This study provides evidence of a directly observable and significant cost of International Financial Reporting Standards (IFRS) adoption, by examining the fees incurred by firms for the statutory audit of their financial statements at the time of transition. Using a comprehensive dataset of all publicly traded Australian companies, we quantify an economy-wide increase in the mean level of audit costs of 23 percent in the year of IFRS transition. We estimate an abnormal IFRS-related increase in audit costs in excess of 8 percent, beyond the normal yearly fee increases in the pre-IFRS period. Further analysis provides evidence that small firms incur disproportionately higher IFRS-related audit fees. We then survey auditors to construct a firm-specific measure of IFRS audit complexity. Empirical findings suggest that firms with greater exposure to audit complexity exhibit greater increases in compliance costs for the transition to IFRS. Given the renewed debate about whether the Securities and Exchange Commission (SEC) should mandate IFRS for U.S. firms, our results are of timely importance.
The guidance under ASC 840 contains
four specific criteria for determining
whether a lease should be classified
as an operating lease or a capital lease
by a lessee. The criteria for capital
lease classification broadly address the
following matters:
•
Ownership transfer of the property to
the lessee
•
Bargain purchase option
•
Lease term in relation to economic life
of the asset
•
Present value of minimum lease
payments in relation to fair value of
the leased asset
The criteria contain certain specific
quantified thresholds such as whether
the lease term equals or exceeds 75%
of the economic life of the leases asset
(“75% test”) or the present value of
the minimum lease payments equals or
exceeds 90 percent of the fair value of the
leased property (“90% test”).
Events of d
efault must be evaluated
pursuant to ASC 840-10-25-14 to assess
whether remedies payable upon default
are minimum lease payments for purposes
of applying the 90% test.
The guidance indicates that the maximum
amount of potential payments under all
non-performance events of default must
be included in the lease classification 90%
test unless each of the following 4 criteria
are met: (i) the covenant is customary, (ii)
predefined criteria relating solely to the
lessee and its operations have been estab
-
lished for the determination of the event
of default, (iii) the occurrence of the
event of default is objectively determin
-
able; and (iv) it is reasonable to assume
at lease inception that an event of default
will not occur.
For a lessor to classify a lease as a direct
financing or sales-type lease under the
guidance, two additional criteria must
be met.