IFRS Covert Options: Evidence from SPAC Reporting

There is cogent research on significant variation in observed accounting policy choices (overt options) that limit the comparability of IFRS reports. Research on variation resulting from the interpretation of vague criteria in IFRS (covert options) is absent, yet is expected to have greater effects, and research is requested (nobes2015). The absence of research on covert options is caused by lack of data that allows to separate interpretation differences of vague criteria in IFRS from variation in unobserved contract differences. To address this issue, we manually assemble a dataset of covert choices of Special Purpose Acquisition Companies (SPACs) that do have uniform and publicly available contracts. These observed covert choices are germane to a broad cross-section of IFRS reporters such as debt/equity classification of shares. We show significant variation in covert choice hampering -between and within country- comparability and significantly affecting financial reporting ratio's. Next, unlike accounting policy choices, the external auditor should be instrumental to consistent interpretation of IFRSs. Our analysis show auditor involvement indeed enhances consistent interpretation of vague criteria in IFRS, resulting in higher comparability.