Value Relevance of Environmental Provisions

Value Relevance of Environmental Provisions
Pre- and Post-IFRS*

MATTHEW WEGENER, University of New Brunswick, Saint John

REAL LABELLE, HEC Montr
eal
Received on November 22, 2015; editorial decision completed on October 27, 2016
ABSTRACT
The purpose of this paper is to compare the value relevance of environmental pro-
visions as recorded under Canadian/U.S. GAAP and IFRS accounting frameworks
with consideration of the impact of voluntarily issuing stand-alone sustainability
reports. The value relevance of environmental provisions is tested using a modified
Ohlson (1995) model. We exploit IFRS reconciliations as a quasi-experimental set-
ting to conduct this comparison. Results indicate that environmental provisions
recorded under either framework only act as liabilities for oil and gas firms that
release stand-alone sustainability reports. For other firms in the oil and gas indus-
try, and the mining industry, the liability nature of these provisions appears to be
discounted by the market. Furthermore, for firms in the oil and gas industry that
do not have stand-alone CSR reports, provisions appear to be interpreted by the
market as a costly signal about future growth. Instead of downwardly affecting
market values, this information is associated with higher market values. In terms of
the transition to IFRS, we find that, while the IFRS provisions are significantly
higher than under former GAAP, they do not improve value relevance for inves-
tors. Accounting standard setters should consider examining the changes in the cur-
rent standards from the original Canadian environmental provision reporting
requirements under Capital Assets section 3060.39, as it was rightfully shown to be
a relevant proxy for unbooked liabilities (Li and McConomy, 1999; Bewley, 2005)
rather than earnings expectancy. The study builds upon prior research to examine
the value of accounting standards that have gone through significant changes.
Keywords Asset retirement obligations; Environmental provisions; Environmen-
tal disclosure; IFRS transition
* Accepted by Pascale Lapointe-Antunes and Claude Laurin. This study is based on the second essay of
Matthew Wegener’s doctoral dissertation (Environmental and social reporting: For shareholders and/
or other relevant stakeholders) with Real Labelle as his supervisor. We acknowledge Michel Magnan,
Sophie Tessier, and Claude Francoeur for the advice, help, feedback, and support they offered while
on the doctoral committee. We also thank Anne Jeny-Cazavan for the comments she offered as the
external examiner at the doctoral dissertation defense. We are grateful for the beneficial feedback
received from Michael Maier, Tom Schneider, and the other participants in the CAAA 2014 Annual
Conference as well as from Ramzi Benkraiem, Magnus Blomkvist, Amelie Charles, Emilios Galariotis,
Carine Girard, and Giacomo Nocera of Audencia School of Management. This project has been real-
ized thanks to the financial support of the Institute for Governance of Private and Public Organiza-
tions and the Stephen A. Jarislowsky Chair in Governance. The usual caveat applies.
AP Vol. 16 No. 3 — PC vol. 16, no 3 (2017) pages 139–168 © CAAA/ACPC

doi:10.1111/1911-3838.12143
140 ACCOUNTING PERSPECTIVES / PERSPECTIVES COMPTABLES

PERTINENCE AUX FINS DE L’EVALUATION DES PROVISIONS
LES IFRS
AU TITRE DE L’ENVIRONNEMENT, AVANT ET APRES

RESUME
Les auteurs se donnent pour but de comparer la pertinence aux fins de l’evaluation
des provisions au titre de l’environnement comptabilisees conformement aux

referentiels des PCGR du Canada ou des Etats-Unis et des IFRS, compte tenu de
l’incidence de la publication facultative de rapports distincts sur le developpement
durable. La pertinence aux fins de l’evaluation des provisions au titre de l’environ-
nement est evaluee a l’aide d’une variante du modele d’Ohlson (1995). Les auteurs
utilisent les rapprochements IFRS comme cadre quasi-experimental pour realiser
cette comparaison. Les resultats revelent que les provisions au titre de l’environne-
ment comptabilisees selon l’un ou l’autre des referentiels ne sont des elements de
passif que pour les societes petrolieres et gazieres qui publient des rapports distincts
sur le developpement durable. Chez les autres entreprises du secteur petrolier et
gazier, et les entreprises du secteur minier, la qualite de passif de ces provisions
semble être escomptee par le marche. En outre, dans le cas des societes petrolieres
et gazieres qui ne publient pas de rapport distinct sur la responsabilite sociale de
l’entreprise, ces provisions semblent être interpretees par le marche comme un sig-
nal onereux de la croissance future. Plut^ ot que d’exercer des pressions a la baisse
sur les valeurs de marche, cette information est associee a des valeurs de marche
superieures. Pour ce qui est du passage aux IFRS, les auteurs constatent que, même
si les provisions conformes aux IFRS sont sensiblement plus elevees que les provi-
sions conformes aux anciens PCGR, elles n’ameliorent pas la pertinence aux fins de
l’evaluation pour les investisseurs. Les normalisateurs comptables devraient songer

a se pencher sur les modifications apportees par les normes actuelles aux exigences
canadiennes initiales du paragraphe 39 du chapitre 3060, Immobilisations, en ce qui
a trait a l’information relative aux provisions au titre de l’environnement, puisqu’il
a ete demontre
a juste titre que cette information etait un indicateur pertinent de
passifs non comptabilises (Bewley, 2005 ; Li et McConomy, 1999) plut^ ot que des
attentes de resultats. Les auteurs s’appuient sur les recherches anterieures pour exa-
miner la valeur de normes comptables qui ont subi d’importantes modifications.
Mots clés : Informations a fournir sur l’environnement, Obligations liees a la
mise hors service d’immobilisations, Passage aux IFRS, Provisions
au titre de l’environnement
INTRODUCTION
An important accounting and corporate social responsibility (CSR) issue facing
public corporations operating in the natural resource sector is the disclosure of
environmental provisions.1 In extractive industries, these environmental provisions
1. Under IAS 37, environmental provisions, previously regulated under CICA handbook, chap.
3110, include asset retirement obligations, decommissioning liabilities, environmental rehabilita-
tion or any other provision that could readily be identified as a cost involved in restoring dam-
ages due to the impact of operations to a previous state.
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VALUE RELEVANCE OF ENVIRONMENTAL PROVISIONS 141
(EP) predominantly represent future site restoration costs. As such, they are of
interest to a wide array of stakeholders. To stakeholders interested in the financial
performance of the firm, although EPs represent possible future cash outflows, the
scale of restoration may also signal potential earnings from operations; while to
stakeholders interested in environmental performance, EPs provide a monetary
value for environmental damage that must be rehabilitated under current regula-
tions. Even though these disclosures are important to a significant number of
stakeholders, empirical evidence to date suggests that the disclosures of environ-
mental costs are either incomplete or understated, which ultimately implies that
they are inaccurate (Li and McConomy, 1999; Joshi, Krishnan, and Lave, 2001).
Yet, institutional investors find environmental disclosures to be decision-useful
despite being inadequate (Solomon and Solomon, 2006). This implies that investors
are using environmental provisions in their investment decisions even though they
are inaccurate, and reinforces Schneider, Michelon, and Maier’s (2017) call to fur-
ther examine the relationship between firm value and environmental liabilities.
The first objective of this study is to test the value relevance of EPs as recorded
under both section 3110 of Canadian GAAP and IAS 37 of IFRS, using the
Ohlson (1995) valuation model. In line with the efficient market hypothesis, which
suggests that prices reflect all available information, we extend the work of Schnei-
der et al. (2017) by also considering the nonaccounting environmental information
published in CSR stand-alone reports.
Despite skepticism surrounding the use of CSR stand-alone reports (see Miche-
lon, Pilonato, and Ricceri, 2015), they have been shown to be related to market
value. There is a significant body of literature that questions whether CSR report-
ing actually increases accountability (Gray, 2002). Not only have they been shown
to be tools of impression management (Cho, Roberts, and Patten, 2010), but critics
have gone so far as to compare CSR stand-alone reports to a simulacrum used to
conceal actual CSR performance (Boiral, 2013). Yet, Dhaliwal, Li, Tsang, and
Yang (2011) find that analysts achieve lower absolute forecast errors and disper-
sion after firms issue stand-alone CSR reports. When considering that CSR stand-
alone reports are positively correlated with market value (Berthelot, Coulmont,
and Serret, 2012) and negatively associated with the cost of equity capital
(Dhaliwal, Li, Tsang, and Yang, 2014), it seems they could potentially be provid-
ing additional relevant nonaccounting information. In support of this school of
thought, Clarkson, Fang, Li, and Richardson (2013) find that voluntary environ-
mental disclosures add incremental information beyond specific environmental per-
formance metrics such as the toxic release inventory. However, even if we consider
stand-alone CSR reports as the symbolic tools that the weight of evidence suggests
(Michelon et al., 2015) their publication has been shown to be a response to
greater levels of scrutiny in terms of corporate social performance (Thorne, Maho-
ney, and Manetti, 2014; Mahoney, Thorne, Cecil, and LaGore, 2013). Institutional
investors will seek additional private information to compensate for inadequate
public CSR disclosures (Solomon and Solomon, 2006; Solomon, Solomon, Joseph,
and Norton, 2013). This increased monitoring facilitated by additional private
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information will restrict management’s ability to manipulate the estimates used to

calculate environmental provisions regardless of CSR stand-alone report quality.
The value relevance of the EP was tested after it was first incorporated into
GAAP in 1990. This requirement of the Capital Assets section 3060.39 of the CICA
handbook was dramatically changed in 2004 when it was replaced by section 3110,
Asset Retirement Obligations. While the intent was to harmonize Canadian
accounting standards with the Financial Accounting Standard Board’s FAS 143,2 a
standard still in use under U.S. GAAP, it obscured the impact of environmental
provisions in the current period by allowing reporting firms to offset the initial
recording of environmental provisions with an increase in the value of the underly-
ing assets requiring the eventual cleanup. In 2011, the CICA adopted International
Financial Reporting Standards (IFRS) for public firms. While IAS 37 continues to
allow firms to increase assets, it differs from previous GAAP in some important
aspects. This evolution in accounting standards creates an interesting setting3 to
compare the value relevance of environmental provisions, as the former GAAP
section 3110 is reflective of current U.S. GAAP and the new IFRS IAS 37 standard
is applicable to the majority of public firms listed outside of the United States.
The second objective of this paper is to test whether the transition to IAS 37
has affected the level of value relevance, using a quasi-experimental research
design. We build upon Schneider et al.’s (2017) incremental test of the change in
value relevance by performing an examination of the relative change in value rele-
vance between standards. While our results pertaining to the transition between
frameworks, and for our overall sample, corroborate the findings of Schneider
et al. (2017), our tests in the oil and gas sector highlight a dichotomy in the value
relevance of reported environmental provisions. To begin with, and consistent with
Schneider et al. (2017), overall the environmental provisions, as reported under
either GAAP section 3110 or IAS 37, do not appear to be associated with market
values in an economically significant way. However, we find an exception to this
lack of value relevance in the oil and gas industry. Yet, while we provide support
for an association between environmental provisions and market value in the oil
and gas sector, only firms that release stand-alone CSR reports appear to have this
environmental liability impounded in their market value. For the majority of oil
and gas firms, instead of downwardly adjusting stock prices to reflect the future
costs, investors appear to be evaluating these environmental disclosures positively.
Similar to warranty and bank loan loss provisions, environmental provisions have
become a tool for management to convey inside information about earnings expec-
tancy. This signaling effect could explain why Schneider et al. (2017) could not find
a statistically significant impact related to differences in credit risk. If the liability
nature of the environmental provisions are being discounted by market
2. FAS 143 is now codified as ASC 410.

3. Canada is also an interesting setting, as its natural resource sector is important both domesti-
cally and internationally. It accounts for almost 40 percent of the world’s mining equity capital
(Liu and Sun, 2015).
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participants, the choice of discount rate would simply be a tool to manipulate esti-
mates for the market signal.
Besides being of interest to standard setters, this study contributes to the envi-
ronmental disclosure literature. As Hopwood (2009) points out, there is a need for
research to explore the role and functioning of accounting in environmental disclo-
sures. Focusing the analysis on this specific accounting provision has answered the
call to move beyond the level of environmental disclosures (Clarkson, Li, Richard-
son, and Vasvari, 2008) and in doing so, has increased our understanding of its
relevance to stakeholders. As McKeown (1999) points out, the environmentally
related liabilities should have a coefficient approaching 1 in an ideal market.
However, we provide evidence that the impact of environmental disclosures should
be considered independently for each industry in future research, since industry
factors appear to dramatically alter investors’ interpretations of the meaning of the
disclosure and of its underlying environmental performance. For the firms in the
oil and gas industry that do not release stand-alone CSR reports, these values con-
vey valuation instead of environmental liability information. Rather than having a
negative association with market value, they have a positive relationship. This
provides indication that, in some situations, the market may favorably interpret
polluting firms’ information and consent to a lower cost of capital.
Finally, to our knowledge, this is the first study to contribute to the IFRS tran-
sition literature while interpreting the benefits of the IFRS from a corporate social
responsibility perspective. Interestingly, from that point of view, it is not the transi-
tion to IFRS that is noteworthy, but rather the value relevance of these environ-
mental provisions under either regime. While we document a relationship between
these environmental provisions and market value both pre- and post-IFRS transi-
tion, we do not find a significant change in the explanatory power of these relation-
ships. In essence, the value of environmental provisions recorded under IFRS is no
better or worse than the estimates recorded under GAAP at fitting the market’s
expectations. This finding is consistent with Schneider et al.’s (2017) findings and
with the nonsignificant change in the value relevance of reported book value and
earnings found for other common law countries transitioning to IFRS (Clarkson,
Hanna, Richardson, and Thompson, 2011). However, from a CSR point of view,
the positive association between market value and environmental provisions disclo-
sure has important implications for the use of accounting information to help regu-
late pollution. This form of regulation relies upon the market punishing polluters
with a higher cost of capital. Given the potential difference in the meaning of
environmental disclosures to investors as opposed to stakeholders concerned with
environmental damage, these findings highlight the need to take a deeper look at
the value of and limitations to information-based regulations for pollution control.
The paper is organized as follows. First, we discuss the evolution of reporting
for environmental provisions in Canada and present a literature review and
hypothesis development section. This is followed by an explanation of the method-
ology and data collection process which leads into the empirical results section
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where descriptive statistics, univariate, multivariate and an earnings expectancy

analyses are performed and interpreted. The final section summarizes the main
findings of the study with a discussion of implications for future research.
BACKGROUND
Evolution of Environmental Provisions in Canada

The 1990 CICA standards encouraged rather than required companies to charge
expected restoration costs to income with a corresponding entry to an accumulated
provision. This meant that stakeholders received information pertaining to the esti-
mated impact of these environmental liabilities on the firm’s operations in the cur-
rent period, but they were not given the estimate of the full costs the firm would
eventually be exposed to. A valuation analysis study based on Ohlson (1995)
performed by Li and McConomy (1999) suggests that such disclosure was value
relevant as it enabled capital markets to appraise future removal and site restora-
tion liabilities.
In 2004, these initial standards were dramatically changed as firms were
required under CICA handbook section 3110 to capitalize the present value of the
total estimated restoration costs in the underlying assets with a corresponding lia-
bility. There was no longer a direct charge of restoration costs to income. Instead,
the future annual restoration costs impacted the income statement through both
the amortization of the capitalized costs and an accretion expense.4 Despite its sig-
nificance, this accounting standard has only begun to receive academic attention
and its value relevance was not supported (Schneider et al., 2017).
In 2011, Canada adopted the International Accounting Standards Board
(IASB) IFRS framework, where IAS 375 brought about another change in the way
these environmental provisions are recorded. Firms are no longer able to avoid dis-
closing environmental provisions upholding that the underlying asset has an inde-
terminable useful life. There are also significant changes in the discount rate
applied to the present value calculations for the liability (Schneider et al., 2017).
Both section 3110 and current U.S. GAAP allow firms to adjust their discount rate
upwards for a firm’s “own credit risk.” However, according to the wording of IAS
37, and the position of the IFRS interpretation committee (IFRIC), firms are no
longer supposed to make these credit risk adjustments (Schneider et al., 2017). At
the time, Schneider (2011) considered that this change in standards would be asso-
ciated with material changes in recorded values. However, Schneider et al. (2017)
could not support these changes in environmental provisions as being value rele-
vant. Further, some amendments to IAS 37 are currently being considered as an
4. The accretion expense is the increase in the present value of the provisions which is associated
with the passage of time.
5. IAS 37—Provisons, Contingent Liabilities and Contingent Assets. Deloitte, IASPlus: http://
www.iasplus.com/en/standards/standards/standard36, retrieved January 26, 2013.
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“IASB-only” research project.6 As of July 23, 2015, information was still being
gathered to determine if the investigation should be made active.7 While the state
of potential amendments to IAS 37 is still unclear, the alignment of IFRS stan-
dards with U.S. GAAP is an important objective of the IASB; if changes occur,
they would likely bring the standard closer to the former U.S./Canadian standard
3110.
Considering the recent switch to IFRS and these potential amendments, com-
paring the value relevance of both accounting standards is of benefit to interna-
tional standard setters. This comparison may also be of interest to U.S. regulators
as they are considering switching from the current common Canadian/U.S.
standards to IFRS. Furthermore, Canada’s Accounting Standards Board (AcSB)
considers that the 2004 Canadian standard 3110 was providing more details, offer-
ing superior guidance in the estimation of the environmental liabilities than IAS 37
(AcSB, 2009). While evidence suggests that the more detailed environmental provi-
sion standards would be more value relevant (Bewley, 2005), current evidence does
not support it (Schneider et al., 2017).
LITERATURE REVIEW AND HYPOTHESIS DEVELOPMENT

Since environmental provisions provide information pertaining to environmental
performance, we review the literature on the value relevance of environmental dis-
closure to help develop our hypotheses. Previous studies have found both negative
and positive relations between the information content of environmental
disclosures and firm value. They mostly use the Ohlson (1995) valuation model
which presents firm value as a linear function of earnings, book value, and other
information.
Environmental Disclosure Valuation

The majority of studies analyzing the value relevance of environmental disclosures
have focused on the level of voluntary environmental disclosures often adjusted by
measures of quality (i.e., Clarkson et al., 2008, 2013; Cormier and Magnan, 2007).
Rather than examining the meaning and implication of any specific environmental
disclosures, this methodology involves compiling indices based on all of the firm’s
environmental disclosures, whether the objects of standard setting or not, with the
expectation that the resulting score lowers the information asymmetry between
management and investors.
6. On reactivating this project as an IASB-only project in December 2012, the IASB confirmed it
will not amend IAS 37 without a full re-exposure. Non-financial liabilities, Deloitte, IASPlus:
http://www.iasplus.com/en/projects/research/non-financial-liabilities, retrieved August 23, 2013.
7. Provisions and contingent liabilities IAS 37—research project (education session). Deloitte,
IASPlus: http://www.iasplus.com/en/meeting-notes/iasb/2015/July/ias-37, retrieved February 23,
2016.
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There are two competing theories predicting the motivation for the level of
environmental disclosures. Each theory has a different implication on the relation-
ship between the environmental disclosures and the firm’s performance. Where eco-
nomic theories predict the disclosing of value-relevant environmental information,
social-political theories predict image-improving disclosures or impression manage-
ment (Brennan and Merkl-Davies, 2013).
The result of the multiple motivations for environmental disclosures has been
the disclosing of two different types of environmental information. Clarkson et al.
(2008) refers to these types of disclosures as “hard” and “soft.” Hard environmen-
tal disclosures are verifiable while soft disclosures are not. This has led to a call
for environmental disclosure research to move beyond focusing on the level of dis-
closure to examine more specific measures (Clarkson et al., 2008). Plumlee, Brown,
Hayes, and Marshall (2015) further refine the assessment of the relationship
between firm value and environmental disclosures by taking into consideration the
nature of the disclosure content (i.e., positive/neutral/negative). Plumlee et al.
(2015) find coefficients differ in models based on the content of the environmental
disclosure. This supports the benefit of developing a more precise understanding of
specific proxies for environmental performance. While there are studies that have
moved beyond examining the level of disclosures, they have predominately focused
on pollution measures such as greenhouse gas emissions or the number of super-
fund sites a firm is associated with (i.e., Hughes, 2000; Barth and NcNichols,
1994). Clarkson et al.’s (2013) findings that voluntary environmental disclosures
add incremental information beyond toxic release inventories, a pollution measure,
suggests the information previously tested could be viewed as complementary to
the accounting information found in CICA 3110 and IAS 37 that our study seeks
to compare. This information constitutes a part of the full set of information that
investors may use to value environmental liabilities. As this information is the
object of standard setting, it is likely to be more reliable and thus relevant to mar-
ket participants.
Our study differs from prior ones in two ways. To the best of our knowledge,
it is only the second study to examine and compare the value relevance of the
Canadian GAAP section 3110 and the IAS 37 environmental provisions. The pro-
vision under section 3110 is similar to the current U.S. FAS 143 and is the present
value of the restoration costs the firm will need to incur to clean up the environ-
mental damage related to its operations. Further, there are very few studies that
have specifically focused on reported environmental accounting numbers. Clark-
son, Li, and Richardson (2004) examined the value relevance of environmental
capital expenditures and found that there was incremental value for low polluting
firms. Li and McConomy (1999) examined the determinants and value relevance of
environmental provisions in Canada. Their examination was performed over
20 years ago upon the adoption in 1990 of CICA handbook’s section 3060.39,
which required the reporting of environmental provisions. We build upon this
study by examining the relative value relevance of the environmental provisions
calculated under the former Canadian GAAP’s section 3110, Asset Retirement
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Obligations, and under the IAS 37 following the 2011 change to the IFRS frame-
work. Bewley (2005) provided additional support for the value relevance of
environmental provisions, as reported under section 3060.39. Her analysis concerns
the factors that make financial reporting regulations effective at enhancing the
relevance and reliability of environmental liabilities.
Similar to Li and McConomy (1999), Bewley (2005) finds a negative associa-
tion between the firm’s environmental provision and market value. As in
McKeown (1999), she argues that the environmental provisions are a liability and
as such should have a coefficient of 1 when market value is regressed upon it in
a modified Ohlson (1995) valuation model. Therefore, she uses the proximity of
her models coefficients to 1 to determine how close they fit investors’ expecta-
tions of the actual environmental liability. This design may make sense for the
environmental provisions recorded under CICA handbook section 3060.39. How-
ever, several key changes have been made under both section 3110 and IAS 37 that
make it less likely that the market still treats these environmental provisions as a
traditional liability.
The evidence from Schneider et al. (2017) corroborates the concept that mar-
kets do not treat environmental provisions, as recorded under both section 3110
and IAS 37, as a traditional liability. While the primary purpose of their study was
to examine the diversity in practice in the reporting of environmental liabilities,
they also performed a value-relevance test of reported environmental provisions at
the time of IFRS transition in Canada and for three years after. They fail to sup-
port a statistically significant relationship between environmental provisions and
market value. However, while their sample was comprehensive, it was small. Their
tests potentially lacked the power to support a statistically significant relationship.
Schneider et al. (2017) used a sample including only firms with a market capitaliza-
tion of $50 million or more under the assumption that smaller firms would not
have significant environmental provisions. We expand our sample including firms
with less than $50 million market capitalization and thus create an even more com-
prehensive sample. The result is a sample that is over twice the size of the sample
used by Schneider et al. (2017). We also extend their work by controlling for the
environmental performance information that would be available to investors
through CSR reports.
For both section 3110 and IAS 37, the changes since section 3060.39 include
the capitalizing of the expected costs. Since the present value of expected site
restoration costs is added to assets and liabilities, it increases the total size of the
company rather than reducing the net book value. In future periods, the book
value is systematically reduced through the amortization of the capitalized costs
that were added to assets. Both the capitalized costs and amortization are aggre-
gated with the underlying asset that will require the environmental cleanup in the
future. This creates a situation where the present value of the terminal value of the
environmental provision is captured, but the impact of these costs to the firms’
book value in the current period is not disclosed. Under the former section
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3060.39, aggregated environmental provisions were the summation of all prior per-
iod environmental provision expenses and would therefore have a value equal to
this unknown book value impact. It was this currently undisclosed value that was
tested and found to impact market value as a traditional liability (Bewley, 2005).
Since the values disclosed under section 3060.39 would only be a fraction of the
values disclosed under either section 3110 or IAS 37, the impact on market value
should only be a fraction of the former market impact.
Information Content of Environmental Provisions

In this section, we argue that the information content of environmental provisions
does not only convey “bad” news which should negatively affect value but may
also carry “good” news which should positively affect firm value. On the one hand,
the cash outflow required to pay for the terminal environmental cleanup may
indeed be considered “bad” news. If measured correctly and there are no omitted
correlated variables, it would likely fit Bewley’s (2005) 1 estimated coefficient.
On the other hand, the disclosure could also indicate “good” news through the
firm’s readiness to forecast higher cleanup costs or commitment to lower reported
earnings. It has long been known that managers have private information pertain-
ing to their firm’s performance. Firms with “good” news will use credible signals
to inform investors of their private information. Management may use some dis-
cretion in estimating the firm’s environmental provision. To this effect, manage-
ment can increase its estimate. While this estimate may be loosely related to the
actual future site cleanup costs, it lowers future accounting earnings through
higher amortization. Since only strong firms can afford to outline this decrease in
their earnings, the increase in estimated environmental provisions provides a costly
means to inform investors of the firm’s quality. This signaling interpretation of
environmental provisions is similar to the one of Liu and Ryan (1995) in the case
of bank loan loss provisions, which have been consistently shown to have a posi-
tive impact on market value namely by Kanagaretnam, Krishnan, and Lobo
(2009), Beaver and Engel (1996), and Wahlen (1994). While bank loan loss provi-
sions are accrued expenses, the market does not interpret them as expected future
losses. Instead, they are viewed as a bank manager’s private information about
future earnings expectancy (Wahlen, 1994). Increases in loan loss provisions are
considered “good” news because only a bank with strong earnings potential can
withstand the “hit to earnings” caused by larger loan loss provisions (Beaver, Eger,
Ryan, and Wolfson, 1989: 169). Environmental provisions and bank loan loss
reserves have fairly similar traits. Much like environmental provisions, there is a
significant amount of uncertainty and discretion surrounding the estimation of
loan losses (Beaver and Engel, 1996).
Environmental provisions providing both “good” and “bad” news are also
consistent with the way markets perceive warranty provisions. Warranty provisions
have been shown to serve two roles (Cohen, Darrough, Huang, and Zach, 2011).
Similar to environmental provisions, warranty provisions inform the market of
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“bad” news in that they represent potential future cash outflows. However, they
may also indicate superior product quality, which is perceived as “good” news. It
should be noted that the estimated warranty provisions are more similar to the
environmental provisions recorded under section 3060.39 in that they only include
values associated with the current and prior fiscal periods. Therefore, while the
“good” news component mitigates the negative response from the “bad” news, it is
not a strong enough signal to result in an overall positive association between the
warranty provisions and market value (Cohen et al., 2011).
When further considering that these provisions are measured with a fair
amount of uncertainty, it seems relatively intuitive that the “good” news content
would likely outweigh the “bad” news content (Verrecchia, 1983). The uncertainty
surrounding environmental provisions goes beyond just the uncertainty in their
measurement. As in the case of warranty or bank loan provisions, it also extends
to whether or not they will even need to be used in the future. Under
Appendix A19 of section 3110, an environmental liability must be recorded even if
the obligation is conditional on whether its payment will be required. Under IAS
37, management may include a contingent provision when they believe it is more
likely than not that the obligation will materialize. This offers an opportunity for
earnings management. If the market believes that a firm will not be held account-
able for these likely or conditional obligations, it dramatically alters the impact
this “bad” news component may have on market value. Again, rather than being
viewed as a liability, it may be viewed as a costly signal of future success. As men-
tioned previously, setting a provision based on conditional or likely obligations
also commits the firm to higher amortization and hence lowers earnings in future
periods. Since larger environmental provisions mean higher levels of amortization,
the larger the environmental provision, the more confident management will be in
their future earnings and hence the stronger the signal. In most cases the “good”
news would outweigh the “bad” news and we would expect a positive coefficient.
Given the above arguments, we formulate our hypotheses in the null form or
as a research question: Are environmental provisions related to firm value under
GAAP or IFRS? The first set of hypotheses is as follows:
HYPOTHESIS 1a. There is no relation between environmental provisions recorded
under Canadian GAAP and firms’ market value.
HYPOTHESIS 1b. There is no relation between environmental provisions recorded

under IFRS and firms’ market value.
IFRS Mandatory Adoption

The second stream of literature that this study builds upon is the IFRS mandatory
adoption literature. Daske, Hail, Leuz, and Verdi (2008) examine the implications
to a firm’s cost of capital at the time of mandatory IFRS adoption. In their study,
AP Vol. 16 No. 3 — PC vol. 16, no 3 (2017)

which includes all countries that forced firms to adopt IFRS prior to 2005, they
find that the mandatory adoption of the IFRS is associated with modest capital
market benefits. However, through a cross-sectional analysis they determine that
these capital market benefits only occur in countries with strong legal enforcement
that promote transparency. Capkun, Cazavan-Jeny, Jeanjean, and Weiss (2008)
study the impact of the IFRS transition on financial statement quality for the nine
European countries that did not allow early adoption. Their findings indicate that
the transition was exploited for earnings management. However, stronger legal
enforcement and less pre-transition earnings management mitigate the use of earn-
ings management at the transition. Capkun et al. (2008) also find that the earnings
reconciliations are value relevant regardless of the earnings management. So far,
the majority of single country studies have been performed in Australia or the Uni-
ted Kingdom. The findings of Australian studies indicate that the aggregate differ-
ences between IFRS and local GAAP have no incremental information for price
(Ahmed and Goodwin, 2007; Goodwin, Ahmed, and Heaney, 2008). In the UK,
the findings suggested that earnings reconciliations have incremental price
relevance over local GAAP (Christensen, Lee, and Walker, 2008; Horton and Sera-
feim, 2010). More relevant to this study is the work of Schneider et al. (2017).
Schneider et al. (2017) examined the incremental value relevance of the change in
accounting standards specifically on environmental provisions. They could not sup-
port an incremental improvement in the value relevance of environmental provi-
sions. All these studies tested for incremental value relevance. Incremental value
relevance is the additional value of the IFRS over local GAAP.
However, in a single-country setting, only one accounting framework is avail-
able at any given point in time. Since information is only available for one set of
accounting standards at a time, it is not the incremental value added from the new
framework that is important, but rather which framework is superior relative to the
other. This study builds upon the work of Schneider et al. (2017) by testing relative
value relevance. In other words, we examine which accounting standards figures fit
price better. Clarkson et al. (2011), examine the relative value relevance of both the
book value and earnings for the transition between local GAAP and IFRS for firms
in Australia and Europe. Their findings indicate that in common law countries, and
when a nonlinear model is employed, the transition to IFRS is not associated with
improved relative value relevance for book value and earnings. While the lack of a
relative improvement in the book value seems consistent across studies, a relative
improvement in the relevance of earnings has been supported. Chalmers, Clinch,
and Godfrey (2011) perform a longitudinal examination of the value relevance of
book value and earnings pre- and post-IFRS in Australia. Their study, from 1990 to
2008, provides indication that, while the value relevance of the book value of equity
did not change, earnings are more value relevant under the IFRS framework. Qu,
Fong, and Oliver (2012) find similar results for Chinese-listed firms: the value rele-
vance of earnings improves, but the value relevance of the book value of equity
remains the same after IFRS adoption. Qu et al. (2012) ran their tests from 2004 to
2010.
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While Clarkson et al. (2011) could be generalizable to Canada due to the major-
ity of Canada being a common law country; Liu and Sun (2015) warn against apply-
ing the findings of the IFRS transition literature to the Canadian setting. Liu and
Sun (2015) point out how Canada is particularly exposed to extractive industries.8
Canada also has different accounting standards and enforcement than the countries
previously tested. However, their findings support there being no difference between
Canadian GAAP and IFRS in terms of earnings quality. When the extractive indus-
try firms are analyzed in a subsample, there is a significant increase in the level of
accruals-based earnings management. Using an event study methodology to examine
the information content of earnings pre- and post-IFRS adoption in Canada, Khan,
Anderson, Warsame, and Wright (2015) find a greater divergence of opinions result-
ing from earnings announcements post-IFRS adoption, which indicates a higher level
of value relevance post-IFRS. While the majority of the above studies indicate we
should expect an increase in the value relevance of earnings, the results pertaining to
the impact on book value are less clear. While Schneider et al. (2017) test incremental
improvement instead of relative improvement, their examination of the change in the
value relevance of environmental provisions is the most closely related to this study.
Since they could not support a significant incremental change in the value relevance
of environmental provisions, the second hypothesis is as follows:
HYPOTHESIS 2. The transition to IFRS did not impact the relation between
firm value and the environmental provisions.
RESEARCH DESIGN AND DATA

The analysis of the ins and outs of the transition to IFRS can be problematic. As
Daske et al. (2008) point out, due to the mandatory adoption of the IFRS being
countrywide, it can be very difficult to find an appropriate set of firms to act as a
control group. This makes it difficult to control for contemporaneous capital-mar-
ket effects that are not related to the change in accounting framework. To address
the problems introduced by examining the presumed improvements related to the
IFRS transition, this study employs a “same firm year” model (Clarkson et al.,
2011; Hung and Subramanyam, 2007). The “same firm year” methodology com-
pares the results from two regression models. Both models use data related to the
same year. Since the IFRS transition requires firms to provide IFRS reconciliations
of the previous year’s GAAP, both IFRS and GAAP data are available for 2010.
These reconciliations from GAAP to IFRS provide a quasi-experimental setting
where pre- and post-IFRS adoption values of environmental provisions can be
tested by holding other market- and time-related influences equal. This is accom-
plished through using the same GAAP data for all variables except environmental
provisions in both models. By only changing environmental provisions, changes in
the model can be attributed to environmental provisions rather than other
8. See note 2.
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influences. In essence, in this study, the firm’s original disclosures under GAAP act
as a control group.
The relevance of the IFRS standard for environmental provisions is tested by
comparing it to the original GAAP equivalent in the same year. By this design, the
sample composition, time period, and other changes in the accounting framework
are kept constant. In effect, the only thing that changes between the two models
being tested is the treatment of the environmental provisions. Changes in the
explanatory power (R2) are then examined to determine the relative presumed
improvement.
A modified version of the Ohlson (1995) valuation model is used to compare
the change in market valuation. The approach taken is similar to the valuation
models employed in previous environmental disclosure studies (Schneider et al.,
2017; Clarkson et al., 2004; Li and McConomy, 1999; Cormier and Magnan, 1997;
Barth and NcNichols, 1994) where the market value of a firm is linked to share-
holder’s equity, net income and other variables that may affect the model or the
environmental provisions. The model is as follows:
MVi ¼ b0 þ b1 EPi þ b2 BVi þ b3 NIi þ b4 Lossi þ b5 NI Lossi þ b6 CSRi
þ b7 EP CSRi þ b8 GASi þ e; ð1Þ
where MV is the per share market value of firm i measured three months after year
ended December 31, 2010. EP is the environmental provision per share for firm i
at year ended 2010. In the GAAP models, environmental provisions are measured
under GAAP. In the IFRS models, environmental provisions are measured under
IFRS. BV is the book value of equity per share for firm i measured under GAAP
at year end 2010. As with previous research, we remove EP from BV (Bewley,
2005). NI is the net income per share for firm i measured under GAAP at year end
2010. Our sample consists of a significant number of firms that reported losses in
2010. Prior research has suggested that losses are not as value relevant as gains
(Hayn, 1995). Collins, Pincus, and Xie (1999) document a statistically significant
negative price-earnings relationship for firms that report losses. Their findings sug-
gest that including the book value of equity in the valuation model mitigates the
issue. However, more recent research finds this anomaly still exists, and persists
when the book value of equity is included in the model (Papadaki and Siougle,
2007). We control for this negative price-earnings relationship by including both a
dummy variable coded one for firm with a negative NI (Loss) and an interaction
term between NI and Loss (NI 9 Loss). An industry dummy variable (GAS) coded
one for firms classified as oil and gas is added to control for industry differences.
Finally, our model includes a dummy variable, CSR, coded one for firms that
issued a stand-alone corporate social responsibility report. We control for the pub-
lication of these reports and their interaction with environmental provisions for
several reasons. First, CSR stand-alone reports were found to be positively corre-
lated with market value (Berthelot et al., 2012) and negatively associated with the
cost of equity capital (Dhaliwal et al., 2014). To this effect, including the CSR
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variable is intended to control for the nonaccounting information used by investors

to help determine market value. Second, their publication is a response to greater
levels of scrutiny in terms of their corporate social performance (Thorne et al.,
2014; Mahoney et al., 2013), so the information provided in CSR reports could
restrict management’s ability to manipulate the estimates used to calculate the
environmental provisions. Finally, good CSR performers that release CSR reports
attract more institutional investors and analyst coverage (Dhaliwal et al., 2011).
Dhaliwal et al. (2011) also find that analysts achieve lower absolute forecast errors
and dispersion for firms after they issue stand-alone CSR reports. An interaction
term (EP 9 CSR) is also included because of the potential impact of this increased
scrutiny, or any perceived increase in the firm’s commitment to environmental per-
formance, may have on the measurement, or interpretation of reported environ-
mental provisions.
An OLS regression is run for the entire sample of extractive firms and then sep-
arately for the oil and gas and mining industries. The first model is the base model.
It includes all variables except EP and EP 9 CSR. Thus, the base model establishes
how well our model fits when EP is not accounted for. Increases in the explanatory
power of the model when EP is added will thus provide support for its value rele-
vance. The GAAP model uses the original values disclosed under GAAP and the
IFRS model employs values as estimated under GAAP for all variables but EP,
and by extension EP 9 CSR, which are computed using IFRS. By only changing
the estimated values of EP in our models, we can infer that any changes in the fit
between the GAAP and IFRS models are related to the different measurement of
EP. These models are then compared based on their explanatory power (R2). An
increase in the explanatory power of the model incorporating IFRS EP would indi-
cate that the overall model is superior at explaining the market value of the firm.
Following Filip (2010), Sami and Zhou (2004), and Ball, Kothari, and Robin
(2000), Cramer’s (1987) standard deviation of the estimated R2 is used to deter-
mine if the differences between models are statistically significant. Similar to Arce
and Mora (2002), a Z-test is used to directly compare differences between the
GAAP and IFRS models:
R2IFRS R2GAAP
Z ¼ qffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi
r2IFRS þ r2GAAP ð2Þ
where R2IFRS is the R2 value from the IFRS models and R2GAAP is the R2 value from
the GAAP models. The r2IFRS is the standard deviation of the IFRS models as
computed in accordance with Cramer (1987) and the r2GAAP is the standard devia-
tion of the GAAP models also formulated in accordance with Cramer (1987). The
z-score is considered to be approximately standard normal in large samples. As
such, in a two tailed test it needs to be greater than 1.66 to be considered as statis-
tically significant at a p-value of less than 0.1. Since it is a null hypothesis test, the
higher the z-score, the greater the confidence that we can reject the null that there
is no difference between the R2 values.
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Data Collection
The sample consists of Canadian firms competing in the oil and gas and mining
industries. Oil and gas firms are classified as any firm with a North American
Industry Classification Standard (NAICS) beginning with a 211, and mining com-
panies were identified by having a NAICS beginning with 212. The sample includes
all oil and gas and mining firms that released a first-quarter statement for 2011 on
SEDAR prior to August of 2011, recorded environmental provisions under Cana-
dian GAAP and included the reconciliations for the prior period to IFRS, and
had market information available on COMPUSTAT. Information pertaining to
the change in environmental related provisions and the book value of equity were
hand collected from the first quarter statements retrieved from SEDAR. Market
prices were taken from COMPUSTAT. CSR stand-alone reports were hand-
collected from company websites.
RESULTS AND DISCUSSION
Descriptive Statistics and Univariate Analysis

As shown in Table 1, the initial sample includes 202 firms. Of these firms, 95 are
from the oil and gas industry and 107 from the mining industry. From the starting
sample, 7 were removed due to a lack of available information on COMPUSTAT.
This left the final sample as 92 oil and gas firms and 103 mining firms.
Table 2 displays descriptive statistics for the entire oil and gas and mining
industry samples. Firm size as measured by total assets (TA), net income (NI) and
environmental provisions (EP) are displayed in millions of dollars. The environ-
mental provision to book value (BV) ratio is calculated using either GAAP or
IFRS for both EP and BV. Overall, firm size and environmental provisions in both
magnitude and relative value are higher in the oil and gas industry. This is an
important distinction between industries. Beaver and Engel (1996) considered the
ratio of bank loan allowance to common equity as an important factor in estab-
lishing the motivation for its use in discretionary behavior. According to Beaver
and Engel (1996), the mean allowance as a percentage of common equity was 11
percent between 1977 and 1984 and 16 percent between 1985 and 1991. Table 2,
TABLE 1
Sample size
All Oil and gas Mining
Starting sample 202 95 107

Additional information not available on COMPUSTAT 7 3 4
Ending sample 195 92 103
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panel B shows that for the oil and gas industry, environmental provisions were 8.7
percent of book value under Canadian GAAP and 10.99 percent under IFRS.
Table 2, panel C reveals that these percentages were lower for the mining industry
(4.37 percent under Canadian GAAP and 3.6 percent under IFRS). While the rela-
tive value of environmental provisions in the oil and gas industry approaches the
relative value of the loan loss allowance in the Beaver and Engel (1996) study, the
environmental provisions in the mining industry might not be significant enough
to convey an earnings expectancy signal.
The results from a paired t-test for reported EP between IFRS and Canadian
GAAP is also displayed in Table 2. The mean increase for the entire sample from
GAAP to IFRS is roughly $26 million. This difference is statistically significant
with a p-value less than 0.01. The major part of this increase is in the oil and gas
industry (panel B). The mean increase in the oil and gas industry is almost
$44 million. The mean difference for the oil and gas industry is statistically signifi-
cant with a p-value of less than 0.01. Panel C also shows an increase in the average
reported EP of the mining industry. However, the magnitude of the increase is
considerably smaller than for the oil and gas industry. In the mining industry, the
mean increase is about $11 million with a p-value of less than 0.1. Taken as a
whole, it appears Schneider (2011) was correct in his claim that the IFRS transi-
tion would be associated with material increases in the reporting of environmental
provisions for extractive industries.
Multivariate Analysis
Results from the OLS regressions using equation (1) on the full extractive industry
sample are displayed in Table 3, panel A. The coefficients for EP are positive and
statistically significant under both accounting standards. This provides some sup-
port for the rejection of both null Hypotheses 1a and 1b. It seems that EP is value
relevant as measured under either standard. The positive coefficient provides indi-
cation that this relevance is related to higher EP being associated with superior
future earnings rather than for the future cash outflows they represent. However,
the inclusion of EP in the GAAP model only improves the adjusted R2 value by
0.02 percent. To this effect, while the coefficient is statistically significant, it does
not provide any meaningful explanation of market value beyond the base model.
The improvement in the adjusted R2 value between the IFRS and base models is
slightly better at 1.9 percent. This provides weak support for the EP as measured
by IFRS being superior to the EP as measured under GAAP. Still, it is a relatively
small improvement, and while the R2 increases from 62.53 percent in the GAAP
model to 64.33 percent in the IFRS model, the difference was not found to be sta-
tistically significant. Taken all together, there is not enough evidence to reject any
of the hypotheses for the entire extractive industry sample.
Panel B of Table 3 displays results from the OLS regression examining the oil
and gas industry. The coefficients for EP are positive and statistically significant at
a p-value of less than 0.01 for all models. However, the interaction between EP
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TABLE 2
Descriptive statistics and analysis of difference
Panel A: Full sample
N = 195 Mean Median Min Max SD
TA 1,543.1 277.1 0.2 42,669.0 4,314.3

NI 49.1 2.8 328.9 1,697.0 211.6
EP (Canadian GAAP) 54.0 6.8 0 2,264.0 225.5
EP (IFRS) 80.3 9.3 0.02 2,624.0 296.2
Change in EP 26.3***
EP (Canadian GAAP) to BV 6.43% 3% 3.86% 102.33% 0.13
EP (IFRS) to BV 7.70% 4.44% 315.93% 146.04% 0.29
Panel B: Oil and gas firms
TA 2,119.9 340.3 0.6 42,669.0 5,717.1

NI 65.1 3.9 328.9 1,697.0 277.0
EP (Canadian GAAP) 95.3 12.5 0.07 2,264.0 321.3
EP (IFRS) 138.8 18.7 0.09 2,624.0 416.9
Change in EP 43.5***
EP (Canadian GAAP) to BV 8.70% 4.93% 0.09% 80.78% 0.13
EP (IFRS) to BV 10.99% 8.10% 315.93% 146.04% 0.4
Panel C: Mining firms
TA 1,027.9 197.2 0.2 16,397.1 2,381.7

NI 34.7 1.6 189.9 771.6 127.4
EP (Canadian GAAP) 17.2 2.4 0 279.7 40.9
EP (IFRS) 28.0 3.5 0.02 594.2 76.9
Change in EP 10.8*
EP (Canadian GAAP) to BV 4.37% 1.75% 3.86% 102.33% 0.12
EP (IFRS) to BV 3.60% 2.67% 58.00% 42.14% 0.07
Notes:
TA = Total Assets for 2010 year end disclosed under Canadian GAAP in millions of dollars.
NI = Net Income for 2010 year end disclosed under Canadian GAAP in millions of dollars.
EP = Environmental provisions for 2010 year end in millions of dollars. EP is identified in the
table as being estimated under either Canadian GAAP or IFRS. Change in EP = Increase in
environmental provisions related to the change in accounting framework. EP to BV = Ratio
comparing environmental provisions to the firm’s book value as measured under either
Canadian GAAP or IFRS. The ratios are estimated for each firm separated with the results used
to calculate the descriptive statistic. ***p < 0.01, **p < 0.05, *p < 0.10.
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and CSR is also statistically significant but negative with a p-value of less than
0.01 for the former Canadian GAAP model and a p-value of less than 0.05 for the
IFRS model. Further, the absolute value of the interaction coefficient is larger in
magnitude than the estimated coefficient for EP. We infer from this that the mar-
ket only impounds the future cash outflows required for site closures, as measured
by EP, into stock prices for firms disclosing their commitment to CSR in stand-
alone reports. For these firms, the coefficients for EP, after accounting for the
interaction, are very close to 1 in both GAAP and IFRS models. Yet for the
majority of firms, EP seems to be capturing the superior earnings expectancy as
discussed in the hypothesis development section. Furthermore, in doing so, it is
adding to the explanatory power of the model. The increase in the adjusted R2
from the base model to the Canadian GAAP model is 5.57 percent and the
increase from the base model to the IFRS model is 5.96 percent. Both the statisti-
cally significant coefficients for EP and the increase in adjusted R2 support the
rejection of Hypotheses 1a and 1b for the oil and gas industry and thus we con-
clude that EP is value relevant as measured under either accounting standard. In
the next subsection, we will investigate this positive association with market value
to support its relationship with earnings expectancy. There does not appear to be
any change in R2 values between GAAP and IFRS models, nor does Cramer’s test
detect any statistically significant difference, and therefore, we do not find any sup-
port for the rejection of Hypothesis 2 in the oil and gas industry.
Table 3, panel C displays the results from the model testing the mining indus-
try. Contrary to the oil and gas industry, the coefficients for EP in the mining
industry appear to be negative, but they are not statistically significant. Further-
more, the adjusted R2 values in both the former Canadian GAAP and IFRS
models are lower than the adjusted R2 from the base model. We therefore cannot
support the rejection of Hypotheses 1a or 1b and accept that there is no associa-
tion between EP and MV in the mining industry.
Earnings Expectancy Analysis

In this section, we perform additional tests to support the potential use of EP to
signal management’s inside information about future growth. The arguments made
in the hypothesis development section pertaining to a firm being able to use EP as
a signal of earnings expectancy to the market relied upon two factors. First, as
any credible signal, it needs to be costly, and second, the EP disclosed in the liabil-
ity section needs to be associated with superior financial performance. To establish
the cost factor, we examine the relationship between EP and a future period’s total
depreciation expense. Since higher depreciation expenses lower net income, it rep-
resents the costly aspect of the signal. Then, we examine the relationship between
EP and future cash flow from operations to establish the information content of
the signal.
We start our earnings expectancy analysis by testing the relationship between
EP and reported depreciation in future periods. Under both accounting standards,
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TABLE 3
Regression of market value on environmental provisions (EP), book value (BV), net income
(NI), and corporate social responsibility performance (CSR) controlling for loss making firms
(LOSS) and industry effects with interaction terms (NI 9 LOSS and EP 9 CSR)
Panel A: Full sample
Base model Canadian GAAP IFRS
Independent Standard Standard Standard

variable Coefficient error VIF Coefficient error VIF Coefficient error VIF
Intercept 3.33* 1.79 3.22* 1.76 3.23* 1.71

EP 4.18* 2.32 1.6 3.57** 1.46 1.9
BV 1.45*** 0.37 1.6 1.35*** 0.44 1.8 1.33*** 0.44 1.8
NI 3.14* 1.66 1.6 2.95** 1.47 1.7 2.90** 1.45 1.7
LOSS 3.87** 1.72 1.7 3.26** 1.15 1.7 3.25** 1.47 1.7
NI 9 LOSS 13.18** 5.68 1.6 11.99** 6.04 1.7 11.82** 6.05 1.7
CSR 6.55 4.43 1.2 6.51 4.39 1.1 6.48 4.38 1.2
EP 9 CSR 6.68 4.95 1.0 2.87 4.02 1.0
Industry (Gas) 1.01 1.37 1.1 1.62 1.16 1.2 1.80 1.11 1.2
N 195 195 195
R2 62.11% 62.53% 64.33%
2
Adjusted R 60.90% 60.92% 62.80%
Cramer’s
standard
deviation 3.46% 3.32%
Z-score 0.07
Panel B: Oil and gas industry

Intercept 5.83*** 1.95 4.81*** 1.53 4.38*** 1.48

EP 6.69*** 1.89 1.8 5.13*** 1.68 1.9
BV 1.06*** 0.31 1.4 0.79*** 0.28 1.6 0.76** 0.31 1.6
NI 7.05* 3.73 2.1 6.42* 3.24 2.2 6.53** 3.25 2.3
LOSS 5.75*** 1.76 1.9 4.00*** 1.45 2.0 3.60** 1.41 2.1
NI 9 LOSS 10.83* 5.88 1.5 6.48 4.72 1.7 5.78 4.69 1.8
CSR 1.36 3.74 1.1 0.38 3.47 1.2 0.12 3.60 1.1
EP 9 CSR 9.94*** 3.58 1.1 6.98** 3.12 1.1
N 92 92 92
R2 73.23% 79.00% 79.36%
2
Adjusted R 71.68% 77.25% 77.64%
(The table is continued on the next page.)
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TABLE 3 (continued)
Panel B: Oil and gas industry

Cramer’s
standard
Z-score 0.01
Panel C: Mining

Intercept 2.69 2.43 2.66 2.32 2.50 2.25

EP 4.63 10.82 2.8 3.48 6.28 4.5
BV 1.45** 0.69 3.1 1.65** 0.72 4.8 1.73** 0.74 6.9
NI 1.11 0.79 1.5 0.90 1.00 1.7 1.12 0.90 1.8
LOSS 4.72 3.26 1.8 4.63 3.17 1.8 4.55 3.13 1.8
NI 9 LOSS 26.96** 11.71 3.0 26.74** 12.16 3.1 26.56** 12.21 3.1
CSR 7.47 7.87 1.5 7.38 7.68 1.5 7.30 7.71 1.5
EP 9 CSR 15.04 22.34 1.2 4.26 12.66 1.4
N 103 103 103
R2 64.91% 65.52% 65.11%
2
Adjusted R 63.10% 62.98% 62.54%
Cramer’s
standard
Z-score 0.01
Notes:
Dependent variable for all models is market value per share three months after year end 2010. All
models are estimated using ordinary least squares regression. EP = Environmental provisions as
of year end 2010 scaled by the number of shares outstanding as of year end 2010. The
measurement of EP is based on Canadian GAAP in Canadian GAAP models and IFRS in IFRS
models. BV = Book value as of year-end 2010 scaled by the number of share outstanding as of
year end 2010. BV is measured under Canadian GAAP regardless of the model. EP, as measured
in the model, is removed from BV. NI = Net income as of year end 2010 scaled by the number of
shares outstanding as of year end 2010. NI is measured under Canadian GAAP regardless of the
model. LOSS = A dummy variable coded one for loss making firms. NI 9 LOSS = An
interaction between NI and LOSS. CSR = A dummy variable coded one for firms that released a
stand-alone CSR report for 2010. EP 9 CSR = An interaction between EP and CSR. EP 9 CSR
has been residual centered to mitigate multicollinearity issues (Burrill, 1997; Lance, 1988; Little,
Bovaird, and Widaman, 2006; Bruynseels and Willekens, 2012). ***p < 0.01, **p < 0.05,
*p < 0.10. All t-statistics are estimated, using White’s (1980) standard error.
AP Vol. 16 No. 3 — PC vol. 16, no 3 (2017)

the impact in the current period (depreciation) of the initial entry of EP cannot
normally be determined since it is combined with the depreciation of the underly-
ing asset. Even though we cannot determine the actual impact of EP on deprecia-
tion, holding all else equal, firms with higher levels of EP should have higher levels
of depreciation. We test this relationship by regressing future period depreciation
(DEPt) values on current environmental provisions (EPt1/t2). We include the
earnings before interest, taxes, interest, depreciation and amortization (EBITDAt)
from the same period as the dependant variable to control for differences in depre-
ciation related to the use of the units of production method of depreciation and
prior period depreciation (DEPt1/t2) values to control for any use of the
straight-line or declining balance methods of depreciation.
Table 4 displays the results of the regression analysis examining the relation
between EP and DEP. In support of our arguments, and as would be expected,
there is a positive relationship between EPt1/t2 and DEPt which is statistically
significant at p-values less than 0.1 for the oil and gas industry in both models.
Furthermore, and contrary to what would be expected, the relationship between
EP and DEP is negative in the “one period ahead” model and statistically signifi-
cant at a p-value less than 0.01, but loses its statistical significance in the “two
years ahead” model for the mining industry.
To confirm EP’s relationship with future financial performance, we regress
cash flow from operations (CFt) on reported environmental provisions (EPt1/t2),
from one or two years prior, for both the oil and gas, and mining industries. We
include three variables to control for information pertaining to profitability that
would have been available at the time the environmental provisions were disclosed.
These control variables include current cash flows from operations (CFt1/t2), the
price to book value ratio (P/Bt1/t2) and the CSR (CSRt1/t2) dummy variable
used in our value-relevance tests.
Table 5 displays the results from the OLS regression with cash flows from
2011 and 2012 (CFt) scaled by outstanding shares as the dependant variable.
The coefficient for EP is positive and statistically significant at a p-value less
than 0.1 for the oil and gas industry in both models. This relationship is not
shared with firms in the mining industry as the EP coefficient is not statistically
significant in either model. Similar to the results from the depreciation regres-
sion, we find that EP has very different characteristics in the oil and gas indus-
try as opposed to the mining industry. While our depreciation model provided
support for the reporting of environmental provisions having a greater cost in
the oil and gas industry, as opposed to mining, through its relationship with
reported depreciation, our cash flow model provides evidence that environmental
provisions are only associated with a benefit, higher future cash flows from
operations, in the oil and gas industry. In doing so, we provide some support
that environmental provisions can act like a costly signal of future earnings
potential.
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TABLE 4
Regression of deprection (DEPt) on prior period environmental provisions (Ept1/t2) control-
ling for current operations (EBITDAt) and prior period depreciation (DEPt1/DEPt2)
Model—One period ahead Model—Two periods ahead
Oil and gas Mining Oil and gas Mining
Independent Standard Standard Standard Standard

variable Coefficient error Coefficient error Coefficient error Coefficient error
Intercept 0.07 0.06 0.04*** 0.01 0.11 0.08 0.03*** 0.01

EPt1/t2 0.16* 0.08 0.03*** 0.01 0.20* 0.10 0.01 0.004
EBITDAt 0.10*** 0.04 0.02 0.02 0.25*** 0.04 0.08*** 0.01
DEPt1 0.69*** 0.08 0.94*** 0.11 0.77*** 0.13 0.84*** 0.06
DEPt2 0.26** 0.13 0.12 0.08
N 85 98 72 83
R2 85.39% 83.55% 84.87% 95.28%
2
Adjusted R 84.85% 83.03% 83.97% 95.04%
Notes:
Dependent variable for models one period ahead is depreciation per share at year end 2011. For
models two years ahead, the dependent variable is depreciation per share at year end 2012. All
models are estimated using ordinary least squares regression. EPt1/t2 = Environmental
provisions as of year end 2010 scaled by the number of shares outstanding as of year end 2010.
The measurement of EP is based on IFRS. EBITDAt = Earnings before interest, taxes,
depreciation and amortization as of year end 2011 in one period ahead models or 2012 in two
period ahead models scaled by the number of share outstanding. DEPt1 = Depreciation as of
year-end one year prior to the dependent variable scaled by the number of shares outstanding.
DEPt2 = Depreciation as of year-end two years prior to the dependent variable scaled by the
number of shares outstanding. ***p < 0.01, **p < 0.05, *p < 0.10.
DISCUSSION
Our results provide an indication that stakeholders should be careful when relying
upon environmental provisions to accurately measure environmental liabilities.
While the original GAAP standard (section 3060.39) was able to proxy for the
firm’s unbooked environmental liabilities (Li and McConomy, 1999), the harmo-
nization with U.S. GAAP and the transition to IFRS have resulted in the disclos-
ing of liabilities that are only treated by market participants as liabilities for the
largest, most visible firms in the oil and gas industry, with a disclosed commitment
to CSR in stand-alone CSR reports. In the mining industry, these reported liabili-
ties appear to lack value relevance, but in the oil and gas industry, they are posi-
tively related to market value. We provide evidence that suggests environmental
provisions in the oil and gas industry are being used by management to convey
private information pertaining to the firm’s earnings expectancy. Thus, care needs
to be taken if they are to be used in assessing the firm’s environmental perfor-
mance, since the provisions may be strategically estimated to influence the market
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TABLE 5
Regression of cash flow from operations (CFt) on prior period environmental provisions
(EPt1/t2) controlling for prior period cash flow from operations (CFt1/CFt2) Market to
book value (P/Bt1/t2) and separate CSR disclosures through stand-alone corporate social
responsibility reports (CSRt1/t2)
Model—One period ahead Model—Two periods ahead
Oil and gas Mining Oil and gas Mining
Independent Standard Standard Standard Standard

variable Coefficient error Coefficient error Coefficient error Coefficient error
Intercept 0.13 0.9 0.15*** 0.06 0.09 0.20 0.13** 0.04

EPt1/t2 0.24*** 0.09 0.02 0.04 0.52*** 0.17 0.01 0.03
CFt1/t2 0.75*** 0.05 0.27*** 0.10 0.30*** 0.09 0.16* 0.09
CSRt1/t2 0.41* 0.23 0.46*** 0.15 1.23*** 0.44 0.56*** 0.14
P/Bt1/t2 0.04 0.03 0.01*** 0.001 0.08 0.05 0.004*** 0.001
N 85 98 73 82
R2 88.27% 63.49% 54.44% 79.96%
2
Adjusted R 87.68% 62.72% 51.76% 78.91%
Notes:
Dependent variable for models one period ahead is cash flows from operations per share at year end
2011. For models two years ahead the dependent variable is cash flows from operations per share
at year end 2012. All models are estimated using ordinary least squares regression. EPt1/t2
= Environmental provisions as of year end 2010 scaled by the number of shares outstanding as of
year end 2010. The measurement of EP is based on IFRS. CFt1/t2 = Cash flow from operations
as of 2010 year end scaled by the number of shares outstanding. CSRt1/t2 = Dummy variable
coded one for firms that released a stand-alone CSR report for 2010. P/Bt1/t2 = Market value
divided by book value measured for 2010. ***p < 0.01, **p < 0.05, *p < 0.10.
expectancies rather than to distinguish the firm as a strong environmental per-

former. If this characteristic is common with other types of environmental disclo-
sures, it would potentially raise problems with the use of information to regulate
pollution by market participants. There is the belief that information pertaining to
a firm’s environmental performance can be used to regulate a firm’s environmental
behavior (Konar and Cohen, 1997). Under this form of regulation, superior CSR
performance is encouraged through its association with the firm’s cost of capital.
However, environmental disclosures that have a different meaning to investors as
opposed to other stakeholders could result in firms being motivated to follow
CSR behavior that is undesirable to noninvestor stakeholders.
CONCLUSION
This study examines and compares the value relevance of the environmental provi-
sions recorded under GAAP and IAS 37 for firms competing in the extractive
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industries. It also tests whether the transition to IAS 37 has improved the level of
value relevance, using a quasi-experimental research design. In doing so, we build
upon the work of Schneider et al. (2017). Through an increased sample size and
additional control variables, we find that the provisions computed under both stan-
dards are value relevant, but only to investors for the oil and gas industry. This
could potentially be driven by the relative value of environmental provisions in the
oil and gas sector as opposed to mining. In the oil and gas sector, environmental
provisions represent a higher percentage of book value than in the mining sector.
However, the environmental provisions are only valued as an environmental liabil-
ity for a small number of large companies releasing stand-alone CSR reports. For
the majority of the companies, the environmental provisions convey information
about expected earnings similar to the costly signal of bank loan loss provisions
(Beaver et al., 1989: 169). The signaling effect we introduces builds upon the find-
ings of Schneider et al. (2017) by providing a possible explanation for why a firm’s
treatment of credit risk did not impact the value relevance of its environmental
provisions. Our study builds upon previous findings by introducing the concept,
and empirically supporting, that for the majority of oil and gas companies, the
environmental provisions act as a costly signal of earnings expectancy. Further-
more, the transition to IFRS has not changed this relationship or the level of its
value relevance. While we examined the relative value relevance as opposed to the
incremental value relevance, our findings are consistent with Schneider et al.
(2017).
We further support our interpretation of environmental provisions being a
costly signal of earnings expectancy by examining its relationship with future costs
and benefits. We find significant differences between the characteristics of environ-
mental provisions reported in the oil and gas industry as opposed to the mining
industry. In terms of costs, environmental provisions are positively associated with
future period depreciation in the oil and gas industry, but there is no relationship
between environmental provisions and depreciation in the mining industry. For
benefits, environmental provisions are positively related to future cash flow from
operations. This relationship does not hold in the mining industry. We interpret
these differences as the reason environmental provisions are generally positively
related to market value for the oil and gas industry, but have no relationship with
market value for the mining industry. We suggest that signaling might only occur
in the oil and gas industry due to the difference in the relative importance of envi-
ronmental provisions between the two industries. Environmental provisions to
book value in the oil and gas industry (8.7 percent under Canadian GAAP and
10.99 percent under IFRS) is higher than that of the mining industry (4.37 percent
under Canadian GAAP and 3.6 percent under IFRS). The relative value of envi-
ronmental provisions in the mining industry might not be significant enough to
convey an earnings expectancy signal.
We also find that stand-alone corporate social responsibility reports moderate
the relationship between environmental provisions and market value for firms in
the oil and gas industry. The environmental provisions for this subset of firms in
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the oil and gas industry were the only reported environmental provisions to affect
market price as the liability they represent. This is consistent with and supports
the stream of literature that views CSR reports as being of value to market partici-
pants (Dhaliwal et al., 2011, 2014; Berthelot et al., 2012). It also provides indica-
tion that environmental provisions as reported under either accounting standard
are missing some important content that is required for proper interpretation by
the stakeholders. This finding should be read with caution as only 23 firms in our
sample produced stand-alone corporate social responsibility reports. Furthermore,
the moderating nature of the relationship was not hypothesized. Rather stand-
alone CSR reports and the interaction with environmental provisions were added
to the models as a control variable given previous findings pertaining to their rela-
tionship with market value. Given the large body of research questioning the qual-
ity of the information disclosed through CSR reports (see Michelon et al., 2015
for a recent example), future studies should examine this relationship further.
In terms of the transition to IAS 37, we find that the IFRS reporting of envi-
ronmental provisions does not improve on the old Canadian GAAP equivalent as
far as value relevance of environmental provisions is concerned. While an improve-
ment in value relevance would have been desirable, finding no difference is consis-
tent with prior studies. The transition to the IFRS for other common law
countries was associated with a nonsignificant change in the value relevance of
reported book value and earnings (Clarkson et al., 2011).
However, considering that the original Canadian GAAP standard for environ-
mental provisions (Capital Assets section 3060.39) was value relevant to investors
(Bewley, 2005; Li and McConomy, 1999), standard setters should consider reform-
ing IAS 37. Adjustments should be made to bring the standard closer to the origi-
nal Canadian GAAP standard. Li and McConomy (1999) were able to support the
value relevance of the current period impact and accumulated value of environ-
mental provisions, but could not support the value relevance of their na€ıve esti-
mate of the terminal value of environmental provisions. When considering IAS 37,
neither the current impact nor the accumulations of these impacts are made avail-
able to financial statement users. Rather, the present value of the terminal value is
provided, and financial statement users must estimate its current period impact
through its accretion. In essence, the harmonization to U.S. GAAP removed what
was found to be value relevant from the standard, and added what was not found
to be value relevant. These changes persisted through the transition to the IFRS.
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Value Relevance of Environmental Provisions

Pre- and Post-IFRS*

AP Vol. 16 No. 3 — PC vol. 16, no 3 (2017) pages 139–168 © CAAA/ACPC

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information will restrict management’s ability to manipulate the estimates used to

2. FAS 143 is now codiﬁed as ASC 410.

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where descriptive statistics, univariate, multivariate and an earnings expectancy

Evolution of Environmental Provisions in Canada

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LITERATURE REVIEW AND HYPOTHESIS DEVELOPMENT

Environmental Disclosure Valuation

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Information Content of Environmental Provisions

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HYPOTHESIS 1b. There is no relation between environmental provisions recorded

IFRS Mandatory Adoption

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RESEARCH DESIGN AND DATA

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variable is intended to control for the nonaccounting information used by investors

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RESULTS AND DISCUSSION

Descriptive Statistics and Univariate Analysis

All Oil and gas Mining

Starting sample 202 95 107

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Panel A: Full sample

N = 195 Mean Median Min Max SD

TA 1,543.1 277.1 0.2 42,669.0 4,314.3

Panel B: Oil and gas ﬁrms

N = 92 Mean Median Min Max SD

TA 2,119.9 340.3 0.6 42,669.0 5,717.1

Panel C: Mining ﬁrms

N = 103 Mean Median Min Max SD

TA 1,027.9 197.2 0.2 16,397.1 2,381.7

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Earnings Expectancy Analysis

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Base model Canadian GAAP IFRS

Independent Standard Standard Standard

Intercept 3.33* 1.79 3.22* 1.76 3.23* 1.71

Panel B: Oil and gas industry

Base model Canadian GAAP IFRS

Independent Standard Standard Standard

Intercept 5.83*** 1.95 4.81*** 1.53 4.38*** 1.48

(The table is continued on the next page.)

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Panel B: Oil and gas industry

Base model Canadian GAAP IFRS

Independent Standard Standard Standard

Base model Canadian GAAP IFRS

Independent Standard Standard Standard

Intercept 2.69 2.43 2.66 2.32 2.50 2.25

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Oil and gas Mining Oil and gas Mining

Intercept 5.83* 1.95 4.81* 1.53 4.38*** 1.48

Intercept 0.07 0.06 0.04* 0.01 0.11 0.08 0.03* 0.01

Intercept 0.13 0.9 0.15* 0.06 0.09 0.20 0.13 0.04