Complex information and accounting standards: Evidence from UK narrative reporting

Abstract

The application of International Financial Reporting Standards (IFRS) has been introduced in many countries to enhance efficiencies in financial markets and improve communication in financial reporting. However, extant studies have suggested that the introduction of IFRS has increased narrative complexity, owing to the demand for more reporting. Considering that accounting complexity can be either informative (enhancing understanding) or non-informative, thereby causing obfuscation, this study performs an empirical analysis to highlight which of the two types of complexities may be affected by IFRS application. Using the setting of IFRS adoption in the UK and a word list-adjusted component of the fog index, this study decomposes complexity into two components: information (common complexity) and obfuscation (uncommon complexity). The results reveal that IFRS adoption has increased the common complexity of accounting narratives (information) but does not necessarily increase obfuscation. The study’s contribution is twofold: methodological through the decomposition of complexity using the term weighting concept and policy-related by identifying areas of increased narrative comparability in IFRS reports. Moreover, the study’s application of complexity decomposition to IFRS is novel. Future studies may apply this by using the identified information and obfuscation components to investigate the economic consequences of IFRS-associated complexity.