Complex Information and Accounting Standards: Evidence from UK Narratives

Accounting literature has documented the occurrence of complex accounting narratives and economic consequences such as market delays in extracting information from narratives. International Financial Reporting Standards (IFRS) were introduced to enhance reporting efficiencies and improve communication in financial reporting. However, research shows that the introduction of IFRS has increased narrative complexity, attributable to the demand for more reporting. Considering that accounting complexity can either be informative or non-informative, thereby causing obfuscation, this study performs an empirical analysis to explain the complexities in accounting narratives that may be affected by IFRS application. Using the framework and setting of IFRS adoption and a word list adjusted component of the fog index, it decomposes complexity into two components: information (common complexity) and obfuscation (uncommon complexity). The results evidence that IFRS adoption has increased the common complexity of accounting narratives that investors are likely to understand (information), but it does not necessarily increase obfuscation. Complementing the wider evidence around IFRS benefits, this evidence can be applied in accounting narrative complexity studies. This complexity decomposition is novel and contributes to the debate on the use of the fog index, while demonstrating the increased narrative comparability of IFRS reports.