liquiditiy and financial leverage ratios - Allied Academies

Page 135
LIQUIDITIY AND FINANCIAL LEVERAGE RATIOS:
THEIR IMPACT ON COMPLIANCE WITH
INTERNATIONAL FINANCIAL REPORTING
STANDARDS (IFRS)
Rodiel C. Ferrer, De La Salle – Manila, Philippines
Glenda J. Ferrer, University of Rizal System, Philippines
ABSTRACT
This paper investigates how the liquidity and leverage ratios exert significant effect on
the degree of compliance with International Financial Reporting Standard disclosure as
measured by Balance Sheet and Income Statement of Publicly Listed Corporations. The
researcher analyzed the effects of current ratio, quick ratio, debt equity ratio and interest
coverage ratio on compliance with IFRS. The compliance audit output was used by the author to
calculate the financial statement disclosure index using a dichotomous procedure to score each
of the company indices. This study covered 100 publicly listed corporations in the Philippines
from different industries out of the 244 PLCs. The companies belong to different sectors /
industries such as Financials, Industrial, Holding Firms, Property, Services, and Mining and
Oil. Published annual reports of the aforesaid companies have been used as a secondary
source.
Disclosure indices were constructed from 475 items of Balance Sheet disclosure checklist
and 263 items of Income Statement disclosure checklist based on the compliance audit consistent
with the International Financial Reporting Standard (IFRS) Report Checklist.
Using multiple regression analysis, the author regressed each of balance sheet index,
income statement index and total of income statement – balance sheet indices, against liquidity
ratios and financial leverage ratios such as current ratio, quick ratio, debt ratio and interest
coverage ratio.
Finding suggests that none of the indices exert a significant effect on the financial
variables cited based on the computed t-statistics whose p-values are greater than the level of
significance (α = 0.05). Therefore, the null hypothesis, that liquidity and financial leverage have
no effect on IFRS when the latter is expressed in terms of Balance Sheet and Income Statement
indices, is accepted.
Academy of Accounting and Financial Studies Journal, Volume 15, Special Issue Number 1, 2011

The body of this manuscript is not reproduced in this posting. The full text of the manuscript is
available through most university libraries. Should you have difficulty in finding the full text,
you may acquire it from the original journal. Visit http://www.alliedacademies.org to find a link
to the original journal source.

Page 149
ratios and financial leverage ratios such as current ratio, quick ratio, debt ratio and interest
coverage ratio. None of the indices exert a significant effect on the financial variables cited
based on the computed t-statistics whose p-values are greater than the level of significance (α =
0.05). Therefore, the null hypothesis, that liquidity and financial leverage have no effect on
IFRS when the latter is expressed in terms of Balance Sheet and Income Statement indices, is
accepted.
The OLS assumptions known as multicollinearity, heteroskedasticity, and autocorrelation
were utilized. This study noted that the coefficients and the mean VIF are less than the critical
value of 10. As such, there is an absence of a linear relationship between the variables. As this
study utilized the cross terms method of the test, this study noted that the White’s Test statistic is
less than the critical chi-square values given the degrees of freedom. Moreover, the p-values
computed are greater than the level of significance that indicates the absence of non-constant
variances among the variables. Thus, this study finds that there is no heteroskedasticity in the
models. The researcher identified the number of changes in the residual and treated such
changes as runs. Under this test, the model commits the violation of autocorrelation when the
number of runs fell above the maximum or below the minimum runs as identified by the
allowable range provided by the standard normal distribution. Using the computations, it can be
observed that the number of runs for all models fall within the maximum and minimum runs;
thus providing strong evidence that there is no autocorrelation in our models.
REFERENCES
Bhat, G., O.-K. Hope and T. Kang (2006), “Does corporate governance transparency affect the accuracy of analyst
forecasts”, Accounting and Finance,(46)5, 715-732.
Cadbury Code, The (1992), Report of the Committee on the Financial Aspects of Corporate Governance: The Code
of Best Practices, December, Gee Professional Publishing, London.
Debrency, R. and G.L. Gray (2001). Financial reporting on the Internet and the external audit (Abstract). European
Accounting Review, 8:2, 335-350.
Dye, R., and S. Sunder (2001). Why Not Allow FASB and IASB Standards to Compete in the U.S. Accounting
Horizons 15, 257-272.
Fama, E. F. (1980). Agency problem and the theory of the firm. Journal of political economy, 88, 288-308.
Farrar J. and B. Hannigan (1998). Farrar’s Company Law, (4 th Edition), Butterworths, London.
Jensen, M. C. (1983). Separation of ownership and control. Journal of law and economics, 26, 301-325.
Academy of Accounting and Financial Studies Journal, Volume 15, Special Issue Number 1, 2011

Page 150
Kusumawati, N. (2006). Profitability and corporate governance disclosure: an Indonesian study. Simposium
Nasional Akuntansi 9 Padang.
Lee, H., V. Mande, and R. Ortman (2004). The effect of audit committee and board of director independence on
auditor resignation. Auditing: A journal of practice and theory, 23(2)., 131-146.
Leuz, Christian and Peter Wysocki (2008). Economic Consequences of Financial Reporting and Disclosure
Regulation: A Review and Suggestions for Future Research. Retrieved Jan 5, 2010, from
http://ssrn.com/abstract=1105398
Richardson, V. (2000). Information asymmetry and earnings management: Some evidence. Review of quantitative
finance and accounting, 15, 325-347.
Roberts J. (2004). Agency Theory Ethics and Corporate Governance, The Judge Institute of Management
University of Cambridge.
Academy of Accounting and Financial Studies Journal, Volume 15, Special Issue Number 1, 2011