Decision-Usefulness in Financial Reports: Research Report No.4: The effect of company size, profitability and the introduction of IFRS on the relevance of financial reports for investor decision making

This is the fourth in a series of five reports that are based on a research study that explores the decision-usefulness in financial reports of Australian listed companies. The first three reports in this series highlighted that, while financial reports have been criticised for increasingly not meeting the needs of users, recent Australian evidence indicates they are still of relevance to investors. While the results suggest there is room for improvement, the findings do not indicate a decline in the decision-usefulness of financial reports in Australia, contrary to some research findings elsewhere. In this report, we examine the effect of company size, profitability and the introduction of International Financial Reporting Standards (IFRS) on the relevance of financial reporting for investor decision making in Australia. Conjecture has surrounded not only the relevance of financial reporting to investors, but also whether the traditional financial reporting model enables all companies to generate equally-useful information. Moreover, there is conflicting evidence as to whether Australia’s adoption of IFRS has enhanced the relevance of financial reports. In response to such conjecture and inconclusive findings, we examine whether the relevance of financial reporting to equity investors is influenced by the size of the company, its profitability and whether the introduction of IFRS, in general, improved the relevance of annual financial statements. Our results show the following: • First, a one size fits all financial reporting model is inappropriate, as the relevance of financial reporting is influenced by company size. In particular, annual financial reports are comparably decision-useful for equity investors of large ASX-listed companies, but less so for small ASX-listed companies. • Second, annual financial reports are more relevant to investors of profit-making companies than loss-making companies, suggesting that investors look to other non-accounting indicators in determining whether to invest in a loss-making company. • Finally, the adoption of IFRS did enhance the relevance of alternative firm performance metrics, as equity investors found the information within these performance metrics to be more decision-useful for investment purposes post-IFRS.