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Procedia
Social and Behavioral Sciences
Procedia - Social and Behavioral Sciences 211 (2015) 644 — 652
2nd Global Conference on Business and Social Science-2015, GCBSS-2015,
17-18 September
2015, Bali, Indonesia
Financial Reporting Quality - Before and After IFRS Adoption
Using NiCE Qualitative Characteristics Measurement
Try Yurisandi*, Evita Puspitasari>*
*° Universitas Padjadjaran, Jl. Dipati Ukur No. 35 Bandung 40134, Indonesia
Abstract
This research aims to evaluate whether there are any increasing in financial reporting quality after the IFRS adoption using the
qualitative approach being developed by Nijmegen Centre for Economics (NiCE).
This research is using paired sample test to analyze the data. The financial reporting quality before the IFRS adoption is represented
by the period 2009-2010, while the financial reporting quality after the IFRS is represented by the period 2012-2013.
We concluded that IFRS adoption increased the quality of financial reporting. The result showed that the qualitative characteristics
of relevance, understandability and comparability level increased after IFRS adoption.
© 2015 Published by Elsevier Ltd. This is an open access article under the CC BY-NC-ND license
(http://creativecommons.org/licenses/by-ne-nd/4.0/).
Peer-review under responsibility of the Organizing Committee of the 2nd GCBSS-2015
Keywords:
Comparability; Faithful Representation; Financial Reporting Quality; IFRS Adoption; NiCE; Qualitative Characteristic; Relevance;
Timeliness;
Understandability.
1. Introduction
Each country has different accounting which is adjusted with the needs of the country. To increase the financial
statement comparability and quality in the global market, we need to set an international accepted accounting standard.
The international accounting standard provides the benefits, such as reducing the distinctive reporting regulation
between countries, reducing the cost of multinational company financial reporting, and reducing the cost of financial
statement analysis. Beside the benefits, there are some obstacles in implemeting the international accounting
standards. One of the obstacles is the conflict between interested parties: politician and private party (Choi and
* Corresponding author. Tel.: +628 15-607-2882
E-mail address: evita.puspitasari
@fe .unpad.ac.id
1877-0428 © 2015 Published by Elsevier Ltd. This is an open access article under the CC BY-NC-ND license
(http://creativecommons.org/licenses/by-ne-nd/4.0/).
Peer-review under responsibility of the Organizing Committee of the 2nd GCBSS-2015
doi: 10.1016/j.sbspro.2015.11.091
Try Yurisandi and Evita Puspitasari / Procedia - Social and Behavioral Sciences 211 (2015) 644 —652
Richard,
645
1988).
Previoulsy, Indonesia applied Standar Akuntansi Keuangan (SAK) which was issued by the Ikatan Akuntan
Indonesia (IAI) and adopted the Financial Accounting Standard of US (US GAAP). But, at the beginning of 2012, as
a part of G-20 (Daske et.al, 2008), Indonesia has obligation to adopt International Reporting Standard (IFRS) as the
accounting standard. The IFRS adoption obligation is expected to increase the quality of financial reporting due to the
changing accounting standards and disclosures in information for many companies, and also increase the
comparability and transparancy of the financial information. IAI then called off special industry accounting standards,
such as: accounting standard for forestry, telecommunication company, and banking. The call off was aim to
implement the principle-based standard, and abandoned the rule-based standard. Indonesia through IAI has decided
to adopt the IFRS gradually. Here is the IFRS adoption roadmap in Indonesia:
Illustration 1. Roadmap of IFRS Convergence in Indonesia
Adoption Stage —
2010)
Final Preparation Stage »
(2011)
* Adopting all IFRS to
* Partial application of the
PSAK
standard
* Preparation for necessary
Finishing the standard
infrastructure
preparation or necessary
Evaluation and managing __ infrastructure
the adoption impact to
SAK
Implementation Stage
(2012)
»
— *The application of the
standard
* Evaluation of IFRS
adoption impact to the
business environment
* Define strategy for full
adoption
Sources: www. iaiglobal.or.id
As we know, IFRS is codification of accounting standards, interpretations, and framework in the preparation and
presentation of the financial statements; which is developed and issued by Internatioal Accounting Standard Board
(IASB). IFRS aims to provide high quality financial statement. Further, the IFRS developes the principle-based
standards other than rules-based standard, which IFRS provides the company with more flexibility in choosing
acconting policy and estimates, and the company can choose the best accounting policy and estimates for the company.
However, the use of the principle-based standards also increase the possibility of the risks such as: error in
management estimates, earnings management, and business distortions.
Related to positive accounting theory (Watts & Zimmerman, 1986), which says that the management has intention
to apply certain accounting policy and estimates for the management interest, the IFRS adoption is expected to increase
the opportunitic action of the management. Before the IFRS adoption, several studies proved Watts & Zimmerman
hypothesis: Healy (1985) study proved that the management used the sistematic accrual accounting policy to report
higher net income to get higher bonus; Sweeney (1994) study proved the company disobey the debt covenant by
maintaining the working capital and share holders’ equity; and Jones (1991) found evidence that the company
decreased the net income to get more facilty in importing goods as the result of politics decision in regulating the
competition. Therefor, we assume that after the IFRS adoption, the company will have more opportunity to apply the
flexible accounting to fullfil their interest.
However, other researchers: Healy et.al (1999), Leuz & Verrechia (2000), Daske et.al (2008), and Amstrong et.al
(2008), found that the asimetry information after the IFRS adoption was decreasing due to the increasing of the
financial statement quality.
There are still debates over the financial statement quality of company after the adoption of the IFRS (Barth et.al,
2008; Daske et.al, 2008; Karampinis and Hevas, 2011; Alali and Foote, 2012). There are arguments that by
implementing the IFRS the financial statement presented will have more relevance quality since the IFRS widely uses
the fair value measurement. The use of the fair value measurement will more reflect the real economic condition of
the company. Further, the use of the IFRS will restrict the management opportunistic action (Barth et.al, 2008). On
the other hand, there are arguments that the implementation of IFRS will reduce the management ability to present
the real economic condition (Barth et.al, 2008).
In the previous research, Karampinis and Hevas (2011) and Alali and Foote (2012) found the evidence that the
646
Try Yurisandi and Evita Puspitasari/ Procedia - Social and Behavioral Sciences 21] (2015) 644 — 652
IFRS implementation did not elevate the financial information quality. However, since there was no direct
measurement over the financial information quality in the researches, there were inconsistency in the results (e.g Barth
et.al, 2008; Schipper & Vincent, 2003; Cohen et.al 2004; Nicholas & Wahlen, 2004).
The IFRS adoption does affect the company. Some companies experience minor changes because of the it, some
other companies have to carry out major changes. But, overall now the company has more flexiblity in choosing
accounting policy and accounting estimates.
latridis (2010), Iatridis & Rouvolis (2010), Lin & Paananen & (2007), Petreski (2006), Ewert & Wagenholf( 2013)
performed the financial statement quality study by measuring the the quality using some approaches: comparability,
relevance, and earnings management. They underlined the periode before and after the IFRS adoption. Petreski (2006)
found that management could increase the company performance, could have higher accountability, and could increase
the financial statement credibility. Ewert & Wagenholf (2013) found that more rigid accounting standard could
decrease the earnings management and increase the financial statement quality.The same result was found by Barth
(2008) and Chua et.al (2012). However, Tandeloo & Vanstraelen (2005) found that there was no differences of the
financial statement quality before and after the IFRS adoption. Yacoob and Ahmad (2011) found that in Malaysia, the
timeliness was decreasing after the IFRS adoption, which meant the companies issued financial statement late.
This research aims to evaluate whether there are any increasing in financial reporting quality after the IFRS
adoption. Other than using the quantitative approach in measuring the financial reporting quality, this research is using
the qualitative approach in measuring the financial reporting quality. The qualitative measurement approach used is
based on the measurement that being developed by Nijmegen Centre for Economics (NiCE). NiCE developes the
comprehensive financial reporting quality measurement in a form of index quality measurement based on the IASB
and FASB each qualitative characteristic such as relevance, faithful representation, understandability, comparability,
and timeliness.
2. Research Design
21
Empirical Design
The purpose of this research is to empirically evaluating the financial reporting quality before and after the IFRS
adoption. To achieve that, we perform mean comparation test using paired sample test. We use this model in order to
find the level of significance of the financial reporting quality changes before and after IFRS adoption. We use SPSS
program version 16.00 and microsoft excel to run the data.
As we state earlier, in this research we use the qualitative approach in measuring the financial reporting quality.
The qualitative measurement approach used is based on the measurement that being developed by Nijmegen Centre
for Economics (NiCE). NiCE developes the comprehensive financial reporting quality measurement in a form of index
quality measurement based on the IASB and FASB each qualitative characteristic such as relevance, faithful
representation, understandability, comparability, and timeliness. Here are the Nice measurement that we use in
evaluating the financial reporting quality:
Table 1. The NiCe Measurement
No.
Question
Operationalization
Concept
Relevance
Rl
To what extent does the presence of the
forwardlooking
statement
help
forming
expectations and predictions concerning the
future of the company
R2
To what extent does the presence of non
financial information in terms of business
opportunities
and risks complement
the
financial information
I=no forward looking information; 2=forward looking
information not an apart subsection; 3=apart subsection;
4-extensive predictions ; 5=Extensive predictions useful
Predictive Value
for making expectations
1=No
non-financial
information;
2=little non-financial
information, no useful for forming expectations; 3=useful
non-financail
information;
4=useful
non
financial
information, helfpul for developing expectations
Predictive value
647
Try Yurisandi and Evita Puspitasari / Procedia - Social and Behavioral Sciences 21] (2015) 644 — 652
R3
To what extent does the company
value instead of historical cost
use fair}
1!=Only Historical cost (HC); 2=Most HC; 3=Balance | Predictive value
Fair value (FV HC; 4=Most FV; 5=Only FV
R4
To what extent do the reported results provide | I=No
feedback;
2=Little
feedback
on the past; | Confirmatory value
feedback to the users of the annual reports as | 3=Feedback is present; 4=Feedback helps understanding
to how various market events and significant | how events and transactions influenced the company;
transactions affected the company
5=Comprehensive feedback
Faithful Representation
Fl
To what extent are valid arguments provided | 1=Only described estimations; 2=General explanations; | Veriafibility
to support the decision for certain assumptions | 3=Specific
explanation
of estimations;
4=Specific
and estimates in the annual report
explanation, formulas explained, etc; 5=Comprehensive
argumentation
F2
To what extent does the company base its | I=Changes not explained; 2=Minimum explanation; | Verification
choice for certain accounting principles on | 3=Explained why; 4=Explained why + consequencesvalid arguments
5=No changes or comprehensive explanation
F3
To what extent does the company, in the | I=Negative
events
only
discussion of the annual results, highliht the | 2=Emphasize on positive
mentiond
in
footnotes; | Neutrality
events; 3=Emphasize on
positive events as well as the negative events | positive events, but negative events are mentioned; no
negative
events;
events
occured;
5=Impact
4=Balance
positive/negative
of positive/negative events is also
explained
F4
Which type of auditors’ report is included in|
the annual report
1=Adverse
opinion;
2=Disclaimer
of
3=Qualified opinion; 4=Unqualified opinion:
figure;
5=Unqualified
opinion:
Financial
opinion; | Free from material
Financial | error, — verification,
figures
+ | neutrality,
Internal Control
F5
To
what
extent
does
the
company
and
completion
provie | 1=No description CG; 2=Information on CG limited, not | Completeness,
information on corporate governance
in
apart
subsection;
attention
paid
to
3=Apart
subsection;
information
4=Extra | veriability,
concerning
CG; |
and
5=Comprehensive description of CG
Understandability
Ul
To what extent is the annual report presented | Judgment based on: -Complete tabel of contents; - | Understandability
in a well organized manner
Headings; -Order of components; -Summary/conclusion
at the each subsection
U2
To what extent are the notes to the balance | 1=No explanation; 2=Very short description, difficult to | Understandability
sheet and the income statement sufficiently | understand; 3=Explanation that describes what happens;
clear
4-Terms
are
explained
(which
assumptions
etc);
S=Everything that might be difficult to undertand is
explained
U3
U4
US
To what extent does the presence of graphs and | I1=No graphs; 2=1-2
tables clarifies the presented information
graphs; 5=>Sgraphs
graphs;
3=3-5
graphs;
4=6-10 | Understandability
To what extent is the use of language and}
1=Much jargon (industry), not explained; 2=Much | Understandability
technical judgment in the annual report easy to | jargon, minimal explanation; 4=Not much jargon or well
follow
explained; 5=No jargon or extraordinary explanation
What is the size of the glossary
1=No glossary; 2=Less than | page; 3=Approximately | Understandability
one page; 4=1-2 pages; 5=>2 pages
Comparability
Cl
To
what
extent do the notes to changes
in}
1=Changes
accounting policies explain in the informations | 3=Explained
of the change
C2
not
explained;
why;
2=Minimum
4=Explain
why
explanation; | Consistency
+ consequences;
5=No changes or comprehensive explanation
To what extent do the notes to revisions in | 1=Revision withount notes; 2=Revision with few notes; | Consistency
accounting estimates and judgements explain | 3=No revision/clear notes; 4=Clear notes + implications
the implications of the revision
C3
free
from material error
(past); 5=Comprehensive notes
To what extent did the company adjust | 1=No adjustments; 2=Described adjustments; 3=Actual | Consistency
previous accounting periods figures for the
Adjustments (one year); 4=2 Years; 5=>2 years + notes
Try Yurisandi and Evita Puspitasari/ Procedia - Social and Behavioral Sciences 211 (2015) 644 —652
effect of the implementation of a change in
accounting policy or revisions in accounting
estimates
C4
To what extent does the company provide | 1=No comparation; 2=Only with previous year; 3=With | Consistency
comparation of the current accounting periode | 5 years; 4=5 years + description of implications; 5=10
with previous accounting period
years + description of implications
C5
To what extent is the information in the annual | Judgment based on: -accounting policies; -structure
- | Comparability
report comparable to information provided by | explanations of events; In other words: an overall
the other organizations
conclusion of comparability compared to annual reports
of other organizations
C6
To
what
extent
does
financial
index
numbers
the
company
and
presents |
1=No
ratios;
2=1-2
ratios;
3=3-5
ratios;
4=6-10
ratios | Comparability
ratios in the | 5=>10ratios
annual reports
Timeliness
Tl
How many days did it take for the auditor to | Natural logarithm of amount of days
sign the auditors’ report after bookyear end
Timeliness
1=1-1.99: 2=2-2.99: 3=3-3.99: 4=4-4.99- 5=5-5.99
Source: Nice Working Paper 09-108
2.2. Sample
Listed companies at Indonesian Stock Exchange (IDX) that also belong on LQ-45 index are used as the subject in
this research. The LQ-45 consists of the companies that are listed in Indonesian Stock Exchange with the highest
market capitalization. In this research, we are using the LQ 45 as the sample companies with the consideration that
these companies could work as a representation for the implementation of the IFRS adoption in Indonesia. The
companies that become the LQ-45 member are evaluated every six months by the IDX. The population in this research
are the companies becoming the member of LQ 45 for the period 2009-2013. At the end, this researh is using 55
sample companies. This reseach is using paired sample test to analyze the data. The financial reporting quality before
the IFRS adoption is represented by the period 2009-2010, while the financial reporting quality after the IFRS is
represented by the period 2012-2013. The research is not using 2011 period with the consideration that the period is
the starting point of implementation the IFRS adoption in Indonesia. We analyze the quality of the financial reporting
using the annual reporting prepared by the companies.
3. Results
Table 2 displays the mean of the financial reporting quality before and after IFRS adoption along with the result of
the paired sample test.
Table 2. Financial Reporting Quality Result & T-Test
Quality
Relevance
Mean
Before IFRS Adoption
After IFRS Adoption
3.2105
4.1058
Rl
3.0455
4.0818
R2
3.6091
4.6909
R3
2.7636
3.5909
R4
3.4182
4.0545
Representational Faithfulness
3.4055
3.0618
Fl
2.8182
3.7909
F2
2.9091
3.8364
T test
Sig
-12.380
0.000
6.129
0.000
Try Yurisandi and Evita Puspitasari / Procedia - Social and Behavioral Sciences 211 (2015) 644 —652
F3
3.1000
3.6636
F4
4.0364
4.0182
F5
4.1636
4.7727
3.4455
3.8618
Ul
4.1727
4.7727
U2
3.5455
4.3818
Understandability
U3
4.0273
4.4727
U4
3.9455
4.2000
US
1.5364
1.5273
3.0798
3.8351
cl
2.9636
3.7545
C2
3.1364
3.9909
C3
2.2091
3.8818
Comparability
Timeliness
649
-9.662
0.000
-11.753
0.000
c4
1.9091
2.3818
C5
4.2182
4.7000
C6
4.0455
4.3000
2.6785
2.7347
-1.082
0.284
3.2941
3.8827
-16.166
0.0000
Tl
Financial Reporting Quality
Sources: Research Data
4, Discussion
From Table 2, we can see that the the overall financial reporting quality after the IFRS adoption has increased
compare to the overall financial reporting quality before the IFRS adoption. The result is significant with the level 1%
significancy. The same results has been shown for the components of the financial reporting quality: relevance,
understandability, and comparability. All with the 1% level of significancy. However, the differerence of the
timeliness quality before and after the IFRS adoption is not significant. We presumed this empirical result for the
timeliness is caused by the increasing demand for disclosures in the IFRS implementation. Because of the mandatory
disclosures are increasing in the IFRS, the company may need longer time in preparing the financial information. And
yet, for the respresentational faithfulness we found the decreasing trend. We believe it was caused by the extensive
use of the estimation and fair value in presenting financial information using the IFRS.
We find the evidence that there is changing in the financial reporting quality before and after the IFRS adoption in
Indonesia. By examining the mean of the financial reporting quality measurement, the level of the quality after IFRS
adoption period is higher compared to the level of the quality before the IFRS adoption. The result is in accordance
with the Barth et.al (2008) study which revealed that there was an elevating in the accounting quality after the
implementation of the IFRS.
The Barth et.al study explained that there was an increasing from timely loss recognition and the value relevance.
Beest, et.al (2009) explained that by using the IFRS, the relevance of the financial reporting is increasing compared
to the use of the US GAAP. Further, the study found that by using the IFRS, the information presented by the company
more reflects the company real condition, which mean the faihful represantion after the IFRS adoption is higher.
Completing the previous study, this research provide the evidence that the comparability an understandability is higher
after the IFRS adoption. This research shows that the company provides more comprehensive financial information
after IFRS adoption whics is more understandable to the users. We believe this happens because the company is
required to provide more disclosures. The same result is found for the comparability quality. In other word, our study
proves that there is an increasing in the financial reporting quality after IFRS adoption. Further, the use of the principle
based standard is elevating the quality of the financial reporting by extending the disclosures.
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Try Yurisandi and Evita Puspitasari/ Procedia - Social and Behavioral Sciences 211 (2015) 644 —652
5. Conclusion
This research aims to evaluate whether there are any increasing in financial reporting quality after the IFRS
adoption. Using the Nice measurement, after conducting several tests we concluded that IFRS adoption increased the
quality of financial reporting.The result showed that the financial reporting quality after the IFRS adoption was higher
than the financial reporting quality before the IFRS adoption. The result showed that the qualitative characteristics of
relevance, understandability and comparability level increased after IFRS adoption. Yet, faithful representation level
had a decrease trend, and timeliness level had no changing in the period before and after IFRS adoption. As a
conclusion, the financial reporting quality of the Indonesian companies was increasing after the adoption of the IFRS.
Further, the IFRS adoption increased the financial reporting quality.
In the future, we are willing to expand this research by involving some other variables, such as industry type,
asymetric information, and also involving the professional judgments in evaluating the financial reporting quality.
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Horizons,
Try Yurisandi and Evita Puspitasari/ Procedia - Social and Behavioral Sciences 211 (2015) 644 —652
effect of the implementation of a change in
accounting policy or revisions in accounting
estimates
C4
To what extent does the company provide | 1=No comparation; 2=Only with previous year; 3=With | Consistency
comparation of the current accounting periode | 5 years; 4=5 years + description of implications; 5=10
with previous accounting period
years + description of implications
C5
To what extent is the information in the annual | Judgment based on: -accounting policies; -structure
- | Comparability
report comparable to information provided by | explanations of events; In other words: an overall
the other organizations
conclusion of comparability compared to annual reports
of other organizations
C6
To
what
extent
does
financial
index
numbers
the
company
and
presents |
1=No
ratios;
2=1-2
ratios;
3=3-5
ratios;
4=6-10
ratios | Comparability
ratios in the | 5=>10ratios
annual reports
Timeliness
Tl
How many days did it take for the auditor to | Natural logarithm of amount of days
sign the auditors’ report after bookyear end
Timeliness
1=1-1.99: 2=2-2.99: 3=3-3.99: 4=4-4.99- 5=5-5.99
Source: Nice Working Paper 09-108
2.2. Sample
Listed companies at Indonesian Stock Exchange (IDX) that also belong on LQ-45 index are used as the subject in
this research. The LQ-45 consists of the companies that are listed in Indonesian Stock Exchange with the highest
market capitalization. In this research, we are using the LQ 45 as the sample companies with the consideration that
these companies could work as a representation for the implementation of the IFRS adoption in Indonesia. The
companies that become the LQ-45 member are evaluated every six months by the IDX. The population in this research
are the companies becoming the member of LQ 45 for the period 2009-2013. At the end, this researh is using 55
sample companies. This reseach is using paired sample test to analyze the data. The financial reporting quality before
the IFRS adoption is represented by the period 2009-2010, while the financial reporting quality after the IFRS is
represented by the period 2012-2013. The research is not using 2011 period with the consideration that the period is
the starting point of implementation the IFRS adoption in Indonesia. We analyze the quality of the financial reporting
using the annual reporting prepared by the companies.
3. Results
Table 2 displays the mean of the financial reporting quality before and after IFRS adoption along with the result of
the paired sample test.
Table 2. Financial Reporting Quality Result & T-Test
Quality
Relevance
Mean
Before IFRS Adoption
After IFRS Adoption
3.2105
4.1058
Rl
3.0455
4.0818
R2
3.6091
4.6909
R3
2.7636
3.5909
R4
3.4182
4.0545
Representational Faithfulness
3.4055
3.0618
Fl
2.8182
3.7909
F2
2.9091
3.8364
T test
Sig
-12.380
0.000
6.129
0.000
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