Determinants of Decommissioning Provision Disclosures: Empirical evidence from energy entities listed on EU-regulated markets

Abstract: The reporting of decommissioning provisions has recently received considerable attention due to inconsistent reporting and lack of sufficient information. The estimation of the provision is highly uncertain due to timing and amount and involves a high degree of professional managerial judgment as a pre-tax discount rate is used to estimate the value. As the decommissioning cost may have a material impact on financial statements, an increased awareness towards the disclosures of the judgments and estimates is essential. To reflect the underlying financial position of the entity the disclosures must be of high quality. However, previous research provides evidence that management has incentives to affect the perception of the entity. Self-serving presentation has been argued to involve strategic choices of both the content and language tone of disclosures. This thesis examines the determinants of decommissioning provision disclosures of entities operating in the energy industry, reporting in accordance with IFRS. We hypothesize that the quality and tone of the disclosures are determined by entity characteristics, more specifically decommissioning provision size, profitability, leverage and entity size. To capture the disclosure quality we use a self-constructed disclosure index, whereas we employ DICTION software to examine the verbal tone of the reports. Our findings show that entity characteristics to a large degree determine the quality and tone of decommissioning provision disclosures, indicating that the variation of disclosures is due to management incentives. The findings support what recently has been notified, i.e. the financial reporting of decommissioning provisions varies among entities. The vague requirements in the standards consequently leave more scope for strategic decisions on what and how to disclose why management may have incentives to provide deceptive disclosures in an attempt to affect stakeholders’ perception.