Effect of Non-IFRS Earnings Reporting Guidelines on Non-IFRS Earnings Reporting Quality: The Case of Australian Listed Firms

Abstract

This study uses data on Australian Securities Exchange (ASX) 200 firms for 2011–2014 to examine the impacts of Australian Securities and Investments Commission (ASIC) non–International Financial Reporting Standards (non–IFRS) earnings reporting guidelines on non-IFRS earnings reporting quality. We find that firms that do not comply with the ASIC guidelines have lower non–IFRS earnings reporting quality than do firms that comply with these guidelines. The former firms opportunistically exclude recurring expenses from IFRS earnings to ensure non–IFRS earnings appear more profitable than IFRS earnings when they miss earnings targets or incur current losses. The latter firms act as responsible reporters by judiciously using their discretion to efficiently report non-IFRS earnings. The findings indicate that although ASIC has issued guidelines to limit firms’ opportunistic non–IFRS earnings reporting, but opportunistic non–IFRS earnings reporting is still present in non–compliance firms. We suggest mandatorily enforcing the guidelines on non–IFRS earnings reporting firms to mitigate such opportunistic reporting. Where possible, ASIC should increase its enforcement action against firms that do not comply with these guidelines.

Keywords: Australian Securities and Investments Commission, earnings target, earnings losses, earnings adjustments, non-IFRS earnings, reporting quality, value relevance

JEL Classification: M41