Abstract
Extant literature suggests that IFRS adoption is associated with higher comparability. However, theoretical ambiguity surrounds how principles-based IFRS accounting standards improve comparability, especially when offering a larger set of accounting choices. This study investigates how introducing more accounting discretion affects financial statement comparability by examining the adoption of IFRS in extractive industries (EI), which increases discretion for accounting for exploration and evaluation (E&E) costs. Using a set of alternative comparability measures and model specifications, our results indicate that overall comparability decreases under IFRS 6 (Exploration for and Evaluation of Mineral Resources). Hand-collected data from annual reports show that a significant number of firms change their E&E accounting policies, contributing to increased diversity in firms’ accounting policies after the adoption of IFRS 6. We find that capital market incentives and other firm characteristics, such as small positive earnings and higher leverage, predict a firm’s decision to change E&E policy. Lastly, we document that while comparability is positively associated with information benefits for financial statement users, the changes in E&E accounting policies negatively affect the market’s assessment of accounting information. Our findings support the theoretical argument that increasing discretion in accounting standards introduces managerial opportunism. Overall, this study contributes to the ongoing debate on the role of accounting discretion and its impact on information quality.