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Influence of a mandatory IFRS

adoption on accounting practice
Evidence from Australia, Hong Kong and
the United Kingdom

Mandatory IFRS
adoption

93

Leopold Bayerlein and Omar Al Farooque

University of New England, Armidale, Australia
Abstract
Purpose The purpose of this paper is to evaluate the changes of accounting policy choices and
the harmonisation of accounting practices for two important financial reporting items within and
between three IFRS adopting countries. Furthermore, it aims to address methodological shortcomings
in the prior harmonisation literature through the introduction of two newly developed significance
assessment methodologies.
Design/methodology/approach The influence of the mandatory IFRS adoption in Australia
(AUS), Hong Kong (HK) and the UK on deferred taxation (DT) and goodwill (GW) accounting practices
as well as the within and between country harmonisation of accounting practices is investigated
through an event type study. These investigations are conducted using a McNemar test with Bowker
extension as well as the Split C-Index with a newly developed bootstrapping significance testing
methodology.
Findings This study demonstrates that the mandatory IFRS adoption in the analysed countries is
linked to a significant harmonisation of DT and GW accounting practices between AUS, HK and the
UK. Furthermore, the increase of adequate accounting policy information in the financial reporting
documents of UK firms over the period of this study is identified as an important harmonisation
accelerator.
Originality/value This study adds to the prior literature due to its focus on the mandatory IFRS
adoption within the analysed countries. Furthermore, the introduction of two newly developed
methodologies to evaluate the significance of accounting policy choice changes and harmonisation
over time addresses an important methodological shortcoming in the prior literature.
Keywords Harmonization, IFRS, McNemar test, Split C-Index, Bootstrapping significance test,
Australia, Hong Kong, United Kingdom, Financial reporting, Accounting, Accounting standards
Paper type Research paper

1. Introduction and motivation

In recent years, a large number of countries across the world have amended their
national accounting regulations to reflect International Financial Reporting Standards
(IFRSs). It has even been argued that the IFRSs are destined to become the lingua
franca of the international accounting world (Gill and Rosen, 2007, p. 70).
These mandatory accounting policy changes are often expected to result in changes
of accounting practice (e.g. see ASIC, 2006; Ding et al., 2007), because formal
harmonisation is typically viewed as an important driver of material harmonisation
(Rahman et al., 1996). However, any standardisation of accounting practices that
increases the number of available treatment options or enlarges the amount of
professional judgement required from preparers may also have a disharmonising effect
in practice (van der Tas, 1988; Fisher, 1990; Canibano and Mora, 2000; Ball and
Shivakumar, 2005).
The main objectives of this study are twofold. First, to investigate the recent
progress in international accounting harmonisation (IAH) for a limited number of

Asian Review of Accounting

Vol. 20 No. 2, 2012
pp. 93-118
r Emerald Group Publishing Limited
1321-7348
DOI 10.1108/13217341211242169

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accounting practices, both within and between three IFRS adopting countries; and
second, employ improved methodological approaches after addressing a number of
methodological limitations in the prior literature. Specifically, this study aims to
produce empirical evidence of the degree of convergence in accounting for deferred
taxation (DT) and goodwill (GW) within and between Australia (AUS), Hong Kong
(HK), and the UK both before and after the IFRS adoption. Furthermore, changes
between the harmony assessments at both points in time are evaluated to determine
the level of IAH that occurred during the mandatory IFRS adoption within the
analysed countries. To pursue the former objective, this paper develops assessment
techniques. While the first technique enables a more accurate assessment of the
significance of harmonisation, the second technique improves our ability to assess
the significance of accounting policy choice changes between two points in time.
This study differs from the existing IAH literature due to its focus on the mandatory
IFRS adoption within the analysed countries. To the best of our knowledge, there is no
other recent study that has assessed the harmony of annual reports from AUS, HK, and
the UK, all of whom adopted IFRSs as of 1 January 2005. However, an assessment
of the impact of a mandatory IFRS adoption on accounting practice is likely to be
important because the adoption of IFRS is typically expected to improve the
international comparability of financial reports (e.g. Biddle and Saudagaran, 1989;
Iatridis, 2010; Jeanjean and Stolowy, 2008). The empirical evidence documented in this
study provides additional insights into the extent to which this particular expectation
of an IFRS adoption is met. This study also contributes to the literature by applying
a modification to the bootstrapping procedure originally introduced by Canibano and
Mora (2000), and introducing a significance assessment based on the McNemar test
of correlated proportions with Bowker extension (Bowker, 1948; Marascuilo and Serlin,
1988). These developments make a significant contribution to IAH research because
the measurement accuracy with which the significance of harmonisation over time and
the significance of accounting policy choice changes over time is assessed, improves
substantially.
Using these two testing procedures, as well as the Split C-index of Archer et al.
(1995), we investigate two specific research questions:
(1)

whether the DT and GW accounting treatments used prior to the adoption of

IFRSs are significantly different from those used after the IFRS adoption; and

(2)

whether the levels of within-country, between-country, and overall DT and

GW harmony of company annual reports after the IFRS adoption are
significantly greater than those prior to the IFRS adoption.

Regarding our first research question, we hypothesise a non-significant difference

between the analysed companies pre/post-IFRS DT accounting policy choices
(H1 for DT), and a significant difference between their pre/post-IFRS GW accounting
policy choices (H1 for GW). These expectations are the result of the largely similar
pre- and post-IFRS DT accounting requirements in the analysed countries as well as
the substantial GW accounting regulation changes caused by their IFRS adoption.
Regarding our second research question, we hypothesise a significant increase in the
within-country, between-country, and overall harmony levels for GW (H2 for GW).
This expectation is a result of the substantially improved similarity of accounting for
GW caused by the mandatory adoption of IFRS. On the other hand, the comparatively
high level of similarity of the accounting regulations for DT both before and after the

analysed countries IFRS adoption led us to hypothesise a non-significant DT harmony

index increase (H2 for DT).
The remainder of this paper is organised as follows. Section 2 describes the
underlying concept of this study and reviews the relevant prior literature. Section 3
explains our research design and Section 4 presents and discusses the empirical results
of this study. Finally, Section 5 provides a summary and outlines some important
implications of this study for future IAH research.
2. The concept of harmonisation and literature review
Prior studies of IAH have utilised a number of different definitions of harmony and
harmonisation. However, it is widely recognised that harmonisation is a process
(flow concept), whilst harmony is a state (stock concept) along a continuum between
the points of total diversity and total harmony (van der Tas, 1988, 1992; Tay and
Parker, 1990; Murphy, 2000; Canibano and Mora, 2000).
According to one stream of thought, total harmony is achieved when all comparable
companies apply one accounting treatment to a particular financial statement item
(e.g. van der Tas, 1988; Canibano and Mora, 2000). Others (e.g. Archer et al., 1996) argue
that such a definition of harmony fails to recognise that individual companies may be
subject to different circumstances. This second stream of thought equates total
harmony with a state in which the probability of selecting a particular accounting
treatment for a specific item in one country is equal to the probability of selecting the
same accounting treatment in another country (Archer et al., 1996). However, this
definition does not appear to take international financial market pressures into
account. Following the concept of El-Gazzar et al. (1999), we argue that international
financial market participants are likely to expect a financial statement item to be
treated using one widely recognised benchmark treatment, even if a countrys
accounting regulations also allow the application of a number of other treatment
alternatives. Companies not wanting to be perceived as applying a non-normal
accounting treatment may thus be forced to apply this benchmark treatment
regardless of their specific circumstances. One example of this effect is the low number
(one out of 18) of UK companies in our pre-IFRS sample which apply the discounting
provision available in the UKs pre-IFRS DT accounting requirements (see Table VI,
option A). The limited uptake of this treatment option is likely to reflect the attempt of
UK companies to align their accounting policies with international user expectations,
because the accounting requirements of many other countries, including those
of AUS and HK, did not include this option. The application of a definition of
total harmony which does not recognise this effect is therefore unlikely to provide a
good representation of the economic reality of the analysed companies. As a result, we
select a definition of total harmony in accordance with the first outlined stream of
thought.
The concepts of harmony and/or harmonisation may also be separated into their
individual components of formal (or de jure), and material (or de facto) harmonisation
(van der Tas, 1988, 1992; Emenyonu and Gray, 1996; Canibano and Mora, 2000; Garrido
et al., 2002). Formal harmonisation represents the harmonisation of accounting
standards, for example through the widespread adoption of IFRS, whilst material
harmonisation represents a movement towards more homogeneous accounting
practice. The formal harmonisation of accounting standards may therefore exert a
substantial influence over material harmonisation (van der Tas, 1988; Rahman et al.,
1996), if standards are applied consistently (Gray, 1980; Needles et al., 2002;

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Rahman et al., 2002). In other words, formal harmonisation will only result in
harmonised accounting practices if accounting standards are applied consistently by
all companies and within all countries. However, formal harmonisation may also have
a disharmonising effect in practice (van der Tas, 1988; Canibano and Mora, 2000),
resulting in the possible independence of material and formal harmonisation
(Herrmann and Thomas, 1995). Such a disharmonising effect may arise if the
harmonisation of accounting standards increases the number of available accounting
treatment options (Canibano and Mora, 2000; van der Tas, 1988), or inflates the amount
of professional judgement required by preparers (Fisher, 1990). Consistent with the
motivation of this study, the concept of material harmonisation is adopted.
A number of previous studies have examined the harmony and/or harmonisation of
different financial statement items across various countries and financial reporting
periods. A comprehensive analysis of these studies is difficult because the countries,
time frames, financial statement items, and number of analysed accounting treatment
options vary substantially between individual studies. Additional complications
arise because the observed levels of harmony are influenced by the, respectively,
applied methodologies (Morris and Parker, 1998). The following discussion therefore
concentrates on the methodologies and major findings of prior literature without
attempting to provide a direct comparison.
In an early contribution to the IAH literature, van der Tas (1988) proposes the
Herfindahl (H), I, and Comparability (C) indices as measures of harmony and
harmonisation. However, although the methodological advances made by van der Tas
(1988) are substantial, he does not provide an assessment of the significance of
harmony index changes over time.
Following van der Tas (1988), Herrmann and Thomas (1995) utilise the I-index in
their assessment of material harmony in Europe during 1992/1993. Overall, they find
low levels of harmony in regard to accounting for GW as well as the valuation of
inventory and fixed assets. Two important issues not addressed by Herrmann and
Thomas (1995) are the distinction of within-country and between-country harmony,
and the assessment of harmony level changes over time.
The study of Archer et al. (1995) addresses one of these issues by proposing an
extension to the C-index which separates within-country and between-country
harmony. Using this new index, they find little evidence of harmonisation in the
treatments for DT and GW in eight European countries between 1986/1987 and 1990/
1991. Nevertheless, the introduction of the Split C-index clearly marks an important
methodological advancement. However, similarly to other prior research, Archer et al.
(1995) do not assess the significance of index value changes over time.
This last remaining issue, the significance of index value changes between multiple
points in time, is addressed by Canibano and Mora (2000) and Aisbitt (2001). The study
of Canibano and Mora (2000) applies a bootstrapping test, as discussed in Efron (1979)
and Greene (2003), as well as a w2-test to determine the significance of harmony index
value changes and accounting policy choice changes between two points in time,
respectively. However, one problem with the bootstrapping procedure applied by
Canibano and Mora (2000) is its inability to reflect the dependence of the second
harmony measurement on the results of the first harmony measurement. Instead, it
erroneously assumes that the two measurements of harmony are independent. Their
significance assessment of accounting policy choice changes between two points
in time raises a similar issue. Here, the test statistic erroneously assumes an
independence of both measurement times as well as the absence of accounting policy

choice frequencies of zero which are a common problem in index-based IAH research
(Canibano and Mora, 2000).
Another approach to assess the significance of harmony index value changes
between multiple points in time is provided by Aisbitt (2001). Her analysis of the
harmonisation of 20 financial statement items in northern Europe relies on
the repeated application the Split C-index and a significance assessment which utilises
the Wilcoxon signed-rank test. Overall, Aisbitt (2001) finds mixed levels of
harmonisation. However, her application of the Wilcoxon signed-rank test as a
measure of significance has certain limitations. First, the test statistic is unable to
determine the significance of the index value changes of individual financial statement
items. Second, studies analysing only a small number of financial statement items may
not be able to apply the test statistic effectively.
Overall, most prior contributions to the literature have concentrated on assessing
financial reporting harmony at one point in time, whilst relatively few studies have
attempted to evaluate the process of harmonisation. Furthermore, to our knowledge,
no prior harmonisation study has focused on the IFRS adoption event by comparing
pre- and post-IFRS adoption harmony levels within and between countries. Last,
all prior test statistics used to assess the significance of individual items harmony
index value changes between multiple points in time exhibit varying degrees of
methodological deficiencies. This current study attempts to close these gaps in the
literature in regard to accounting for DT and GW in AUS, HK, and the UK.
3. Research design
3.1 Selection of country and company samples
Only few prior studies (e.g. Parker and Morris, 2001; Ali et al., 2006) have concentrated
on the Australasian region, whilst most literature focuses on the European setting.
This study attempts to take a wider view by selecting three economically important
countries (e.g. AUS, HK, and the UK) with a leading role in accounting harmonisation
(Christensen et al., 2007). Other Australasian and/or European countries of comparable
economic importance are not selected in order to limit the sample to countries
that adopted the IFRSs as of 1 January, 2005, require companies within their
jurisdiction to prepare financial reports in English, and exhibit similar environmental
features. Whilst our concentration on the above aspects results in the selection of
three Anglo-Saxon countries, it is noted that IFRSs are certainly appropriate for
adoption or convergence in a much wider range of countries. However, the process
of adoption and convergence is far slower in non-Anglo-Saxon counties (except
EU countries) due to socio-economic constraints as compared to Anglo-Saxon
countries. In any case, the selection of countries with similar IFRS adoption dates
and comparable environmental features is of particular importance because this
reduces the influence of uncontrolled external variables on our findings (Ruland et al.,
2007), and enhances our ability to link the observed harmony index and accounting
policy changes to the analysed countries mandatory IFRS adoption. Some important
environmental features shared by all selected countries include low levels of ownership
concentration, extensive shareholder/outsider rights, extensive disclosure
requirements, and a strong legal enforcement (Leuz et al., 2003). In addition,
accounting in all selected countries is strongly influenced by equity market pressures
(Ball et al., 2003). Given the strong similarity between the analysed countries, we
expect that formal harmonisation progress will coincide with high levels of material
convergence.

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Before the selection of companies included in this study is discussed, the dates of
our pre/post-IFRS adoption measurements are determined. Two measurement dates,
one before and one after the analysed countries IFRS adoption date (1 January, 2005)
are selected. However, one financial period on either side of this date is excluded from
the sample to control for the possible effects of an early and/or late adherence to the
newly adopted standards (see Murphy, 2000; Abdelsalam and Weetman, 2007).
As a result, the first (pre-IFRS) and second (post-IFRS) measurement dates of this
study are the end of the selected companies first reporting period which commences on
or after 1 January 2003, and 1 January 2006, respectively.
Within each country, a random number generator is used to draw a random sample
of companies from an alphabetical list of all companies listed on the selected countries
principal stock exchanges (i.e. Australian Securities Exchange, Hong Kong Stock
Exchange, and London Stock Exchange). Following van der Tas (1988), we ensure that
all country samples are based on a comparable set of industries. We therefore restrict
our analyses to a set of industries which occur at least once in every country
sub-sample. As a result, all companies whose main source of revenue does not fall
within one of the following five industry categories: manufacturing; transportation,
communication, and utilities; trade; real estate; and services, are excluded from the
sample. This ensures matching samples across countries. Companies with an initial
listing date after 1 January 2003, as well as companies incorporated outside their
country of listing (not counting multiple listings) are also excluded from the sample.
Overall, 18 companies which fulfil the above criteria and whose annual reports for 2003
and 2006 are obtainable online are chosen from within each country.
A disadvantage associated with this sample selection approach is to the potential
inclusion of a survival bias. However, it is important to note that the analytical
procedures employed in this study require identical samples of firms in both analysed
periods, which is not uncommon in the IAH literature. The relative importance of
this bias is also likely to be limited as the period under analysis in this study is
comparatively short.
3.2 Selection and treatment of financial statement items
This study focuses on an analysis of DT and GW. The selection of these items has three
motivations. First, a number of prior studies have identified both items as exhibiting
comparatively low levels of harmony (see Table I), leaving ample room for further
harmonisation. Second, the impact of both items on a companys equity and net income
may potentially be substantial (Goodwin and Ahmed, 2006). Third, the selection of two
financial statement items whose post-IFRS accounting regulations provide preparers
with different levels of flexibility when selecting an accounting policy enables us to
demonstrate the application of the newly proposed assessment methodologies in a
wide range of settings. The selected items are well suited for this purpose because the
analysed countries DT post-IFRS accounting regulations allow preparers to select from
a number of available treatment alternatives, whilst the ability of preparers to select
between different GW treatment options is far more restricted.
Subsequently, an in-depth review of both items pre/post-IFRS adoption accounting
regulations is conducted to construct tables that incorporate all possible, mutually
exclusive, accounting treatment alternatives across both years under analysis. This
assessment of DT and GW accounting regulation in AUS, HK, and the UK revealed
nine (A-I) possible treatment alternatives for each analysed item (Table II). Once all
identified categories are adequately defined, the DT and GW items of all collected

Number of
analysed
items

Author(s)
Herrmann and Thomas (1995, p. 264)
Archer et al. (1995, pp. 75 and 79)

9
2

Emenyonu and Gray (1996, p. 277)

26

Canibano and Mora (2000, p. 365)

Parker and Morris (2001, pp. 315-17)

Aisbitt (2001, pp. 54-5)
Ali et al. (2006, p. 54)

11
20
18

Ranking of GW
Ranked x (out of y)a

Ranking of DT
Ranked x (out of y)a

8th (out of 9) (1992/1993)

1st (out of 2) (1986/1987)
1st (out of 2) (1990/1991)
12th (out of 26) (1971/1972)
19th (out of 26) (1991/1992)
3rd (out of 4) (1991/1992)
4th (out of 4) (1996/1997)
10th (out of 11) (1993)b
17th (out of 20) (1998)
1st (out of 18) (1997/1998)c

na
2nd (out of 2) (1986/1987)
2nd (out of 2) (1990/1991)
21st (out of 26) (1971/1972)
22nd (out of 26) (1991/1992)
4th (out of 4) (1991/1992)
3rd (out of 4) (1996/1997)
11th (out of 11) (1993)b
na
na

Notes: aThe levels of harmony of individual financial statement items analysed in prior studies are used to rank
items from highest harmony levels to lowest harmony levels. Lower rankings indicate the existence of lower levels of
harmony relative to the harmony levels of the remaining analysed items, where x is the ranking of either GW or DT,
and y is the number of analysed items; bbased on the Split C-indexs disclosure adjusted between-country
component; cbased on the overall Split C-index results of the amortisation of GW

Option

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Table I.
Ranking of GW and
DT harmony
in previous index studies

Description

Deferred tax treatment alternatives

A
Full provisions/discounted
B
Full provisions/future rates/not discounted
C
Full provisions (except for investments in subsidiaries)/future rates/not discounted
D
Full provisions/current rates/not discounted
E
Full provisions (except for investments in subsidiaries)/current rates/not discounted
F
Full provisions/no rates discussed/not discounted
G
Full provisions (except for investments in subsidiaries)/no rates discussed/not discounted
H
Method not determinable
I
Item not applicable
Positive goodwill treatment alternatives
A
Indefinite life/not amortised/impairment tested at least annually
B
Amortisation/straight line/maximum 20 years/impairment tested
C
Amortisation/straight line/maximum 20 years/not impairment tested
D
Amortisation/straight line/over 20 years/impairment tested
E
Amortisation/straight line/over 20 years/not impairment tested
F
Amortisation/straight line/years unknown/impairment tested
G
Amortisation/straight line/years unknown/not impairment tested
H
Method not determinable
I
Item not applicable

annual reports are sorted into one of the available DT or GW treatment categories,
respectively.
The DT and GW accounting treatment alternatives outlined in Table II incorporate
all allowed treatment options available in one or more of the analysed countries
in one or both years under analysis. Some treatment options included in the table
may consequently not be available in all analysed countries or years. However, the

Table II.
DT and GW treatment
alternatives

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computation of the Split C-index applied in this study requires the creation of a table of
treatment alternatives across all analysed countries and years (see Archer et al., 1995).
Three important issues arise in regard to the DT treatment alternatives indentified in
Table II. First, all DT treatment options between, and including, A-G are based on the
liability method. Second, treatment options B, D, and F account for all temporary
differences (full provision approach), whilst options C, E, and G account for all temporary
differences except those arising from investments in subsidiaries, branches, associates,
and interests in joint ventures (full provision approach, except for indicated items). The
recognition of a DT asset/liability in such cases depends on whether or not the existing
temporary difference is expected to reverse in the foreseeable future, and whether or
not the timing of the reversal of the difference is controlled by the reporting entity
IAS 1: paragraph 39 (IASB, 2004) and AASB 112: paragraph 39 (AASB, 1994).
A final issue arises because not all analysed companies indicate whether or not their
DT items are discounted. This study treats all companies whose accounting policy
note disclosures fail to discuss the discounting of DT items as non-discounters if
a subsequent re-examination of their financial reports does not reveal the existence of
DT discounting.
Two accounting treatment alternatives shared by both analysed financial statement
items are options H and I. Although these categories are not treatment alternatives in
the sense of options A-G, their inclusion into the set of categories outlined in Table II is
an important part of our subsequent Split C-index computation. Prior IAH studies have
often excluded cases falling into categories H and I from their analyses although this
treatment introduces a self-selection bias. This study follows the arguments of Archer
et al. (1995), Morris and Parker (1998), and Aisbitt (2001) who highlight the importance
of a detailed analysis of these cases as well as their inclusion into all harmony index
computations.
The inclusion of treatment options H and I into the analysis of both items reflects
the problem that an item may not be applicable to all selected companies (I), or a
company may choose not to disclose an item (H), or disclose insufficient information
to determine the applied accounting treatment (H). However, an item is only treated as
not applicable (I), if no indication of the items applicability exists after the complete
annual report is assessed. If a financial statement does not recognise DT it is always
included in the H category as it is seen as virtually impossible to determine the actual
applicability of a DT item with sufficient certainty. Financial reports which do not
recognise GW are only included in the I category if they show no signs of any
investments in other entities. Otherwise, such reports are included in the H category.
However, it is important to note that the incorporation of treatment options H and
I into our subsequent Split C-index assessment differs from that of the remaining
treatment options. A detailed discussion of the necessary considerations is provided
in Section 3.3.4.
3.3 Methodological approach
3.3.1 Significance of accounting policy choice changes. The significance of accounting
policy choice changes between our pre- and post-IFRS adoption measurements is
assessed using the McNemar test of correlated proportions with Bowker extension
(Bowker, 1948; Marascuilo and Serlin, 1988). This test is methodologically superior to
previously applied test statistics (e.g. the w2-test applied by Canibano and Mora (2000))
because it assumes that the results of both measurements are identical unless external
and/or internal factors have led to a change in the analysed companies accounting policy

choices (Bowker, 1948; Marascuilo and serlin, 1988). In other words, it is not necessary to
assume the independence of the first and second harmony assessments of this study.
Another advantage of the applied test statistic is its ability to handle the existence of
accounting policy choice occurrence frequencies of zero, which are a common problem
in IAH research. The applied test statistic is uninfluenced by such occurrence
frequencies because the two components used to assess the significance of policy
choice changes between 2003 and 2006 (Table III, Equation (5)) are not affected by the
number of unused accounting policy choice categories.
In this study, the McNemar test of correlated proportions with Bowker extension is
applied as follows. Initially, a 9  9 table which summarises all possible longitudinal
interaction of the nine defined accounting treatment alternatives (Table II) on an
individual company basis is constructed for every country, and across-country, by
financial statement item sub-sample. Subsequently, a total of 36 2  2 two-way
contingency tables are derived from each 9  9 table in order to compute the Bowker
test statistic. The computation of the Bowker test statistic is explained using the
theoretical situation outlined in Table III, where companies are able to choose between
three treatment options (A, B, and C) when accounting for an individual financial
reporting item (e.g. GW) at two points in time.
Panel 1 of Table III summarises all possible interactions between Time 1 and Time 2,
using a 3  3 interaction table similar to the 9  9 interaction table of this study. This
interaction table is subsequently split into three 2  2 contingency tables (panel 2),
and Equations (1)-(3), taken from Marascuilo and Serlin (1988), are used to determine
the extent of the accounting policy changes captured within each contingency table.

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Panel 1: 3  3 table of longitudinal interactions

Time 2
Option A
Option B
aAB
Time 1
Option A
aAA
Option B
aBA
aBB
Option C
aCA
aCB
Panel 2: derived 2  2 two-way contingency tables of interactions
Time 2
Option A
Option B
aAB
Time 1
Option A
aAA
Option B
aBA
aBB

Option C
aAC
aBC
aCC

2
XAB

aBA  aAB 2
aBA aAB

Time 1

Option A
Option C

Option A
aAA
aCA

Option C
aAC
aCC

2
XAC

aCA  aAC 2
aCA aAC

Time 1

Option B
Option C

Option B
aBB
aCB

Option C
aBC
aCC

2
XBC

aCB  aBC 2
aCB aBC

Bowker test statistic:

Significance assessment:

2
2
2
2
XTotal
XAB
XAC
XBC
2
Xcritical w2 5
XTotal

Notes: aAA is the number of companies which choose treatment option A in both years under
analysis, aAB is the number of companies which choose treatment option A at Time 1 and treatment
option B at Time 2, ? and aCC is the number of companies which choose treatment option C in both
years under analysis

Table III.
McNemar test of
correlated proportions
with Bowker extension

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The Bowker test statistic (Equation (4)) is then derived by adding Equations (1)-(3), and
the significance of the accounting policy choice changes between Time 1 and Time 2
is determined via a comparison of the Bowker test statistic with a critical w2 value
(Equation (5)).
This study uses the outlined logic to compute a Bowker test statistic for each
country, and across-country, by financial statement item sub-sample. The critical w2
values required to test the significance of the observed accounting policy choice
changes within each sub-sample are based on a confidence level of 95 per cent as well
as the respective sub-samples number of degrees of freedom. An individual subsamples degrees of freedom are calculated by m(m1)/2 (Bowker, 1948), where m is
the number of accounting treatment categories used across all analysed companies in
each country, and across-country, by item sub-sample across both years under
observation. For example, if companies across all three countries used six DT
accounting treatment options in 2003 (the used options being A, B, C, D, F, and H),
whilst options B, C, G, and H are used in 2006 (see Table VI), a total of seven treatment
options (A, B, C, D, G, F, and H) are utilised within the sub-sample. The degrees of
freedom of the across-country DT sub-sample may thus be calculated as 7(71)/2 21.
Treatment options B, C, and H are only counted once because the multiple inclusion of
these categories would lead to an artificial increase of the computed number of degrees
of freedom. This computation of degrees of freedom based on the number of actually
employed accounting treatment options ensures that the existence of accounting policy
choice options with an occurrence frequency of zero does not influence the derived
critical w2 value. The applicable critical w2 values to which the Bowker test statistics of
each sub-sample are compared are taken from table A-6 of Kvanli et al. (1986). Any
observed accounting policy choice changes are regarded as significant if a subsamples Bowker test statistic is equal to, or exceeds, its respective critical w2 value.
The number of degrees of freedom of an individual sub-sample is directly related to our
significance assessment because a higher (or lower) number of degrees of freedom
results in a greater (or smaller) critical w2 value.
One important limitation of the employed test statistic is its conception as a large
sample test. The comparatively small sample size within each analysed country (N 18)
therefore limits the applicability of this test statistic in all country-specific sub-samples.
However, this limitation does not extent to the across-country sub-samples of
this study. It should also be noted that this limitation of the McNemar test of correlated
proportions with Bowker extension is specific to the study at hand, and is not expected to
extend to future harmonisation assessments with larger sample sizes within each
jurisdiction.
3.3.2 Within-country, between-country, and overall DT and GW harmony. The
harmony and harmonisation of the observed companies GW and DT accounting policy
choices is assessed by the Split C-index of Archer et al. (1995). This index is computed
by weighting the observed number of company pairs that apply a specific accounting
treatment to a particular financial statement item against the overall number of
possible company pairings (Archer et al., 1995). The computation of the Split C-index is
subsequently demonstrated in Equations 6)-(10), using the notations of the theoretical
situation outlined in Table IV, where companies from two countries (x and xy) may
choose between two accounting treatment alternatives ( j and jk) to account for a
particular financial statement item.
The Split C-index is principally divided into three components. The within-country
component uses Equations 6 and 7, taken from Archer et al. (1995), to determine the

Mandatory IFRS
adoption

level of harmony within the analysed countries at one point in time:

0:5axj axj  1 0:5axjk axjk  1 ? 0:5axyjk axyjk  1
XX
aCAT aCAT  1
0:5
C

AT

First, Equation (6) is used to establish the number of actually existing comparable
company pairs within the selected countries. Its result is then divided by that of
Equation (7), which determines the maximum number of possible company pairs
within the selected countries, to derive the indexs within-country component:
X
aC aC  1
7
0:5ax ax  1 0:5axy axy  1 0:5

103

The indexs second (i.e. between-country) component is, if only two countries are
included in the analysis (see Table IV), computed using Equation (8) (Archer et al.,
1995). However, if the sample is extended to incorporate a third country xyz, Equation
(8) evolves into Equation (9) (Morris and Parker, 1998):
axj axyj axjk axyjk
ax axy

axj axyj axjk axyjk  axyzj aaj axyj axyzj axjk axyjk 
ax axy axyz ax axy 

The indexs third and final component assesses overall harmony by incorporating
both previously described components. The overall Split C-index is calculated by
dividing the total of the within-country (Equations (6) and (7)) and between-country
(Equation (8)) component numerators by the total of their denominators as illustrated
in Equation (10):
P P
0:5 C AT aCAT aCAT  1 axj axyj axjk axyjk 
P
10
0:5 C aC aC  1 ax axy 
Whilst index methodologies such as the Split C-index have, in general, been associated
with a number of shortcomings (see van der Tas, 1988; Archer et al., 1995; Aisbitt, 2001;
Rahman et al., 2002 for details), they are typically seen as a useful and appropriate
harmonisation assessment methodology. Comments specific to the Split C-index

Country (C)

x
xy
Total

axj
axyj
aj

Accounting treatment (AT)

jk
axjk
axyjk
ajk

Total
ax
axy
n

Notes: axj is the number of companies in country x using accounting treatment j, axjk is the number of
companies in country x using accounting treatment jk, axyj is the number of companies in country xy
using accounting treatment j, and axyjk is the number of companies in country xy using accounting
treatment jk, whilst C incorporates all companies in countries x and xy, and AT incorporates all
companies using accounting treatments j and jk

Table IV.
Split C-index illustration
grid (Archer et al.,
1995, p. 69)

ARA
20,2

104

include those of Aisbitt (2001) who criticises that the indexs individual component
values are influenced by the number of available accounting treatment options. We
address this specific problem by holding the number of available accounting treatment
options constant throughout both years under observation. Krisement (1997) also
criticises the Split C-index because its within-country and between-country
components do not add up to the indexs overall value. We choose to apply the Split
C-index despite this criticism because the computation logic of the three Split C-index
components is internally consistent, whilst the computation of other harmony index
groups would have relied on a number of different methodological concepts (e.g. Parker
and Morris, 2001). As a result, the Split C-index is seen as being methodologically
superior to other available index groups.
3.3.3 Significance of harmony index value changes between 2003 and 2006. Apart
from some notable exceptions (e.g. Canibano and Mora, 2000; Aisbitt, 2001), most prior
IAH research has not included an assessment of the significance of harmony index
value changes between multiple points in time. This study utilises an adaptation of the
bootstrapping procedure of Canibano and Mora (2000) to determine the significance of
such changes. In fact, we build upon the procedure applied by Canibano and Mora
(2000) and introduce a correction which, for the first time in the IAH literature, enables
an assessment of the significance of harmonisation in a matched-pair analysis with
dependent harmony observations. Our bootstrapping procedure differs from
traditional bootstrapping tests because we do not rely on a re-sampling of cases
from the originally drawn sample. Instead, additional sample estimates are generated
via a biased random number generator. The advantage of this procedure is that
we are able to create a large number of sample estimates which are specific to
the circumstances within each analysed sub-sample without being restricted by the
comparatively small number of cases in the analysed sub-samples.
Initially, our biased random number generator is used to create 1,000 sample
estimates for every country by year by item sub-sample. This process randomly
allocates the available accounting policy options, whilst every options probability of
success is determined by the actually observed accounting policy choice frequency in
each individual country by year by financial statement item sub-sample. One
important advantage of this procedure is its ability to generate sample estimates which
reflect the particular circumstances of the originally observed sub-sample.
The alternative application of an unbiased random number generator would result
in the generation of sample estimates with an entirely random distribution which
would not reflect the particular circumstances within any of the analysed sub-samples.
The resulting sample estimates are then used to compute 1,000 Split C-index
estimates for every year by financial statement item sub-sample. The populations of all
Split C-index component estimates for each year by financial statement item
interaction are then tested for their distributions and 95 per cent confidence intervals
(CIs) are established on a sub-sample by sub-sample basis. The observed Split C-index
component values of each sub-sample are subsequently compared to the 95 per cent
CIs of their respective population estimates. This information is then used to determine
whether the sampled companies provide a good representation of their respective
estimated populations; and whether any observed index value changes between the
two years under observation are significant. The companies within an analysed
sub-sample provide a good representation of their estimated population if their
observed index value falls inside a 95 per cent CI of their respective population
estimate. The significance of a sub-samples index-value changes between 2003 and

2006 may then be assessed if this good representation arises during both years under
analysis. At this point, our procedure deviates from that of Canibano and Mora (2000).
The significance assessment utilised here follows the argument that a matched-pair
accounting policy choice assessment leads to a dependence of the choices made at
Time 2 on the those made at Time 1. In other words, unless intrinsic and/or extrinsic
changes have occurred between the first and second measurement, we would expect to
find similar harmony index values and estimated population CIs at both points in time.
A sub-samples initially observed (measurement one) harmony index value would thus
fall within the 95 per cent CI of its respective population estimates at both measurement
times, depicting a non-significant change. A situation where a sub-samples initial
harmony index value (measurement one) falls inside the 95 per cent CI of its respective
population estimate at Time 1, but outside the respective CI at Time 2 consequently
indicates the existence of significant changes between both measurement times.
3.3.4 Reliability and sensitivity issues. The application of the Split C-index in this
study also introduces some reliability and sensitivity issues. Reliability problems arise
when a company fails to disclose an applicable financial statement item (Table II,
option H), provides insufficient information to determine the utilised accounting
treatment (Table II, option H), or when a financial statement item is not applicable
(Table II, option I) (van der Tas, 1988; Aisbitt, 2001). Although options H and I are
incorporated in the list of DT and GW treatment alternatives provided in Table II,
careful consideration is required to ensure their appropriate treatment in our Split
C-index assessment.
Companies to which an item is not applicable (option I) are regarded as being
comparable to all other companies (Archer et al., 1996; Morris and Parker, 1998; Aisbitt,
2001). These companies are therefore included in the numerators as well as the
denominators of all three Split C-index components (Archer et al., 1995). However, a
company may also choose not to disclose an applicable item or provide insufficient
information to determine an items actual accounting treatment (option H). All
companies that do not provide information about DT are always included in
option H because it is virtually impossible to determine the actual applicability
of the item with sufficient certainty without having access to internal company
information. Companies that do not provide information about GW are only included in
option I if their financial reports as a whole do not provide any indication of
investments in other entities. Companies whose financial reports indicate the existence
of investments in other entities are consequently included in option H. Companies
included in option H are regarded as being incomparable to all other companies
regardless of whether or not the other companies disclose the item (Archer et al., 1995),
and are excluded from the numerators of all three Split C-index components whilst
remaining included in their respective denominators (Archer et al., 1995; Morris and
Parker, 1998).
Sensitivity issues arise because the utilised Split C-index is based on categorical
treatment alternatives. Whilst all cases within each treatment option are similar, they
may differ in regard to some detailed aspects. For example, companies using straight
line amortisation over a maximum of 20 years as well as regular impairment tests to
value GW (Table II, option B) may differ in respect of their actual amortisation time
frames. However, it is necessary to limit the number of available accounting treatment
alternatives because a large increase in the number of treatment options would lead
to an artificial reduction of the computed index values (Aisbitt, 2001). The applied
bundling of similar treatments into mutually exclusive treatment categories provides

Mandatory IFRS
adoption

105

ARA
20,2

106

an acceptable solution to this problem (van der Tas, 1988). However, one unavoidable
limitation of this approach is that cases within an individual category may not be
entirely identical.
4. Empirical results and discussion of major findings
Initially conducted descriptive tests reveal a significant (po0.000) relationship
between the analysed companies size, with market capitalisation at balance sheet (BS)
date in AUS dollar used as size proxy, and their country of incorporation. The HK
companies included in our sample exhibit the largest mean size in both years under
analysis, followed those domiciled in the UK, and AUS (Table V). We also find a
significant (p 0.013) across-country increase in the analysed companies market
capitalisation at BS date between our pre- and post-IFRS adoption measurement.
An analysis of the relationship between the selected companies industry
classifications (Table V) and their respective countries of origin, on the other hand,
only reveals a non-significant relationship.
A subsequent examination of the pre/post-IFRS industry classifications in Table V
reveals the existence of a limited number of cases (six out of 54) with dissimilar pre/
post-IFRS industry classifications. One example of this is the HK company China
Everbright International Ltd whose industry classification in 2003 is manufacturing
(M), whilst its industry classification in 2006 is real estate (RE). These changes occur
because this study applies the industry classification procedure of Parker and Morris
(2001), whereby companies are assigned industry classifications based on a companys
main source of revenue.
4.1 Accounting policy choice changes between 2003 and 2006
The analysed companies DT accounting policy choices in 2003 (Table VI) show a
distinct preference for three treatment options, B (31.5 per cent), C (29.6 per cent),
and H (24.1 per cent). In 2006 on the other hand, all DT accounting policy categories
except B (37.0 per cent) and C (59.3 per cent) are only applied infrequently.
The observed GW accounting policy choices (Table VI) also exhibit changes between
both periods with most companies applying accounting policy B (72.2 per cent)
in 2003, whilst accounting policy A (81.5 per cent) is the most favoured option
in 2006.
The significance of these accounting policy choice changes between both years
under analysis is then assessed, using the McNemar test of correlated proportions
with Bowker extension (Bowker, 1948; Marascuilo and Serlin, 1988). Whilst
significance assessments are carried out for all country by financial statement item
and across-country by financial statement item sub-samples, different levels of
persuasiveness are associated with the significance assessments of both sub-sample
groups. These differences arise because the McNemar test of correlated
proportions with Bowker extension is a large sample test (Bowker, 1948), and the
comparatively small sample size of our individual country sub-samples (N 18) is
likely to generate somewhat inaccurate results. The interpretation of all country-level
assessments in Tables VII and VIII therefore requires caution. However, this limitation
does not extent to our across-country sub-samples as these are based on a larger
sample size of N 54.
4.1.1 DT accounting policy choice changes. The results of the McNemar test of
correlated proportion with Bowker extension in regard to DT are summarised in
Table VII. The computation of the Bowker test statistics shown in column 3 is

Treatment Treatment
Industry
Market capitalisation
of DTa
of GWa classificationb
(million AUS$)
2003 2006 2003 2006 2003 2006
2003
2006
Australia
Lighting Corporation Ltd
Bremer Park Ltd
Harvest Road Ltd
MXL Ltd
XCEED Biotechnology Ltd
BSA Ltd
Embelton Ltd
Credit Corp Group Ltd
Agenix Ltd
Abacus Group Holdings Ltd
Amalgamated Holdings Ltd
Ausmelt Ltd
Antisense Therapeutics Ltd
IT&E Ltd
RCR Tomlinson Ltd
Jackgreen Ltd
e-pay Asia Ltd
MedTech Global Ltd
Mean company size AUS
Hong Kong
China Strategic Holdings Ltd
Vitasoy International Holdings Ltd
Great China Holding Ltd
eCyberChina Holdings Ltd
Television Broadcasts Ltd
Kong Sun Holdings Ltd
Guangzhou Investment Company Ltd
Hung Hing Printing Group Ltd
HAECO Ltd
China Seven Star Shopping Ltd
Beijing Development (HK) Ltd
China Everbright International Ltd
Minmetals Resources Ltd
Raymond Industrial Ltd
Guangnan (Holdings) Ltd
Hysan Development Company Ltd
i-Cable Communications Ltd
Crocodile Garments Ltd
Mean company size HK
United Kingdom
Microgen plc
Air Partner plc
Speedy Hire plc
SCi Entertainment Group plc
The Jersey Electric Company Ltd
Filtronic plc
Nord Anglia Education plc

B
B
F
B
D
B
F
B
D
D
H
D
B
B
B
D
B
B

C
C
C
B
C
B
B
B
C
C
C
C
B
C
B
B
B
H

B
B
F
B
B
B
B
B
B
B
B
H
I
B
B
B
B
B

A
A
H
A
A
A
H
A
A
A
A
H
I
A
A
A
A
A

T
M
S
S
M
S
M
S
M
RE
S
S
S
S
M
RE
TCU
S

T
M
S
S
M
S
M
S
M
RE
S
S
S
S
M
TCU
S
S

65
16
22
59
13
42
7
79
103
289
421
16
47
32
18
8
114
53
79

69
5
11
30
15
117
10
529
62
1,056
820
39
20
29
247
30
104
13
178

C
C
C
C
C
C
C
B
C
C
C
C
B
C
C
C
C
C

B
B
C
C
C
C
C
B
C
C
C
C
C
C
C
C
C
C

B
H
H
H
B
B
B
F
F
F
B
B
F
B
H
F
B
B

A
H
A
A
A
A
A
A
A
A
A
A
A
A
A
H
A
H

M
M
T
RE
TCU
RE
RE
M
S
RE
S
M
M
M
M
RE
TCU
M

M
M
T
RE
TCU
RE
RE
M
S
T
T
RE
T
M
M
RE
TCU
M

25
225
16
5
2,641
22
800
461
1,172
19
76
131
76
96
1,357
1,937
612
30
539

27
507
23
4
3,282
13
2,360
392
2,824
111
116
651
643
94
193
3,411
583
43
849

H
H
A
H
B
B
H

B
B
C
G
B
C
B

B
B
B
B
B
B
B

A
A
A
A
H
A
A

S
TCU
S
S
TCU
M
S

S
TCU
S
S
TCU
M
S

76
913
427
83
116
576
150

135
272
1,285
963
148
230
114

(continued)

Mandatory IFRS
adoption

107

Table V.
Descriptive information

ARA
20,2

108

Table V.

Treatment Treatment
Industry
Market capitalisation
of DTa
of GWa classificationb
(million AUS$)
2003 2006 2003 2006 2003 2006
2003
2006
Gyrus Group plc
Devro plc
Goldshield Group plc
WS Atkins plc
Uniq plc
Greggs plc
Robert Walters plc
CSL Holdings plc
TDG plc
Coral Products plc
Low & Bonar plc
Mean company size UK

H
H
B
H
H
H
B
B
H
H
H

B
H
B
B
B
H
B
B
B
I
B

A
A
A
A
A
H
A
A
A
I
A

M
M
T
S
M
T
S
RE
TCU
M
M

M
M
T
S
M
T
S
RE
TCU
M
M

328
345
206
1,367
424
1,071
281
582
355
25
291
423

1,367
491
153
2,379
641
1,199
607
1,437
530
6
406
687

Notes: aDT and GW treatment indicators are based on the treatment options described in
Table II; bindustry classifications reflect the five industry groups in this study, where M is
manufacturing; TCU is transportation, communication and utilities; T is trade; RE is real estate;
and S is services

Country

Accounting choices DT 2003

AUS
10
HK
2
UK
1
5
Total
1
17
Accounting choices DT 2006
AUS
8
HK
3
UK
9
Total
0
20
Accounting choices GW 2003
AUS
15
HK
9
UK
15
Total
0
39

Table VI.
DT and GW accounting
policy choice frequencies

C
C
B
B
C
B
C
C
B
B
C

Accounting choices GW 2006

AUS
14
HK
15
UK
15
Total
44
0

16
16
9
15
8
32

1
0

1
1

0
1

1
4
2
7

3
3
2
8

1
5
0

12
13

1
2
1
1
2

described in Section 3.3.1. The critical w2 values provided in column 4 are taken from
table A-6 of Kvanli et al. (1986) and reflect degrees of freedom of 1 (HK), 10 (AUS and
the UK), and 21 (across countries) as well as a confidence level of 95 per cent. The
relevant degrees of freedom are calculated individually for every sub-sample through

m(m1)/2 (Bowker, 1948), where m is the number of DT accounting treatment

categories used by the companies in each sub-sample across both years under
observation (see Table VI). However, treatment categories used in both years under
observation are only counted once to avoid the artificial inflation of the calculated
number of degrees of freedom.
Accounting policy choice differences within and across the selected countries are
significant (across-country sub-sample), or suggestive (within-country sub-sample), if
their individual Bowker test statistics (Table VII, column 3) are equal to or larger than
their critical w2 values in column 4. However, none of the analysed DT sub-samples
fulfil this requirement. Consequently, we accept our first hypothesis regarding DT
from an across-country perspective, and conclude that the DT accounting policy
choices across AUS, HK, and the UK before and after their IFRS adoption are not
significantly different. The interpretation of our individual country sub-samples is less
straightforward because the size of these samples is insufficient to draw a strong
conclusion. However, the substantial amount of difference between the Bowker test
statistics (column 3) and critical w2 values (column 4) of our within-country subsamples, in combination with the non-significant result of our across-country
assessment provide a strong indication that these observed country-level differences
are likely to be non-significant. An in-depth review of the selected countries DT
accounting regulation changes is subsequently used to corroborate these observations
and provide possible explanations.
A close examination of the observed DT accounting policy choice frequencies
(Table VI) reveals their high level of correspondence with certain aspects of the change
of accounting requirements in AUS, HK, and the UK. The large similarity of the preand post-IFRS DT accounting requirements in HK, for example, is reflected in the

Country

Bowker test statistic

AUS
HK
UK
Across-country

18
18
18
54

12.00
0.33
16.00
21.28

Bowker test statistic

AUS
HK
UK
Across-country

18
18
18
54

16.00
17.00*
16.00*
49.00*

109

Critical w2a
18.31
3.84
18.31
32.67

(df 10)
(df 1)
(df 10)
(df 21)

Notes: aThe critical w2 values are taken from table A-6 of Kvanli et al. (1986) and are based on the
respective sub-samples individual degrees of freedom and a confidence level of 95 per cent

Country

Mandatory IFRS
adoption

Table VII.
Results of McNemar
test with Bowker
extension (DT)

Critical w2a
18.31
12.59
12.59
18.31

(df 10)
(df 6)
(df 6)
(df 10)

Notes: aThe critical w2 values are taken from table A-6 of Kvanli et al. (1986) and are based on the
respective sub-samples individual degrees of freedom and a confidence level of 95 per cent;
*significant at a 95 per cent confidence level

Table VIII.
Results of McNemar
test with Bowker
extension (GW)

ARA
20,2

110

concentration of actual accounting policy choices on treatment options B and C, in 2003

as well as 2006. The larger pre- and post-IFRS adoption differences of DT accounting
requirements in AUS and the UK, on the other hand, are reflected in the increasing
application of accounting treatment C, and the coinciding decreasing application of
accounting treatments D, F, and H. Both examples provide some indication that the
observed accounting policy choice differences are influenced by changes in the
underlying accounting standards. The McNemar test of correlated proportions with
Bowker extension also corroborates these observations although no precise countrylevel significance assessment is provided. However, the values of the Bowker test static
(Table VII, column 3) provide some indication of the extent of change within each
sub-sample between 2003 and 2006. The lowest Bowker test statistic, indicating a
small amount of change, is calculated for HK (0.33), whilst the values for AUS (12.00)
and the UK (16.00) are comparatively larger, indicating a greater extent of change.
The high level of correlation between the pre- and post-IFRS DT accounting
regulations in HK may thus be seen as one possible explanation for the high likelihood
that this particular sub-samples DT accounting policy choice changes are
non-significant. The large importance of DT treatment option B in AUS and the UK
both before and after their IFRS adoption also points to a possible explanation why
the DT accounting policy choice changes within these countries are likely to be nonsignificant. It appears possible that at least some companies may have selected
treatment option B in or before 2003 as part of an early IFRS adoption strategy. In other
words, the pre- and post-IFRS accounting regulations in AUS and UK enabled
companies to apply a DT accounting alternative in 2003 whose legality extended
beyond the IFRS adoption date. However, the alternative explanation that some
companies may have made the concise choice to apply treatment option B in 2003 to
gain an economic advantage unrelated to the IFRS adoption and, as a result, have not
had an incentive to switch to another DT accounting treatment by 2006 appears to be
similarly valid. Such a decision to apply DT treatment option B may also have been
made prior to 2003 and carried forward into our sampling period. In any case, both
scenarios point towards the continued availability of treatment option B as a likely
explanation for the probably non-significant DT accounting policy changes within
AUS and the UK. However, it must also be pointed out that the comparatively large
amount of change within the UK sub-sample is probably strongly influenced by the
large number of companies in category H in 2003. These companies fail to provide
sufficient information to determine their actual DT accounting policy choices in 2003,
whilst none of the analysed UK companies are included in category H in 2006. If these
companies would have provided sufficient information to determine their actual DT
accounting treatments in 2003, the extent of the observed DT accounting policy choice
change in the UK may have been different. However, the practical implications of these
improved disclosure practices are considerable because an increase in the number of
companies which provide adequate accounting policy disclosures improves the
comparability and usefulness of their financial reporting information.
4.1.2 GW accounting policy choice changes. The McNemar test of correlated
proportions with Bowker extension reveals a significant change of the GW accounting
policy choices across all analysed countries between 2003 and 2006 (Table VIII).
Tentative country-level results suggest the existence of a significant amount of change
within HK and the UK as well as a non-significant amount of change within AUS
(Table VIII). However, the comparatively small sample size within each analysed
country (N 18) requires a cautious interpretation of these within-country results.

The significance assessment of accounting policy choice changes for GW relies on

the process outlined above and compares an individual sub-samples Bowker test
statistic (Table VIII, column 3) with its respective critical w2 value (Table VIII,
column 4). Accounting policy choice changes across the analysed countries are
regarded as significant because the Bowker test statistic of this sub-sample exceed its
respective critical w2 value. We therefore accept our first hypothesis for GW from an
across-country perspective. The substantial amount of difference between the Bowker
test statistics and the critical w2 values of each within-country sub-sample also
provides some assurance that our analyses have resulted in an adequate country-level
significance assessment. However, given the caution required in the interpretation of
these results, we are unable to provide a definite acceptance or rejection of hypothesis
one for our GW within-country sub-samples.
A close comparison of the GW accounting policy choices in 2003 (Table VI) with the
underlying pre-IFRS GW accounting regulations reveals that although the number of
allowed GW treatment options in 2003 differs substantially between the analysed
countries, the accounting policy choices within each jurisdiction are quite similar. GW
accounting requirements in 2003 are the least flexible in AUS, followed by those in HK,
and lastly those in the UK. However, the accounting policy choices in the two countries
with the most (UK) and least (AUS) flexible accounting requirements in 2003 are
remarkably similar (Table VI). This observation lends support to our intuition that
companies may ignore some of the flexibility granted by accounting regulations in
order to avoid the application of accounting treatment alternatives which users may
perceive as being non-normal. The similarity of the accounting policy choices between
the UK and AUS companies in 2003 is also aligned with the mimetic isomorphism
concept discussed by DiMaggio and Powell (1983). Table VI also reveals a considerable
overall shift from treatment option B (useful life of GW not exceeding 20 years; straight
line amortisation; impairment tested) in 2003, to treatment option A (useful life of GW
indefinite; no amortisation; impairment tested as least annually) in 2006. The
significance of these changes is subsequently confirmed from an across countries
perspective, but no clear indication can be provided for our individual country subsamples although their accounting policy changes are substantial (Table VIII).
However, one likely explanation for the considerable changes of accounting practice
within AUS and HK is their extensive pre/post-IFRS GW accounting policy difference.
In fact, the IFRS adoption in AUS and HK introduced treatment option A whilst
concurrently abolishing all previously allowed treatment options. Preparers are
therefore unlikely to attempt the deferral or bringing forward of the GW accounting
policy changes required by the mandatory IFRS adoption in these countries. The more
flexible pre-IFRS accounting regulations in the UK, on the other hand, allow a
treatment of GW similar to that prescribed after the countrys IFRS adoption. However,
the UKs benchmark treatment for GW in 2003 requires the amortisation of GW over its
useful life. Interestingly, all UK companies in our sample apply some form of
amortisation (Table VI), whilst none exploit the allowed treatment alternative as an
early adoption mechanism. One likely reason for this observation, which differs from
that made in regard to accounting for DT in AUS and HK, is that companies wanting to
adopt this allowed treatment alternative in 2003 were obliged to demonstrate the
indefinite lifespan of GW. The required level of assurance may thus have rendered this
option more theoretical than practical. In addition, preparers in the UK may also have
avoided the adoption of GW treatment option A in 2003 because this option might
have been perceived as being non-normal in an international context. Again, some

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companies may have avoided the application of treatment option A, and adopted
another treatment option, because option A was associated with some financial and/or
non-financial disadvantage. Whilst these arguments may explain the outlined
behaviour of UK companies in 2003, the identification of a specific cause for this
behaviour lies beyond the scope of this study.

112

4.2 Material harmonisation of accounting for DT and GW

The assessment of DT and GW harmony in 2003 and 2006 as well as its changes
between both years under analysis (harmonisation) relies on the Split C-index. The
significance of all index value changes between both points in time is evaluated using
a bootstrapping procedure.
Column 2 of Table IX displays the DT and GW Split C-index component values
for both years under analysis, whilst columns 3-7 describe the distribution of the
sub-samples respective Split C-index bootstrapping population estimates. The last
column of Table IX indicates whether a sub-samples observed index component value
falls within our outside a 95 per cent CI of its respective population estimate. Such an
evaluation is necessary because the subsequently conducted significance assessment
requires a sub-samples pre/post-IFRS index values to fall within their respective
95 per cent CIs during both years under observation. This requirement is only fulfilled

95 per cent
CI
Index

Table IX.
Results of Split C-index
and bootstrapping
procedure

Deferred tax 2003

Within-country
component
Between-country
component
Overall index
Deferred tax 2006
Within-country
component
Between-country
component
Overall index
Goodwill 2003
Within-country
component
Between-country
component
Overall index
Goodwill 2006
Within-country
component
Between-country
component
Overall index

Sample
index
Standard
value Mean
error

Lower
bound

Upper
bound

Sub-sample within
CI

0.407

0.427

0.002

0.424

0.431

1,000

No

0.082
0.187

0.082
0.193

0.001
0.001

0.080
0.191

0.084
0.195

1,000
1,000

Yes
No

0.514

0.542

0.002

0.538

0.545

1,000

No

0.463
0.479

0.462
0.488

0.002
0.001

0.460
0.485

0.465
0.490

1,000
1,000

Yes
No

0.625

0.649

0.002

0.645

0.654

1,000

No

0.590
0.601

0.585
0.606

0.003
0.002

0.580
0.601

0.590
0.610

1,000
1,000

Yes
Yes

0.719

0.742

0.003

0.737

0.748

1,000

No

0.739
0.732

0.741
0.741

0.003
0.003

0.736
0.736

0.746
0.746

1,000
1,000

Yes
No

by the between-country components of both items, limiting the significance

assessment of the observed index value changes between 2003 and 2006 to the
between-country index components of the two analysed items. One possible
explanation for the inability of the remaining two Split C-index components to
provide the required good representation of their respective population estimates
(observed index values fall within 95 per cent CI) is the relative small size of the
analysed sample. Hence, larger sample sizes may be required to overcome this small
sample bias and utilise the full potential of this analysis technique.
Harmony index value changes between our pre- and post-IFRS adoption
measurements are significant if a sub-samples 2003 sample index value falls inside the
95 per cent CI of its respective population estimate in 2003 and outside the 95 per cent CI
of its respective population estimate in 2006. This requirement is fulfilled by the betweencountry components of both DT and GW (Table IX). As a result, the between-country
harmonisation of both analysed items is regarded as significant.
4.2.1 Within-country harmonisation. The within-country index component for DT
increased by 26.3 per cent between 2003 and 2006, whilst its GW equivalent increased by
15.0 per cent. These within-country harmony index changes as well as all subsequently
discussed index value changes between 2003 and 2006 are computed as ([index value
2006][index value 2003])/[index value 2003]. However, an assessment of the significance
of these index value changes is not possible because none of respective sub-samples
provide the required good representation of their respective estimated populations
(Table IX). As a result, we are unable to accept or reject our second hypothesis for DT or
GW from a within-country perspective. Nevertheless, some possible explanations for the
observed within-country harmony index increases may be considered.
The increase of DT within-country harmony, which indicates the increased
convergence of accounting practice within the analysed countries, is likely to be
strongly influenced by the considerable number of atypical pre-IFRS accounting policy
choices in the UK in 2003. In fact, 12 UK companies failed to provide sufficient
information to determine their actual DT accounting policy choices in 2003, whilst all
UK companies made sufficient disclosures in 2006 (Table VI). The improved disclosure
practices within the UK sub-sample have two important implications. First, they
provide at least a partial explanation for the found increases of within-country
DT harmony. In addition, it is demonstrated that high levels of harmony require
high-quality disclosures. As a result, this paper takes the view that an improved
disclosure of accounting policy choices by itself constitutes harmonisation because it
increases the comparability of financial reporting information.
The GW within-country Split C-index results of Table IX demonstrate that although
comparatively little harmonisation occurred between 2003 and 2006, high levels of withincountry harmony exist at both points in time. Using the findings of our prior GW
accounting policy choice assessment (Section 4.1.2) as corroborating evidence, we are able
to conclude that although substantial within-country pre/post-IFRS GW accounting policy
choice differences and accounting regulation differences exist, the overall improvement of
within-country convergence of accounting for GW is likely to be small.
4.2.2 Between-country harmonisation. Additional harmony index increases between
2003 and 2006 are found in the between-country components of accounting for DT
(464.4 per cent) and GW (25.3 per cent). The subsequent significance assessment of
their respective index value changes between both analysed years reveals a significant
between-country harmonisation for DT as well as GW. As a result, we are able to confirm
our second hypothesis from a between-country perspective in regard to GW and DT.

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114

The low level of DT between-country harmony in 2003 (Table IX) as well as its
significant increase between 2003 and 2006 are probably attributable to the large
number of UK companies which failed to disclose the treatment of their DT tax items in
2003, but provide this information in 2006 (Table VI). This atypical behaviour of UK
companies also explains why our DT between-country harmonisation results do not
meet our outlined expectations. In other words, the observed between-country
harmonisation may have been different (i.e. non-significant) if all analysed UK
companies would have provided sufficient information to determine their DT
accounting policy choices in 2003. This study takes the view that although the results
of this analysis may not be driven by the convergence of accounting practice but reflect
the changes in UK disclosure practices, a significant level of harmonisation exist
because the improvement of accounting policy choice disclosure in itself furthers the
comparability of financial reporting information.
The demonstrated significant GW between-country harmonisation confirms our
second hypothesis from a between-country GW perspective and indicates the
probable existence of a connection with our GW accounting policy choice analysis. In
fact, the simultaneous presence of a significant between-country GW harmonisation,
significant GW accounting policy choice changes across countries (Table VIII), and
substantial changes within the underlying GW accounting requirements point towards
the analysed countries IFRS adoption as a probable key harmonisation driver.
4.2.3 Overall harmonisation. The increases of the overall harmony index for DT and
GW amount to 156.1 and 21.8 per cent, respectively. A significance assessment of these
changes is not possible because, apart from the GW sub-sample in 2003, none of
the sub-samples harmony index values fall inside a 95 per cent CI of their respective
population estimates (Table IX). As a result, we are unable to accept or reject our
second hypothesis from an overall perspective. However, some possible explanations
for the observed index value changes are worth mentioning.
The fairly large increase of the overall harmony index for DT (156.1 per cent) is likely
to be driven by the previously discussed atypical disclosure compliance in the UK in 2003.
The low level of disclosure provided in the pre-IFRS UK sub-sample, as well as their
improvement between the years under analysis, must therefore be seen as an important
finding of this study. Hence, even if the observed index value changes are less reflective of
increased convergence than improved accounting policy choice disclosures, the existence
of any harmony index value increases indicates the existence of some harmonisation.
The comparatively smaller increase (21.8 per cent) of the overall Split C-index
component for GW is likely to be driven by the analysed countries IFRS adoption. Some
evidence to this effect is provided by the significant between-country GW index increase
between 2003 and 2006, the results of the McNemar test of correlated proportions with
Bowker extension (Table VIII), and the substantial changes in the countries underlying
GW accounting requirements. However, although the persuasiveness of this evidence is
substantial, we do not claim to expose any cause and effect relationship.
5. Summary and implications for future research
This study evaluates the level of material harmony of the DT and GW accounting
treatments of 54 listed companies incorporated in AUS, HK, and the UK, both before
and after the IFRS adoption in these countries, and investigates whether the IFRS
adoption event coincides with a significant harmonisation of accounting practice for
the selected items. In addition, changes between the selected companies pre/post-IFRS
accounting policy choices for DT and GW are determined, and assessed for their

significance. These results are then used to connect any observed harmonisation with
the analysed countries IFRS adoption.
An analysis approach new to the IAH literature, the McNemar test of correlated
proportions with Bowker extension, is used to assess the significance of accounting policy
choice changes between both years under analysis. Whilst this analysis is conducted for
all within-country and across-country sub-samples, the conception of the applied test
statistic as a large sample test only enables us to draw strong conclusions from an acrosscountry perspective. Overall, non-significant DT accounting policy changes are found
from an across-country perspective, whilst the existence of a significant amount of acrosscountry accounting policy changes is revealed for GW. The application of the McNemar
test of correlated proportions with Bowker extension provides an important contribution
to the literature, in itself, because the developed test statistic improves our ability to assess
the significance of accounting policy changes over time.
Within-country, between-country, and overall DT and GW harmony both
before and after the IFRS adoption in AUS, HK, and the UK is assessed using the
Split C-index. This analysis demonstrates that the selected countries IFRS
adoption coincides with an increase of all harmony index component values
for DT and GW. In addition, some indications that the observed GW index value
increases are likely to be driven by the IFRS adoption in AUS, HK, and the UK
are provided. As a result, it is plausible that the IFRS adoption has most likely
improved the harmony of DT and GW accounting practices in AU, HK, and the
UK as well as between these countries. The significance of these index value
changes between 2003 and 2006 is assessed using an amended version of the
bootstrapping procedure applied by Canibano and Mora (2000). The creation and
application of this improved assessment approach, in itself, also provides a substantial
contribution to the literature because it enables a more accurate assessment of the
significance of harmony changes over time. However, data limitations within our
sample limit our significance assessments to the between-country harmony index
value changes of both items. Here, we find a significant increase in the betweencountry harmony levels of DT and GW, leading us to conclude that the IFRS
adoption in AUS, HK, and the UK coincides with a significant between-country
accounting practice harmonisation of both items.
The findings of this study are subject to certain limitations. For one, the distinction
between current and future tax rates in the table of DT treatment alternatives (Table II)
may understate the computed DT harmony index levels. However, we believe that
the inclusion of such a methodologically important distinction outweighs its possible
disadvantages, especially as neither the existence nor the significance of harmonisation
is materially affected if harmony in both years is similarly understated. Furthermore, the
use of a random number generator to select the sample firms from the principal stock
exchange in each analysed country, the small number of observations as well as our
strict sampling procedure at company level limit our ability to generalise the findings of
this study. It is also worth noting that the analysis of 18 randomly selected companies
per country does not enable us to draw inferences about the general behaviour of
companies within these countries. The results presented for DT and GW are also limited
to the two analysed items and cannot be extended to any other items within the analysed
financial reports, or the financial reports as a whole.
This study makes important contributions to the literature. It provides empirical
evidence of the influence of IFRSs adoption in three countries on two financial
reporting items (DT and GW). Specifically, this study sheds light on the question

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whether the IFRS adoption in AUS, HK, and the UK has coincided with a significant
harmonisation of DT and GW accounting practices. A significant increase in the DT
and GW harmony levels between the analysed countries is exposed, and a probable
link connecting the between-country harmonisation of accounting for GW and the
IFRS adoption in AUS, HK, and the UK is identified. However, such a strong conclusion
cannot be drawn for any of the remaining DT or GW sub-samples. Another important
finding of this study is the large number of UK companies with insufficient DT
accounting policy disclosures in 2003, and the subsequent decline of this number in our
post-IFRS adoption measurement. This change in the disclosure behaviour of UK
companies furthers harmonisation because financial reporting information
becomes more comparable, both within the UK, and across all analysed countries.
The change of DT and GW accounting policy choices during the IFRS adoption in the
three analysed countries, as well as the coinciding harmonisation of accounting
practice, may be of interest to accounting standard setters and users of financial
reporting information. Both groups are likely to be interested in our results because
the increased comparability of financial reporting information has been repeatedly cited
as an important advantage of the adoption of IFRS (e.g. see Biddle and Saudagaran,
1989; Iatridis, 2010; Jeanjean and Stolowy, 2008). Accounting standard setters are thus
provided some assurance that the application of IFRS in the three analysed countries has
indeed led to a harmonisation of accounting practice. Users may be interested in our
results because they imply that the IFRS adoption in AU, HK, and the UK has most likely
improved the comparability of information for two important financial reporting items
(DT and GW). Whilst this study is unable to determine whether or not these
comparability improvements extent to other financial reporting items, it provides an
indication that users are likely to benefits from the adoption of IFRSs.
This study also makes important methodological contributions to the IAH
literature. We propose and apply a variation of the bootstrapping-based significance
test utilised by Canibano and Mora (2000) which enables an assessment of the
significance of index value changes between two dependent harmony index
observations. This has important implication for future research as it improves the
accuracy of the significance assessment technique of Canibano and Mora (2000)
substantially. We then introduce the McNemar test of correlated proportions with
Bowker extension. This improved test statistic provides possible solutions for
shortcomings in prior assessments of the significance of longitudinal accounting
policy choice changes. These methodological contributions may therefore be able to
assist future index-based IAH research.
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Corresponding author
Leopold Bayerlein can be contacted at: lbayerl2@une.edu.au

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