Obscuring tax avoidance by alternative interpretations in applying segment disclosure under IFRS 8

Purpose: We examine whether firms concealing tax avoidance activities through lower effective tax rates (ETRs) are associated with the flexibility allowed on disclosing segments under the International Financial Reporting Standard (IFRS) 8, Operating Segments.

Design/methodology/approach: We adopt an archival research approach and conduct empirical analysis based on a hand-collected sample of firms listed on the Australian Securities Exchange over the 2016–2019 period. A unique disclosure index of 32 items is constructed, covering the core principles of IFRS 8 to measure the level and disclosure categories.

Findings: We find that lower ETRs are associated with lower combined segment disclosure level scores. Additional analyses indicate that firms with lower ETRs disclose less mandatory, voluntary, hard, soft, mandatory-hard, mandatory-soft, voluntary-hard and voluntary-soft segment information.

Research limitations/implications: The validity of our findings depends on ETRs being an appropriate proxy measure for tax avoidance. ETRs have limitations as a measure of tax avoidance even though they are widely accepted in the literature. Our results have implications for regulators by demonstrating that allowing discretion and judgment in interpreting accounting standards can have negative consequences in terms of allowing firms to obscure tax avoidance.

Originality/value: We show that complex accounting standards that allow higher levels of discretion and judgment are linked to attempts by firm managers to conceal tax avoidance through lower disclosure of segment-related information in the annual report.