Public Choice and Accounting Standard Setting in New Zealand: An Exploratory Study

Recent studies in accounting regulation have used either the capture argument or the pluralistic notion to describe the enactment of accounting regulations. This paper explores the nature of the impact of public choice in accounting standard setting in New Zealand using the pluralistic notion. To provide an insight into the standard-setting process, this paper involves an examination of the establishment, withdrawal and re-establishment of New Zealand's most controversial standard after current cost accounting — the standard on investment property accounting (SSAP 17). The investigation considers the nature of public choice in the agenda entrance, demand and supply factors influencing standard setting in New Zealand. The results indicate that the New Zealand accounting standard-setting process is pluralistic in a limited way. Like most other English-speaking countries, the scope of participation for certain groups has been institutionalized on the supply side by way of membership of standard-setting committees of the New Zealand Society of Accountants. On the demand side, however, consumers of accounting have been provided with only limited scope for participating in the formal process of standard setting. Nevertheless, other means (i.e., exogenous and informal ones) may be used to influence the process. Overall, from both the demand and supply perspectives of regulation, the Big-8 accounting firms (as they were previously known) followed by the preparers of financial statements, seem to have greater participatory capacity in the New Zealand standard-setting process.     

Motivations behind users’ participation in the standard-setting process: Focus on financial analysts

The aim of this study is to investigate what motivates financial analysts to participate in the accounting standard-setting process. We focus on financial analysts because they are an important group of the financial statements users. The paper employs the meso-level approach used by Durocher et al. (2007) that integrates the macro domain’s focus on the standard setters with the micro domain’s focus on individuals and thus it links the characteristics of due process for standard setting with users’ attitudes. We develop a survey for the Chartered Financial Analysts Institute (CFA), which is one of the largest associations of investment professionals in the world, and collected data through computer-assisted Web interviews. We use a structural equation model with PLS to test our hypotheses. Our main findings confirm that a combination of micro and macro domains explains the frequency of financial analysts’ participation in the standard setting process. This investigation, thus, deepens our understanding of motivations behind analysts’ involvement in the accounting standard-setting process and delivers both theoretical contributions and practical insights.     

Understanding participation in accounting standard-setting: the case of AASB ED 192 Revised Differential Reporting Framework

This paper explores the motives of participants in the standard-setting process, based on the premise that standard-setters strive for standards that are useful for decision-making by a wide range of financial statement users. Our setting is the development of a contentious but contained Australian accounting standard, Reduced Disclosure Requirements. A consultative process initiated by the Australian Accounting Standards Board to create a specific Australian accounting standard for differential reporting provided an opportunity for interested parties to participate. We analyse the motives of participants through semi-structured interviews with members of the Australian Accounting Standards Board and comment letter writers who responded to the relevant exposure draft. Our findings identify participants’ economic and political motivations and question the ability of the current standard-setting process to extract decision-making requirements from a wide range of users of financial statements and to reflect these in financial reporting standards. We find that the perspectives gathered are homogenised and that the process privileges the voices of powerful elites.     

Making Deferred Taxes Relevant

Abstract

We analyse the conceptual problems in current accounting for deferred taxes and provide solutions derived from the literature in order to make International Financial Reporting Standards (IFRS) deferred tax numbers value-relevant. In our view, the empirical results concerning the value relevance of deferred taxes should find their way into the accounting standard-setting process. We conclude that deferred taxes should only be recognised for temporary differences that will result in real future tax payments and/or tax receipts. Temporary differences for which the tax cash flow has already occurred have valuation implications for the underlying asset or liability and should, therefore, be accounted for based on the valuation adjustment approach. Furthermore, we conclude that partial allocation should replace comprehensive allocation in order to better align deferred taxes with expected future cash flows and thus increase their relevance and understandability. Finally, we conclude that deferred tax balances should be measured on a discounted basis to address time value.     

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.     

Politics, Processes and the Future of Australian Accounting Standards

The perspective of public interest and interest group theories of regulation is adopted to consider the future of Australian accounting standards following major reforms proposed by the Australian Commonwealth government as part of its 1997 Corporate Law Economic Reform Program (CLERP). Interest groups in the Australian environment are identified. Their lobbying had influenced the initial proposals; and their reactions when the CLERP proposals were published resulted in substantial modifications to the CLERP proposals, which had initially recommendedthat International Accounting Standards (IASs) be adopted as national standards from 1 January 1999.
The role of accounting standards and the structure of standard setting are explored. The political nature of standard setting is illustrated through a review of the CLERP proposals, submissions of various interest groups and the government's responses to them. The central arguments are that key assumptions underlying the CLERP proposals are flawed, and that the CLERP proposals could not achieve the outcomes desired of them.
It seems inevitable, however, that international standards eventually will supplant domestic standards. In the longer term, Australian standard setters seem destined to have a diminished role in the international standard setting arena.     

Accounting research and researchers of the nineteenth century and the beginning of the twentieth century: an international survey of authors, ideas and publications

At the beginning of the nineteenth century the former glory of Italian accounting was overshadowed by its decline during the eighteenth century, and literature from France, England, Germany, America and other countries took centre-stage. 'Theories of accounts' (rather than 'accounting theories') dominated not merely the early but also the later part of this century when Italian accounting had regained a prominent position beside other countries. The relation of those theories to the 'charts of accounts'-which later became so prominent in Continental Europe is historically important. The controversies over personalistic versus materialistic accounts and that between entity versus proprietary theories, as well as the emergence of other theories are discussed with reference to individual authors. Diverse topics from railroad accounting and auditing to various aspects of cost accounting are investigated. Particularly important are the pioneering efforts of this period that anticipated further developments. These manifested themselves in the following ideas: entity theory, flow of funds statement, matrix accounting, different aspects of valuation, allocation and depreciation, price-level adjustments and indexation, current values, exit values, residual income valuation, managerial control, the emergence of competing accounting (and Bilanz) theories, the separation of fixed from variable costs, fixed and flexible budgeting, zero-based budgeting, PERT, transfer prices, break-even charts, variance analysis, job-order costing, labour and machine hour rates, standard costing, price determination, integrating financial and cost accounting, clean surplus theory, agricultural accounting, holding gains, and other topics. Appendix A offers an overview of Nineteenth century scholars concerned with accounting history (together with one representative work of each), and Appendix B lists the nationally (and often internationally) prominent names of accounting authors born in the nineteenth century but also or exclusively active during the twentieth century. The paper integrates approximately 400 publications of which less than half are of the English tongue.     

The relevance of the value relevance literature for financial accounting standard setting: another view

This paper explains that value relevance research assesses how well accounting amounts reflect information used by equity investors, and provides insights into questions of interest to standard setters. A primary focus of financial statements is equity investment. Other uses of financial statement information, such as contracting, do not diminish the importance of value relevance research. Value relevance questions can be addressed using extant valuation models. Value relevance studies address econometric issues that otherwise could limit inferences, and can accommodate and be used to study the implications of accounting conservatism.     

On the Relationship of Stewardship and Valuation—An Analytical Viewpoint

Agency theoretical literature in accounting has frequently stressed possible difficulties in pursuing stewardship and valuation usefulness simultaneously. However, recent empirical evidence has revealed a significantly positive correlation between the two objectives. These empirical findings provide support for the IASB/FASB's decision to encompass stewardship in valuation usefulness in their revised conceptual framework. The objective of our paper is to identify factors influencing the stewardship/valuation relationship by using an analytical model. In a Linear Exponential Normal (LEN) setting we focus on the characteristics of an accounting system, in particular relevance, freedom from error and freedom from bias, the latter two according to IASB/FASB being components of representational faithfulness. We show that accounting quality, comprising relevance and freedom from error, has similar effects on valuation and stewardship usefulness. However, we identify conditions under which there is no perfect mapping from stewardship to valuation. Moreover, discretion in the accounting system has different consequences for both objectives as it does not affect valuation usefulness while it entails potentially negative effects on stewardship. Thus, we raise doubts in relation to the standard‐setters' view that stewardship is automatically met by a focus on valuation usefulness.     

Making up users

Within recent years, financial statement users have been accorded great significance by accounting standard-setters. In the United States, the conceptual framework maintains that a primary purpose of financial statements is to provide information useful to investors and creditors in making their economic decisions. Contemporary accounting textbooks unproblematically posit this purpose for accounting. Yet, this emphasis is quite recent and occurred despite limited knowledge about the information needs and decision processes of actual users of financial statements. This paper unpacks the taken-for-grantedness of the primacy of financial statement users in standard-setting and considers their use as a category to justify and denigrate particular accounting disclosures and practices. It traces how particular ideas about financial statement users and their connection to accounting standard setting have been constructed in various documents and reports including the conceptual framework and accounting standards.     

Does the Nobes Cycle Exist,and if so,What Does it Signify?

This article provides an alternative analysis of the recent evidence provided by Nobes concerning the existence of cycles in accounting standard setting. We disagree with Nobes' interpretation on three grounds. (1) We do not believe that the theory of the ‘Nobes Cycle’ in accounting standard-setting is specified adequately to explain any cyclical behaviour in the degree of standardisation of ASC pronouncements. (2) Nor do we believe that the empirical evidence advanced by him justifies the view that the cycles exist in reality. The pattern seems to be substantially influenced by ASC's mode of operation and consultative process. (3) The single ‘degree of standardisation’ measure adopted by Nobes offers only a very partial view of changes in the quality of corporate reporting practice. We argue that the direction of standards and the quality and volume of disclosure are at least as important. Judging by the latter, we suggest that the ASC was highly successful.     

On the Stewardship and Valuation Implications of Accrual Accounting Systems

In this paper we explore the role of accruals in determining “earnings quality” from both a stewardship and a valuation perspective. We show that the valuation and stewardship qualities of accrual accounting are maximized by either an “aggressive” or a “conservative” accrual strategy. Furthermore, accrual strategy choices can be delegated to management as it does not benefit by implementing a strategy that is not in the best interests of the shareholders. We also investigate the implications of accrual strategies for standard empirical measures of “earnings quality”: regression coefficients and R²s from price‐earnings and market‐to‐book regressions. We show that such measures respond differently, and in some cases adversely, to the kind of strategies that make accounting constructs more correlated with the underlying economic activities of firms.     

Selective Commercialisation of Public-Sector Accounting and its Consequences for Public Accountability

This paper examines the exclusion of two accounting standards from the commercialised public-sector accounting model in Australia. It locates the commercialisation in the wider context of the global neo-liberal reform ideology and argues that the selective commercialisation is a product of the neo-corporatist standard-setting process and policy networks that can be explained by public choice and agency theories. It is found that the exclusions have resulted in a significant erosion of public accountability. As implementing the excluded standards will constitute a contradiction in policy, abrogation of the commercialised accounting model might be feasible and appropriate     

Observing the PSASB: ED 50 and the Recognition of Infrastructure Assets

Provisions of AAS 27 significantly expanding the recognition of assets in local government financial statements have proven to be controversial, particularly through their application to items of infrastructure. In one instance, state legislation was amended to overrule the standard. More recently, the standard itself has been amended to extend the relevant transitional provisions. To assist in explaining why an accounting issue ostensibly resolved through the due process of standard-setting continues to generate controversy, the responses to the exposure draft (ED 50) that preceded the standard were reviewed and analysed. This led to the conclusion that any inference that respondents to ED 50 generally supported the proposals relating to accounting for infrastructure items is, at best, problematic. This paper provides insights to standard-setting processes, particularly the workings of the Public Sector Accounting Standards Board and the extent of its responsiveness to parties affected by its deliberations.     

The Setting Of Accounting Standards in Australia: An Evolving Structure

The evolution of the accounting standard-setting process in Australia will bring further significant changes as we move to introduce major features of the structures existing in the United States and the United Kingdom. Those features include an independent standard-setting body, full-time board members and broad-based funding of the process. Similar structural changes can be expected in other countries which have well developed standard-setting activities, and ultimately at the level of the International Accounting Standards Committee. These changes will result from the increasing demands on the standard-setting process and the increasing accountability required by those affected by the output of the process.     

Capital markets research in accounting

I review empirical research on the relation between capital markets and financial statements. The principal sources of demand for capital markets research in accounting are fundamental analysis and valuation, tests of market efficiency, and the role of accounting numbers in contracts and the political process. The capital markets research topics of current interest to researchers include tests of market efficiency with respect to accounting information, fundamental analysis, and value relevance of financial reporting. Evidence from research on these topics is likely to be helpful in capital market investment decisions, accounting standard setting, and corporate financial disclosure decisions.     

Der neue Standard zur bilanziellen Abbildung von Versicherungsverträgen (IFRS 17) – Eine kritische Analyse der Auswirkungen auf die Versicherungsbranche

The new standard for the accounting of insurance contracts (IFRS 17) will entail substantial changes for the insurance industry. In the following article the new standard is critically analyzed. First and foremost the coming valuation model, the so-called building block approach, is presented which will be the basis for all insurance contracts within the scope of IFRS 17. (For certain insurance contracts, especially those with direct participation features, or for less complex or short-term insurance contracts, there are some modifications.) To be more precise, IFRS 17 introduces an enterprise-specific valuation approach that is grounded on the so-called fulfilment value. This fulfilment value is determined by four separate building blocks (fulfilment-cashflow, discount rate, risk margin and contractual service margin), which will be addressed in detail. Finally, major changes in performed accounting practices that insurance enterprises are confronted with and will have to adapt to in their financial statements and accounts are pointed out.     

Standard-setting in Australia: Implications of Recent Radical Reform Proposals

We examine the implications of the Howard government's Corporate Law Economic Reform Program as they relate to accounting standard-setting in Australia. A luck of systematic and compelling evidence for wholesale changes to the existing standard-setting process is identified, as is a fundamental shift in the rationale for standard-setting which underlies the proposed changes. We disagree with the main plank of the proposals, that is, that international accounting standards should be adopted in Australia.