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Developing Accounting Regulations that Reflect Public Viewpoints: The Australian Solution to Differential Reporting

Brad Potter, Tom Ravlic & Sue Wright

t is difficult to argue against the long-held view that accounting standards should be developed which enable the preparation of financial reports that provide information that is useful for decision making by users who rely on those reports (see, for example, Fitzgerald 1936; Goldberg 1956; Belkaoui 1978, 1980). By doing so, the reporting function will also assist in reducing information asymmetry between preparers and users of financial reports, providing capital markets the opportunity to function effectively. However, the process of developing accounting standards frequently highlights differences between the viewpoints of preparers of the reports and users of the information. Further, financial reporting imposes significant costs on preparers, including direct costs associated with developing and maintaining accounting systems, auditing and report preparation, as well as indirect (‘proprietary’) costs associated with reporting.1 All of these different perspectives and interests must be balanced by regulators in developing regulations that guide the information to be reported. The standards determined by the Australian Accounting Standards Board (AASB) to prescribe appropriate accounting policies in Australia have, for the past decade or so, reflected those of the International Accounting Standards Board (IASB), which are primarily focused on reporting by larger entities in the for-profit sector. For smaller entities,2 however, the AASB has recently chosen not to reflect the IASB’s ‘IFRS for SMEs’3 standard and instead has developed its own Reduced Disclosure Requirements (RDR) for reporting. This represents a move toward a two-tier reporting system, which incorporates recognition and measurement approaches and techniques embedded throughout existing International Financial Reporting Standards (IFRS). By examining the development of the Board’s approach to differential reporting in Australia, this study exploits a unique opportunity to analyse the process through which regulations are created and justified. Since we do so by examining various communications between the accounting regulator and the stakeholders, we can shed light on the complex processes through which resulting regulations might 18
Australian Accounting Review No. 64 Vol. 23 Issue 1 2013

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In this paper, we analyse the factors that have shaped the approach taken by the Australian Accounting Standards Board (AASB) in addressing the issue of differential reporting in Australia. In contrast to its early adoption of International Financial Reporting Standards in 2005, the AASB has signalled an independent approach to differential reporting. Still in progress at the time of writing, we show how the AASB’s approach has been shaped by feedback from key stakeholder groups, as well as by influential individuals and key events. In the face of strongly held views on both sides of the debate, the Board has moved from reliance on discursive techniques to develop and justify proposed policies to embracing to a greater extent, the use of more objective research evidence to resolve the empirical questions presented in the public debate.

Correspondence Brad Potter, Associate Professor, Department of Accounting, The University of Melbourne, Parville, VIC 3010. Tel: +61 3 8344 4989; email: bnpotter@unimelb.edu.au doi: 10.1111/auar.12000

it has moved from being independent of scholarly critiques to actively commissioning such research. including those focusing on the rhetoric and the associated images that appear to underpin much accounting regulation and practice (Walters-York 1996. The Forces that Shape Accounting Standard Setting We contribute to the literature that explores the myriad factors that impact the diverse processes through which regulations are developed and implemented. These themes provide a broad reference point from which we explore the development of differential reporting in Australia. Potter. including speeches delivered by staff each year. more relevant information and more informed decisions (Carnegie and Napier 1996). to reflect the concerns of those stakeholders. Ryan 1995. and through the preparation of various documents including exposure drafts and accounting standards. Regulators have been routinely criticised for a primary reliance on such arguments in the past (Potter 2002. Young 2005). 1996.4 Its actions seem to reflect a greater appreciation of the need to inform regulatory debates by recourse to objective research evidence. This has occurred through official presentations. even though the benefits for organisations and stakeholders may be questioned.B. 1997). Power 1991. but also as an important social and institutional practice. promoted and justified. Young 1994. restrict the scope of the accounting standards that are ultimately developed when specific and unique accounting issues emerge (Hines 1991. This can. remained largely unquestioned and poorly understood. We show that the AASB’s initial proposal for SME reporting was underpinned by assumptions about the current state of SME reporting. According to Young (2003). with implications for the actions of individuals and the functioning of organisations and societies. The general conclusion drawn by researchers in this area is that changes to the accounting domain often occur through largely discursive means. prior research documents regulators as typically reluctant to deviate from their intended course (Potter 2005. the benefits of applying the advocated policy or approach can be overstated. According to Young (2003: 622). articles prepared for accounting publications. Young 1994. the Board appears to have evolved its stance to become more responsive to the viewpoints expressed by diverse stakeholders. We show that in the context of differential reporting. 1997. Wright Developing Accounting Regulations That Reflect Public Viewpoints come. these persuasive efforts cover a range of activities and occur through various forums. An implication of the above is that fundamental changes to accounting regulation can and do occur in rigid and programmed ways. Young (2003) explored the rhetorical strategies employed by the US Financial Accounting Standards Board (FASB) when new standards are put forward. and are functions of the manner in which particular accounting ‘issues’ are identified and defined and also functions of the ‘solutions’ that are put forward to resolve them. the standard-setting process may be appropriately considered to be an ‘exercise in persuasion’. These depictions of accounting have enabled accounting regulators and other advocates to promote and justify changes to accounting regulations and practices. Young 1996). appropriate. with little if any critical evaluation and without considering a range of implementation issues or a range of alternative treatments or solutions (Young 1996). T. In recent decades. 1996). The regulator has become more open to debate and disagreement. 1996). research published in quasi-academic and professional journals. Young 2003). although somewhat longer in duration than has typically been the case for previous standards. This is particularly the case where the resolution of issues through the application of advocated accounting approaches and techniques is made to appear so appropriate that it is held to be selfevident (Kent 2000. where FASB members and staff are continuously engaged in efforts to convince interested parties that the FASB’s work is ‘valuable. until recently. and the application can be made to appear more effective and appropriate than should be the case (Power 1995. In calling for research to inform its debates and decisions. 1998. When accounting regulators and other advocates portray accounting in standardised and programmed ways. and its decision making more inclusive of public viewpoints. Miller 1991. Young 1996). The resulting process for developing the ensuing regulation is more inclusive. rhetoric and images that have. despite a C lack of robust evidence to support the proposed reforms (Potter 1999. and depicting particular changes to regulation and practice as cognate with progress towards better. Ravlic & S. and in public lectures. Consistent with these themes. in turn. useful and correct’ (Young 2003: 627). and to rely less on discursive/normative arguments as a primary basis for justifying advocated reforms. through time. This has prompted various streams of literature. 1995. Even in light of evidence contrary to the advocated accounting treatment. the nature and extent of the changes can be oversimplified. and the costs and benefits and other implementation issues associated with moving to a new framework. researchers have come to understand accounting not just as a technical practice. Australian Accounting Review 2013 CPA Australia 19 . The rhetoric and images underpinning accounting regulation and practice include portraying accounting as a neutral and unbiased tool for measuring and representing pre-existing organisational and social reality.

which reviewed a small but undisclosed number of SME reports. A size test was introduced for small private companies in the First Corporate Law Simplification Act.Developing Accounting Regulations That Reflect Public Viewpoints B. While at the time no specific size tests were developed to implement the concept. which defined the concept of the reporting entity and set in place the basis for determining the types of entities that should report and the level of information required from each. with regulators often criticised in the past for addressing ‘new’ accounting problems in programmed and standardised ways and for a reluctance to deviate from the initial solution advocated (Potter 2002. as well as some general indicators including financial and non-financial information (AARF/AASB 1990. the Statement of Accounting Concepts (SAC) 1 Definition of the Reporting Entity . then secretary of the Legislation Review Board (LRB). revenue. In 1989. McCahey’s work included consolidating the literature from different parts of the world – most notably the United States – on accounting standards overload. the AARF published a discussion paper on accounting standards overload (McCahey and Ramsay 1989). In December 1991. Even though there was little understanding initially of the nature and extent of the problems that existed or the implementation issues associated with any likely solution. was released. T. A key reporting issue at the time was the ‘accounting standards overload problem’ which is said to arise when entities are required to produce financial reports that meet a higher reporting standard than should be the case given the present and potential users of the reports. with the Corporate Reporting Reform Act (2010). Potter. were resisted by accounting regulators in favour of retaining a degree of flexibility in application. which established a new set of thresholds for these entities on C 2013 CPA Australia . the AARF issued Legislative Policy Discussion Paper No 1 entitled ‘The Reporting Entity Concept: Implementation Under the Corporations Law’.5 The discussion paper explored the consequences of the introduction of the conceptual framework for financial reporting in Australia. The consequence of applying the concept was that general purpose financial statements were required from only those entities that deemed they had users relying on the reports as their primary information source for decision making. distinguishing generally accepted accounting principles for large and small entities that are often referred to as ‘big GAAP’ and ‘little GAAP’. This constitutes a somewhat unique setting. para 20–22). there were additional guidelines that preparers were encouraged to consider in its application. it appears that any objective size tests to guide the application of the reporting entity concept. In August 1990. which was designed to assist Australian accounting regulators to incorporate the notion of ‘differential reporting’ in light of the then developing conceptual framework. The reporting compliance burden on not-for-profit entities was relieved much later. For some time after the implementation of SAC 1. Background to Differential Reporting The notion that entities with different characteristics (most often size/significance) should prepare financial reports containing different information has been embedded in financial reporting regulation and practice in Australia for decades. Young 1995). The development of guidelines for this ‘differential’ form of reporting dates back to the development of the conceptual framework by the Australian Accounting Research Foundation (AARF) in the mid-1980s. while the Board initially appeared likely to define the problem and the solution to SME reporting in a particular way. a reporting entity is one for whom it is reasonable to expect the existence of users dependent on the information in general purpose financial statements for making and evaluating decisions about the allocation of scarce resources (AARF/AASB 1990. 40). and/or number of employees. Such guidelines included the economic and social significance of the entity. The discussion paper preceded the release of a series of exposure drafts dealing with the four statements of accounting concepts that were 20 Australian Accounting Review developed and exposed for public comment in the following years. and (again) proposed differential reporting to be the solution to the accounting standards overload problem. the AASB seemingly had a problem in need of a solution. The principles set down in the framework had no direct legal backing. and so consistent application of the concept depended upon its subjective application by the preparers of the reports. Wright A key motivation for the AASB to address this issue seems to be the Australian Securities and Investment Commission’s (ASIC) Regulatory Guide 85 (2005). enacted in 1995. for example. specified for example in terms of an entity’s assets. Under SAC 1. more recently there has been a greater willingness to consider alternative solutions and to seek further research to inform the development of appropriate solutions. McCahey 1986). Ravlic & S. whether and to what extent there was a separation of management and economic ownership. para. As later sections of this paper show.6 That reflected the prevailing view that prima facie . written by Mr Ian Langfield-Smith. The appointment of Ms Jan McCahey to the Foundation in 1986 seemed to bring a greater awareness of reporting issues for smaller entities (see. it was inappropriate for entities below a certain size to be required to lodge audited financial statements prepared according to ‘applicable accounting standards’. exempting many entities from having to lodge financial statements. identifying problems with the application of the reporting entity concept and also reporting quality.

respectively. C Professor David Boymal succeeded Alfredson as the chairman of the AASB in November 2003. Wright Developing Accounting Regulations That Reflect Public Viewpoints the assertion that the cost of preparing audited financial statements under GAAP returned little or no benefit to the entity or its stakeholders. At least in part as a response to concerns of business practitioners that accounting standards were being set by academics and others without current business experience. in July 2009.11 The directive brought with it a degree of public controversy. The responses to ITC 12 were substantial in volume. Until this point. Australian entities required to comply with IFRS needed to plan to use the new standards not only for reporting periods ending from 1 January 2005 but also for comparative figures for the preceding year. Various interest groups put forward alternative proposals with a similar objective: to enable the move to a system of differential reporting to address the high cost of producing full GAAP financial statements. seeking comment on Australia’s adoption of IFRS for SMEs. However. IFRS adoption required an entity’s numbers to be ‘retro-fitted’ to the new accounting standards. which ultimately influenced the stance taken by the Board. the CLERP reforms contained an analysis of a range of financial reporting regimes across the globe. Given this. Few. the AASB announced Invitation to Comment (ITC) 12. with the FRC issuing a directive requiring standards to be developed for both private and public sector financial reporting. had to be dealt with somehow. and by commissioning independent research to inform policy. He was the second chair appointed under the revised standardsetting regime overseen by the FRC and it was Boymal’s task to facilitate IFRS adoption. which amended the Corporations Act and took responsibility for overseeing the accounting standard-setting process away from ASIC in favour of the newly formed Financial Reporting Council (FRC). In the latter part of 2002 the issue of sectorneutral10 accounting standards arose again. The decision to adopt IFRS does not appear to have been subject to a broad community due process. Australia’s adoption of IFRS applied to all entities that were obliged to prepare financial statements under the Corporations Act 2001. and so it was reasonable to assume that Australia would adopt IFRS for SMEs. This had been recognised as a potential problem by the IASB almost from the beginning of IFRS. if any. The issue of differential reporting gave the AASB an opportunity to again play an independent role in the development of accounting standards. as well as public sector and not-for-profit sector entities. which might include charities and other not-for-profits.B. One of the first decisions of the FRC was that Australia would adopt IFRS as issued by the IASB for financial years beginning on or after 1 January 2005. the AASB signalled a move toward a more open and inclusive approach. In other words. but was a decision that was made at the specific direction of the then Treasurer Mr Peter Costello. This was challenging enough for companies that were using major accounting firms to provide them with advice. Mr Keith Alfredson and Mr Jeff Lucy. By seeking public comment. T. of the arguments or assumptions were based on rigorous research on the issues being considered. A Policy on Differential Reporting The early adoption of IFRS and the formation of the FRC to oversee accounting standards in Australia effectively reduced the standard-setting role of the AASB considerably. In October 2009. Potter. the discussion and debate on differential reporting had been based primarily on deductively derived assumptions about the costs and benefits of financial reporting for smaller entities. but was even more confronting for smaller entities that had to seek advisory services. While not immediately ruling out the adoption of IFRS for SMEs. it was evident that the financial reporting practices of SMEs. regardless of size. The costs associated with complying with recognition and Australian Accounting Review 2013 CPA Australia 21 . Ravlic & S. One of Stevenson’s first projects as chairman was to re-open the differential reporting debate.9 It was during the implementation of IFRS that criticism of its use in the context of smaller entities began to emerge publicly. including a significant split in opinion between the incumbent chairs of AASB and FRC.7 The Adoption of International Financial Reporting Standards in Australia The adoption of IFRS8 was first signalled publicly with the enactment of the Corporate Law Economic Reform Program (CLERP) (1999). Was it appropriate or even possible to bring into the one accrual accounting framework both GAAP and government finance statistics? How viable was a sectorneutral financial reporting framework – particularly given diversity in ownership structure and business focus of entities across the sector? The implication of this directive was the dismantling of the existing public sector-based accounting standards and incorporation of public sector issues into the existing corpus of accounting standards. reflecting the controversial nature of the issue. on the grounds that full IFRS were too detailed for the needs of users of SME reports and too costly for smaller entities to produce. the early signs were that any SME stance the Stevenson-led Board would take would reflect the importance of consistent recognition and measurement across all entities rather than allowing modified recognition and measurement approaches for smaller organisations. Mr Kevin Stevenson was appointed as the new AASB permanent chairman.

which determined that the reporting entity concept was not always being appropriately applied. ITC 12 contained nominated size thresholds. or do not fall under (a)(ii) above. the application of AASB standards would no longer depend on whether entities were reporting entities but rather would be based on the type of reports produced and the concept of ‘public accountability’. and in response to feedback received on earlier documents. and was consistent with ASIC’s (2005) Regulatory Guide 85 . (b) The application of an Australian equivalent to the IFRS for SMEs to the general purpose financial reports of: (i) For-profit entities that do not meet the IASB’s definition of a publicly accountable entity. The then National Institute of Accountants’12 submission to the Board proposed a model with three tiers. and (iv) Public sector entities that exceed nominated size thresholds. (iii) Not-for-profit entities that exceed nominated size thresholds. Wright measurement approaches embedded in IFRS were a particular concern. and (iii) Public sector entities that fall below nominated size thresholds. Under the proposed framework. (c) All financial reports on a public register or otherwise made available to the public at large to be regarded as general purpose financial reports. Also under the proposed differential reporting framework as outlined in ITC 12. two of which embedded recognition and measurement in accordance with IFRS but with disclosure differences. (ii) AASB Consultation Paper: ‘Differential Financial Reporting – Reduced Disclosure Requirements’ (February 2010). size would be a primary basis on which differential reporting was implemented. released in May 2007. (iii) AASB Exposure Draft (ED) 192: ‘Revised Differential Reporting Framework’ (February 2010). T. contained the original proposals for the revised framework. ITC 12 ITC 12. the Board had delayed formal implementation of part of the project until further research is performed. This signalled a significant change from the differential reporting approach that had existed in Australia for decades. The preface to ITC 12 contained details of the size thresholds that were proposed: For-profit entities: • • Consolidated Revenue for the financial year of the entity and the entities it controls (if any) $500m. based on the notion of ‘public accountability’. and a third tier incorporating the notion of special purpose financial statements (SPFS). The AASB sought comment on any aspect of the document as well as a number of specific questions. (iv) AASB 1053 ‘Application of Tiers of Australian Accounting Standards’ (June 2010). 22 Australian Accounting Review C 2013 CPA Australia .Developing Accounting Regulations That Reflect Public Viewpoints B. and Consolidated Assets at financial year end of the entity and the entities it controls (if any) $250m. and Consolidated Assets at the end of the financial year of the entity and the entities it controls (if any) $12. An analysis of these documents demonstrates the evolution in the AASB’s approach to developing the new reporting regime with significant input from the public. (ii) For-profit entities that are not identified as publicly accountable under the IASB’s definition. At the time of writing. (AASB 2007: iv-v) ITC 12 endorsed in substance the basic tenets of the IFRS solution to the SME reporting issue.5 m. The case in focus: Differential reporting There are four primary documents that provide the basis for our critique of the development of a differential reporting standard in Australia: (i) Invitation to Comment (ITC) 12 ‘Request for Comment on a Proposed Revised Differential Reporting Regime for Australia’ and IASB ‘Exposure Draft of a Proposed IFRS for Small and Medium-sized Entities’ (May 2007). The main tenets of the framework are reproduced below: (a) The application of Australian equivalents to IFRS to the general purpose financial reports of: (i) For-profit entities that meet the IASB’s definition of a publicly accountable13 entity. Not-for-profit private sector entities: • • Consolidated Revenue for the financial year of the entity and the entities it controls (if any) $25m. since it was the Board’s preliminary view that the size of entities should be used as a primary determinant of reporting responsibility. (ii) Not-for-profit entities that fall below nominated size thresholds. Potter. but are important from a public interest perspective based on nominated size thresholds. Ravlic & S.

what was needed was a rigorous and robust examination of the current reporting practices of those entities likely to be affected by the new standard. and c) under the current differential reporting regime. Its response to this feedback and its subsequent actions signalled a change in its approach to standard setting. Further. Amongst major standard setters. and Consolidated Assets at the end of the financial year of the entity and the entities it controls (if any) $12. less than 50% of those surveyed indicated that they were aware of the content of the AASB’s proposed policy on differential reporting. incorporated associations and other entities lodged with relevant state authorities. Wright Developing Accounting Regulations That Reflect Public Viewpoints Public sector entities: • • Consolidated Revenue for the financial year of the entity and the entities it controls (if any) $25m. this did not sit well given that one of the implications of extending IFRS was that all financial reports made available to the public. rather than reduce it. However that assumption was seemingly not based on what little evidence existed about the adoption of IFRS. Rather than moving quickly. some of which have a differential reporting regime in place. which apply to general purpose financial reports. such as an interpretation that nonreporting entities should apply the recognition and measurement requirements in Standards. Ravlic & S. A key justification for the approach in ITC 12 was to reduce the cost of reporting for smaller entities. only 44% of those surveyed who were preparing SPFS14 indicated that they were doing so by applying recognition and measurement approaches in IFRS. if some entities were not applying IFRS recognition and measurement but would have to do so if preparing reports under the framework put forward under ITC 12. and that there was confusion regarding its appropriate application – a view seemingly informed by the content of ASIC’s (2005) Regulation 85 . the Board would take more than 30 months to release the next documents relating to the project. the Board began redeliberating ITC 12 proposals in light of the comments received. such research at that time. If all appropriate entities were applying IFRS recognition and measurement and the new standard resulted in fewer disclosures. Potter. then this argument would hold: reducing the quantity of disclosure would represent a cost saving. However. However. there was no rigorous evidence of any confusion over the application of the reporting entity concept – which had been in use for almost three decades. various interpretations have been developed around the reporting entity concept that have had mixed success. Consultation Paper and ED 192 The next iteration of documents relating to the project appeared in early 2010 and showed the result of the AASB’s redeliberations on a number of key points. Also. The rationale for the AASB’s policy on SME reporting was based less on evidence regarding its claimed benefits. Finally. T. Thus. It established roundtable discussions in Sydney and Melbourne to draw out the views of the various contributors to ITC 12 and to move the discussion towards common understanding and a resolution of differences. However. b) Australia has adopted IFRS. First. The Board received considerable feedback on its proposals in response to ITC 12. The implicit assumption in ITC 12 was C that lowering the reporting requirements for some entities compared to their burden under full IFRS would reduce reporting costs. Handley reported the findings of a survey of accounting practitioners. the Board carefully strengthened its rationale for the project. The stated rationales for the change to the reporting entity concept included that it was not used in other jurisdictions. in the Consultation Paper. and also the reports of cooperatives. According to Handley (2010).B. and more on assertions about the costs and benefits of not acting. or commission. More specifically.5 m. On reflection. the AASB had known since its introduction that the reporting entity concept was unique to Australia. would be covered. but need only apply some of the presentation and disclosure requirements. For example in 2010. Part of the rationale was set out in ITC 12 (ix) and is reproduced below: a) the reporting entity concept is not used internationally for the purpose of determining the application of accounting standards. again citing a reduction in the cost of reporting and inconsistencies Australian Accounting Review 2013 CPA Australia 23 . ITC 12 was put forward as a solution to the problem of ‘accounting standards overload’ identified by McCahey in 1986. including all financial statements of corporations lodged with central authorities such as ASIC. the differential reporting standard could in fact add to the cost of reporting. so this alone did not drive change. Australia is the only jurisdiction that uses the concept of reporting entity in the application paragraphs of its accounting standards for differential reporting purposes. just over 47% of those surveyed who were employed in non-publicly accountable organisations indicated that they would use IFRS for SMEs as an alternative to full IFRS. rather than reporting entities. which examined the accounting standards being used to produce general purpose and special purpose financial statements. the AASB did not call for. suggesting that the net benefit of adopting the standard may be less clear.

some of which would be able to report under second-tier requirements. which are not publicly accountable. (e) Public sector entities should have a choice of applying Tier 1 or Tier 2.2 A commonly voiced concern is that the existing framework does not allow entities that have limited external users a set of requirements that are less burdensome than full IFRS as adopted in Australia. or (B) required to be GPFS under a legal mandate or held out to be GPFS. refocusing the differential reporting solution around the nature and type of reports. The Consultation Paper highlighted the potential effects of the new differential reporting regime on non-listed entities. the grounds for moving away from the international standard appear to be based on three potential impediments to its successful introduction: (i) there was a lack of understanding amongst Australian practitioners about what IFRS for SMEs entailed (see.3) No longer was IFRS for SMEs the cornerstone of the differential reporting project. To summarise. 4. (ii) there were potential implications of IFRS for SMEs for the application of taxation laws. (b) They are held out as having been prepared in accordance with Australian Accounting Standards or held out as being GPFS (AASB 2010b: para.18) Third. Those entities included: a) Approximately 7 000 large for-profit proprietary companies that lodge financial statements with ASIC. d) Potentially thousands of public sector entities. there was little or no consideration of the full impact of its adoption on other laws that depend on accounting numbers. An impetus for this is the desire to avoid the cost and exposure that would come from applying full IFRS as adopted in Australia. (c) Publicly accountable for-profit private sector entities should apply Tier 1. such as taxation. b) Approximately 11 000 public companies limited by guarantee that lodge financial statements with ASIC. e) Potentially thousands of entities not established under the Corporations Act in the not-for-profit sector. Wright in the application of the reporting entity concept as key drivers for change: 4. and Tier 2: A Reduced Disclosure Regime (b) A Reduced Disclosure Regime (RDR) that retains the full IFRS recognition and measurement requirements and substantially reduced disclosures corresponding to those requirements. rather than the entity preparing those reports.5. Whether these companies face an increased or decreased reporting burden depends on whether their current reporting is GPFS under IFRS or SPFS. and it was decided not to repeat C 2013 CPA Australia . (d) Not-for-profit private sector entities should have a choice of applying Tier 1 or Tier 2.3 Another related concern raised is that entities are asserted to be ‘abusing’ the reporting entity concept by claiming to be non-reporting entities and preparing SPFS when they should be preparing GPFS. in which the AASB outlined its proposed differential reporting regime. whether under a legal mandate or voluntarily and (ii) They are either: (A) prepared in accordance with Australian Accounting Standards under a legal mandate or held out to be so prepared. 27). but would nevertheless lead to GPFS. When IFRS were first adopted in Australia. (AASB 2010b: para. Handley 2010). The type of entities was amended from those lodging documents on the public record to the following: General purpose statements are general purpose if: (a) They satisfy the following two conditions: (i) They are publicly available. it signalled a major refocus of Australian Accounting Standards away from the reporting entity concept. dispensing with size tests15 and proposing a framework consisting of two tiers: (a) A revised differential reporting framework would consist of two tiers of reporting requirements for preparing GPFS: Tier 1: Full IFRS as adopted in Australia. (AASB 2010c: para. except: (i) Federal. (ii) Local Governments. The Board revised its proposed framework. T. the AASB amended the type of entities that were required to produce GPFS. State and Territory Governments.Developing Accounting Regulations That Reflect Public Viewpoints B. if they are not-for-profit entities and Tier 1 reports are not required by their regulators. Ravlic & S. and (iii) Universities. and non-publicly accountable for-profit private sector entities have a choice of applying Tier 1 or Tier 2. 4.4 A further related concern is that many of the regulators requiring the preparation and lodgement of financial statements may not have given sufficient consideration to the nature of the information they require and the needs of any external users of that information. c) Approximately 7 000 unlisted public companies limited by shares. (AASB 2010c: 12) Second. in ED 192. for example. should apply Tier 1. Potter. which reduced the reporting 24 Australian Accounting Review burden of some entities moving to the new differential reporting world.

C 2013 CPA Australia Australian Accounting Review 25 . AASB 2010c: para. AASB 1053 was released in June 2010 to establish the basis of the Board’s Differential Reporting framework – and was applicable for annual reporting periods beginning on or after 1 July 2013. AASB 1053 At its May 2010 meeting. and The extent of audit and assurance work in connection with the GPFS is expected to be reduced with a commensurate reduction of costs. . therefore. deciding instead While now clearly more circumspect than before. In essence. AASB 1053 provides the mechanism for non-publicly accountable entities to prepare financial statements containing a lower level of disclosure. . Potter. The AASB will continue its deliberations on a revised differential reporting regime with a view to further improvements. Ravlic & S. indicating a softening of its previous approach towards reform: The proposals are not held out as the complete or final answer . without any reference to measures or large-scale studies of reporting behaviour by Australian companies on which such conclusions could rely.10). For the same reason. Wright Developing Accounting Regulations That Reflect Public Viewpoints this oversight. Such research was not conducted prior to the release of the Exposure Draft. as well as on professional bodies and tertiary institutions (see. it is acknowledged that it may also indirectly lead to an increase in the reporting burden of entities currently lodging on public registers financial statements that are not GPFS. However. pending further research (AASB 2010a). and therefore. This would impose costs on individuals. This may mean that the GPFS prepared under the RDR are less useful. There are a number of testable propositions in the Consultation Paper – particularly those relating to the asserted usefulness and comparability of the information as well as implications for costs. of less value to those users. it is anticipated that the disclosure regime proposed in this paper would substantially reduce the disclosure burden of the great majority of preparers of GPFS. T. The AASB is of the view that the reforms proposed in this Paper should not be delayed while consideration of other possible areas of reform continues. will be faced with a substantially reduced volume of information.87). (AASB 2010c: 6) In the Consultation Paper. under the summary headings ‘Significantly reduced preparation costs’ and ‘Significantly reduced audit and assurance costs’. although such points were debated at length during the exposure period for the standard. and that the information that is not provided under RDR was less relevant to them. consistent with ED 192. Accounting Standards. means prepared in accordance with all reporting requirements under a Tier and not a subset of them. This will impact on entities that lodge special purpose financial statements when such statements are required to comply. It would also clarify the circumstances in which financial statements are regarded as GPFS. the standard did not address the reporting entity issue. At the same time. including analysts who represent them. AASB 2010b: para. and generalisations such as ‘all’ and ‘many’. there is still a degree of rhetoric and persuasion evident in the Board’s approach. or are held out as complying with. referring to preparers under RDR. Significantly.B. For users. the Board decided to defer the final decision about the future of the reporting entity concept in preparing GPFS until the second stage of implementing the project. The focus of the initial reforms is through the Australian differential reporting framework and benefits only those entities that would be able to apply Tier 2 requirements. users are advised that their needs were considered when RDR was designed. for example. (iii) there had been no policy consideration of the need for extensive re-education of current and future practitioners if there were to be two sets of standards in operation. there was also evidence of caution from the Board. for example. the Board outlined the asserted costs and benefits of different solutions to the issue. However. more useful to users. on the basis that the RDR has been designed to meet the particular needs of users of GPFS of such entities. Only with the consideration of its implications on taxation law could it be said that a full regulatory impact analysis of a move to IFRS for SMEs had been thought through (see. For example.5. There was also a recognition that the reporting burden for some entities might increase: As indicated. (AASB 2010c: 7) Via the Consultation Paper. the Consultation Paper (17) states that: The number of disclosures an entity would be required to make under RDR is likely to be a fraction of those under full IFRS as adopted in Australia. using terms such as ‘significant’ and ‘unchanged’. the financial statements may be more understandable and. Section 9 clarifies that the phrase ‘prepared in accordance with Accounting Standards’. under the summary heading ‘Unchanged usefulness to users’. the information that would no longer be provided is regarded as being less relevant. the possibility that information produced under reduced disclosure requirements might not be as relevant for users is entirely turned around in passages such as that reproduced below: Users.

In contrast. responding to feedback. and it has judiciously chosen to commission academic research on pertinent matters. 7 It is also worth noting that the reporting population historically required to produce general purpose financial reports under GAAP in Australia is smaller in number than the entities that have no GAAP-based reporting or lodgement obligation to federal or state authorities and agencies. its prior approach of relying more on rhetoric and argument through its various documents in defending some of the policy choices made has continued. by a concern that such disclosures can damage their competitive position in product markets. Our evaluation reveals the emergence over time of a more responsive and engaging regulator. 3 The full title of the standard issued by the international regulator is International Financial Reporting Standard (IFRS) for Small and Medium-sized Entities (SMEs). official Commonwealth reports and other documents to identify matters that were directly relevant to the accounting profession (Burrows 1996). Brad Potter is at the University of Melbourne.Developing Accounting Regulations That Reflect Public Viewpoints B. as a more consultative and potentially responsive standard-setting body. Wright to commission research into the application of the concept16 to inform future policy. The AASB developed and announced changes to reporting policy with little input related to public consultation or systematic research. The AASB has allowed debate and criticism. (c) the company and the entities it controls (if any) have fewer than 50 employees at the end of the financial year. The results of the research commissioned by the Board to inform the project were not yet known at the time of writing. 5 The LRB was a board under the then AARF whose role was to review all existing and proposed Commonwealth legislation (other than taxation legislation). with the European adoption. more work is needed to elaborate on the workings of regulatory bodies around particular issues. Potter. Ravlic & S. The concept of the reporting entity. (b) the value of the consolidated gross assets at the end of the financial year of the company and the entities it controls (if any) is less than $5 million. in contrast to the determination of accounting standards in other contexts. professional bodies and individuals. Nevertheless. then consulted. Howieson (2012) details research undertaken for the Board to inform its Consolidated Financial Statements project.) 2 The term ‘small and medium-sized entities’ is widely used in relation to this group. the AASB has set differential 26 Australian Accounting Review reporting policy by drawing input from the public. and has amended its reporting model in response. The label is commonly used to describe those entities that are sufficiently small enough in any jurisdiction such that the benefits of preparing full generally accepted accounting principles (GAAP) financial statements may be questioned. 10 Sector neutrality refers to an accounting framework that has one set of accounting standards that caters for all sectors. 9 This was not the same in other international jurisdictions. the name of the standards changed to ‘International Financial Reporting Standards’ (IFRS). The regulator has listened to the diverse viewpoints of stakeholders. and as feedback was obtained and incorporated. The analysis in the paper suggests interesting avenues for further research. Rather than draw on academic reflections on the issue. as stakeholders were at first informed. for example. 8 The standards issued by the International Accounting Standards Committee were originally known as International Accounting Standards (IAS). 6 A proprietary company was defined as small if it met at least two of the following tests: (a) the consolidated gross operating revenue for the financial year of the company and the entities it controls (if any) is less than $10 million. When the responsibility for setting standards moved to the IASB somewhere around 2001. the decision in 1999 to pass responsibility for overseeing accounting standards to the FRC was a move away from broad community involvement in due process. For example. T. issued in July 2009. even research from within its own ranks. We have documented iterations of the reporting model that have developed over time. Discussion and Conclusion In this paper we have explored the evolution of the AASB’s Differential Reporting project. at least to some degree. C 1 2013 CPA Australia . and calling for research into the topic prior to its eventual full implementation. 4 Differential reporting is not the only ‘current’ project for which the Board seems more inclusive. under the chairmanship of Kevin Stevenson since 2009. For example. see Healy and Palepu 2001. including from academics. It can now be described. Tom Ravlic is at Taxpayers Australia. It has deliberated carefully before arriving at a position. Sue Wright is at Macquarie University. Is the personality of the regulatory board a function of the individuals within it. although designed to limit the burden on smaller entities. drawing out debate and conflict between various interest groups. albeit it to a lesser extent. only for listed companies trading in a single European market. and has placed extensive documentation in the public domain. (For further reading. for example. at least in relation to this project. or are such characteristics driven more broadly by environmental and institutional factors that affect the form and operations of the regulator? We have noted that the original iterations of differential reporting were based largely on discursive representations about the costs and benefits of the suggested reforms for which there was little or no evidence in support – even though empirical evidence on the costs and benefits of reporting could have been sought. The AASB has engaged with relevant stakeholders through the process of developing this regulation. did not fully reflect the research papers of McCahey or Langfield-Smith written at the time of SAC 1. Notes There is an argument to suggest that a firm’s decision to disclose information to investors is influenced.

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