Fase de Construcción

Compliance with IASs / IFRSs has been a continuous issue in the last two decades. Prior research assessed the extent of compliance with the disclosure requirements of IASs / IFRSs and documented considerable level of non-compliance in many areas. (Rahman, 1998; Street et al., 1999; Tower et al., 1999; El-Gazzar et al., 1999; Street and Bryant, 2000; Street and Gray, 2001 and 2002; Taplin et al., 2002; Camfferman and Cooke, 2002; Glaum and Street, 2003; Abd-Elsalam and Weetman, 2003 and 2007; Chatham, 2004 and 2008; Al-Ulis, 2006; Hodgdon et al., 2008; Fekete et al., 2008; Al-Jabri, 2008; Hodgdon,

et al., 2009; Al-Shammari et al., 2008; Tsalavoutas, 2009 and 2011; Mechelli, 2009; Carlin and Finch, 2011; De Vicente Lama, 2011; Bova and Pereira, 2012).

Despite obvious non-compliance with IAS requirements companies frequently noted full compliance with IASs in their annual reports. Concerned about the problem the IASC tried to reduce non-compliance by requiring companies to report any material departure from IASs and not to report full compliance with IASs unless they comply with all the requirements of each applicable standard (IAS 1, 1.20). (IAS 1R, effective from 1998) Research results suggest that non-compliance remained a problem. (see later in this section) Thus, what the companies actually do in practice (de facto) is not always the same as what the companies should do (de jure). To be useful for its users financial information needs to be comparable. However, if companies do not comply with the accounting standards the convergence of these standards may not result in the convergence of accounting practices. Therefore, the quality and comparability of the financial statements remain a concern.

Evidences from compliance studies revealed that the level of compliance varied across standards. The results also indicated that the compliance with IASs / IFRSs requiring the disclosure of more proprietary information such as IAS14 and IAS 14R was usually below the average level of compliance. (Street and Bryant, 2000; Al-Shammari et al., 2008; Tsalavoutas, 2011) (Table 5.2) Thus, segmental reporting is one of the areas of particular concern. Rahman (1998) found that the overall level of compliance with the disclosure requirements of IAS 14 was between 7% - 30% for the sample companies. Later Taplin et al. (2002) found about the same compliance level when they used more strict compliance indices. Both studies focused on the Asia-Pacific area. Al-Shammari et al. (2008) investigated the Gulf Co-Operation Council member states and found less than 50% compliance with IAS 14 and with IAS 14R. Street and Bryant (2000) and Street and Gray (2001, 2002) studied international samples. Although, they found a higher level of average compliance, their results still indicate considerable non-compliance with IAS 14. For example, Street and Bryant (2000) found that the average level of compliance in regard to geographic disclosures is only 60%. Street and Gray (2001, 2002) found that the average level of compliance with IAS 14 was 76% for the whole sample. However, the more detailed results revealed that the compliance by country varies within a wide range (from 66% in China to 85% in Germany). (Table 5.1)

Table 5.1 Compliance with mandatory segmental reporting disclosures in prior studies

Author Country Year30 _{Standard Sample Compliance level}

Rahman (1998) Korea

Thailand Indonesia Malaysia Philippines

1997 IAS 14 90 Segment information checklist & overall compliance (Source: Rahman, 1998; table 5.2, p26):

Industry segments described 30%

Geographic segments described 7%

Sales revenue of each of the segments, amount disclosed 30%

Operating result of each of the segments, amount disclosed 30%

Segment assets employed, amount disclosed 27%

Intersegment sales, amount disclosed 11%

Taplin et al. (2002) Australia Hong Kong Malaysia Philippines Singapore Thailand

1997 IAS 14 60 NDV compliance index (“... the proportion of occasions where

a company complies with the IAS after items where compliance is not discernible or not applicable have been removed.” P180)

Disclosure 97%

Measurement 100%

Combined 99%

DNI index (“... the proportion of items where compliance was

discernible – either compliance or non-compliance was clear – “ p181)

Disclosure 36%

Measurement 20%

Combined 32%

Street and Bryant (2000) International 1998 IAS 14 82 the average level of compliance in regard to geographic disclosures is 60% Street and Gray (2001 & 2002) International 1998 IAS 14 279 the average level of compliance is 76%;

compliance by country: China: 66%; Switzerland: 83%; Germany: 85%; France: 62%; Other Western Europe: 75%

Table 5.1 (continued) Compliance with mandatory segmental reporting disclosures in prior studies

Author Country Year Standard Sample Compliance level

Street and Nichols, 2002 International 1999 IAS 14R 210 “The research ... identified several instances where it appears companies may not be fully complying

with all the ... disclosure guidelines.” (p91)

Compliance by segmentation (Source: Street and Nichols, 2002, table 6&9, p102 & 107):

Required item Primary segment Secondary segment

External revenue 100% 95% Profitability measure 99% - Assets 93% 65% Liabilities 76% - Capital addition 81% 57% Depreciation 77% -

Other non-cash items 20% -

Equity method income 26% -

Prather-Kinsey & Meek (2004) International 1997-99 IAS 14R 120 “There is substantial non-compliance with IAS 14R.” (p229)

Compliance by segmentation (Source: Prather-Kinsey and Meek, 2004, table 7, p225):

Required item Primary segment Secondary segment

External revenue 93% 70% Internal revenue 34% - Results 76% - Assets 74% 47% Liabilities 65% - Capital expenditures 54% 33%

Table 5.1 (continued) Compliance with mandatory segmental reporting disclosures in prior studies

Author Country Year Standard Sample Compliance level

Al-Shammari et al. (2008) Gulf Co- Operation Council Members

1996-2002 IAS 14 IAS 14R

137 the average level of compliance for all years is less than 50%

Research documented non-compliance with IAS 14. Therefore, it is of interest to know whether modification to the standard (IAS 14R) resulted in a greater compliance. Street and Nichols (2002) and Prather-Kinsey and Meek (2004) found that companies responded to the new regulatory requirements (increased number of segments, increased number of segment items) but the compliance with the standard remained a concern. Both studies found that a substantial minority of the companies failed to disclose items required by IAS 14R. In a more recent research Tsalavoutas (2009 and 2011) examined the compliance of Greek listed companies’ disclosure practice with mandatory disclosure requirements of selected IASs / IFRSs. The author found approximately 80% overall level of compliance (for all the IASs / IFRSs he studied). However, the average level of compliance with IAS 14R was lower, only 71% with considerable variation between the compliance levels of individual companies (25% standard deviation). (Table 5.2)

Table 5.2 Average level of compliance with IAS / IFRS requirements

Author(s) Average level of compliance

with IAS 14 / IAS 14R

Overall level of compliance

Street & Bryant (2000) for geographic disclosure → 60% with US listing 84.3% without US listing 77.4% Street & Gray (2001,

2002)  overall sample: 76%  China: 66%  Switzerland: 83%  France: 62%  Germany: 85%  Other W. Europe: 75%

each IAS weighted equally 72% each item of disclosure weighted equally

74%

Al-Shammari et al. (2008)

average for all years less than 50% 1996 68%

2002 82%

Tsalavoutas (2011) 71% approximately 80%

More recently studies examined the effects of the introduction of IFRS 8 and found that relatively high percentage of the sample companies failed to provide the mandatory entity-wide disclosures. (e.g. Pardal and Morais, 2011; Crawford et al., 2012a; Nichols et al., 2012) Crawford et al. (2012a) analysed the first adoption of IFRS 8 of a sample of 150 UK listed companies and found that 85% (55%) of the sample companies provided revenue from external customers (non-current assets) by geographic areas. Furthermore, only 38% of the companies disclosed information about their major customers. (Table 5.3)

Studies analysing the items disclosed for each reportable segment under IFRS 8 also found that a proportion of the sample companies failed to provide segment profit / loss information. (e.g. Pisano and Landriana, 2012 → 6%31_{; Crawford et al., 2012a → 11%}32₎

(Table 5.3)

Table 5.3 Summary of the findings of studies on IFRS 8: Percentage of companies providing information on selected disclosure requirements of IFRS 8

Compliance with IFRS 8

Crawford et al., 2012a Nichols et al.,2012 Pisano & Landriana, 2012 Pardal & Morais, 2011 Mardini, 2012 Country UK inter- national

Italy Spain Jordan

Sample size 150 335 124 131 109

Segment results 89.00 100.00 94.00 100.00 68.90

Revenue from external customers by product and services

80.00 17.00 - 13.70 -

Revenue from external customers by geographic area

85.00 77.00 - 55.00 -

Non-current assets by geographic area

53.00 67.00 - - -

Information about major customer

38.00 6.00 - 19.10 -

5.2.2 Company characteristics and compliance

Research found evidence that certain company characteristics are associated with the companies’ disclosure practice and their level of compliance with IASs / IFRSs. The factors considered in prior studies include structure related (e.g. size, gearing), performance related (e.g. profitability, liquidity), and market related (e.g. industry type, auditor type) characteristics. (e.g. Lang and Lundholm, 1993; Wallace et al., 1994; Wallace and Naser, 1995; Camfferman and Cooke, 2002; Tsalavoutas, 2009 and 2011) Findings of these studies indicate that size, cross listing, and being audited by one of the big international audit firms are significantly positively associated with the level of

31 _{percentage of non-disclosing companies = 100% - 94% = 6%} 32 _{percentage of non-disclosing companies = 100% - 89% = 11%}

compliance. However, research found mixed or no relationship between the level of compliance and other company characteristics (e.g. gearing, liquidity, profitability etc.).

Pardal and Morais (2011) (for a sample of 99 non-financial Spanish companies) and Pisano and Landriana (2012) (for a sample of 124 listed non-financial Italian companies) analysed the effect of different company characteristics on the number of items disclosed by the companies for each operating segments. The studies found that the bigger the company, the more item is disclosed for each operating segments. Pardal and Morais (2011) calculated a disclosure index by dividing the total number of items reported by the total number of items required by IFRS 8 and treated it as a compliance score. However, most of the items required by IFRS 8 for each operating segments only need to be disclosed if they are included in the calculation of segment profit / loss or are regularly reported to the CODM. (Table 2.1) Therefore, many of the items listed in IFRS 8 become voluntary. Thus, the disclosure score calculated by Pardal and Morais (2011) is rather a kind of quality measure than a measure of compliance.

Prior research related to compliance with IASs / IFRSs (in general) and with IAS 14, IAS 14R and IFRS 8 (in particular) have been reviewed in this Section. Research provides evidences of non-compliance with the segmental reporting requirements of the relevant international standards. Thus, although segment information disclosure is mandatory the actual segment information provided by the companies may vary considerably in quality.