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.     

A theoretical basis for public sector accrual accounting research: current state and perspectives

ABSTRACT

Public sector or government accounting has been the subject of many research endeavors. However, scholars have repeatedly criticized the lack of a consistent and well-defined theoretical basis for international research. So far, most researchers have drawn from various streams of theoretical perspectives with often unsatisfactory results. The goal of this paper is to put forward the International Public Sector Accounting Standards Board’s (IPSASB) Conceptual Framework as a point of reference for establishing a better-fitting theoretical basis for public sector accrual accounting research.     

Discourses surrounding the evolution of the IASB/FASB Conceptual Framework: What they reveal about the “living law” of accounting

The International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) recently published the final version of Chapter 1 of their joint Conceptual Framework for Financial Reporting (IASB/FASB, 2010). In this article, we focus on two of the key issues addressed in Chapter 1: stewardship and the definition of the primary user groups of financial statements. To address the discourses surrounding the evolution of Chapter 1, we introduce the concept of “living law” from sociological jurisprudence into accounting scholarship. We first trace the role of stewardship/accountability in the evolution—from antiquity to the present day—of the living law of accounting. We then explore the origin, nature, and implications—from a living law perspective—of the moral traditions associated with stewardship/accountability. Our analysis suggests that stewardship has been, and continues to be, embedded in the living law of accounting—notwithstanding the formal pronouncements of standard setters. We also examine the social accounting project from a living law perspective and we suggest that such an analysis provides new possibilities for addressing core social accounting concerns. We conclude by arguing that, particularly in light of the far reaching impact of the neoliberal agenda, there is an urgent need for scholars in both contemporary “social” and “mainstream” accounting to recognize and build upon their shared living law heritage rooted in the age-old traditions of stewardship/accountability.     

Accounting policies in the public sector: Characteristics and consequences of accounting for capital assets

We study the evolution of American state and local governments’ capital asset accounting policies from the initial adoption of Governmental Accounting Standards Board Statement No. 34 through the fiscal year ending in 2016. We document substantial cross-sectional and time-series variation in capital asset accounting policies, which potentially diminishes the comparability of capital asset accounting information across governments and over time. We also explore the economic implications of those policies in terms of capital investment decisions and capital asset condition ratios, as reported in governments’ annual financial reports. Our findings, which are relevant to the Governmental Accounting Standards Board and its constituents, extend prior research examining the adoption and application of generally accepted accounting principles in the public sector.     

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.     

On the Attributes of an Asset

Definition of the elements of financial accounting has been a much discussed topic since the Financial Accounting Standards Board (FASB) began work on their Conceptual Framework Project. Defining assets, liabilities, revenues, expenses and other elements has been attempted by many knowledgeable accountants but, to date, no single, generally accepted set of definitions exists. This paper will focus upon the definition of assets and will, through an examination of FASB Statements, attempt to derive an implicit definition of assets from the pronouncements of the FASB.     

FASB与IASB联合趋同框架(初步意见)的评介

首先,本文对FASB与IASB于2006年7月6日发布的联合趋同框架(关于目标和信息质量特征的初步意见)的制定背景、主要内容(包括财务报告的目标和信息质量特征的相关内容)进行了简要的介绍和评价,着重强调了联合框架与FASB概念框架和IASB概念框架的区别。其次,本文对联合框架提出了两点整体性看法:一是是否应该由IASB和FASB联合制定联合框架;二是是否应该将受托责任观隶属于决策有用性。最后,本文分析了联合趋同框架对我国新会计准则《基本准则》的影响。     

Implications for the Conceptual Framework Arising From Accounting for Financial Instruments

This article describes some of the issues faced by standard setters in developing guidance on accounting for financial instruments and the implications these issues have for the conceptual framework (CF). The objective is to outline issues, not necessarily to resolve them, and to consider the implications they have for further developing the conceptual framework.
Given the current trend of harmonization and convergence of accounting practice towards international standards, it seems reasonable to assume that any policy implications will be most relevant to the CF inherited by the International Accounting Standards Board (IASB). ¹ Unless otherwise stated, references will be made to International Accounting Standards (IAS).     

An intuitive appeal for the correct calculation of Present Value-Based Measurements in Accounting

Most introductory and intermediate textbooks in accounting provide a discussion of the time value of money and include a presentation of the calculation of bond values as an example. The bond valuation model is needed primarily for the valuation of debt on the firm's balance sheet when the issue is placed in the market at an amount other than its face value. Often, however, these texts present this information in an incorrect or confusing manner. The errors arise from improperly determining the appropriate discount rate to use when interest payments are other than annual. This paper briefly summarizes prior efforts to correct this problem and offers a consolidated and intuitive approach for accounting instructors to use in presenting this information to students. Examples are provided which can be used in the classroom to explain differences in the alternative techniques, as well as explain the types of errors caused by use of incorrect procedures under different assumptions. Present value concepts play an important role in the recognition and measurement of many accounting transactions, including those in such areas as corporate bonds, long-term notes, long-term investments, capital leases, pension cost components, and capital budgeting. The importance of present value issues is also evident from a Discussion Memorandum entitled “Present Value-Based Measurements in Accounting,” issued by the Financial Accounting Standards Board (FASB, 1990). Given the importance that time-value-of-money concepts play in accounting, and the scope of the current FASB agenda project dealing with present-value measurements, it is important for the accounting instructor to correctly understand and present this information.     

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.     

Business-model (intent)-based accounting

We discuss how basing financial reporting on an entity's business model is, in effect, basing financial reporting on management's intent with respect to the use, transfer or other disposition of an asset or liability. We provide several examples of existing International Financial Reporting Standards and US Generally Accepted Accounting Principles that permit or require intent-based accounting. We describe the meaning and consequences of basing the accounting for financial assets on management's intentions for realising value from those assets. We analyse the positive and negative features of intent-based accounting in the context of the Financial Accounting Standards Board's and International Accounting Standards Board's conceptual frameworks, specifically, the qualitative characteristics relevance and comparability and the objective of financial reporting, and apply that analysis to existing and proposed guidance for measuring financial assets. We also discuss evidence from academic research on the measurement of financial assets.     

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.     

Articulation,Profit or Loss and OCI in the IASB Conceptual Framework: Different Shades of Clean (or Dirty) Surplus

Abstract

The 2015 International Accounting Standards Board (IASB) Conceptual Framework Exposure Draft (2015 IASB CF ED) proposes a mixed valuation and transactions approach to income determination. Nevertheless, it does not clearly choose between single or dual concepts of profit, which renders the 2015 IASB CF ED’s financial accounting model somewhat incoherent. The 2015 IASB CF ED proposes a rebuttable presumption that profit or loss should be all-inclusive. Only the IASB can rebut this presumption, but the 2015 IASB CF ED provides no clear conceptual basis on which to rebut this presumption. In spite of considering dual measurement, the IASB believes that it is neither possible, nor necessary, to distinguish between profit or loss and other comprehensive income (OCI) on a conceptual basis. This paper suggests that the 2015 IASB CF ED’s approach to measurement can be improved by introducing a deprival value measurement rule in cases where fair value and historical cost are not appropriate. Furthermore, it argues that under dual measurement it is both necessary and possible to make a conceptual distinction between the realised items of income and expense in profit or loss and those recognised by accretion in OCI.     

Does the Control-based Approach to Consolidated Statements Better Reflect Market Value than the Ownership-based Approach?

Motivated by the recent Discussion Paper (DP) issued by the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) on how to define reporting entities, this study investigates the value relevance of consolidated statements under the ownership-based approach of U.S. Accounting Research Bulletin No. 51 (ARB 51) and the control-based approach of International Accounting Standard No. 27 (IAS 27). The results show that consolidated financial statements based on a broader definition of control provide more useful accounting information than those based only on majority-ownership control. We also address one concern raised in the DP, namely, whether a reporting entity should use the common control model to include entities that are under common control of an individual investor or family. The results suggest that accounting standard boards should include the common control model in defining the group reporting entity for firms with complex ownership structures.     

(No) Limits to Anglo-American accounting? Reconstructing the history of the International Accounting Standards Committee: A review article

The development of the current International Accounting Standards Board (IASB) from the earlier International Accounting Standards Committee (IASC) provides insight into many issues of international financial reporting, among them the characteristics of international accounting standards themselves. This article reviews Camfferman and Zeff’s [Camfferman, K., & Zeff, S. A. (2007). Financial reporting and global capital markets. A history of the international accounting standards committee 1973–2000. Oxford: Oxford University Press] volume on the organizational development of the IASC and contextualizes it in the broader literature of cross-border standardization in accounting. While having produced a seminal piece, the authors take a clear Anglo-American perspective. The downsides are insufficiencies regarding a simplistic understanding of experts and expertise, a neglect of the role of auditing firms, and only an imbalanced integration of different stakeholders.     

Assessing Conformity with Generally Accepted Accounting Principles Using Expert Accounting Witness Evidence and the Conceptual Framework

To enhance understanding of the status of the Financial Accounting Standards Board's Conceptual Framework for Financial Reporting, we analyse important rules of evidence in United States (US) courts regarding the presentation of expert accounting witness testimony. We draw on this analysis to recommend the relocation of the Conceptual Framework in the US Generally Accepted Accounting Principles (GAAP) hierarchy. For empirical support, we explore how rules of evidence in the criminal trial in 2006 of Enron's two most senior executives affected assessment of whether Enron's financial reports conformed with the FASB's GAAP. We recommend that the FASB's Conceptual Framework should be included in authoritative literature as the uppermost authority, and that it be grounded closely in user needs and the ethical principles associated with meeting those needs. Further, we recommend that accounting expert witnesses adopt an overriding concern for objectivity and impartiality in assisting courts to understand complex accounting matters within the Conceptual Framework.     

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.     

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.     

Financialisation and the Conceptual Framework

The ongoing neoliberalisation of global economies has been well documented. Neoliberalism requires a commitment to a broad set of ideas about how political economies should operate, and these ideas underpin the transformations of practice in the process of neoliberalisation—both at a technical and conceptual level. Transactions within a neoliberal economy need to be accounted for in a way that accords with this broader set of ideas. Specifically, the growth of accumulation through financial markets has seen a concurrent growth in accounts that both reflects and reproduces finance at its centre. These accounts are more than just reports; they condition our expectations and support the production of further accounts, which in turn reinforce the dominant political economy. Despite the connection between neoliberalism, financialisation and the practice of accounting, the role of accounting in the process of neoliberalisation has received only limited attention. In order to contribute to a deeper understanding of these processes and to the role that accounting plays within them, this paper re-examines the Conceptual Framework (CF) to show how it forms an important part of the architecture of neoliberalism, providing coherence and legitimacy to its key ideas. The current CF project was jointly conducted by the International Accounting Standards Board (IASB) and the US Financial Accounting Standards Board (FASB), and is positioned within the broader literature on neoliberalism and financialisation. This paper shows how changes in terminology, shifts in notions of income and the popularity of market valuations (fair value accounting) work to normalise the speculative characteristics of financial markets. Through this newly configured globalised CF, the regulatory architecture of accounting may work to sustain the centrality of finance in a post-GFC economy, despite its many deficiencies.     

On the intertemporal value relevance of conventional financial accounting in Australia

This paper examines whether the relevance of conventional (earnings focused) accounting information for valuation has declined in Australia over a recent period of 28 years. Motivation is provided by the anecdotal concerns of financial analysts, accounting regulators, and a cluster of US centric academic research papers that conclude that the relevance of financial accounting (and earnings in particular) has declined over time. After controlling for nonlinearities and stock price inefficiencies, we find that the value relevance of core accounting earnings has not declined. A possible exception is found for small stocks. We also observe that net book values are relatively less important in Australia when compared to the USA. Our results are informative for investors who require feedback on valuation issues and the International Accounting Standards Board regulators in any further moves towards a balance sheet focus.