companies to prepare comparative financial statements on both an interim and annual basis. Additionally, the Act reinforced the requirement of the 1981 SIA for Financial Statements to be audited by practicing members of the ICATT who are obliged to use standards approved by ICATT in the performance of their professional duties. Therefore, the introduction of the 1995 Companies Act did not significantly alter the financial repo- rting environment faced by public-traded companies in Trinidad and Tobago.
The new Securities Industry Legislation was also enacted in 1995 and took effect in May 1997. While it specifies in greater details the expected content of the published financial statement, especially the Income Statement, most of the financial reporting requirements found in the 1981 SIA were maintained. For instance, like the 1981 SIA, the 1995 SIA requires publicly traded companies to use standards adopted by ICATT when preparing their financial statements and to disclose and explain any non- compliance. As a result, the 1995 SIA had the effect of maintaining the status quo in the financial reporting environment faced by publicly traded Trinidad and Tobago companies.
The results of these analyses suggest that the adoption of IAS was generally, but not universally, associated with increasing uniformity of domestic financial reporting.
The entire population of companies listed on the TTSE was eligible for inclusion in the study. A list of these companies was obtained from the TTSE. There were 21 firms listed on the TTSE in 1987 and that number had risen to 24 in 1995, 26 in 1999, 30 in 2002 and 32 in 2003. Using this list, all 21 firms trading on the TTSE in 1987 (the year prior to the adoption of IAS) were identified. Then, all 1987 firms that were still trading in 1995, 1999, 2002 and 2003 (the comparison years) (18 firms) were included in the study (seeTable 1for a listing of these firms).3
Only five years’ financial statements were examined due to difficulties experienced in obtaining the financial statements for the entire period, the budgetary constraints under which the study was conducted and the labor- intensive nature of the data collection process.
The year 1995 was chosen as the first comparative year because the effect of the IASB’s comparability project on IAS requirements would have already been reflected in published statements and, therefore, would not confound the analysis. The year 1999 was chosen as the second comparative year because it was the most recent financial year for which a full set of financial statements was available at the commencement of the study. The study was updated as additional years’ financial data (2002, 2003) became available.
Table 1. Sample Companies.
Agostini’s Limited Angostura Holding Limited ANSA McAl Limited
Barbados Shipping and Trading Company Limited Berger Paints Limited
Flavorite Foods Limited Furness Trinidad Limited
Lever Brothers (West Indies) Limited L.J. Williams Limited
Neal and Massy (Holdings) Limited
Point Lisas Industrial Port Development Corporation (PLIPDECO) Readymix (West Indies) Limited
Trinidad Publishing Company Limited West Indian Tobacco Company Limited Royal Bank (Trinidad and Tobago) Limited Republic Bank (Trinidad and Tobago) Limited Scotia Bank (Trinidad and Tobago) Limited CIBC (West Indies) Holding Limited.
Procedure Used to Examine Financial Statements and Collect Data The following six financial statement elements that are governed by the IAS adopted by Trinidad and Tobago were selected for analysis:
1. Expense Recognition for Retirement Benefit Plans;
2. Depreciation of Property Plant and Equipment;
3. Valuation of Property Plant and Equipment; Valuation of Short-Term Investments;
4. Valuation of Associated Companies; and 5. Inventory Cost Flow Assumptions.
These financial statement elements were chosen based on their being identified as areas prone to diversity in prior studies, and the perceived likelihood of the permitted alternative accounting treatments having a material effect on asset valuation and income determination (Hoyle et al., 1998; Street & Shaugh- nessy, 1998).Table 2summarizes the changes in the IAS rules for the selected financial statement elements during the period of the study.
To establish the number of alternative bases/methods used for the selected financial statement elements, two reviewers examined the contents of the financial statements of each firm, for each year, independently. Each reviewer noted the practices used for the selected elements. Where the findings of the reviewers conflicted, the item in question was re-examined by both reviewers and a mutually agreeable decision reached.
Measures of Financial Reporting Uniformity
Two measures were used to operationalize financial reporting uniformity.
The first measure was a composite of the number of different alternatives used to account for a specific financial statement element and the distribution of firms across the various alternatives used, during a given reporting period.
The fewer the number of alternative methods used to account for a financial statement element and/or the greater the number of firms using a particular method to account for a financial statement element, the greater the degree of financial reporting uniformity, ceteris paribus. The second measure was an adaptation of the Herfindahl Index (H) that is frequently used to measure industry concentration. The Herfindahl Index may range in value from i/n (the number of allowed alternative accounting treatments for a specific financial statement element) to 1. The closer the computed value ofHis to 1, the greater the degree of financial reporting uniformity.
Table 2. Evolution of Selected International Financial Accounting Standards.
IAS Number and Title Key Dates Effect on Financial Statement Elements Examined IAS 19 – retirement benefit
plans: expense recognition by employers (for post- employment benefit plans and other long-term benefits)
Initially effective – January 1, 1983
Allowed:
– Cash basis (pay-as-you-go) method
– Terminal funding method – Accrual methodsa Revised effective – January
1, 1999
Allowed:
– Accrual methods IAS 4 – depreciation accounting.
Superseded by IAS 16 – accounting for PPE
Initially effective – January 1, 1977
Allowed:
– A variety of systematic allocation methods but chosen method(s) must be applied consistently Effective – January 1, 2000
IAS 16 – accounting for PPE (valuation/measurement subsequent to initial recognition)
Initially effective – January 1, 1983
Allowed:
– Historical cost
– Market (fair) value (for an entire class of assets each time or basis of selection of asset for revaluation should be systematic) and periodically Revised 1993 and 1998
(effective – July 1, 1999)
– No substantive change in valuation bases but entire class of assetsmustbe revalued when market value chosen
IAS 26 – accounting for investments(short-term equity securities) superseded by IAS 19 – financial instruments: recognition and measurement
Initially effective – March 1, 1986
Allowed:
– Market value
– Lower of cost or market Effective – January 1, 2001
(could be adopted as early as March 1999)
– Breaks equity investments into trading and available- for-sale (AFS) categories both valued at market in periods subsequent to acquisition (gains and losses on trading securities to profit and loss, those on AFS to equity)
While the range and distribution measure is clearly more judgmental than the adapted Herfindahl measure, it is also more descriptive of the changing pattern of financial reporting uniformity following the adoption of IAS as TTAS.