Do principles‐based accounting standards lead to biased financial reporting? An Australian experiment

International accounting standards are deliberately designed to be principles‐based (i.e. ‘substance over form’). With Australia's recent adoption of international accounting standards, a relevant question is, do principles‐based accounting standards lead to biased financial reporting? The present paper describes a study that analysed the consolidation judgements of senior accounting officials from Australian listed companies. Participants made consolidation judgements based on AASB 1024 Consolidated Accounts. Although AASB 1024 is not identical to IAS 27 Consolidated and Separate Financial Statements, there are many similarities and both follow a principles‐based approach. In aggregate, the present study finds that principles‐based accounting standards do not necessarily lead to biased financial reporting.     

Applying Conceptual Framework Principles to Superannuation1 Fund Accounting

The Australian accounting standard AAS 25, Financial Reporting by Superannuation Plans, was the first pension accounting standard internationally to apply established conceptual framework (CF) principles. In Australia those principles have guided standard setting for more than a decade. However, AAS 25 has been criticized for failing to provide useful financial information. The analysis provided in this article addresses this paradox. The findings reveal major anomalies in AAS 25 associated with the treatment of accrued benefits that distort financial position and performance measures. The conceptual flaws in the standard are attributed to the misapplication of CF principles and an absence of adequate guidance in the CF for non‐corporate entities such as superannuation funds. Distorted financial information produced by superannuation plans has potential undesirable taxation and social outcomes. Consequently, there is an urgent need to update the Australian and international conceptual frameworks to provide guidance for revising accounting standards that better reflect current fiduciary and ownership relationships in non‐corporate entities such as superannuation funds.     

Some Implications of IFRS Adoption for Accounting Education

This paper addresses challenges accounting educators face in their teaching following the adoption of International Financial Reporting Standards (IFRS). We use Australia as an example of a developed nation and 2005 adopter of IFRS, the United States as a potential adopter, and Romania as an emerging economy with a history of harmonisation and adoption initiatives. Accounting educators globally need to strengthen their engagement with the principles‐based approach to teaching IFRS. Teaching resources, educational research and Continuing Professional Development activities related to a principles‐based approach to teaching IFRS are necessary for educators to enrich the learning experience of students given the move from a rules‐based to a principles‐based set of accounting standards.     

Effect of information quality due accounting regulatory changes: Applied case to Mexican real sector

The purpose of this paper is to examine whether changes in accounting standards improve value relevance of financial information on listed companies in Mexico. The research was conducted for the period 2000–2013 using a sample of 141 companies that report to the Mexican stock exchange using the methodology of panel data. Our findings show that changes in local regulations (generally accepted accounting principles) to internationally approved standards (Financial Reporting Standards and International Financial Reporting Standards) increase the value relevance and therefore the quality of information. The study shows that the accounting information with international Financial Reporting Standards is more trustworthy for foreign and national investors.     

The Conceptual Framework as a Coherent System for the Development of Accounting Standards

The Financial Accounting Standards Board (FASB) visualized a conceptual accounting framework as a 'coherent system of interrelated objectives and fundamentals that can lead to consistent standards that prescribes the nature, function, and limits of financial accounting and financial statements' (FASB, 1976). To Australian standard setters, the primary purpose of the conceptual framework (CF) was only to be used as a 'guide' in developing and reviewing accounting standards (AASB, 1995, para. 5). The International Accounting Standards Committee (IASC) diminished the role of a conceptual framework even further by openly acknowledging that some standards are inconsistent with the guidelines offered by the framework (IASC, 1989 para. 12). Even though the Australian Accounting Standards Board (AASB) supposedly pursues a policy of harmonization of conceptual frameworks and accounting standards, there are also acknowledged inconsistencies in the conceptual frameworks of the IASC.
The aim of this article is to assess the coherence of the Australian (and IASC) conceptual framework. This analysis identifies confusion in drafting or construction of the conceptual framework, internal inconsistencies, and inconsistency with the legal framework within which business entities operate. Accordingly it is suggested that the adoption of a conceptual framework will not lead to consistent accounting standards, and inevitably the conceptual framework will lack credibility so long as it is inconsistent with legislation.     

The Nature and Rationale of a Conceptual Framework for Financial Reporting by Islamic Banks

Islamic banks have to abide by the revealed doctrines in Islam in conducting their business and financial transactions. They employ in-house religious advisers—often referred to as Shari'a Supervisory Board (SSB)—who issue a special report to inform users of financial statements whether or not the bank has adhered to the Islamic principles. Recently, a private standard-setting body—the Financial Accounting Organization for Islamic Banks and Financial Institutions (FAOIBFI)—has been set up to externally regulate the financial reporting by Islamic banks. The FAOIBFI has published two statements on the objectives and concepts of financial reporting to act as a framework in setting accounting standards for Islamic banks. This paper examines the FAOIBFI's approach for developing objectives and concepts of financial accounting and investigates its need for such a theoretical framework. It is argued that the FAOIBFI's objectives and concepts would not be useful in mandating accounting standards on issues that are affected by religious ruling. This does not necessarily mean that such a framework may not be useful in legitimating the FAOIBFI's role and in setting accounting standards for issues that are not governed by revealed moral doctrines although it will be subject to similar limitations to those found by other standard-setting bodies in utilising and applying their framework. However, it implies that the more the FAOIBFI sets accounting standards that incorporate religious ruling, the less it would tend to find its own objectives and concepts useful. The ambiguities that may arise from different interpretations of the religious rules will require resolutions primarily by reference to religious rather than accounting authority.     

Measurement of Formal Convergence of Vietnamese Accounting Standards with IFRS

Convergence refers to the process of narrowing the differences between International Accounting Standards/International Financial Reporting Standards (IAS/IFRS) and country‐specific accounting standards. The purpose of this study is to measure the formal convergence between Vietnamese Accounting Standards (VAS) and IAS/IFRS using a fuzzy‐based approach. We assess the extent of convergence between VAS and IAS/IFRS from the perspective of a single standard, clusters of standards and the standards as a whole. The levels of standards convergence are clustered into four categories: full convergence, substantial convergence, substantial difference and complete difference. Our results indicate that the level of convergence between the two sets of standards only achieves mid‐level convergence. The findings of this study should help policy makers improve VAS to meet international standards.     

Accounting Standards Harmonization and Financial Statement Comparability: Evidence from Transnational Information Transfer

This paper investigates whether accounting standards harmonization enhances the comparability of financial information across countries. I hypothesize that a firm yet to announce earnings reacts more strongly to the earnings announcement of a foreign firm when both report under the same rather than different accounting standards. My analysis of abnormal price reactions for a global sample of firms supports the prediction. Next, in an attempt to control for the underlying economic comparability and the effects of changes in reporting quality, I use a difference‐in‐differences design around the mandatory introduction of International Financial Reporting Standards. I find that mandatory adopters experience a significant increase in market reactions to the release of earnings by voluntary adopters compared to the period preceding mandatory adoption. This increase is not observed for nonadopters. Taken together, the results show that accounting standards harmonization facilitates transnational information transfer and suggest financial statement comparability as a direct mechanism.     

Does IFRS 10 on Consolidated Financial Statements Abandon Accepted Economic Principles?

The 2007 global financial crisis revealed a deficiency in the financial reporting of off‐balance‐sheet vehicles. To better reflect risks associated with such items, International Financial Reporting Standard (IFRS) 10 provided new principles for determining an investor's control of an investee for the purpose of preparing consolidated financial statements. We show that an applicative example appearing under the new guidelines contradicts the conclusion drawn from widely accepted power indices: the Shapley‐Shubik value and the Banzhaf index. Our study adds to the literature aiming to incorporate methodological economic thought into accounting principles.     

Comparability in IPSASs: Lessons to be Learned for the European Standards

Abstract

In 2013 the European Commission started addressing issues concerning public sector accounting harmonization across EU Member States, embarking on a project to develop European Public Sector Accounting Standards (EPSASs). Although acknowledging the indisputable reference of the existing International Public Sector Accounting Standards (IPSASs), it highlighted that IPSASs, as they were, could not be suitably applied in the EU context (European Commission, 2013a). IPSASs were considered as not covering specific important matters of public sector accounting, not showing enough stability due to the need of constant convergence with IFRSs, and offering several options that compromised comparability.

Comparability of public sector accounts across Member States is one of the main objectives of EPSASs (EUROSTAT, 2016, 2019), clearly established as a qualitative characteristic in the draft EPSAS Conceptual Framework (EUROSTAT, 2018). It is critical for EU economic and fiscal convergence that countries’ accounts allow for substantial comparison and standardized transition to the National Accounts (Jorge et al., 2014).

The IPSAS Conceptual Framework (IPSASB, 2014), meanwhile issued, sustains that adopting these standards would improve comparability of General Purpose Financial Reporting (GPFR), in this way strengthening transparency and accountability of public sector finance.

Given that, despite the above concerns, EPSASs are to be developed on the basis of IPSASs (European Commission, 2019), the purpose of this paper is to show that IPSASs are not an adequate reference for EPSASs in terms of allowing the desired comparability of countries’ accounts in the EU. It relies on evidence gathered from IPSAS-based financial reports prepared by some Agencies of the United Nations System and from audit reports of the UN Board of Auditors.

The research illustrates that IPSASs only allow for de jure comparability of financial reports at a very broad level. Their implementation and interpretation in practice (due to the options permitted and the judgement required) does not allow for de facto comparable GPFR. European standard-setters need to be aware that the comparability EPSASs need to address across EU Member States’ accounts must go beyond the one that is permitted by IPSASs – EPSASs need to stretch IPSASs harmonization to a higher level of standardization.     

The IASB and FASB convergence process and the need for ‘concept-based’ accounting teaching

The increasing globalization of the U.S. economy drives interest in international accounting standards. In this respect, the convergence process between the International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) targets the completion of several major projects by 2011. The importance of the projects under consideration as well as the lack of conclusive theoretical solutions around them suggests that the target of a “common set” of accounting standards will be replaced in the short-medium term by a de facto situation of a “slightly different set” of accounting standards. In this paper, we draw on best available practices to make a specific proposal for the introduction of IFRS into the curriculum of institutions of higher learning in the U.S. Our proposal is driven by the idea that accounting education should move from teaching ever temporary rules to emphasize the economic and strategic underpinnings of accounting transactions.     

The influence of process accountability and accounting standard type on auditor usage of a status quo heuristic

There has been considerable discussion about the U.S. reporting standards becoming less rules based, similar to International Financial Reporting Standards (IFRS). One proposed advantage of a change to IFRS is increased comparability across multinational and non-U.S. companies. Additionally, some believe that IFRS afford greater flexibility in its principles, thereby enabling firms’ accounting choices to better reflect the true economic nature of any given transaction (FASB, 2002; SEC, 2003). With fewer rules, both financial statement preparers and auditors would be expected to adjust to having more options with regards to financial reporting. However, some proposed changes leave the option open to implement IFRS (or other principles-based standards) in ways that still follow rules in U.S. GAAP. This paper investigates whether prior year accounting treatments influence the judgment for current year treatments when one way to implement the standard is to follow the prior year treatment. We find that some auditors fixate on prior year scenarios and judgments, even if the current year scenario and applicable accounting standards are different. We find that holding auditors accountable for their decision making process reduces the likelihood of sticking with the prior year treatment most notably when the prior year standards were U.S. GAAP.     

Harmonization and the Conceptual Framework: An International Perspective

The release of CLERP 9 (Commonwealth of Australia, 2002) requires the Financial Reporting Council and the Australian Accounting Standards Board to adopt International Accounting Standards (IAS) en bloc as domestic reporting standards by 1 January 2005. This article considers the current and future role and direction of the conceptual framework (CF) under the CLERP proposals and a potential IAS reporting environment after January 2005. It is argued that Australia, which has been a major innovator on CF issues, may suffer a major setback if the International Accounting Standards Board's CF is adopted in January 2005. Furthermore, while the International Accounting Standards Board (IASB) has been aggressively pursuing a set of global accounting standards, it remains unclear whether the IASB will, or can, develop an internationally relevant and generally accepted CF which can guide the development of a globally compatible set of accounting standards.     

Exploring attitudes to financial reporting in the Australian not‐for‐profit sector

The current level of satisfaction among different stakeholders about the current approaches and practises of financial reporting of not‐for‐profit (NFP) entities is underexplored ( Christensen and Mohr, 2003 ; Lee, 2004 ; Gray et al., 2006 ; Parker, 2007 ). This paper uses content analysis to examine submissions to the 2008 Australian Senate Economics Standing Committee for its inquiry into the disclosure regimes of charities and NFP organisations, which aimed to explore attitudes about financial reporting in the NFP sector. Financial reporting is viewed as an important part of accountability, but the sector identifies deficiencies in the current regime in terms of consistency, efficiency and transparency. Respondents to this inquiry believed that a sector‐specific accounting standard was important. Financial reporting standards, regulations and legal structures should be uniform across the entire sector, but with some variation allowed for smaller NFPs. The cost of complying with standards was a significant issue for smaller NFPs.     

Relationships between national economic culture,institutions, and accounting: Implications for IFRS

National economic culture has an indirect influence on accounting at the national level through the mediating variable of institutions. The relationships are evaluated using measures of national economic culture from Culture, Leadership, and Organizations: The GLOBE Study of 62 Societies (House et al., 2004); measures of institutions from the World Bank (Kaufmann et al., 2007); and measures of national accounting from the Financial Standards Foundation (2008). At the national level, institutions are found to mediate the relationship between economic culture variables and accounting. The empirical findings indicate that accounting in a given nation is linked to the nation's supporting institutions, which institutions in turn are influenced by the national economic culture of those who maintain them. This suggests that altering aspects of accounting within a nation can be expected to entail much more than formal adoption of standards, principles, or innovations. Institutional adjustments must be made and the impact of national economic culture must be understood and appropriately addressed.     

Disharmony in international accounting standards setting: The Chinese approach to accounting for business combinations

The paper addresses two distinct aspects of disharmony in international accounting standards setting. The first aspect relates to the political economic context of financial accounting standards. This is illustrated by the Chinese standards setters’ decision to allow the pooling of interests method of accounting for business combinations despite the prohibition of this method by both the FASB and the IASB. This decision by the Chinese standards setters appears to have been based on political economic factors related to the need for industrial reorganization in China rather than a desire to serve the needs of global capital markets. The second aspect of disharmony relates to the role played by differential understandings of the fundamental objectives of financial reporting in an international context. The IASB's goal of producing one set of global accounting standards to serve the needs of global capital markets has led to a reduction in the number of permissible accounting methods and a move towards the fair value accounting model. In particular, the IASB concluded that the acquisition method of accounting for business combinations should be the only method allowed for business combinations. In contrast, the Chinese standards setters have recognized the existence of both mergers and acquisitions, and in response they created two different methods of accounting for business combinations. Effectively, the Chinese standards setters developed an alternative approach to accounting for business combinations which challenges the IASB's goal of achieving international accounting convergence through the fair value model.     

Assessing international accounting harmonization using Hegelian dialectic,isomorphism and Foucault

This paper applies an innovative approach to explore the processes, effects and likely future progress of the convergence of national accounting standards with International Financial Reporting Standards (IFRS). Particular use is made of the Hegelian dialectic concepts of thesis, antithesis and synthesis; notions of isomorphism and decoupling; and, to a lesser extent, Foucault's concept of power–knowledge. Factors that are likely to explain the extent, rhythm and pattern of convergence of national accounting standards with IFRS are discussed. The paper concludes by highlighting four matters that are thought likely to enhance understanding of the process of international accounting standards harmonization; and by averring that the international harmonization process is a dialectical process influenced by belief systems that are constructed in a context of isomorphism and decoupling.     

中国对于国际会计协调的基本态度与所面临的问题

本文从分析当前国际经济全球化的背景和国际财务报告准则制定及其应用的急剧变化出发,认为我们应当积极关注国际财务报告准则发展和国际会计协调与趋同的进展情况。尽管我国目前尚没有完全采用国际财务报告准则,但是中国实际上也是国际财务报告准则的使用者和受益者,为此,中国一方面支持国际会计准则理事会制定全球公认会计准则的努力,另一方面也将积极参与国际会计协调与趋同进程。与此同时,考虑到中国当前所面临的特殊会计环境及其对我国会计国际协调与趋同的影响,中国会计国际化将适应经济发展的需要,走一条渐进式改革之路。为此,本文提出了一个务实、可行的会计国际化策略。     

Government Accounting: An Assessment of Theory, Purposes and Standards

Government accounting and financial reporting aims to protect and manage public money and discharge accountability. These purposes, and the nature of public goods and tax financing, give rise to differences with commercial accounting. This is not yet reflected either in government accounting standards in English–speaking developed nations or in international public sector accounting standards. All of these are heavily influenced by private sector practices, which favour the accrual basis and consolidated reporting. This article argues for a gradual symmetric approach to accruals and a combination of government–wide and fund reporting. The author also proposes some broad accounting principles to promote political and economic accountability.     

公允价值具有价值相关性吗?基于金融资产的研究

本文以构成我国证券市场主体的A股上市公司为研究样本,考察了公允价值相对于历史成本以及公允价值自身变动产生的未实现收益的价值相关性问题。实证结果发现:相对于历史成本,公允价值具有增量的价值相关性;金融资产公允价值变动产生的未实现收益具有价值相关性;两种金融资产中,只有可供出售金融资产产生的未实现收益具有价值相关性,交易性金融资产不具有价值相关性。此研究结果不仅为国际会计准则在中国证券市场的应用和实施效果提供了经验证据,同时也能够帮助监管层和实务界正确认识公允价值在股票市场上信息传递方面所起的作用。