Future economic benefit: The future economic benefit embodied in an asset is the
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An item may be recognized as an intangible asset when it meets the definition of an intangible asset mentioned above as well as corresponds to the following recognition criteria: To recognise
an intangible asset, the enterprise must deem it probable that future economic benefits associated with that asset will flow to the enterprise, and it has a cost or value that can be
measured reliably IAS 38.21. If an intangible item does not meet any of the criteria for definition and recognition as an asset, the expenditure is recognised as an expense when incurred.
Expenditure that was initially recognised as an expense is not included in the cost of an intangible asset at a later date IAS 38.71.
It lies in the nature of internally generated intangible assets that they are more uncertain than separately acquired intangible assets. Firstly, problems arise in identifying whether there is an
identifiable intangible asset which will generate a future economic benefit Egginton, 1990; Kothari, Laguerre and Leone, 2002; Wulf, 2007. Secondly, it is more difficult to measure the
cost or the value of these assets because there are usually no market prices available for internally generated intangible assets Ballwieser, β006; Küting and Dawo, β00γ.
As a result, the IASB defined rules for the recognition of internally generated intangible assets which are more demanding. In order to determine if an internally generated intangible asset
qualifies for recognition, the IASB distinguishes research from development activity. Research is defined as original and planned investigations to gain new scientific or technical knowledge. The
application of such knowledge to the plan or design of new products or processes is considered as development. IAS 38.54 requires research costs to be expensed as incurred because a firm
can never demonstrate that expected future benefits from such outlays are probable. In contrast to the research phase, the development stage is further advanced. At this more
advanced stage of the innovation process, an enterprise might possibly identify an intangible asset and demonstrate its probable future economic benefits. If the enterprise fulfils the following
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six restrictive requirements, the standard allows recognition of an intangible asset during the development phase IAS 38.57:
1. The technical feasibility of completing the intangible asset so that it will be available for use or sale;
2. its intention to complete the intangible asset and either use it or sell it; 3. its ability to use or sell the intangible asset;
4. the mechanism by which the intangible will generate probable future economic benefits; 5. the availability of adequate technical, financial and other resources to complete the
development and to use or sell the intangible asset; and 6.
the enterprise‘s ability to reliably measure the expenditure attributable to the intangible asset during its development.
The recognition criterion of technical feasibility is barely illustrated in the specifications of IAS
38 so that the enterprise has the opportunity to base decisions on whether or not a project is technically feasible on its subjective point of view. Because of its similarity the definition of
technical feasibility generally follows the US-GAAP rules of accounting for the costs of software in SFAS 86 Baetge and Keitz, 2002; Lutz-Ingold 2005. Accordingly, a software program has
established technical feasibility when a detailed program design or working model has been completed Lev, 2001. However, the following of SFAS 86 may substantiate the technical
feasibility for software but it is not adequate for other intangible items. Furthermore, the recognition criterion of technical feasibility is only sufficient for traditional product or process
development. For other intangible items like brands the question of technical feasibility is negligible Dawo, 2003; Baetge and Keitz, 2002; Hepers, 2005; Schreiber, 2005.
To meet the second criterion for recognition, the company has to intend completing the
intangible asset for internal usage or external selling. Strictly speaking, this criterion results from the application of the framework and IAS 1. Because without an intention of production or
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commercialisation, there is no possibility to get an economic benefit of the development. The intention of completion is sufficiently proven if development is continued until the point of
preparation of the annual financial statement. This is based on the argument that a businessman would never continue development if he did not intend to finish it Dawo, 2003; Baetge and Keitz,
2002; Lutz-Ingold, 2005.
The third criterion for capitalisation recognition is the ability to internal use or external sale
which results from the basic economic principles. These economic principles imply that companies would not develop an intangible asset unless it was internally used or externally sold.
This criterion is met, if legal or effective measure lead to presumption that the potential benefit is accessible Dawo, 2003. More precisely, the evidence has to be given on the ability as well as
on the intention of internal usage or external selling. The reason for this provision is that a completed intangible asset may intentionally not be used in order to prevent a decrease in value
of existing inventory Lutz-Ingold, 2005.
The fourth criterion requires a verification, in which terms the asset is likely to yield benefits.
Whereas an increase of benefits has to be proven for internally generated intangible assets, for derivative acquired intangible assets it is sufficient to expect benefits. Therefore, the
requirements for the capitalization of internally generated intangible assets are more restrictive Fülbier, Honold and Klar, β000. Following IAS 38.60 this proof has to be documented
according to IAS 36. In case of selling intangible assets or products which were produced with the aid of intangible assets, the existence of a related market has to be based on market
research. In case of internal use the intangible assets´ potential benefit depends on the technical and economic consistence and is therefore mainly determined by the criterion of feasibility. In
case of an internal use future economic benefits have to be based on the estimation of the net present value of payment flows Baetge and Keitz, 2002; Schreiber, 2005.
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The criterion of possessing adequate technical, financial and other resources for completion and the subsequent utilization can be met
– according to IAS 38.61 – by presenting a business plan showing the needed resources and the companies´ ability to mobilize
these resources. Regarding the availability of debt capital a letter of intent from the lender is accepted as a qualified proof
Küting and Dawo, β00γ.
The last criterion for capitalization recognition requires a reliable valuation of all expenditures
connected to the developed intangible asset. This is when an appropriately equipped costing system is able to reliably determine the cost of production.
Measurement
When the recognition criteria are satisfied, intangible assets are initially measured at cost IAS 38.24. The standard states, that after recognition, intangible assets may be measured using
either the cost model or the revaluation model IAS 38.72. After initial recognition, the cost model suggests that intangible assets should be carried at cost less any amortisation and
impairment losses Wulf, 2007. If the revaluation model is selected, intangible assets shall be carried at its fair value less any subsequent accumulated amortisation and impairment losses;
fair values are to be determined by reference to an active market IAS 38.75. In this respect, an active market is one in which the items traded are homogeneous, willing buyers and sellers can
be found at any time, and prices are available to the public IAS 38.8. Such active markets are expected to
be uncommon for intangible assets Küting and Dawo, β00γ; Ballwieser, β006; Mindermann, 2009. Therefore, in most instances, the revaluation model would not be a
realistically usable model. Nevertheless, if fair value information can be obtained from active markets, and the enterprise opts for the revaluation model, it will be essential to perform
revaluations on a regular basis, such that the carrying amount does not differ materially from its fair value at balance sheet date.
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Assessment of decision usefulness
While the requirements of understandability appear uncontroversial, the requirements of relevance, reliability and comparability have to be more carefully examined.
Relevance
As opposed to other accounting standards like US-GAAP or HGB the IFRS allow the capitalization of development costs, which is most welcome under the relevance aspect Aboody
and Lev 1998. Development expenses have to be capitalized with regard to aforementioned premises. Consequently at first glance, financial statements according to IFRS should be able to
give much more information about internally generated intangible assets than other financial statements like US-GAAP or HGB. However, the capitalization rules for development costs as
provided in IAS 38 are prudence-driven. The underlying reason being that financial accounting shall emphasise the aspect of information reliability Healy, Myers and Howe, 2002. The trade-
off between relevance and reliability causes that only a small amount of development cost can be capitalized if the requirements are too restrictively interpreted Mindermann, 2009. For
example, the technical feasibility of completing an asset cannot be verified until the final stage of a development process. The same is true for the evidence that all resources are available, which
are necessary to finish the development Dawo, 2003.
Furthermore, the codified prohibition of reinstatement that is mentioned in IAS 38.71 is unsatisfying with regard to the aspect of relevance because only a relatively small part of the
development expenditures can be considered for capitalization Lutz-Ingold, 2005. If the asset fulfils the capitalization criteria for the first time its value in the balance sheet will be too low,
because only parts of the whole development costs may be capitalized. The users of financial statements will not be informed about the real value of the asset and will not be able to appraise
it by themselves. So the balance sheet value is meaningless Bentele, 2004. Due to the fact
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that there are explicit capitalization prohibitions for certain internally generated intangible assets such as research costs, the contingent of internally generated intangible assets which are
allowed to be capitalized is manageable. Finally, there are not many more internally generated intangible assets capitalizable according to IFRS in comparison to other accounting standards
which do not allow the capitalization of internally generated intangible assets Lutz-Ingold, 2005.
Reliability
Financial statements information have to be reviewable which means that third parties must be able to verify if the information are true and in accordance with actuality. Scopes of discretions
and options to capitalize lower the objectivity of financial statements. The capitalisation of expenditures for intangible assets requires that costs are assigned solely to the development
phase. Therefore, the differentiation between costs for research and those for development is the first step in order to determine the expenditures to be capitalized. If the company cannot
distinguish the research phase from the development phase, the scope of discretion is limited: the expenditure is treated as if it only were incurred in the research phase. Of course, a
statement that an explicit distinction cannot be made is an area of discretion in itself Keitz, 1997. This remaining scope of discretion can be indirectly limited by additional documentation
containing reasons why a project is already in the development phase Hepers, 2005.
Furthermore, the additional recognition criteria in IAS 38.57 which should guarantee objectivity can be influenced by the balancing enterprise, because IAS 38 does not determine how the
evidence on the fulfilled capitalization criteria has to be provided. Pursuant to the principles of objectivity evidence provided by a third party for example in the form of an expert testimony
would be favourable. External references enhance the verifiability. It would be consequent, if these requirements were also part of the capitalization rules of development cost Bentele, 2004;
Baetge and Keitz, 2002. But even if an enterprise is able to demonstrate all definition and
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recognition criteria, eventually it will be the company‘s choice whether or not it externalizes them, i.e. the obligation to capitalize de facto turns into an option to capitalize internally generated
intangible assets Keitz, 1997; Ballwieser, 2006.
After recognition the standard allows for intangible assets to be carried at their fair value. However, the fair value is not estimated as a reliable valuation rate. IAS 38 claims that the fair
value shall be determined by reference to an active market. The distortion of prices by speculative effects could, however, interfere with reliability Dawo, 2003; Bentele, 2004; Hepers,
2006. Basically, perfect markets must be a precondition for a definite fair value. Only in this case the existence of a unique market price, which includes all valuation relevant information, is
warranted. Imperfect markets show a difference between the purchase price and the retail price Barth and Landsman, 1995. If the intangible asset will only be used for internal purposes, the
reference to a market price is inappropriate and leads to a pretended objectivity Dawo, 2003; Bentele, 2004.
The principle of reliability also postulates that the information about the internally generated intangible assets is complete. Thus, a financial statement should inform about all intangible
items of an enterprise. Of course, it is not possible to specify all intangible assets in the balance sheet because some items do not meet the definition criteria of an intangible asset and other
items are prohibited to be capitalized for example the IAS 38.15 disallows the capitalization of customer lists or market shares. In these cases the principles of completeness would be met
doubtless if IAS 38 requires information about these non-capitalizable items in the notes Mindermann, 2009. But IAS 38 does not demand information about these items, and thus IAS
38 does not adhere strictly to the principles of completeness either Bentele, 2004; Hepers, 2006.
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Comparability
Comparability is only warranted, if every enterprise interprets the capitalization criteria in the same way. Due to the fact that there are no rules, how an enterprise shall demonstrate the
additional recognition criteria for internally generated intangible assets, it is inevitable that companies proceed in different ways and therefore no comparable information is delivered Keitz,
1997; Dawo, 2003; Bentele, 2004; Hepers, 2006.
With regard to comparability, the choice between benchmark treatment and allowed alternative treatment is problematic. These valuation rates are derived from fundamentally different origins
and are ther efore not suitable for comparisons of the accounts‘ content. Increasingly drastic is
the development of the discrepancy in valuation over time as asset prices continually increase Baetge and Keitz, 2002; Hepers, 2006. Within the scope of benchmark treatment, deductions
of depreciations are made and thus the valuation rate decreases. As opposed to this, with the allowed alternative treatment the continuous revaluation leads to an increasing valuation rate
Bentele, 2004; Mindermann, 2009.
Recommendations
Reliability and comparability could be improved if the rules of IAS 38 would determine how an enterprise shall demonstrate that an internally generated intangible asset will generate probable
future economic benefits. Pursuant to reliability evidence provided by a third party would be favourable. At least the standard should commit enterprises to state in the notes, why and how
the capitalized internally generated intangible asset meets the recognition criteria Mindermann, 2009. This would enable users of financial statements to assess whether an enterprise is
conservative or liberal in the capitalization of its internally generated intangible assets Høegh- Krohn and Knivsflå, β000.
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Relevance could be improved if IAS 38 would allow the reinstatement of previously expensed costs δev and Zarowin, 1999; Høegh-Krohn and Knivsflå, β000; Dawo, β00γ. When an
enterprise starts research and development activities the future economic benefits of these activities are usually very uncertain, and if an internally generated intangible resource does not
meet the criteria at this early stage its cost should be expensed when incurred. But if the enterprise is able to demonstrate the future economic benefits in a subsequent period, the
previously expensed cost should be capitalized and amortized over its remaining life Lev and Zarowin, 1999.
Given the fact that intangibles resources are difficult to verify, and that the management of an enterprise could use them to manage or manipulate reported earnings, stringent rules for
reinstatement of previously expensed costs are required. Høegh-Krohn and Knivsflå suggest,
that an enterprise should initially disclose in its notes when research and development activities were started and that a possible intangible asset might be created in a subsequent periods, but
at this early stage the uncertainty of the future economic benefits prohibits capitalization. By doing this the enterprise does not only brief the users of financial statements but also creates an
off-balance sheet portfolio of potential intangible assets Mindermann, 2009. The reinstatement of previously expensed costs should be only allowed if a potential intangible asset was disclosed
in advance and was added to the portfolio of potential assets. This would disallow enterprises to arbitrarily
capitalize previously expensed costs Høegh-Krohn and Knivsflå, β000.
References
Aboody, David and L ev, Baruch 1998. ―The Value Relevance of Intangibles: The Case of
Software Capitalization‖. Journal of Accounting Research, Vol. γ6: 161-191 Baetge, Jörg and Keitz, Isabel von β00β. ―IAS γ8 Immaterielle Vermögenswerte Intangible
Assets―. In Baetge, Jörg et al. Ed.: Rechnungslegung nach International Accounting Standards IAS: Kommentar auf der Grundlage des deutschen Bilanzrechts, Stuttgart.
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Barth, εary E. and δandsman, Wayne R. 1995. ―Fundamental Issues Related to Using Fair Value Accounting for
Financial Reporting‖. Accounting Horizons, Vol. 12: 97-107. Dawo, Sascha β00γ. Immaterielle Güter in der Rechnungslegung nach HGB, IAS-IFRS und
US-GAAP, Herne and Berlin. Egginton, Don A. 1990. ―Towards some principles for intangible asset accounting‖. Accounting
and Business Research, Vol. 20: 193-205 Fülbier, Rolf U., Honold, Dirk and Klar, Alexander β000. „Bilanzierung immaterieller
Vermögenswerte: εöglichkeiten und Grenzen der Bilanzierung nach US-GAAP und IAS bei Biotechnologieunternehmen―. Recht der Internationalen Wirtschaft, Vol. 46: 833-844.
Healy, Paul ε., εyers, Stewart and Howe, Christopher D. β00β. ―RD Accounting and the Tradeoff between Relevance and Objectiv
ity‖. Journal of Accounting Research, Vol. 40: 677- 710.
Hepers, Lars 2005. Entscheidungsnützlichkeit der Bilanzierung von Intangible Assets in den
IFRS, δohmar and Köln. Høegh-Krohn, Nils E. J. Knivsflå, Kjell H. β000. ―Accounting for Intangible Assets in
Scandinavia, the UK, the US, and by the IASC: Challenges and a Solution ‖. The
International Journal of Accounting, Vol. 35: 243-265. Keitz, Isabel von 1997. Immaterielle Güter in der internationalen Rechnungslegung:
Grundsätze für den Ansatz von immateriellen Gütern in Deutschland im Vergleich zu den Grundsätzen in den USA und nach IASC, Düsseldorf.
Kothari S.P., δaguerre T. and δeone A. β00β. ―Capitalization versus Expensing: Evidence on the Uncertainty of Future Earnings from Capital Expenditures versus RD Outlays‖. Review
of Accounting Studies, Vol. 7: 355-382.
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Küting, Karlheinz and Dawo, Sascha β00γ. „Die Bilanzierung immaterieller Vermögenswerte nach IAS 38
– gegenwärtige Regelungen und geplante Änderungen: Ein Beispiel für die Polarität von Vollständigkeitsprinzip und Objektivierungsprinzip―. Betriebswirtschaftliche
Forschung und Praxis, Vol. 55: 397-417. Lev, Baruch 2001. Intangibles: Management, Measurement, and Reporting, Washington D.C.
δev, Baruch and Zarowin, Paul 1999: ―The Boundaries of Financial Reporting and How to Extend Them‖. Journal of Accounting Research, Vol. 37: 353-385.
δev, Baruch. and Sougiannis, Theodore 1996. ―The Capitalization, Amortization, and Value- relevance of RD‖. Journal of Accounting and Economics, Vol. β1: 107-138.
Litan, Robert E. and Wallison, Peter J. 2000. The GAAP Gap: Corporate Disclosure in the Internet Age, Washington D.C.
Lutz- Ingold, εartin β005. Immaterielle Güter in der externen Rechnungslegung: Grundsätze
und Vorschriften zur Bilanzierung nach HGB, DRS und IASIRFS, Wiesbaden. Mindermann, Torsten 2009. Wissen in der Rechnungslegung, 2.Aufl., Norderstedt.
Schreiber, Susanne β005. ―Zur Informationsgewährung durch die Bilanzierung von Intangibles nach IFRS.― Zeitschrift für Planung Unternehmenssteuerung, Vol. 16: 451-469.
Wulf, Inge 2007. Immaterielle Vermögenswerte nach IFRS, Berlin.
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Session 7.1: Financial Reporting
THE INFLUENCE OF COMPANY CHARACTERISTICS ON CORPORATE REPORTING ON THE INTERNET BY TURKISH LISTED FIRMS
Ali Uyar, Fatih University
Abstract
The main objective of this study is to investigate the influence of company characteristics on corporate reporting on the internet by Turkish listed firms. The study was conducted on 44
companies of which 30 are randomly chosen and 14 are listed in the Corporate Governance Index XCORP of the Istanbul Stock Exchange ISE. The methodology of the study is content
analysis which was applied to the web sites of the companies included in the sample. The results of univariate test indicated significant association between information disclosure level on
corporate web sites and the variables; ownership structure, auditor size, page rank, and being listed in XCORP. But, no significant association was found between information disclosure level
and leverage. In addition, multivariate analyses proved that ownership structure, page rank, and being listed in XCORP are significant explanatory variables for the disclosure level on the
corporate web sites.
Keywords: Corporate reporting, internet, audit size, ownership structure, leverage, Turkey Introduction
Besides mandatory disclosures, firms make voluntary disclosures as well both by traditional tools such as hard copy publications e.g. annual reports and corporate web sites. Voluntary disclosure
and its determinants have been identified as an important research area in financial reporting since the 1970s Ho and Wong, 2001. Many studies have been conducted in different countries
to find out the determinants of voluntary disclosure. Previously, these studies were conducted mainly by analyzing corporate annual reports. However, as internet usage becomes widespread,
2131 corporations tend to disclose information electronically on corporate web sites. Therefore,
corporate web sites have emerged as a new medium to conduct research studies. In prior studies, researchers have used univariate and multivariate analyses to determine
firm characteristics that influence voluntary disclosure level. In those studies, some of the variables that are investigated to have a likely effect on voluntary disclosure are firm size,
ownership structure, auditor size, profitability, leverage, intangible assets percentage, industry type, listing status etc.
Although, prior studies provide information about the determinants of voluntary disclosure in developed countries, there is a need to make investigations of the subject in
developing countries. Because, the characteristics of developed and developing countries are different from each other. This difference may result in variations in voluntary disclosure
practices. This study aims to contribute to the existing literature in this way. The remaining of the paper is organized as follows. Second section provides literature
review. Third Section presents scope and methodology of the study. Hypotheses are developed in the fourth Section. The results are analyzed and discussed in the fifth Section. Finally,
conclusions are drawn in Section six.
Literature review
Prior studies can be categorized as either descriptive studies i.e., providing statistics on disclosed items or association studies i.e., providing evidence of independent variables associated with
the level of disclosure addressing the determinants of corporate reporting on the internet Abdelsalam et al., 2007.
Descriptive studies In the following paragraphs, findings of some prior descriptive studies conducted in various
countries are summarized. There are variations among companies operating in different countries
2132 in terms of web site usage for information disclsure. This may be atributable to country effect,
timing difference among studies, or some other factors. Deller et al. 1999 found in their study that 95 of the US corporations had a homepage,
compared with 85 of the UK corporations and 76 of the German corporations. In the USA, substantially more corporations used the internet for investor relations activities 91, compared
to the UK 72 and Germany 71. Marston 2003 conducted a study on the top 99 Japanese firms. She found that 91
companies 92 percent had a web site and 78 companies 79 percent had a web site with English version.
Hurtt et al. 2001 showed that 99 out of the Fortune 100 companies studied had web sites with some form of investor relationsfinancial information found on 93.
Abdul Hamid 2005 examined 100 stock market index-linked firms listed on the Kuala Lumpur Stock Exchange and showed that 74 companies 74 percent had web sites. Out of these
74 firms 70 95 percent disclosed investor-related materials on firm web sites. Among those 70 firms, 23 33 percent had specific section on investor relations.
Gowthorpe and Amat 1999 found that out of a total of 379 quoted companies on the Madrid Stock Exchange, seventy 18.5 are listed as having web sites. As a result of
examination of web sites of firms, they proved that certain company sectors are far more likely to use websites for communication than others such as electricity and gas 83 percent, insurance
companies 80 percent, and services 71 percent. Another significant finding of their studies was that larger companies are far more likely to have a web site: twenty-six of the IBEX-35
companies 74.2 have sites. The authors concluded that Spanish companies still lag behind those in some other advanced economies in communicating with stakeholders via electronic
means.
2133 Oyelere and Mohamed 2007 analyzed 142 companies listed on the stock market in
Oman, and found that only 84 of these companies maintain web sites, and only 31 of them provide financial information. Majority of these companies use the PDF format to publish the
financial information. Hence, they expressed that the findings reveal a seemingly limited use of the internet for financial reporting purpose in Oman.
Ettredge et al. 2001 compared the disclosure levels of U.S. companies in 17 industries. Out of 490 U.S. companies, 402 82 percent had a web site in 1998. The most commonly
disclosed items were quarterly reports 54 percent and news releases 80 percent. Their comparative study also revealed that larger, more established firms tended to provide more
information than smaller, emerging technology firms. Association studies
In addition to descriptive studies referenced above, researchers conducted some empirical studies about the association of information disclosure level or content and firm characteristics. While
those studies used mandatory or voluntary information disclosure levels as dependent variables, they used the following as independent variables: firm size, profitability, leverage, ownership
structure, auditor size, chief executive officer duality, industry type, listing status and so on. Table 1 summarizes the findings of association studies.
Table 1:Ooverview of studies addressing determinants of voluntary disclosure
Authors Intermediary
Country Number of
firms Significant
influence Not significant
influence Camfferman
and Cooke 2002
Annual reports Multivariate
Netherlands 161
Trading companies, conglomerates,
size, debt-to-equity ratio, current ratio
Return on equity, manufacturing
companies, net income margin,
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audit firm Camfferman
and Cooke 2002
Annual reports Multivariate
United Kingdom 161 Manufacturing
companies, conglomerates,
size, net income margin, and audit
firm Return on equity,
debt-to-equity ratio, current ratio
Patton and Zelenka
1997 Annual reports
Univariate Czech Republic
50 Size, auditor size,
leverage, listing status, number of
employees Industry,
profitability, operational risk
intangible assets percentage
Singhvi and Desai 1971
Annual reports Univariate
USA 155
Size, auditor size, listing status,
profitability, ownership structure
Singhvi and Desai 1971
Annual reports Multivariate
USA 155
Listing status, profitability,
Size, auditor size, ownership structure
Malone et al. 1993
Annual reports Multivariate
USA 125
Leverage, ownership
structure, listing status
Size, diversification,
profitability, audit firm, listing status,
foreign operations, proportion of
outside directors Marston and
Polei 2004 Internet
Univariate Germany
50 Size, free float,
listing status, systematic risk
Profitability
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Oyelere et al. 2003
Internet Multivariate
New Zealand 229
Size, liquidity, ownership spread,
industry Profitability,
internationalization, leverage
Bonsón and Escobar
2006 Internet
Multivariate Countries of
Eastern Europe 266
Size, industry, auditor size
Country
Marston 2003
Internet Univariate
Japan 99
Size Profitability,
industry, listing status
Scope and methodology
This study investigates the corporate reporting practices of Turkish companies listed on the Istanbul Stock Exchange ISE. The ISE which was established in early 1986 is the only
securities exchange in Turkey ISE, 2009. The ISE Corporate Governance Index XCORP hereafter which includes 14 companies as of the first quarter of 2009 is one of the ISE Stock
Market Indices. The Index is composed to measure the price and return performances of the companies traded on the ISE markets having corporate governance rating grades determined
according to the Corporate Governance Principles CGP can be obtained from http:www.cmb.gov.tr issued by the Capital Markets Board ISE, 2009. The sample of this
study consists of 44 companies of which 14 included in the XCORP and 30 randomly chosen non-XCORP N-XCORP hereafter companies for comparative purposes. Web site of 1 company
out of 30 randomly chosen was under construction at the time of the study conducted, and therefore, the analyses were conducted based on 43 companies.
The search engine Google and the web site of the CεB were used to find the companies‘ web addresses. The web sites of the companies were analyzed in the month of February 2009.
2136 Content analysis method was used on the sample in order to collect data, and then the collected
data was transferred onto Excel sheet. A list of criteria has been developed to evaluate the web sites of the companies in the sample. These criteria are based on literature review Pirchegger and
Wagenhofer, 1999; Marston and Polei, 2004; Marston, 2003; Khadaroo, 2005 and Public Disclosure and Transparency section of the CGP CMB, 2005. Based on these criteria, a
checklist was prepared consisting of six sections and 61 items that were measured on a yesno bases, encoded as 1 and 0, respectively see Table 6 in Appendix. The web site attributes were
analyzed under the following six headings: general web page attributes, financial reports, general assembly, corporate governance, presentation of investor relations information, and social
responsibility.
Hypotheses
A firm‘s disclosure level may be affected by factors such as psychological, sociological, economic, political, legal, institutional Patton and Zelenka, 1997. Past studies investigated the
influence of size, profitability, leverage, listing status, auditor size, liquidity, ownership structure, industry, risk, free float etc.
In the preliminary unpublished study which is currently under review for a journal, the author of this paper investigated industry, firm size, being listed in XCORP, and profitability influence on
disclosure level on the internet. In that study, the results indicated no significant association between disclosure level and the variables; industry and profitability. However, the results
indicated a positive association between disclosure level, and being listed in XCORP and firm size measured by log of total assets.
More in-depth literature review motivated the author for more variables to be investigated about the subject; hence, this study came out. In this complimentary study, the association between the
level of corporate reporting on the internet and the following variables are investigated:
2137 The ISE Corporate Governance Index XCORP
Leverage debt to equity ratio Auditor size Auditor-Big-4 or not
Ownership structure percentage of shares held by unknown shareholders
Public exposure measured by Google‟s PageRank The ISE Corporate Governance Index XCORP
XCORP is composed to measure the price and return performances of the companies traded on the ISE markets having corporate governance rating grades determined according to the
Corporate Governance Principles issued by the Capital Markets Board ISE, 2009. The companies listed in this index is said to have best practices of corporate governance principles
including public disclosure and transparency. As shown in Table 3, since the companies listed in the XCORP are superior to N-XCORP companies in disclosing information on corporate web
sites, the first hypothesis was developed: H1. There is a positive association between XCORP listing and the total score of
disclosed items on corporate web sites. Leverage
The leverage ratio is a proxy for the financial risk of the firm. The higher the leverage ratio, the higher the risk of the firm, and the greater the expected extent of disclosure Patton and Zelenka,
1997. Malone et al. 1993 and Inchausti 1997 also hypothesized that firms with a high rate of leverage disclose more information than those with low rate. The arguments that support this
hypothesis are that information may be used to avoid agency costs in the relationship between owners and managers to reduce information asymmetries Inchausti, 1997. Thus the following
hypothesis was stated:
2138 H2. Firms with high debtequity ratios disclose more information than do firms with low
debtequity ratios. Auditor size Big-4 or non-Big-4 audit firm
Past studies examined possible influence of external auditor on information disclosure level of firms Patton and Zelenka, 1997; Singhvi and Desai, 1971; Malone et al., 1993. Malone et al.
1993 argue that smaller CPA firms are more sensitive to client demands because of the economic consequences associated with the loss of a client, on the other hand, larger firms have a
greater incentive to require adverse disclosures by the client. The alternative hypothesis tested was thus stated:
H3. Firms that work with larger audit firms disclose more information than those that work with smaller audit firms.
Public exposure Public exposure expresses the level of intensity that a web page is visited by public. Based on
some prior studies Patten, 2002; Tilling, 2004, Gutierrez-Nieto, Fuertes- Callén, and Serrano-
Cinca 2008 states that the more visible the entity, the more information it will disclose in accordance with legitimacy theory.
Therefore, the following hypothesis was stated: H4. A positive association exists between a firm‘s public exposure on the internet and the
total score of disclosed items on corporate web sites. To test Hγ, Google‘s PageRank PR was chosen as the measure of public exposure on the
internet Gutierrez-Nieto, Fuertes- Callén, and Serrano-Cinca 2008. Google algorithms assign a
PR, which ranges from 0 to 10 to each webpage. The more visible a webpage is the higher PR it receives.
Ownership structure
2139 Some studies have examined the ownership structure that may influence voluntary disclosure
practices of the companies Malone et al, 1993; Singhvi and Desai, 1971; Raffournier, 1995. Raffournier 1995 states that agency relations are likely to play a major role in the disclosure
policy of companies, because annual reports can be used to reduce monitoring costs. Hence, he argues that managers of firms whose ownership is diffuse have an incentive to disclose more
information in order to help shareholders in monitoring their behaviour. Singhvi and Desai 1971 state that there may be positive relationship between the number of stockholders and the
quality of disclosure in annual reports. Malone et al. 1993 also state that as the number of shareholders increases, one would expect financial disclosures to increase.
H5. A positive association exists between a firm‘s ownership diffusion and the total score of disclosed items on corporate web sites.
In this study, ownership diffusion is defined as the percentage of shares not held by known shareholders Raffournier, 1995.
Discussion and analysis of the results
Descriptive statistics Table 2 shows the distribution of the variables used in the study. There are large variations in
ownership structure. The portion of unknown shareholders ranges from 0.02 to 0.84. There is a wide range in the level of voluntary scores in the sample. The highest disclosure score obtained is
52, and the lowest is 3. Almost half of the companies are the customers of Big-4 auditing firms. Page rank also indicates wide range, from 1 to 8, in the level of public exposure. On average,
leverage is 1.92 among the sample companies in Turkey.
2140 Table 2: Descriptive statistics
N Minimum Maximum
Mean Std. Deviation
OWNERSHIP OSHIP 43
.02 .84
.3530 .18917
AUDITOR ADTOR 43
1 .51
.506 PAGERANK PRANK
43 1
8 4.67
1.569 LEVERAGE LRAGE
43 .0042
18.7942 1.92
3.281 TOTAL SCORE TSCORE
43 3
52 33.21
11.755 Valid N listwise
43
Disclosure items The findings with respect to the existence of disclosure items which totals 61, on corporate web
sites are presented in Table 3. The results are given separately for XCORP and N-XCORP companies so as to make comparison. In addition, the percentages and ranking of items are also
given for the whole sample under TOTAL and Rank columns respectively. Comparison of disclosure levels reveals that XCORP companies are superior to N-XCORP companies in almost
all disclosure items. There are a few exceptional items.
Table 3: Disclosure of items on corporate web sites
XCORP N-XCORP TOTAL Rank
N=14 N=29
N=43 GENERAL ATTRIBUTES
Graphic images 100.00
100.00 100.00 1
Animated graphics 92.86
72.41 79.07
20 Sound files
0.00 10.34
6.98 59
Video files 57.14
20.69 32.56
42 Search box or link to search page
57.14 24.14
34.88 39
Company profile 100.00
96.55 97.67
2
2141
Advertisement of own productsservices 100.00
86.21 90.70
5 Homepage button
92.86 93.10
93.02 3
English version of web site 85.71
79.31 81.40
17 Quick reach
14.29 10.34
11.63 57
Site map 71.43
48.28 55.81
28 Security information
14.29 3.45
6.98 60
Last update date 7.14
6.90 6.98
61 INVESTOR RELATIONS
Link to investor relations from home page 92.86
82.76 86.05
8 English version of investor relations page
85.71 44.83
58.14 26
Special condition disclosures 100.00
75.86 83.72
13 Press releasesroom
78.57 44.83
55.81 29
Postal address for investor relations 50.00
17.24 27.91
50 E-mail address for investor relations
71.43 34.48
46.51 34
Phone number for investor relations 92.86
34.48 53.49
30 Communication form
21.43 6.90
11.63 58
Responsible persons name for investor relations 64.29
17.24 32.56
43 Current stock prices
71.43 37.93
48.84 32
Frequently asked questions 64.29
37.93 46.51
35 Investors calendar
42.86 10.34
20.93 52
FINANCIAL REPORTS Annual report
100.00 89.66
93.02 4
Quarterly reports 85.71
68.97 74.42
23 Balance-sheet
100.00 82.76
88.37 6
Statement of income 100.00
82.76 88.37
7 Statement of cash flow
100.00 75.86
83.72 14
Changes in shareholders‘ equity 100.00
72.41 81.40
18 Notes to financial statements
100.00 79.31
86.05 9
2142
Analysts Reports 42.86
24.14 30.23
45 Dividend distribution table
50.00 17.24
27.91 51
Auditors reports 92.86
55.17 67.44
25 Audit committee report
21.43 20.69
20.93 53
GENERAL ASSEMBLY 0.00
0.00 Agenda invitation
100.00 72.41
81.40 19
Meeting minutes of general assembly 100.00
75.86 83.72
15 List of participants of general assembly
100.00 62.07
74.42 24
Proxy voting form 92.86
72.41 79.07
21 CORPORATE GOVERNANCE
Number of clicks to get to corporate governance information 100.00
27.59 51.16
31 Chairman message
57.14 17.24
30.23 46
Board members 100.00
79.31 86.05
10 Audit committee
85.71 44.83
58.14 27
Ownership structure 100.00
75.86 83.72
16 Preferred shares information
42.86 24.14
30.23 47
Articles of Association 92.86
82.76 86.05
11 Prospectus Circulars
57.14 44.83
48.84 33
Trade registry information 92.86
72.41 79.07
22 Dividend distribution policy
42.86 24.14
30.23 48
Code of ethics 100.00
17.24 44.19
36 Disclosure policy
92.86 6.90
34.88 40
Disclosure of insiders 57.14
3.45 20.93
54 Corporate governance rating report
92.86 0.00
30.23 49
Corporate governance compliance report 92.86
82.76 86.05
12 SOCIAL RESPONSIBILITY
Number of clicks to get to social responsibility information 64.29
17.24 32.56
44 Education
57.14 31.03
39.53 38
2143
Culture and art 50.00
27.59 34.88
41 Environment
57.14 34.48
41.86 37
Sport 35.71
10.34 18.60
55 Foundation
21.43 10.34
13.95 56
Univariate analysis Table 4 presents the results of the univariate analysis conducted by the Pearson correlation
analysis for the dependent and independent variables. According to the results, the dependent variable total disclosure score is significantly associated with PRANK at a level of 0.01,
ADTOR at a level of 0.01, and OSHIP at a level of o.05. This means the more visitor attracts the web page of the corporation, the more information it discloses on the internet. Secondly, the
companies who work with Big-4 auditing companies are more likely to disclose more information on corporate web pages. Thirdly, the ownership diffusion is negatively associated
with total score of information disclosure. This means the higher the percentage of unknown shareholders, it tends to disclose less information on the web page, contrary to expectations.
Lastly, LRAGE is not significantly associated with the information disclosure on the internet. Furthermore, the correlation analysis revealed the following significant associations for XCORP
companies: XCORP companies ADTOR significant at 0.01 level. This means XCORP companies
are more likely to work with Big-4 auditing firms. XCORP companies PRANK significant at 0.01 level. Since PRANK is a measure of
public exposure, XCORP companies‘ web sites are more exposed to public. XCORP companies TSCORE significant at 0.01 level. This significant association is
likely to be explained with the previous two significant associations. Big-4 auditing firms
2144 may be encouraging and motivating their customers to disclose more information to
stakeholders. In addition, XCORP PRANK association also may mean that corporations whose web sites attracting more visitors tend to disclose more information
on the web sites.
Table 4: Pearson correlation results
OSHIP ADTOR
PRANK LRAGE
XCORP
TSCORE OSHIP
Pearson Correlation 1
-.281 -.291
-.217 .016
-.352 Sig. 2-tailed
.068 .058
.163 .921
.021 N
43 43
43 43
43 43
ADTOR Pearson Correlation
-.281 1
.605 .306
.480 .438
Sig. 2-tailed .068
.000 .046
.001 .003
N 43
43 43
43 43
43 PRANK
Pearson Correlation -.291
.605 1
.339 .498
.578 Sig. 2-tailed
.058 .000
.026 .001
.000 N
43 43
43 43
43 43
LRAGE Pearson Correlation
-.217 .306
.339 1
.105 .101
Sig. 2-tailed .163
.046 .026
.501 .520
N 43
43 43
43 43
43
XCORP
Pearson Correlation .016
.480 .498
.105 1
.662 Sig. 2-tailed
.921 .001
.001 .501
.000 N
43 43
43 43
43 43
TSCORE Pearson Correlation -.352
.438 .578
.101 .662
1 Sig. 2-tailed
.021 .003
.000 .520
.000 N
43 43
43 43
43 43
Correlation is significant at the 0.05 level 2-tailed. Correlation is significant at the 0.01 level 2-tailed.
2145 Multivariate analysis
To test the 5 hypotheses established earlier, multivariate regression analysis was performed on the 5-variable multiple regression model.
The model which consists of five independent variables and the dependent variable is as follows: TSCORE =
α + β
1
OSHIP + β
2
ADTOR + β
3
PRANK + β
4
XKURY + β
5
LRAGE Where,
TSCORE = total disclosure on corporate web site OSHIP = ownership diffusion percentage of shares held by unknown shareholders
ADTOR = auditor 0 if non-Big-4, 1 if Big-4 PRANK = page rank ranges from 0 to 10
LRAGE = debt to equity ratio The multivariate regression results are shown in Table 5. The model is significant at p .000
adjusted R
2
= .56. The findings support H1, and H4 provide evidence that the page rank, and being XCORP company, are significantly associated with disclosure level on the internet.
Contrary to H5, negative significant association was found between ownership diffusion and information disclosure level. No support was found for a significant association for the varibles;
leverage H2 and Big-4 auditing firm H3. Hypothesis 1 predicts an association between being an XCORP company and disclosure level on
the internet; I found a significant positive association. Hypothesis 2 predicts an association between leverage and disclosure level on the internet; I
found no significant association. This is in line with Oyelere et al. 2003, contrary to Malone et al.
1993. Hypothesis 3 predicts an association between auditor size and disclosure level on the internet; I
found no significant association. This finding contradicts some previous studies Camfferman
2146 and Cooke β00β, Patton and Zelenka, 1λλ7; Bonsón and Escobar, β006 and parallels some
others Malone et al., 1993; Singhvi and Desai, 1971. Hypothesis 4 predicts an association between public exposure and disclosure level on the
internet; I found significant positive association as hypothesized. The finding supports Gutierrez- Nieto, Fuertes-
Callén, and Serrano Cinca β008. Hypothesis 5 predicts an association between ownership diffusion and disclosure level on the
internet; I found significant negative association surprisingly. In the hypothesis, the sign was predicted as positive. This finding contradicts with Raffournier, 1995 who found no significant
association for ownership diffusion and disclosure level. Table 5: Multivariate regression analysis results
R Square = .612 Adjusted R Square = .560
F = 11.669 Significance = .000
Unstandardized Coefficients
Standardized Coefficients
B Std. Error
Beta t
Sig. Dependent Variable: TSCORE
Constant 27.564
5.424 5.082
.000 OSHIP
-19.930 6.945
-.321 -2.870
.007 ADTOR
-1.367 3.190
-.059 -.428
.671 PRANK
2.026 1.057
.270 1.916
.063 XKURY
14.179 3.136
.572 4.521
.000 LR
AGE Debt to TE -.368
.398 -.103
-.924 .361
2147
Conclusion
Regulatory bodies in Turkey such as the ISE and the CMB play an important role in encouraging the utilization of corporate web sites as a communication tool for investors. For example, CMB
has issued corporate governance principles in 2003 for the first time and amended in 2005. The principles state that company‘s website should be actively used as a means of public disclosure.
Among principles, significant information to be published on the company‘s website is provided as well.
The steps taken by regulatory bodies seem to have served the purpose. Because, the percentage of corporate web site existence among the sample companies is 100 percent. It can be
said that having corporate web site is a common practice for Turkish listed companies. However, there are variations among sample companies. For example, companies that are customers of Big-
4 auditing firms, and are listed in XCORP disclose more information that others. Hence, there is a need to increase the level of information disclosure on corporate web sites, especially, for non-
Big-4 and N-XCORP companies. Because, the more information disclosed, the more transparent the firm is.
Furthermore, to test company characteristics that influence information disclosure level, five hypotheses were set up. The results of univariate test indicated significant association
between disclosure level and the variables; ownership structure, auditor size, page rank, and being listed in XCORP. But, no significant association was found between disclosure level and
leverage. In addition, multivariate analyses proved that ownership structure, page rank, and being listed in XCORP are significant explanatory variables for the disclosure level on the corporate
web sites. What implications the study has for the companies are that they should improve level of
information disclosure on corporate web sites, especially in some areas such as investor relations,
2148 corporate governance, and social responsibility. This study sets as benchmark for what to be
disclosed on corporate web sites.
Appendix
Table 6: The checklist of disclosure items
ITEMS COMMENTS
GENERAL ATTRIBUTES Graphic images
Animated graphics Sound files
Video files Search box or link to search page
Company profile Advertisement of own productsservices
Home page button English version of web site
Quick reach Site map
Security information Last update date
INVESTOR RELATIONS Link to investor relations from home page
English version of investor relations page Special condition disclosures
Press releasesroom Postal address for investor relations
Accepted if disclosed on investor relations page E-mail address for investor relations
Accepted if disclosed on investor relations page
2149
Phone number for investor relations Accepted if disclosed on investor relations page
Communication form Accepted if disclosed on investor relations page
Responsible persons name for investor relations Accepted if disclosed on investor relations page
Current stock prices Frequently asked questions
Accepted if disclosed on investor relations page Investors calendar
FINANCIAL REPORTS Annual report
Quarterly reports Balance-sheet
Statement of income Statement of cash flow
Changes in shareholders‘ equity Notes to financial statements
Analysts Reports Dividend distribution table
Auditors reports Audit committee report
GENERAL ASSEMBLY Agenda invitation
Meeting minutes of general assembly List of participants of general assembly
Proxy voting form CORPORATE GOVERNANCE
Number of clicks to get to corporate governance information 1 click or 2 clicks from home page
Chairman message Board members
Audit committee
2150
Ownership structure Preferred shares information
Articles of Association Prospectus Circulars
Trade registry information Dividend distribution policy
Code of ethics Disclosure policy
Disclosure of insiders Corporate governance rating report
Corporate governance compliance report SOCIAL RESPONSIBILITY
Number of clicks to get to social responsibility information 1 click or 2 clicks from home page
Education Culture and art
Environment Sport
Foundation
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2154
ROADMAP TO FUTURE MANDATORY APPLICATION OF IFRS IN JAPAN
—FROM THE PERSPECTIVE OF FINANCIAL STATEMENTS PREPARERS
Yao Jun, Kobe University Hu dan, Nagoya University
Chitoshi Koga, Kobe University Norio Igarashi, Yokohama National University
Abstract
A fter ten years‘ efforts on producing high-quality accounting standards which can represent
Japanese style of business activities and on exploring its own way to converge with global financial reporting standards, Japan makes a major step forward towards adopting International
Financial Reporting Standards IFRS by publish the Interim IFRS Roadmap. This shows a stance for acceptance of adoption. However, there are still quite a lot issues to be taken into
consideration before the last determination of mandatory application of IFRS is made. The current research explores these issues from the perspective of financial statements preparers
— in this paper, accounting managers or CFOs in leading Japanese companies which are most
possible to be subject to mandatory application. The background of Japan ‘ stepping towards
adoption is introduced, the feature of Japanese accounting that might influence the adoption by Japanese companies are analyzed. Based on the this, a survey was made investigating their
opinions on IFRS implementation, as well as the source of finance of and actual application in these companies at the present time. The results of the survey acquired in the current paper are
expected to have implications for regulation making and IFRS adoption training programming.
2155
１ Introduction
The current research tries to investigate issues concerning the adoption of international
accounting standards refers to IAS or IFRS from the perspective of financial statements preparers.
When we were preparing this paper, the ― Interim Report: Application of International
Financial Reporting Standards IFRS in Japan‖ the ―Interim IFRS Roadmap‖ was published which is based on the exposure draft published on February 4, 2009. It seems that a
fter ten years‘ efforts on producing high-quality accounting standards which can represent Japanese
style of business activities and on exploring its own way to converge with global financial reporting standards, Japan makes a critical step forward towards adopting International
Financial Reporting Standards IFRS. The main points of the report concern the acceptance of
voluntary adoption of IFRS in consolidated financial statements from fiscal years ending 31 εarch β010 for ―companies with global financial operating activities‖ and the considerations for
the possibility of mandatory application of IFRS in Japan. As we know, there are two-pronged approaches to achieving a single set of global
accounting standards: adoption and convergence. Japan, as well as U.S. has been regarded as examples of convergence countries. However, The Interim IFRS Roadmap indicates a future
approach foreseeing the possibility that IFRS can be used and that Japan should adopt IFRS in some way in the future. Therefore, the issuance of the Initial IFRS Draft Roadmap would signify
great regulatory change and proposes some important issues that should be considered and dealt with. For example, before the final decision on mandatory adoption is made, questions
such as whether to adopt IFRS in both consolidated financial statements and non-consolidated financial statements or only adopt IFRS in consolidated financial statements, what kind of
companies should be required to prepare financial statements in compliance with IFRS, the incentive and obstacles of companies to implement IFRS and other related questions should be
answered based on comprehensive investigation. Since these issues are closely related to
2156
preparers of financial statements, it is relevant to explore their understanding of IFRS and opinion towards the adoption of IFRS and preparation for the application.
We made the survey investigating leading Japanese companies‘ view on IFRS application before the publication of the Initial IFRS Roadmap when Japan still stood on the crossroad of
convergence and adoption. We aimed to provide evidence for adoption or against adoption from the standpoint of preparers of financial statements. However, this result of our survey is also
quite relevant right now because it provides reference for the issues proposed in the Interim IFRS Roadmap. The result of the survey is expected to
provide implications for future standards setting concerning mandatory application of IFRS and provide evidence for the establishing
training and supporting program for the application of IFRS in Japanese companies. The following section firstly introduces background of Japan moving towards IFRS
adoption to indicate the importance of strategy about the structuring of accounting system based on comprehensive understanding of situation of Japanese company and accounting context.
Then section 3 specifies the significance of Interim IFRS Roadmap and important issues concerning adoption that is to be taken into consideration. In section 4, the most important
influential factors that effect accounting practices of Japanese company, the feature of Japanese accounting and difference between IFRS and Japanese GAAP which direct relate to the
problems concerning application of IFRS in Japanese companies. In section 5, based on the analysis in section 3and 4
, we investigate Japanese managers‘ opinions on issues concerning IFRS application and the perceived proper way of application. Finally, some problems facing
companies will be identified and concluding remarks are provided. .