Does IFRS convergence affect the readability of annual reports by Indian listed companies?

Abstract

Purpose

The purpose of this study is to investigate the influence of IFRS convergence on annual report readability in an emerging market context, with an emphasis on the contents of management discussion and analysis (MD&A), notes to the accounts (Notes) and the whole annual report.

Design/methodology/approach

The study performs firm-fixed effect regression on a sample of 143 Indian listed companies over a period spanning from 2012 to 2021 to examine the influence of IFRS convergence on readability. This assessment primarily focuses on broader spectrums of readability dimensions, namely annual report length and complexity, wherein complexity is measured using the Gunning Fog, Flesch Reading ease and Flesch-Kincaid grade index.

Findings

As Indian firms shift to IFRS reporting, the findings suggest that annual reports have become significantly lengthier and more complex, causing deterioration in readability. The Notes section, in particular, exhibits the most significant increase in length and complexity, followed by the entire annual report and MD&A section. Furthermore, the findings also indicate that the complexity of the Notes section is instrumental in the observed complexity growth of the whole annual report in the post-IFRS period.

Research limitations/implications

The current study employs readability indices rather than directly taking into consideration the opinions of actual users of annual reports to determine readability. As a result, the study does not provide direct evidence on how information in annual reports affects users' readability.

Practical implications

The findings provide insightful information to managers and policymakers about the difficulties stakeholders may encounter while reading IFRS-based annual reports, which ultimately impact their investment decisions. Thus, there is an important managerial implication from this, depending upon the severity of complexity corporations participate in while complying with IFRS in the post-IFRS period.

Originality/value

Analyzing the influence of exogenous information shock, such as IFRS convergence, on readability is critical, particularly for emerging markets like India, where a lack of financial literacy and weaker enforcement already have detrimental effects on the capital market. In light of this, the current study provides a comprehensive examination of the impact of IFRS convergence on annual report readability and contributes to the growing IFRS literature in the less explored emerging market context.

Citation

Saravanan, R., Mohammad, F. and Kumar, P. (2023), "Does IFRS convergence affect the readability of annual reports by Indian listed companies?", Journal of Applied Accounting Research, Vol. ahead-of-print No. ahead-of-print. https://doi.org/10.1108/JAAR-10-2022-0284