An Analysis of A-IFRS in foreign investment inflows to Australia using structural break tests

This paper examines whether the switch from the Australian Generally Accepted Principle (AGAAP) to the Australian equivalent of the International Financial Reporting Standards (AIFRS) makes Australia more attractive to foreign investment inflows. The standard methodology to evaluate such a shift is the use of variation in the time series to compare preand post-implementation outcomes. To detect this variation, a wide range of techniques that identify breaks both exogenously and endogenously are applied to all foreign components inflows to Australia for the period 2000Q1–2012Q4. We find limited evidence to support the premise that A-IFRS facilitates cross-border investment. A possible explanation is that such an effect may not be obvious for Australia, a country with high-quality accounting standards prior to A-IFRS implementation. The only exception is foreign derivatives, which indicates a significant, positive structural break in 2006Q4, which was the date of IFRS 7/ AASB 7 implementation. This result is confirmed further by applying the ARDL approach, which controls for other economic events and risks such as the commodity price boom, GFC, and exchange rate. Thus, a greater requirement of quantity and quality of disclosure under AASB7 conveys useful information to investors in derivatives, which are known for their informational complexity. This result constitutes a contribution to the research in this field. To the best of our knowledge, the present study is the first in the accounting field to investigate the effect of the convergence of the GAAP to IFRS on foreign derivatives.