Readability of notes to the financial statements and the adoption of IFRS

Purpose: Financial reports should present clear and easily comprehensible information to investors, yet there are uncertainties regarding the impact of financial report readability after the adoption of IFRS. Therefore, this study examines the association between readability, firm performance and IFRS in Australia by assessing the impact of the adoption of IFRS on readability of Notes to the financial statements in an Australian context; the interaction effect between IFRS and firm performance on readability. Design/methodology/approach: This paper measure financial reports readability separately based on two components, namely, complexity of financial reports (Fog index), and number of words (Length). Originality: This study extends the financial report readability literature by examining the effect of adopting IFRS on readability of financial reports. It also contributes to understanding the issues associated with effective communication, and therefore, extends to the global discussion on the economic consequences of adopting IFRS. Key literature/theoretical perspective: Li (2008) / management obfuscation hypothesis. Findings: Results show that complexity of the sentences in the Notes to the financial statement reduces after the adoption of IFRS in Australia, despite the Notes being significantly lengthier. Second, the introduction of IFRS did not alter the complexity of financial reports based on performance. However, it affects the relationship between length and performance, where manipulation exists prior to IFRS and disappears after the adoption takes place. Research limitations/implications: A limitation of this study is its reliance on readability formula that is based on simple assumption, thus, the analysis is restricted to printed material in the form of sentences. Practical and Social Implications: This study is important to both preparers and users of financial reports.