0.183 0.098 0.033 0.283 0.240 0.062 0.092 1.668 0.166 0.075 0.108 0.274 0.274 0.298 t-statistics for difference in means 1.556 -1.832* -0.093 0.072 0.292 1.435 2.641*** 1.213 -0.452 0.536 1.008 -0.293 -1.025

n 95 95 95 95 95 95 95 95 95 95 95 95 95

n 50 50 50 50 50 50 50 50 50 50 50 50 50

TACC/TA 1/TA REV/TA PPE/TA ABSDACC SIGNEDDACC LOGTA TL/TA ABSTACC/TA CFO/TA DBIG4 DNETLOSS GROWTH

where TACC is total accruals, estimated as net profit minus cash flows from operations, TA is total assets, REV is change in revenue, and PPE is property, plant & equipment. SIGNEDDACC is signed residuals and ABSDACC is absolute value of residuals from the cross-sectional version of Jones (1991) model, LOGTA is the natural log of total assets, TL/TA is total liabilities deflated by total assets, ABSTACC/TA is absolute total accruals deflated by total assets, CFO/TA is cash flows from operations deflated by total assets, and DBIG4 is the dummy variable that takes 1 if the auditor is a Big 4 auditor and 0 otherwise. DNETLOSS is a dummy variable that takes 1 if there is net loss and 0 otherwise, and GROWTH is change in revenue this year deflated by last years revenue. *, **, and *** indicate significance at 10%, 5%, and 1% levels, respectively.

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Table 3 Amounts of IFRS Adjustments during the last year of pre-IFRS NZ GAAP Items Mean Median Minimum Maximum (million NZ (Million (Million (Million NZ $) NZ $) NZ$) $) Profit for the 4.041** 0.438 -7.701 51.000 period Equity -17.185 0.025 -654.296 109.580 Liability 32.730 0.225 -23.943 665.280 Total assets 15.829* 1.224 -35.038 226.286

30 30 30 30

n (positive IFRS adjustments) 22 15 28 24

*, **, and *** indicate significance at 10%, 5%, and 1% levels, respectively.

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Table 4 Jones model for all firm-years during 2005-07 Panel A Correlation matrix 1/TA 1/TA REV/TA PPE/TA 1.000 -0.517 -0.116

REV/TA 0.009 1.000 -0.194

PPE/TA -0.230 -0.297 1.000

Panel B Results of cross-sectional Jones (1991) model Coefficients 1/TA REV/TA PPE/TA n Adjusted R squared F statistic -0.047 -0.014 -0.057 201 0.145 12.403*** t-statistics -0.731 -1.129 -5.259***

Panel A reports correlations between independent variables in model (1). Correlations below the diagonal are Pearsons correlations and those above the diagonal are Spearmans rank order correlations. Panel B reports the results of running the following Jones (1991) model for 2005-2007 for 201 firm-years: TACC/TA = [1/TA] +1 [ REV/TA] + 2 [PPE/TA] + (1) where TACC is total accruals, estimated as net profit minus cash flows from operations, TA is total assets, and REV is change in revenue, and PPE is property, plant & equipment. *, **, and *** indicate significance at 10%, 5%, and 1% levels, respectively.

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Table 5 Discretionary Accruals Analysis during 2005-2007 Panel A Correlation matrix DIFRS DIFRS LOGTA TL/TA ABSTACC/TA CFO/TA DBIG4 1.000 0.154 0.010 0.045 0.024 0.037

LOGTA 0.157 1.000 0.278 0.125 0.129 0.302

TL/TA 0.012 0.283 1.000 -0.106 -0.090 0.015

ABSTACC/ TA 0.046 -0.156 -0.143 1.000 0.462 0.059

CFO/TA 0.053 0.127 -0.209 0.412 1.000 0.114

DBIG4 0.037 0.297 0.056 0.082 0.165 1.000

Panel B Regression results Dependent variable: ABSDACC Coefficients Intercept DIFRS LOGTA TL/TA ABSTACC/TA CFO/TA DBIG4 Year dummies Industry dummies N Adjusted R-squared F-statistic 0.033 0.000 -0.001 -0.007 0.855 -0.085 0.008 Included Included 201 0.815 56.228*** t-statistics 1.952* -0.003 -0.650 -0.600 26.006*** -4.409*** 1.046

Dependent variable: SIGNEDDACC Coefficients 0.054 -0.002 0.003 -0.032 -0.686 -0.269 0.012 Included Included 201 0.620 21.390*** t-statistics 1.665* -0.192 1.090 -1.418 -10.771*** -7.175*** 0.815

Panel A reports correlation coefficients between independent variables in model (3) and (4). Correlations below the diagonal are Pearsons correlations and those above the diagonal are Spearmans correlations. Panel B reports the results of the following two regressions for 201 firm-years during 2005-2007: ABSDACC = + 1 DIFRS + 2 LOGTA + 3 [TL/TA] + 4 [ABSTACC/TA] + 5 [CFO/TA] + 6 DBIG4 + Year Fixed Effects + Industry Fixed Effects + (3) SIGNEDDACC = + 1 DIFRS + 2 LOGTA + 3 [TL/TA] + 4 [ABSTACC/TA] + 5 [CFO/TA] + 6 DBIG4 + Year Fixed Effects + Industry Fixed Effects + (4) where where ABSDACC is absolute value of residuals and SIGNEDDACC is signed residuals from the crosssectional version of Jones (1991) model, DIFRS is the dummy variable that takes 1 if financial statements are prepared using NZ IFRS and 0 otherwise, LOGTA is the natural log of total assets, TL/TA is total liabilities deflated by total assets, ABSTACC/TA is absolute total accruals deflated by total assets, CFO/TA is cash flows from operations deflated by total assets, DBIG4 is the dummy variable that takes 1 if the auditor is a Big 4 auditor and 0 otherwise. *, **, and *** indicate significance at 10%, 5%, and 1% levels, respectively.

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Table 6 Loss Avoidance Analysis for all firms during 2005-2007 Panel A Correlation Matrix DIFRS LOGTA DIFRS 1.000 0.157 LOGTA 0.154 1.000 TL/TA 0.010 0.278 GROWTH -0.058 0.002 DBIG4 0.037 0.302

TL/TA 0.012 0.283 1.000 0.055 0.015

GROWTH 0.029 0.106 0.243 1.000 0.026

DBIG4 0.037 0.297 0.056 -0.030 1.000

Panel B Results of logistic regression Variables Constant DIFRS LOGTA TL/TA GROWTH DBIG4 Model significance

Coefficients -22.207 0.381 -0.106 3.864 -0.008 -1.034 0.359

t-statistics -0.001 0.471 -0.552 2.321** -0.163 -1.136

Panel A reports correlation coefficients between independent variables in model (4). Coefficients below diagonal are Pearsons correlations and those above the diagonal are Spearmans correlations. Panel B reports the results of the following logistic regression: DNETLOSS (=1) = + 1 DIFRS + 2 LOGTA + 3 TL/TA + 4 GROWTH + 5 DBIG 4 + Year Fixed Effects + Industry Fixed Effects + (4) where DNETLOSS is the dummy variable that takes 1 if there is net loss and 0 otherwise, DIFRS is the dummy variable that takes 1 if financial statements are prepared using NZ IFRS and 0 otherwise, LOGTA is the natural log of total assets, TL/TA is total liabilities deflated by total assets, GROWTH is change in revenue this year deflated by last years revenue, and DBIG4 is the dummy variable that takes 1 if the auditor is a Big 4 auditor and 0 otherwise. *, **, and *** indicate significance at 10%, 5%, and 1% levels, respectively.

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Table 7 Discretionary accruals Analysis for early adopters during 2003-2005 Panel A Results of Jones (1991) model Coefficients 1/TA REV/TA PPE/TA n Adjusted R squared F statistic -0.062 -0.030 -0.079 145 0.271 19.003*** t-statistics -1.006 -2.414** -6.211***

Panel B Regression results Dependent variable: ABSDACC Intercept DPOSTIFRS LOGTA TL/TA ABSTACC/TA CFO/TA DBIG4 Year dummies Industry dummies N Adjusted R-squared F-statistic Coefficients 0.068 0.022 -0.003 -0.009 .668 -0.030 0.013 Included Included 145 0.685 15.221*** t-statistics 3.064 1.576 -1.116 -0.403 13.849*** -1.462 0.940

Dependent variable: SIGNEDDACC Coefficients 0.072 -0.011 0.008 -0.033 -0.904 -0.036 -.010 Included Included 145 0.613 13.698*** t-statistics 2.244** -0.554 1.750* -1.058 -13.008 -1.216 -0.475

Panel B reports the results of the following two regressions: ABSDACC = + 1 DPOSTIFRS + 2 LOGTA + 3 [TL/TA] + 4 [ABSTACC/TA] + 5 [CFO/TA] + 6 DBIG 4 + Year Fixed Effects + Industry Fixed Effects + (5) SIGNEDDACC = + 1 DPOSTIFRS + 2 LOGTA + 3 [TL/TA] + 4 [ABSTACC/TA] + 5 [CFO/TA] + 6 DBIG 4 + Year Fixed Effects + Industry Fixed Effects + (6) where ABSDACC is absolute value of residuals and SIGNEDDACC is signed residuals from the cross-sectional version of Jones (1991) model, DPOSTIFRS is a dummy variable that takes 1 if the years financial statements are prepared using NZ IFRS and 0 otherwise, LOGTA is the natural log of total assets, TL/TA is total liabilities deflated by total assets, ABSTACC/TA is absolute total accruals deflated by total assets, CFO/TA is cash flows from operations deflated by total assets, DBIG4 is the dummy variable that takes 1 if the auditor is a Big 4 auditor and 0 otherwise. *, **, and *** indicate significance at 10%, 5%, and 1% levels, respectively.

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Table 8 Loss avoidance analysis for early adopters during 2003-2007 Variables Coefficients Constant -16.526 DPOSTIFRS -1.651 LOGTA -0.679 TL/TA 0.221 GROWTH -0.527 DBIG4 -0.260 Year dummies Included Industry dummies Included n 145 Model significance 0.013

t-statistics -0.001 -1.078 -1.850* 0.118 -1.383 -0.211

Table 8 reports the results of the following logistic regression for early adopters during 2003-07: DNETLOSS (=1) = + 1 DPOSTIFRS + 2 LOGTA + 3 TL/TA + 4 GROWTH + 5 DBIG 4 + Year Fixed Effects + Industry Fixed Effects + (8) where DNETLOSS is the dummy variable that takes 1 if there is net loss and 0 otherwise, DPOSTIFRS is a dummy variable that takes 1 if the years financial statements are prepared using NZ IFRS and 0 otherwise, LOGTA is the natural log of total assets, TL/TA is total liabilities deflated by total assets, GROWTH is change in revenue this year deflated by last years revenue, and DBIG4 is the dummy variable that takes 1 if the auditor is a Big 4 auditor and 0 otherwise. *, **, and *** indicate significance at 10%, 5%, and 1% levels, respectively.

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