ACCOUNTABILITY AND GOVERNMENTAL FINANCIAL REPORTING

Accountability is the cornerstone of Governmental Generally Accepted Accounting Principles (GGAAP) in the United States according to the Governmental Accounting Standards Board (GASB). This paper analyzes the implications of alternative definitions of the concept of accountability for GGAAP and for GASB. It also discusses the costs and benefits of accountability information, the effect of diverse users of governmental reports, and alternative mechanisms for achieving accountability in governments. Finally, a governmental accounting research agenda based on accountability is proposed for the future.     

Financial reporting for sustainable development: Critical insights into IFRS implementation in the European Union

By adopting a political economy perspective to accounting, this paper provides an overall post-implementation assessment of International Financial Reporting Standards (IFRS) adoption relative to the European Union’s (EU’s) fundamental goal of sustainable development. The paper questions the consistency of the International Accounting Standards Board’s business view with the EU’s and provides some critical insights into the potential long-run effects of IFRS on the European economy and society. Therefore, it raises several doubts about unquestioned accounting standardization at a global level and makes some suggestions for future policymaking and research.     

Equity and Liabilities – A Discussion of IAS 32 and a Critique of the Classification

Abstract

It is a traditional convention in accounting to distinguish between two classes of claims, liabilities and equity. The International Accounting Standards Board and the Financial Accounting Standards Board have been using a dichotomous classification approach, adhering to this convention. However, over the recent years, this approach has been put under stress. First, there is an ever-growing variety of hybrid financial instruments, some of which designed to exploit this classification approach (accounting arbitrage). Second, the adoption of IFRS in Europe and elsewhere has brought scenarios to light in which the classification approach does not result in decision-useful information. These issues arise when IFRS are applied by entities in legal forms other than a private or public limited company. This essay discusses IAS 32 in the light of the historic origins of the dichotomous classification approach, the recent standard-setting activities and a review of the empirical research. This essay suggests that a reconsideration of the traditional dichotomous classification might be a way forward.     

Equity Financial Assets: A Tool for Earnings Management—A Case Study of a Chinese Corporation

With China’s adoption of principles-based international accounting standards and its convergence with International Accounting Standard 39 (IAS 39), Chinese companies have discretion under the original Accounting Standards for Enterprises 22 (CAS 22) as to how they account for the initial measurement, sale, and subsequent reclassification of financial assets. We use a Chinese company (‘Company A’) as a case study to illustrate how earnings are managed to exploit this discretion. We document that the company re-classifies its available for sale equity investments as long-term equity investments to decrease the volatility of the company’s apparent profits. We also make some predictions regarding how the company will handle its financial assets under the new standard, which is the same as IFRS 9. Our research contributes to the continuous improvement of China’s accounting standards and has implications for regulators of the capital market.     

Goodwill impairment as a reflection of investment opportunities

We exploit a unique opportunity to examine whether goodwill impairment write‐offs reflect firms’ investment opportunities during the first years of the US goodwill impairment accounting regime. We find that impairment write‐offs are negatively associated with firms’ underlying investment opportunities. We also find associations between goodwill impairment write‐offs and traditionally applied leverage, firm size and return on assets variables, although the leverage and firm size results are less robust. The results support the International Accounting Standards Board and Financial Accounting Standards Board contention that an impairment test regime can reflect firms’ underlying economic attributes, while simultaneously indicating that managers use discretion to reduce contracting costs.     

The Effect of Mandatory IFRS Adoption on Conditional Conservatism in Europe

We study the effect of mandatory adoption of International Financial Reporting Standards (IFRS) in Europe in 2005 on conditional conservatism. We capture conditional conservatism with a modified version of the Khan and Watts measure (C_Score) that also controls for potential shifts in unconditional conservatism and cost of capital. From a sample of 13,711 firm‐year observations drawn from 16 European countries spanning the 2000–2010 period, we document an overall decline in the degree of conditional conservatism after the adoption of IFRS. We show that the decline in conditional conservatism is less pronounced for countries with high quality audit environments and strong enforcement of compliance with accounting standards using the Brown et al. audit and enforcement index. As asset impairment tests are a key mechanism ensuring conditional conservatism in the IFRS framework, we further examine these. We show that firms booking an asset impairment present a smaller decline in the degree of conditional conservatism relative to firms that do not. We also demonstrate that firms that do not book an asset impairment when evidence suggests the probable need to do so experience a more pronounced reduction in conditional conservatism. We argue that IFRS are conceptually conditionally conservative but that inappropriate application of conditional conservatism principles is likely to prevent financial reporting from reaching the level of conservatism targeted by the International Accounting Standards Board (IASB).     

Meeting user information needs: The impact of major changes in FASB and GASB standards on financial reporting by colleges and universities

This longitudinal study reports the impact of changes in generally accepted accounting principles on financial statement disclosures for 100 public and private institutions of higher education. Disclosures from the period when all colleges and universities followed the same accounting standards are compared with disclosures in periods after major changes in accounting and reporting standards were made by the Financial Accounting Standards Board (FASB) for private institutions and by the Governmental Accounting Standards Board (GASB) for public institutions. We find that an importance-weighted disclosure index shows that user needs are better met using the new reporting standards for public but not private institutions. An expanded unweighted index, however, shows improvement for both public and private colleges and universities. Using this disclosure index, the improvement for universities reporting under GASB standards exceeded the improvement for those reporting under FASB standards.     

The evolution of Indian accounting standards: Its history and current status with regard to International Financial Reporting Standards

This paper addresses the adoption and applicability of International Accounting Standards (IAS) and International Financial Reporting Standards (IFRS), issued by the International Accounting Standards Board (IASB) to India. Specifically, the paper highlights some major areas where the country lacked harmonization with IAS in 1993 and the rapid congruence with IAS in the decade that followed. The attempt to achieve congruence with IAS appears to be more a by-product of the country's rapid economic growth rather than its catalyst. However, continued growth and the attraction of foreign capital to domestic ventures will depend on the transparency of the financial dealings. The Institute of the Chartered Accountants of India, (ICAI), India's standard setting body, is increasingly attempting to provide this transparency by revisions and additions to accounting standards, and by Exposure Drafts which aim to bring India more in line with International Financial Reporting Standards.     

On the ‘Disclosure Initiative – Principles of Disclosure’: The EAA Financial Reporting Standards Committee’s View

Abstract

This paper summarises the contents of a comment letter produced by a working group of 12 academics in response to the International Accounting Standards Board (IASB) Discussion Paper on principles of disclosure. The comment letter was submitted by the Financial Reporting Standards Committee (FRSC) of the European Accounting Association (EAA). The work includes reviews of relevant academic literature of areas related to the various questions posed by the IASB in the Discussion Paper, including the ‘disclosure problem’ and the objective of the project, the suggested principles of effective communication, the roles of the primary financial statements and notes, the location of information and the use of performance measures. The paper also discusses the disclosure of accounting policies, the objectives of centralised disclosure, and the New Zealand Accounting Standards Board staff’s approach to disclosure.     

‘Old Hens Make the Best Soup’: Accounting for the Earning Process and the IASB/FASB Attempts to Reform Revenue Recognition Accounting Standards

Abstract

By developing a synthesis of documents that have been released officially under the revenue recognition project jointly run by the International Accounting Standards Board and Financial Accounting Standards Board, this article points out that the earning generation and realization process over time (that is to say, the traditional accounting model) is in reality still playing an important role without losing its raison d'être. Although this model is supposed to have been consistently rejected since the outset on the premise of the adoption of the assets and liabilities approach amid the Boards' attempt to establish a new revenue recognition model, this article aims to reconfirm the significance and validity of this earning process – that is, the corporate process of generating and realizing earnings over time – as the representational focus of accounting for revenue recognition. Through an internal critique, our article summarizes and discusses successive Boards' proposals under the same asset–liability approach that they have been advocating for revenue recognition. Through a comprehensive comparative analysis (external critique), our article further criticizes the usefulness and feasibility of this approach, especially the transfer-of-control basis of revenue recognition which the Boards propose. It argues then for an alternative approach that combines asset–liability with revenue–expense accounting while re-establishing focus upon the earning process over time.     

Converging to International Accounting Standards: Views from Japan

Many countries, including the European Union member states and Australia, adopted international accounting standards in 2005. This year was also critical in Japan for convergence activities. Based on a review of 2005 financial statements and a survey of securities analysts, this study identifies key issues for convergence of Japanese and international accounting standards. We find that accounting requirements relating to fair value measurement, comprehensive income items, leases and business combinations are relevant to Japanese firms. A survey of 974 members of the Security Analysts Association of Japan about these issues indicated support for convergence and the use of fair value measurement, disclosure of comprehensive income, recognition of leases and use of the purchase method for consolidation. We report support for several positions favoured by the International Accounting Standards Board (IASB), a positive signal for achieving convergence goals in Japan, which will be of interest to capital market participants in Japan and other countries .     

IFRS in the United States: If,When and How

This paper provides an overview of the convergence efforts of the International Accounting Standards Board (IASB) and the Financial Accounting Standards Board. It begins with their 2002 Memorandum of Understanding and traces developments up to the December 2011 announcement by the IASB Chair that convergence has come to a close, and it is now time to incorporate IFRS into the US financial reporting system. The paper then assesses approaches being considered by the SEC for incorporating IFRS into the US financial reporting model. The conclusion calls on the SEC to ‘make a decision’ and set a date for US adoption of IFRS. Otherwise, the SEC effectively will have abandoned its goal of a single set of high quality global accounting standards.     

Altering Investment Decisions to Manage Financial Reporting Outcomes: Asset‐Backed Commercial Paper Conduits and FIN 46

We evaluate the manner in which sponsors of highly leveraged asset‐backed commercial paper (ABCP) conduits responded to Financial Accounting Standards Board Interpretation No. 46 (FIN 46), Consolidation of Variable Interest Entities an Interpretation of ARB No. 51, and its Canadian counterpart Accounting Standards Board of Accounting Guideline 15 (AcG‐15), Consolidation of Variable Interest Entities. By matching commercial paper investors with corporations seeking liquidity, ABCP sponsors facilitate a significant amount of short‐term, securitized financing in the United States. FIN 46 and AcG‐15 require sponsors to consolidate their ABCP conduits with their financial statements. We demonstrate that the volume of ABCP began to decline when FIN 46 was first proposed, and that this decline is primarily attributable to a reduction in North American banks' sponsorship of ABCP. We also demonstrate that North American banks entered into costly restructuring arrangements to avoid having to consolidate their conduits per the new accounting standards. Our results suggest that, in certain settings, accounting standards appear to have real effects on investment activity and product‐market competition.     

Monopoly versus Competition in Setting Accounting Standards

Financial accounting standards are set by organizations granted a significant degree of monopoly power by various governments. While there has been considerable debate on the merits of national (e.g., US Financial Accounting Standards Board (FASB)) versus international (International Accounting Standards Board (IASB)) monopolies, little attention has been paid to the merits of using competing standard‐setting organizations (SSOs) for setting accounting standards. We compare the standard‐setting processes of the FASB/IASB to the processes of four technology‐oriented SSOs to assess the role of competition. We also provide a case study of monopoly and competitive standards in telephony. Both telephony and accounting yield some gains from coordination, and similar arguments are used (under the labels of comparability and consistency of accounting) in debates about granting a monopoly to their respective SSOs. Our results show that a group of volunteers competing with the government‐sanctioned monopoly of International Telecommunications Union transformed the telephone industry. Thanks to this standards competition, we enjoy free video internet calling and massive cost savings. Implications for accounting standard setting are discussed.     

All for Nothing? Accounting for Land under Roads by Australian Local Governments

Accounting for land under roads by local governments has been one of the most controversial and protracted episodes in the setting of Australian accounting standards. However, after more than two decades of exposure drafts, regulation, transitional provisions and re‐regulation, most land under roads has not been recognised in local government balance sheets. Australian Accounting Standard AAS 27 Financial Reporting by Local Governments was first issued in 1991 and, among other significant reforms, proposed that local governments report land under roads as an asset in their financial reports. However, persistent opposition to this requirement and practical difficulties associated with its implementation gave rise to a succession of transitional provisions deferring its mandatory application. Finally, in 2007 – 16 years after AAS 27 was first promulgated – the Australian Accounting Standards Board (AASB) sought to bring closure to this issue with the release of AASB 1051 Land Under Roads. However, in the interim some state governments had pursued their own resolutions, forbidding the recognition of land under roads. This research reports the results of a survey of the impact of land under roads on local government financial reports. After two decades of debate and regulation, diversity is found to persist in the extent and manner of recognition of this ‘asset’. However, recognition remains the exception rather than the norm and is typically confined to recent acquisitions that comprise only a very small portion of total assets. These circumstances are suggestive of an episode of regulatory failure.     

Reporting on Service Efforts and Accomplishments on a 'Whole of Government' Basis

The United States' Governmental Accounting Standards Board has fostered the development of reports on "service efforts and accomplishments". The SEAs framework for classifying performance indicators and providing accompanying contextual data and interpretative commentary was adopted in New South Wales, but developed through its application on a "whole of government" basis and the adoption of distinctions between "program outcomes" and "community outcomes". The whole-of-government approach has the potential to provide a more consistent track record of public-sector performance in the face of departmental restructuring or the shifting of programs or subprograms between agencies.     

Stock Market Reactions to SFAS No. 96: Evidence from Early Bank Adopters

Statement of Financial Accounting Standards (SFAS) No. 96, “Accounting for Income Taxes,” issued by the Financial Accounting Standards Board (FASB) in December 1987 changed accounting for income tax recognition and accrual. The original deadline for implementation of SFAS No. 96 was December 15, 1988, and earlier adoption was encouraged. This study examines empirically the stock price impact of four pertinent announcement dates regarding SFAS No. 96 for 19 banks that adopted the statement in late 1987 and early 1988. Our results suggest that these early bank adopters have different characteristics from other banks that cause them to benefit from the changes in accounting for deferred taxes and explain their voluntary adoption of the standard.     

An examination of the perceptions of auditors and chief financial officers regarding principles versus rules based accounting standards

The debate over the adoption of International Financial Reporting Standards (IFRS) by United States issuers, or its convergence with U.S. Generally Accepted Accounting Principles (U.S. GAAP) has been going on for several years now. However, as of this writing, the Securities and Exchange Commission (SEC) has still not taken a definitive position on the issue. This is in part due to issues involving the cost of adoption, independence concerns relating to the IFRS promulgation body, the International Accounting Standards Board (IASB), and the debate over which type of accounting standards is superior for financial reporting: IFRS, which are said to be “principles-based,” or U.S. GAAP, which are said to be “rules-based.” In this paper we examined the views of two stakeholders in the U.S. financial reporting system, auditors in large public accounting firms and Chief Financial Officers in the Fortune 1000. We elicited their perceptions involving ten situations where specific rules are incorporated in U.S. GAAP. We asked if the elimination of the specific rule would be likely to better achieve the “qualitative characteristics of useful financial information” as defined by the Conceptual Framework for Financial Reporting adopted by the Financial Accounting Standards Board (FASB) in 2010 (FASB 2010) and the similar document adopted by the IASB at the same time (IASB 2010). We found that in eight of the ten situations both groups preferred the rules-based accounting regime (the current U.S. GAAP rules) over a principles-based approach.     

THE SUBSTANCE OF ACCOUNTING FOR PUBLIC‐PRIVATE PARTNERSHIPS

This article evaluates Public‐Private Partnerships (PPP) accounting practice and the related financial accounting and reporting requirements. Governments across the world are seeking to access private finance to improve public infrastructure. Accounting for PPPs has encountered many difficulties, one of which is the practice by which PPPs are not accounted for as fixed assets on the balance sheet of either the public sector client or the private sector operator. Accounting for PPPs has grown in importance at a time of transition from national Generally Accepted Accounting Practice (GAAP) to International Financial Reporting Standards (IFRS). Under UK GAAP, both client and operator accounting adopt the reasoning – familiar from leasing standards – of the allocation of risks and rewards between the parties to determine the party which should recognize the fixed asset on its balance sheet. The gap in IFRS with regard to operator accounting has been filled by the interpretation IFRIC 12 on service concession agreements: this moves the reasoning from risks and rewards to control, familiar from consolidation standards. The UK Treasury and the International Public Sector Accounting Standards Board (IPSASB) have required/proposed the adoption of the mirror‐image treatment of IFRIC 12. In most, but not all, cases, control will be assessed to rest with the client, which will recognize property, plant and equipment, and not with the operator, which will recognize either a financial asset or an intangible asset on the basis of an assessment of which party bears the majority of risks and rewards. Under both UK GAAP and IFRS, accounting policy choices are strongly influenced by, for the client, governmental control frameworks, and for the operator, by the implications for the profile of distributable profits and for taxation. An important public policy issue is that the national accounts, which for European Union member states must comply with European System of Accounts 1995, will remain on a risks and rewards basis. It is these numbers that will be used in assessments of macro‐fiscal policy and fiscal risks, notwithstanding that the Eurostat version of risks and rewards is even more open to manipulation than were the national financial reporting standards.     

Reporting on Service Efforts and Accomplishments on a Whole of Government' Basis

The United States' Governmental Accounting Standards Board has fostered the development of reports on "service efforts and accomplishments". The SEAs framework for classifying performance indicators and providing accompanying contextual data and interpretative commentary was adopted in New South Wales, but developed through its application on a "whole of government" basis and the adoption of distinctions between "program outcomes" and "community outcomes". The whole-of-government approach has the potential to provide a more consistent track record of public-sector performance in the face of departmental restructuring or the shifting of programs or subprograms between agencies.