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i
STAKEHOLDERS’ PARTICIPATION IN THE DEVELOPMENT OF IAS 1
AND THEIR VIEW OF A PRINCIPLE-BASED DISCLOSURE
by:
REDYA PURNA
232011017
WORKING PAPER
Submitted to the Faculty of Economics and Business
to Fulfill a Part of the Requirements to Achieve
the Bachelor of Economics Degree
FACULTY : ECONOMICS & BUSINESS
STUDY PROGRAM : ACCOUNTANCY
SATYA WACANA CHRISTIAN UNIVERSITY
SALATIGA
2015
ii
FAKULTAS EKONOMIKA DAN BISNIS
UNIVERSITAS KRISTEN SATYA WACANA
Jalan Diponegoro 52-60
Telp : (0298) 21212, 311881
Telex 22364 ukwsa ia
Salatiga 50711 – Indonesia
Fax. (0298) 213433
STATEMENT OF AUTHENTICITY OF THE WORKING PAPER The undersigned below
Name : Redya Purna
NIM : 232011017
Study Program: ACCOUNTING
Faculty of Economics and Business
Satya Wacana Christian University
Salatiga
states that the working paper,
Title : Stakeholders‘ Participation in the Development of IAS 1
and Their View of a Principle-Based Disclosure
Supervisor : Like Soegiono, SE, MSi
Examined date: January 23, 2015
is really the result of my own work.
In this working paper there is no partially or wholly idea or writing from
other people that I take by copying or duplicating in the form of sentence or
symbol which I claim as my own idea without giving credits to the original
author.
If it is subsequently proven that I claim other people‘s idea or writing as my
own, I am ready to face the consequences as stated by the rules that applies in the
Faculty of Economics and Business, Satya Wacana Christian University,
including a revocation of the degree that I have achieved.
Salatiga, January 2015
The writer
REDYA PURNA
iii
STAKEHOLDERS’ PARTICIPATION IN THE DEVELOPMENT OF IAS 1
AND THEIR VIEW OF A PRINCIPLE-BASED DISCLOSURE
by :
REDYA PURNA
232011017
WORKING PAPER
Submitted to the Faculty of Economics and Business
to Fulfill a Part of the Requirements to Achieve
the Bachelor of Economics Degree
FACULTY : ECONOMICS & BUSINESS
STUDY PROGRAM : ACCOUNTANCY
Agreed by:
LIKE SOEGIONO, SE, MSi
SUPERVISOR
STUDY PROGRAM OF ACCOUNTANCY
FACULTY OF ECONOMICS AND BUSINESS
SATYA WACANA CHRISTIAN UNIVERSITY
SALATIGA
2015
iv
ACKNOWLEDGMENT
The researcher acknowledges that there are many people who help,
support, and motivate the researcher while he undergoes his study at Satya
Wacana Christian University and writes this working paper
Therefore, the researcher would like to express his biggest gratitude to the
following people and parties:
Mrs Like Soegiono, SE, MSi as a thesis supervisor in the writing of this working
paper who has given the researcher her time, energy, and ideas in the
process of completing this working paper.
Mrs Elisabeth Penti Kurniawati, SE, MAk as an academic supervisor to the
researcher who has helped the researcher in the process of study by giving
guidance and insights.
Every Lecturer at FEB-SWCU who has shared his/her knowledge and experience
while the researcher undergoes his study.
Every Administration Staff at FEB-SWCU who has helped the researcher in the
administration process while studying.
Accounting Competition Supervisors, Mrs Yeterina Widi Nugrahanti SE, M.Acc,
Mr Paskah Ika Nugroho SE, Msi, & Mr Ari Budi Kristanto SE, MM, who
have helped and supported the researcher while competing in various
accounting competitions.
Yosua, Ardy, Garry, & Agung as the researcher‘s best friends.
The researcher‘s accounting competition partners and best friends, Garry, Agung,
Ardy, Gilang, & Venny who have shared moments of joy and
disappointment with the researcher.
v
Astrid, Mateus, Ifo, Robby, Fiona, Iva, Mellisa, Vania CK, Vania Yunita, Cia,
Carolin, Ayu, Stephen Boe, Ian, Epafras, Adit Tori, Frenny, Stevano,
Rendy Suswanto, Rion, and Yonathan, as good friends of the researcher
while undergoing his study.
The researcher‘s juniors and mentor students, Pauline, Oni, Nico, Rendy,
Stephanie, Christine, Sundari, Ruben, Eki, & Claudia.
Every Assistant Lecturer in the Faculty of Economics and Business,
Every person and parties that have not been mentioned above.
God bless.
Salatiga, January 2015
Researcher
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MOTTO
Intelligence plus character - that is the goal of true education
(Martin Luther King Jr.)
Whether you think you can, or you think you can‘t—you‘re
right
(Henry Ford)
Be proud, but never satisfied
(Christian Guzman)
Intelligence is the ability to adapt to change
(Stephen Hawking)
The future depends on what we do in the present
(Mahatma Gandhi)
vii
PREFACE
The International Accounting Standards Board welcomes suggestions
from numerous parties around the globe in the development of its standards. The
purpose of this paper is to see the involvement of those parties (in this case
referred as ―stakeholders‖) in the development of IAS 1 through comment letters.
This paper also aims to see which one between principle-based accounting and
rule-based accounting is preferred by the stakeholders.
This working paper is written to fulfill one of the requirements to obtain a
Bachelor of Economics degree at the School of Accountancy, Faculty of
Economics & Business, Satya Wacana Christian University. The researcher is
aware that this paper is far from perfect. Hence the researcher welcomes all
suggestions and critics to improve this paper. Hopefully this paper will contribute
to the accounting world by increasing knowledge of international accounting
standards development.
Salatiga, January 2015
Researcher
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TABLE OF CONTENTS
Title Page.................................................................................................. i
Statement of Authenticity of the Working Paper.................................... ii
Agreement/Validation Page..................................................................... iii
Acknowledgment..................................................................................... iv
Motto....................................................................................................... vi
Preface..................................................................................................... vii
Table of Contents..................................................................................... viii
List of Tables............................................................................................ ix
List of Appendix...................................................................................... x
Abstract.................................................................................................... 1
1. INTRODUCTION............................................................................... 1
2. LITERATURE REVIEW.................................................................... 3
Previous Studies........................................................................... 3
The Amendments......................................................................... 6
Principle-Based Accounting........................................................ 9
3. METHODOLOGY.............................................................................. 11
4. RESULTS............................................................................................ 13
The Participant Composition....................................................... 13
Stakeholders‘ Level of Support................................................... 15
Stakeholders‘ View on Principle-Based Accounting.................. 19
5. CONCLUSIONS AND SUGGESTIONS.......................................... 24
REFFERENCES..................................................................................... 26
APPENDIX............................................................................................ 29
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LIST OF TABLES
TABLE 1. Criteria for Assessing Principle-Based or Rule-Based
Standard................................................................................. 11
TABLE 2. Criteria for Assessing the Participant‘s Answers.................. 12
TABLE 3. The Composition of the Participants..................................... 13
TABLE 4. The Participants‘ Responds towards the Amendments......... 17
TABLE 5. Assessing the Amended IAS 1.............................................. 21
x
LIST OF APPENDIX
APPENDIX 1. Questions Listed in ED/2014/01............................... 29
APPENDIX 2. List of Participants.................................................... 30
APPENDIX 3. Stakeholders Composition Based on Country and
Interest Group.......................................................... 33
APPENDIX 4. Example of a Comment Letter.................................. 35
1
Stakeholders’ Participation in the Development of IAS 1
and Their View of a Principle-Based Disclosure
ABSTRACT
Throughout the years, the IASB has been involving public opinion
in the development of International Accounting Standards. The
goal of this paper is to see the participation of major stakeholder
groups around the world in the development of IAS 1 via comment
letters, and their view of a principle-based accounting.
This paper confirms that the amended IAS 1 (as proposed by the
IASB in ED/2014/01) is leaning more towards a principle-based
accounting. The results show that overall, stakeholders around the
world agree with the intention of the amendments proposed by the
IASB, and at the same time agree with accounting standards that
are leaning more towards principle-base.
Keywords: Stakeholders, comment letters, International
Accounting Standard, principle-based accounting, rule-based
accounting
1. INTRODUCTION
The International Accounting Standards Board (IASB) considers
presentation and disclosure as parts of its revision of the Conceptual Framework
for Financial Reporting. That work will help the IASB when it develops new
Standards or amends existing Standards. To complement the Conceptual
Framework project, in 2013 the IASB started its Disclosure Initiative. The
Disclosure Initiative is made up of a number of projects (both short-term and
medium-term) and activities that explore how presentation and disclosure
principles and requirements in existing Standards can be improved. (IASB 2014)
Exposure Draft Disclosure Initiative: Proposed Amendments to IAS 1
(ED/2014/01) is the result of a short-term project under the Disclosure Initiative.
It proposes narrow-focus clarifying amendments to IAS 1 Presentation of
Financial Statements to address some of the concerns about existing presentation
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and disclosure requirements, and to ensure that entities are able to use judgment
when applying that Standard. (IASB 2014)
This IASB project is in accordance with what the Group of 100 (G100, i.e.
an organization of chief financial officers from Australia‘s largest business
enterprises with the purpose of advancing Australia‘s financial competitiveness)
proposed in its publication Less is More in 2009. This project is a response to an
invitation by Sir David Tweedie (the IASB Chairman, 2001-2011) to develop a
set of principles for guiding decisions when we determine disclosures required by
accounting standards.
G100 believes that a principle-based framework is necessary for assessing
current disclosures and developing new disclosure requirements. G100 argues that
many entities and users are questioning the value that the disclosure requirements
of International Financial Reporting Standards (IFRS) bring to users of financial
reports. The volume and complexity of disclosure have a negative impact by
distracting users from the information relevant to their decision making. There is a
risk that quantity outweighs quality (G100, 2009).
ED/2014/01 Disclosure Initiative: Proposed Amendments to IAS 1, was
published by the IASB on March 25, 2014. Although July 23, 2014 was the
deadline for submitting comment letters, the IASB accepted comment letters
submitted after the deadline. The last comment letter was received and published
by the IASB on August 19, 2014. A total of 118 comment letters have been
received and published by the IASB on their website (www.ifrs.org).
This research aims to see the participation of different types of
stakeholders around the globe and their opinion of the amendment of IAS 1 that is
leaning towards a principle-based approach. This research is similar to a research
by Huian (2013) related to ED/2009/12 Financial Instruments: Amortized Cost
and Impairment. The previous research aims for a specific view of stakeholders‘
support to the new standards for Financial Instrument. This research aims for a
broader view since IAS 1 is related to all reporting entities required to use IFRS as
their basis for reporting, and observes the stakeholders‘ point of view regarding a
more principle-based approach in accounting. Besides the 2 reasons above, the
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different year of issuance of the exposure draft itself can lead to different sets of
stakeholders commenting on the draft based on their country/continent, since
some countries (e.g. Indonesia) had just recently begun to fully adopt IFRS since
2012 (Phase 1 - except for IAS 41, IFRS 1, and IFRIC 15) (DSAK 2014).
The researcher addresses a set of research questions as follows:
1. How are the stakeholders who submit comment letters regarding
ED/2014/01 composed based on their interest and country/continent?
2. What level of support do the stakeholders show regarding the amendment
upon IAS 1 as stated in the exposure draft?
3. Based on the answers to research question 2, how does the public react to
accounting standards that are leaning more towards principle-base?
The outcome of this paper can become a reference for standard-setting-
bodies when they develop new standards for accounting, especially standards that
are more principle-based. At the same time, the researcher also hopes that this
paper will benefit the readers by giving more understanding about the
development process of accounting standards, especially international accounting
standards.
This paper is organized as follows: section 2 describes the main findings
of relevant literature, the amendments of IAS described by the ED/2014/01, and
the criteria for assessing principle-based and rule-based regulatory. Section 3
describes the research methodology. Section 4 provides the results, and divided
into three parts to answer each research question. Section 5 provides conclusions
and suggestions.
2. LITERATURE REVIEW
Previous Studies
To give opportunities to interested parties to discuss and debate their
proposals, the standard-setters undertake a range of outreach and stakeholder
communication activities. There are several ways in which companies and
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individuals can influence the development of a financial reporting standard:
comment letters, round-table meetings, individual meetings with organizations or
representative bodies or webinars, live webcasts and online surveys (Huian 2013).
Some studies such as Sutton (1984), Tandy & Wilburn (1996), Georgiou
(2002), Georgiou (2005), Georgiou (2010), and Huian (2013), have addressed the
subject of stakeholders‘ participation in the accounting standard setting process.
Most of these studies use the analysis of comment letters submitted by the
stakeholders to reach their goal. The stakeholders are parties who submit
comment letters in response to the standard setter‘s exposure drafts (Huian 2013).
Provided below are the group of stakeholders as proposed by Huian (2013) with
some modification:
1. Accounting Profession comprises professional accounting bodies, public
accounting firms, and other accounting groups. Their participation in the
accounting standard setting process is of common knowledge because they
have provided important resources to IASC/IASB in the form of finance,
personnel, technical expertise, and members for many of the IASC/IASB‘s
committees (Cortese et al. 2010).
2. Users include financial analysts and financial investors. Users‘
participation in the development of new accounting standards is motivated
by the obtaining of standards that provide useful information in financial
statement (Durocher 2007). Accounting standard setters value their input
and ask them to clearly state their needs by clearly commenting on them
(IASB).
3. Preparers include entities obligated to prepare financial statement in
accordance to the IFRS. Prepares‘ strong engagement in lobbying on
accounting standards is motivated by the revenue and earnings pressures
on top management or by the consequences on management
compensations (Zeff 2008).
4. Business Association consists of organizations composed by Users,
Preparers, or other interested groups besides the accounting association.
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5. Regulators consist of accounting standard setters, stock exchange
regulators, and other government entities. National accounting standard
setters have always been considered key constituents by the IASB (Street
2006). Also, the international board has been aware of the significant role
played by regulators in achieving the main IASB‘s objective, i.e. high
quality global standards, and has paid special attention to their opinions
(IASCF 2010).
6. Others are represented mainly by academic communities and individuals
whose affiliation cannot be clearly established.
Exposure Drafts are the IASB‘s main vehicle for consulting the public. An
Exposure Draft sets out a specific proposal in the form of a proposed Standard (or
amendment to an existing Standard). The development of an Exposure Draft
begins with the IASB considering: issues on the basis of staff research and
recommendations; comments received on any Discussion Paper; and suggestions
made by the IFRS Advisory Council, Consultative groups, and accounting
standard-setters, and arising from public education sessions. After resolving issues
at its meetings, the IASB instructs the staff to draft the Exposure Draft. When the
draft has been completed, and the IASB has balloted on it, the IASB publishes it
for public comment (IASB). Some people might question if the IASB really does
take the public opinion into consideration when they develop accounting
standards, but recent evidence from the comment hearing of ED/2009/12 in 2009
related to financial instruments has proven that the IASB does listen to the
public‘s opinion. ED/2009/12 generated a lot of discontent from the stakeholders,
as a result the IASB decided to publish a supplement on the ED in 2011 in which
it proposed significant changes to the most disapproved principle (Huian 2013).
The stakeholders‘ comment and position towards a certain exposure draft
may vary depending on their interest. According to the capture theory, all
members of society are economically rational; therefore, each of the stakeholders
will try to influence the standard setting body into developing standards that
benefits them the most. In the presence of diverse and often conflicting interest,
6
the standard setting body should strike a balance between them by making
political choices. An ideal standard setting process would allow stakeholders to
contribute to standard setting, but also prevent any one party to dominating the
process (Godfrey et al. 2010).
The number of stakeholders that send comment letters from a certain
country or continent may also vary. Larson (2007) suggested that the number of
participants for each continent may vary, depending on the countries‘ position
towards the international accounting standards.
EU responses dominated, which might be expected given that the
EU required its 7,000 listed companies to prepare consolidated
accounts using IFRS in 2005. Low responses came from the USA,
which is not expected to require US companies to use IFRS, and
Canada, which did not until January 2006 approve a five-year plan
to converge Canadian GAAP with IFRS. Responses from countries
requiring the use of IFRS ‗equivalents‘ produced mixed results.
For example, Australia and New Zealand, which adopted
‗equivalents‘ that were quite close to IFRS, provided a relatively
large number of responses. Conversely, Malaysia and Singapore,
which adopted ‗equivalents‘ not in full agreement with IFRS,
generated responses from only their national accounting standard-
setters (Larson 2007).
The Amendments
The Exposure Draft (ED/2014/01) published by the IASB contains
proposed amendments to IAS 1 Presentation of Financial Statements. The
amendments were resulted mainly from the IASB‘s Disclosure Initiative (as
described in the Introduction). One proposal comes from a submission to the IFRS
Interpretations Committee (regarding presentation of items of other
comprehensive income arising from equity-accounted investments). Because the
proposed amendments to IAS 1 are similar in nature, they are considered by the
IASB at the same time and are presented in one Exposure Draft. (IASB 2014)
Related to those issue, the IASB provides 3 sets of questions listed in
ED/2014/01. Each question respectively calls for public view regarding: (1)
Disclosure Initiative amendments, (2) Presentation of items of other
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comprehensive income arising from equity-accounted investments, and (3) The
transition provisions and effective date of the amendments.
Question (1) of the exposure draft regarding Disclosure Initiative
amendments consists of 4 sections. Participants are asked whether they agree or
disagree with each section. Described below are the 4 sections and the overview
of each section as quoted from the exposure draft:
A. Materiality
The IASB proposes to amend the materiality requirements in IAS 1 to
emphasize that:
a) entities shall not aggregate or disaggregate information in a manner that
obscures useful information;
b) the materiality requirements apply to the statement(s) of profit or loss and
other comprehensive income, statement of financial position, statement of
cash flows and statements of changes in equity and to the notes; and
c) when a Standard requires a specific disclosure, the resulting information
shall be assessed to determine whether it is material and consequently
whether presentation or disclosure of that information is warranted.
B. Information to be presented in the Statement of Financial Position or the
Statement(s) of Profit or Loss and other Comprehensive Income
The IASB proposes to amend the requirements for presentation in the
statement of financial position and in the statement(s) of profit or loss and
other comprehensive income by:
a) clarifying that the presentation requirements for line items may be fulfilled
by disaggregating a specific line item; and
b) introducing requirements for an entity when presenting subtotals in
accordance with paragraphs 55 and 85 of IAS 1.
C. Notes
The IASB proposes to amend the requirements regarding the structure of the
notes by:
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a) emphasizing that the understandability and comparability of its financial
statements should be considered by an entity when deciding the systematic
order for the notes; and
b) clarifying that entities have flexibility as to the systematic order for the
notes, which does not need to be in the order listed in paragraph 114 of
IAS 1.
D. Disclosure of Accounting Policies
The IASB proposes to remove the guidance in paragraph 120 of IAS 1 for
identifying a significant accounting policy, including removing unhelpful
examples.
Question (2) of the exposure draft asks whether the public agrees with the
proposed amendment to IAS 1 which arises from the presentation of items of
other comprehensive income arising from equity-accounted investments. The
amendment clarifies that entities shall present the share of other comprehensive
income of associates and joint ventures accounted for using the equity method:
a) by whether those items will or will not be subsequently reclassified to profit or
loss (as intended in the 2011 amendments to IAS 1); and
b) presented in aggregate as a single line item within those classifications.
Question (3) of the exposure draft asks for public opinions regarding the
transition provision and effective date of the amendments to IAS 1. Provided
below are the IASB‘s suggestions upon the effective date of the amendment as
quoted from paragraph 139N of the exposure draft.
Disclosure Initiative (Amendments to IAS 1), issued in [date],
amended paragraphs 29–31, 54, 82, 82A, and 113–117, added
paragraphs 30A, 55A, 85A–85B, and 113A, replaced paragraph
115 in full and deleted paragraph 120. An entity shall apply those
amendments from the effective date of [date]. Earlier application is
permitted. If an entity applies those amendments for an earlier
period it shall disclose that fact. (IASB 2014)
The IASB also decided that there will not be any transition provisions
upon implementing the standards. The IASB did not consider that additional
transition provisions were necessary or beneficial.
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To answer research question 3 regarding public view upon standards that
are leaning toward a principle-based approach, this research will focus more on
the answers of question (1) of the exposure draft, since the issue related to the
question (disclosure initiative) has a broader coverage upon the financial
statement.
Principle-Based Accounting
The researcher believes that the standards in accounting itself have never
been a pure principle-based or rule-based regulatory system. The regulatory
system is always a mixture of both (Heffes 2004, Burgemeestre et al. 2009, Illiano
2012). For this reason the researcher has always used the term ―leaning towards‖
when describing whether the standards are ―more‖ principle-based or rule-based.
In the debate between rules and principles we often see a tendency
to classify legislative systems as either principle-based or rule-
based. The advantages of principles are then depicted as the
disadvantages of rules, and vice versa. However, in practice the
distinction is not so clear cut. In fact, most regulatory systems
contain a mixture of rules and principles. Rules may become more
principle-like through the addition of qualifications and exceptions,
whereas principles may become more rule-like by the addition of
best-practices and requirements. (Burgemeestre et al. 2009)
The question is not which approach is better, but how to search for the best
mixture between a principle-based and a rule-based regulatory system.
One reason why relatively younger standard setting regimes appear
more principles-based is that they have not had as much time to
accrete rules. Therefore, every accounting standard will exist
somewhere along a spectrum between rules and principles. The
goal must be to seek the ‗sweet spot‘ on that spectrum.
(Burgemeestre et al. 2009)
Although the IASB never stated that the amendments in the exposure draft
related to disclosure initiative are leaning towards principle-based regulatory, the
researcher is sure (provided in section 4) that these new standards are more
principle-based by using the criteria provided by Cunningham (2007) and
Burgeemestre et al. (2009) to localize a regulative system on the continuum.
10
Cunningham (2007) provided 3 dimensions to distinguish between principle-
based or rule-based regulatory system, while Burgeemestre et al. (2009) proposed
4 additional characteristics to help distinguish if a single standard is leaning
toward principle-based or rule-based. Provided below are the 7 criteria as quoted
from Burgeemestre et al. (2009):
1. The temporal dimension indicates when the content of a regulation is
provided: rules define boundaries ex ante, i.e., before adoption and
implementation, whereas a principle is settled ex post, when compliance is
being audited. A rule-based system initially requires more effort from the
regulator, because details need to be fixed in advance; a principle-based
system requires effort from the subject.
2. The conceptual dimension distinguishes between principles and rules by the
properties of being general versus specific, abstract versus concrete, and
universal versus particular. The number of clarifications, details, exceptions,
or limitations may serve as an indicator.
3. The functional dimension considers the relative discretionary power of the
participants in the regulative process. Rules are defined by the regulator.
Principles tend to give more space for interpretation to both subjects and
auditors.
4. A declarative representation specifies what situation is required. How this
should be achieved is left to the discretion of the implementer. Procedural
descriptions specify how (i.e. by what actions) an objective should be
achieved. Generally principles are formulated in a declarative way; typical
rules are procedural.
5. What knowledge is needed to apply a regulation? Applying rules requires
relatively little knowledge. Knowledge of the rule itself and the concepts
involved suffice. Applying principles requires more knowledge, such as
knowledge of the context and of all other relevant principles.
6. How are exceptions handled? A form of reasoning may be defeasible, in the
sense that exceptions may occur and overrule the original line of reasoning, or
strict, in the sense that no exceptions are allowed.
11
7. To resolve conflicts between different exceptions we need a kind of priority
order or weight. In other words: for principles there is a conflict resolution
mechanism; for rules no conflicts are possible.
Table 1: Criteria for Assessing Principle-Based or Rule-Based Standard
Dimension Typical Principles Typical Rules
1. Temporal Ex post Ex ante
2. Conceptual General/ universal/ abstract Specific/ particular/ concrete
3. Functional Large discretionary power Little discretionary power
4. Representation Declarative (what) Procedural (how)
5. Knowledge needed Quite a lot Relatively little
6. Exception handling Allow for exception
(defeasible)
All or nothing (strict)
7. Conflict resolution By weight (trade off) No conflicts possible
(Source: Burgeemestre et al. 2009)
3. METHODOLOGY
Content analysis upon the comment letters is used to analyze the
stakeholders‘ participation and level of support regarding the amendments of IAS
1 provided in the Exposure Draft Disclosure Initiative: Proposed Amendments to
IAS 1 (ED/2014/01). All of the comment letters are obtained from the IASB‘s
website (www.ifrs.org), while information related to the stakeholders that submit
the letters is obtained from their respective website (if possible) or other various
sources from the internet.
The total number of letters submitted and analyzed is 118. Responses to
the questions provided by the ED/2014/01 (Q1a, Q1b, Q1c, Q1d, Q2, and Q3) are
assessed using a scoring system that distinguishes the participants‘ answers into
four different support levels, that is: Agreement, Partial Agreement, Partial
Disagreement, and Disagreement.
The participants‘ answers are categorized into ―Agreement‖ when they
simply state that they agree with the amendments (usually by simply stating ―yes‖
or ―yes we agree‖) with or without the reasons of their support. ―Partial
Agreement‖ is chosen when the participants agree with the intention of the
amendments but they demand something from the IASB that does not change the
current amendments proposed by the IASB in the exposure draft. Similar to
12
―Partial Agreement‖, the ―Partial Disagreement‖ level of support is also a part of
the agreement opinion but with a difference level of support. ―Partial
Disagreement‖ is chosen when the participants agree with the intention of the
amendments but they demand something from the IASB that changes the current
amendments proposed by the IASB in the exposure draft, or the participants
disagree with some part of the amendments, although on the whole they still agree
with the amendment. Contrary to the other 3 levels of support, the
―Disagreement‖ is chosen when the answers provided by the participants imply
that they do not agree with the intention of the amendments proposed by the
IASB. Provided in table 2 are the detailed criteria for assessing the answers.
Table 2: Criteria for Assessing the Participants‘ Answers
Level of
Support
Criteria for Assessing
Agreement The answer implies that the participant simply agrees with the intention of the
proposed amendment without demanding anything else from the IASB.
Partial
Agreement
The answer implies that the participant agrees with the intention of the
amendment but he/she also demands something from the IASB including:
1. Additional guidance for applying the standards
2. Examples of application to provide further understanding of the
standards
3. Change of other standards so that they are in line with the
amendments of IAS 1
4. Further clarification from the IASB regarding the standards
Partial
Disagreement
The answer implies that the participant generally agrees with the intention of
the amendment, but there are certain conditions below that are met:
1. The participants disagree with the wording or language aspects of the
new standards
2. The participants disagree with some parts of the amendment
3. For participants that are in form of an organization, some of the
members do not agree with the amendment
Disagreement The answer implies that the participant does not agree with the intention of the
amendment. Source: Huian (2013) with some modification
Besides content analysis, the researcher will also use previous literature
and cases to explain the standing of the stakeholders regarding a more principle-
based standard. This will be provided in the 3rd
part of section 4.
13
4. RESULTS
This section is divided into 3 parts to provide answers to the 3 research
questions. The first part provide answers to research question 1, while the other 2
parts answer research questions 2 and 3 respectively.
The Participant Composition
Regarding the exposure draft, stakeholders from 37 countries submitted their
answers through comment letters (a total of 118 comment letters) to show their
responses to the amendments addressed in ED/2014/01. This number is slightly
higher than the previous research (Huian 2013) regarding ED/2009/12 that was
related to financial instruments where stakeholders from 35 countries were
involved, although there is a decrease in the overall number of comment letters,
where a total of 197 comment letters submitted regarding ED/2009/12. This
difference is not surprising since exposure drafts related to financial instruments
project have always been attracting more response from the public (Chatam et al.
2010, Huian 2013).
Table 3: The Composition of the Participants
Country Total % Accounting
Profession Regulator Preparer User
Business
Association Others
Asia 20 17 6 10 1 1 2 0
Australia- 7 6 2 3 1 0 1 0
Oceania
Europe 54 46 14 12 13 0 13 2
Africa 6 5 4 1 1 0 0 0
North 8 7 1 2 2 1 2 0
America
South 6 5 0 3 1 0 0 2
America
International 17 14 11 4 0 1 1 0
Total 118 100 38 35 19 3 19 4
Percentage 100% 31% 30% 16% 3% 17% 3%
Source: Researcher‘s analyzing worksheet
An interesting finding is that the Accounting profession and the Regulators
are the two groups of stakeholders that submitted the highest number of comment
letters. Combined they represent 61 percent of the total comment letters, almost
14
twice the amount of comment letters submitted by the groups of stakeholders that
are the actual users of the standard. In this case, the users of the standard are the
preparers and users of financial statements, and also the business association that
consist of both users and preparers. These three group of stakeholders combined
only represent 36 percent of the total comment letters.
In line with several studies before (Durocher et al. 2007, Gîrbină 2007,
Huian 2013), this research has proven that users‘ participation in the standard
setting process through comment letters is still very low, with the users group of
stakeholders only represents about 3 percent (three letters) of the total 118
comment letters received by the IASB. However, if we include the business
association group of stakeholders as users, the number rises significantly to 19
percent. Nevertheless, the low amount of response is still an issue that needs to be
addressed by the IASB (Huian 2013). Because financial statements are provided
mostly for the users (IASB), it will be hard for the standard setters if the users do
not state what they need or give their point of view regarding the standards.
Besides the users, the academics‘ participation has also been very low,
with only two academics included in the total of four letters submitted by the
―others‖ group of stakeholders. This fact is also supported by previous studies
which stated that the academics participation in the developing process of
accounting standards has always been low throughout the years (Tandy &
Wilburn 1996, George 2004, Larson et al. 2011). Those studies also suggested
that the IASB should encourage the academic community to take part in the
standard settings process. Academics are not affected by the standards in the same
way as users, preparers, auditors, government agencies, special interest groups,
and so on. As a result, their outlook and positions can be counted on to offer an
unbiased look at proposals and alternatives (Larson et al. 2011).
From the geographical perspective, Europe (46%) is still the continent
with the most submitter of comment letters, with the United Kingdom (14 letters,
24% in Europe or 12% worldwide) being the country with the most submitter in
Europe and worldwide. This finding is also in line with the previous studies
(Larson 2007, Huian 2013). Asia came in 2nd
with 20 letters (17%) and
15
International bodies are in 3rd
with 17 letters (14%). International bodies are
mostly composed of CPA firms that operates in a global scale (all the Big 4 and
several of world known CPA firms such as Grant Thornton, Crowe Horwath, and
BDO), international regulators (IMF, IAASB, IAIS, and IOSCO) and other
international organizations /associations such as the IMA and The Corporate
Reporting Users Forum.
Stakeholders’ Level of Support
Most of the participants provided their answer by following the general
structure of the questions in the exposure draft (ED/2014/01), although there are
some participants that only provided a general view upon the amendments. The
majority of participants responded to all of the questions, while some others only
answered several questions that are in their interest. Some participants answered
the questions by simply stating ―yes‖ or ―no‖, while most of the participants
provided reasons behind their answers.
As shown in table 4, most of the stakeholders agreed with the amendments
proposed in the exposure draft. Most of the stakeholders agree that the financial
statements these days provide a long explanation that contains a lot of
unnecessary information. This can lead to an overload of information. Romney et
al. (2009) explained that an information overload occurs when the limits to the
amount of information the human mind can effectively absorb and process are
passed. Information overload is costly since it reduces the decision-making
quality. The stakeholders‘ point of view related to each of the specific questions
provided in the exposure draft are provided below.
Regarding Q1a (Materiality), the most common support level showed by
the stakeholders is the ―partial agreement‖ level of support (42%). Most of the
stakeholders that provided a ―partial agreement‖ level of support suggested the
IASB to provide additional guidelines for assessing the materiality of an
information.
In general, we agree that the proposed amendments relate to areas
in which the application of judgement can result in clearer
16
communication to users of financial statements. However, we are
concerned that the proposed amendments do not provide sufficient
guidance to assist in the application of that judgement and, as such,
are unlikely to result in significant changes in practice (Deloitte).
Only one participant showed disagreement toward the amendments related
to Q1a. The disagreement was shown by Volkswagen AG which argued that the
IFRS reporters would still have to prepare all information to decide and document
whether it is material or not.
On the other hand, regarding Q1b, related to Information to be presented
in the statement of financial position or the statement(s) of profit or loss and other
comprehensive income, the ―partial disagreement‖ level of support is the majority
level of support shown by the stakeholders (47%). The stakeholders agree with
the intention of the amendments, but most of them disagree with the wording of
some paragraphs. They argue that some of the words in the new paragraphs
proposed in the exposure draft could be misleading. Some of them proposed a
new paragraph of their version that they think is more appropriate for the context,
while some others suggested some words in the paragraph to be deleted or
substituted with another term.
Para 55A (a) states that when an entity presents subtotals in
accordance with Para 55, those subtotals shall be made up of items
recognised and measured in accordance with IFRSs. Similarly, Para
85A (a) states that when an entity presents subtotals in accordance
with Para 85, those subtotals shall be made up of items recognised
and measured in accordance with IFRSs. As financial statements
are prepared in accordance with IFRSs, MICPA is of the view that
the two paragraphs are redundant as they appear to imply that there
could be a situation where subtotals are not recognised and
measured in accordance with IFRSs. Additionally, MICPA is of
the view that Para 85A (d) is not required. The decision of whether
certain subtotals should be displayed with more prominence or not
should be left to the judgement of the preparer (MICPA).
17
Table 4: The Participants‘ Responds towards the Amendments0..
NoA = Number of Answers
Q1a (Materiality)
Q1b (Information to be presented in the statement of financial position or the statement(s) of profit or loss
and other comprehensive income)
Q1c (Notes)
Q1d (Disclosure of accounting policy)
Q2 (Presentation of items of other comprehensive income arising from equity-accounted investments)
Q3 (The transition provisions and effective date of the amendments)
Accounting Profession (Number of Letters: 38)
Question Agreement
Partial
Agreement
Partial
Disagreement Disagreement No Comment
NoA % NoA % NoA % NoA % NoA %
Q1a 8 21% 17 45% 13 34% 0 0% 0 0%
Q1b 8 21% 10 26% 18 47% 0 0% 2 5%
Q1c 17 45% 9 24% 10 26% 0 0% 2 5%
Q1d 14 37% 13 34% 8 21% 1 3% 2 5%
Q2 24 63% 5 13% 6 16% 0 0% 3 8%
Q3 28 74% 3 8% 3 8% 0 0% 4 11%
Business Association (Number of Letters: 19)
Question Agreement
Partial
Agreement
Partial
Disagreement Disagreement No Comment
NoA % NoA % NoA % NoA % NoA %
Q1a 8 42% 6 32% 5 26% 0 0% 0 0%
Q1b 6 32% 0 0% 11 58% 0 0% 2 11%
Q1c 11 58% 1 5% 5 26% 0 0% 2 11%
Q1d 9 47% 5 26% 0 0% 0 0% 5 26%
Q2 11 58% 0 0% 4 21% 1 5% 3 16%
Q3 11 58% 1 5% 1 5% 0 0% 6 32%
Others (Number of Letters: 4)
Question Agreement
Partial
Agreement
Partial
Disagreement Disagreement No Comment
NoA % NoA % NoA % NoA % NoA %
Q1a 1 25% 1 25% 1 25% 0 0% 1 25%
Q1b 0 0% 1 25% 1 25% 0 0% 2 50%
Q1c 0 0% 1 25% 1 25% 0 0% 2 50%
Q1d 1 25% 1 25% 0 0% 1 25% 1 25%
Q2 1 25% 0 0% 1 25% 0 0% 2 50%
Q3 1 25% 0 0% 0 0% 1 25% 2 50%
18
Source: Researcher‘s analyzing worksheet
For the rest of the questions, ―Agreement‖ is the level of support that is
mostly shown by the stakeholders, with the following percentage respectively for
Preparer (Number of Letters: 19)
Question Agreement
Partial
Agreement
Partial
Disagreement Disagreement No Comment
NoA % NoA % NoA % NoA % NoA %
Q1a 6 32% 7 37% 5 26% 1 5% 0 0%
Q1b 4 21% 5 26% 10 53% 0 0% 0 0%
Q1c 10 53% 3 16% 5 26% 0 0% 1 5%
Q1d 10 53% 4 21% 3 16% 1 5% 1 5%
Q2 13 68% 3 16% 1 5% 0 0% 2 11%
Q3 13 68% 1 5% 2 11% 0 0% 3 16%
Regulator (Number of Letters: 35)
Question Agreement
Partial
Agreement
Partial
Disagreement Disagreement No Comment
NoA % NoA % NoA % NoA % NoA %
Q1a 8 23% 15 43% 11 31% 0 0% 1 3%
Q1b 6 17% 10 29% 15 43% 1 3% 3 9%
Q1c 9 26% 12 34% 9 26% 1 3% 4 11%
Q1d 11 31% 11 31% 6 17% 3 9% 4 11%
Q2 19 54% 2 6% 4 11% 1 3% 9 26%
Q3 19 54% 3 9% 3 9% 1 3% 9 26%
User (Number of Letters: 3)
Question Agreement
Partial
Agreement
Partial
Disagreement Disagreement No Comment
NoA % NoA % NoA % NoA % NoA %
Q1a 0 0% 3 100% 0 0% 0 0% 0 0%
Q1b 0 0% 3 100% 0 0% 0 0% 0 0%
Q1c 0 0% 0 0% 1 33% 2 67% 0 0%
Q1d 0 0% 0 0% 2 67% 0 0% 1 33%
Q2 1 33% 1 33% 1 33% 0 0% 0 0%
Q3 1 33% 0 0% 0 0% 0 0% 2 67%
Total (Number of Letters: 118)
Question Agreement
Partial
Agreement
Partial
Disagreement Disagreement No Comment
NoA % NoA % NoA % NoA % NoA %
Q1a 31 26% 49 42% 35 30% 1 1% 2 2%
Q1b 24 20% 29 25% 55 47% 1 1% 9 8%
Q1c 47 40% 26 22% 31 26% 3 3% 11 9%
Q1d 45 38% 34 29% 19 16% 6 5% 14 12%
Q2 69 58% 11 9% 17 14% 2 2% 19 16%
Q3 73 62% 8 7% 9 8% 2 2% 26 22%
19
each question: Q1c (40%), Q1d (38%), Q2 (58%), Q3 (62%). From all the six
questions provided in the exposure draft, Q1d is the question with the most
―disagreement‖ opinion from the participants (5%). One of the disagreement
responses that the researcher decides to take note is the response from the
University of Gothenburg, Sweden. They provided opinion on the question based
on their research regarding disclosures on judgment and estimation uncertainty in
the preparation of financial statements. They argue that in practice, preparers are
driven more by incentives and enforcement than by information about underlying
economic phenomena in making disclosure choices related to principles-based
mandatory disclosures. Therefore, the outcome of the proposed amendments may
not be as intended.
The most unanswered question is Q3 (22%), related to the transition
provision and effective date of the amendments to IAS 1. This question also
generated the highest ―agreement‖ level of support (62%) from the participants.
Stakeholders’ View on Principle-Based Accounting
Before discussing more about the stakeholders‘ stand on principle-based
accounting, the researcher made sure that the new IAS 1 resulting from the
amendments (especially amendments covered by Q1 of the exposure draft) is
leaning more toward a principle-based regulatory system by matching it with the
criteria written in section 2. Provided below are the results of the assessment:
1. Under the amended standard, the reporting entity must interpret what is
meant by materiality, which information is material and which is not. This
interpretation is verified afterwards, when the financial report is audited.
2. Since the disclosure of accounting policies is based on materiality, the
IASB proposes to remove the guidance for identifying a significant
accounting policy, including removing unhelpful examples. This makes
the standard more abstract.
3. Under the amended standard, the reporting entities are driven to report
information that is ―material‖. The IASB does not determine a specific
rule to identify whether certain information is material or not. Hence it is
20
open to interpretation by the reporters to determine whether certain
information is material or not. The same goes to the auditors. They are free
to determine whether the subject has reported all ―material‖ information.
4. The amended standard specifies what situation is required, that financial
reporters should consider the materiality of certain information when they
forge the financial statement. How this should be achieved is left to the
discretion of the implementer.
5. Applying the amended standard requires more knowledge from the
preparers. Since the IASB does not provide a clear guidance on assessing
materiality, the preparers will have to use their judgment. They are
required to have more understanding of what information is material
enough or needed by the users of their financial report for decision
making.
6. Although the IASB has provided guidance on the order list of the notes
(listed in paragraph 114 of IAS 1), the amended standard stated that the
reporting entities have flexibility to decide the systematic order for the
notes. In this case, they do not have to follow the order listed in paragraph
114.
7. Related to conflicts in the standards arriving from the amendment,
conflicts may arise from implementing other standard that requires
disclosure of certain information. Some IFRSs identify information
required to be presented or disclosed in the financial statements of an
entity. Notwithstanding these specific requirements, an entity shall assess
whether all of that information needs to be presented or disclosed, or
whether some of the information is immaterial, and presenting or
disclosing it would reduce the understandability of its financial statements
by detracting from the material information. If the information is deemed
immaterial and would reduce the understandability, then the entity should
not disclose it.
21
Table 5: Assessing the Amended IAS 1
Dimension Amended IAS 1
1. Temporal Ex post, verified by the auditor
2. Conceptual More General/ universal/ abstract
3. Functional More for Preparers and Auditors
4. Representation Declarative with no specific guidance
5. Knowledge needed More regarding materiality and
Understandability
6. Exception handling Allow for exception as long as it is more
―understandable‖
7. Conflict resolution By weight (trade off) on the
understandability of the financial statements
Source: Researcher‘s analyzing worksheet
This finding has confirmed that the amended IAS 1 as proposed by
ED/2014/01 could be seen as a more principle-based standard. Combined with the
results provided in the second part of section 4, we can see that the stakeholders
support the idea of a more principle-based standard. This finding is not something
new, as quoted from Heffes (2004). Back in 2004, Grant Thornton conducted a
survey of their mid-sized clients. Fully 80 percent said "Yes" when asked "Should
we adopt a principles-based approach to accounting standards?". Of the
participants "yeses," 69 percent were from public companies, and 85 percent from
private companies
Although overall the stakeholders agree with the idea of a more principle-
based standard, some stakeholders think that the current amendment is leaning too
much toward principle-based. This could be seen from the high number of ―partial
agreement‖ responses from the stakeholders. Most of the partial agreement
responses demanded additional guidance in assessing materiality. This would
cause the standard to be less principle-based than it currently is as proposed by the
exposure draft, though in the bigger picture the amended standard is still more
principle-based than the original standard.
The finding that the stakeholders prefer principle-based regulatory can be
a sign that people do not think that the rigid rule-based regulatory in accounting
really provides the ―safety‖ edge anymore, either for the user or for the preparer.
For the users, whether it is a rule-based or principle-based system, if the preparer
intends to manipulate the financial statement, then they will still find a way to
22
breach the rigid rule-based regulatory system (Nelson et al. 2002). In fact, back in
2003, PricewaterhouseCoopers (PwC) placed a full-page advertisement in the
Wall Street Journal stating that rule-based system encourages creative accounting
(Mano et al. 2006). The advertisement, as cited from the CPA Journal (2006)
said:
Rules-based systems encourage creativity (and not the good kind)
in financial reporting. They allow some to stretch the limits of what
is permissible under the law, even though it may not be ethically or
morally acceptable. A principles-based system requires companies
to report and auditors to audit the substance or business purpose of
transactions; not merely whether they can qualify as acceptable
under incredibly complex or overly technical rules. A rules-based
system allows managers to ignore the substance and instead ask
'Where in the rules does it say I can't do this?'.
From the preparers and auditors perspective, following a rigid rule-based
system does not really make them safe from lawsuits and litigations. An example
of this is the Continental Vending case that took place in the United States back in
1969 that later on became a reference for other cases. According to the CPA
Journal (Mano et al. 2006) the Continental Vending case was one of the first
major criminal cases successfully brought against auditors. Charges against the
auditors involved in the case included the violation of U.S. securities laws by
certifying a document the auditors knew to be false. The auditors were engaged to
audit Continental Vending Machine Corporation. A Continental affiliate, Valley
Commercial Corporation, borrowed a large sum of money from Continental.
Valley then loaned the funds to a dominant officer and significant shareholder of
both Valley and Continental. The auditors learned that the dominant officer would
not be able to repay Valley, and the auditors knew that as a consequence Valley
would be unable to repay Continental. Nevertheless, the Continental financial
statements showed the receivable from Valley as an asset, with only a relatively
obscure footnote explaining the circumstances surrounding the receivable. As
cited from CPA Journal (Mano et al. 2006), Continental Vending actually went
bankrupt not long after the issuance of their financial statements:
23
Continental never did collect payments from Valley on the
receivable in question; in fact. Continental went bankrupt shortly
after the financial statements were issued. When the U.S.
government brought criminal charges against the auditors, the
auditors maintained that they properly followed generally accepted
auditing standards (GAAS) during the audit and that the footnote
also complied with applicable standards. Moreover, several experts
testified that the footnote disclosure explaining the receivable from
Valley complied with generally accepted accounting principles
(GAAP) and that the auditors had followed GAAS.
Near the end of the trial, the district court judge instructed the jury that
mere compliance with professional accounting standards was not a complete
defense. Rather, the critical test was whether the financial statements fairly
represented Continental's financial status. The jury found the defendants guilty.
On appeal, the appellate court held that the district court judge did not err in his
instructions to the jury. The appellate court judge in Continental Vending, in
refusing to find error in the district court's jury instructions, clearly told the
accounting profession that "fairly presented ... in accordance with generally
accepted accounting principles" is two statements rather than one. Furthermore,
the clear message was that if one is to prevail over the other, it must be "fairly
presented." "Fairly presented" is principle-based accounting, and "in accordance
with GAAP" is rule-based accounting (Mano et al. 2006).
One way that court decisions effectively become part of law is by being
cited by other courts in future cases. Law comes into existence not only through
legislation, but also by regulation and litigation. Laws from all three sources are
binding, one source no less so than another. Numerous subsequent cases have
favorably cited Continental Vending, including the Second and Ninth Circuit
cases of Natelli and Sumo (Mano et al. 2006). Although this case happened in the
U.S., the case itself sends a message to the world that hiding behind a set of rigid
and detailed rules provided by a rule-based regulatory system does not guarantee
that one would be invulnerable to lawsuits and litigations.
Provided above are the possible reasons why stakeholders, especially users
and preparers, do not contend against principle-based regulatory in accounting.
The researcher focuses more on past practices and events in searching for a
24
possible answer, although there could be more reasons why the stakeholders act
this way. In the never-ending debate between rule-based and principle-based
accounting, there cannot really be a winner since the goal itself should not be
which is better, but where in between should a standard be established.
5. CONCLUSIONS AND SUGGESTIONS
The goal of this paper is to see the involvement of stakeholders across the
globe in developing international accounting standard and their view regarding the
amendments of IAS 1 that is leaning towards principle based accounting through
the submission of comment letters on the ED/2014/01. The finding shows that
stakeholders from every continent (except Antarctica) participated in the process,
though Europe, in line with previous studies (Larson 2007, Huian 2013) is still the
continent with the most submitter of comment letters.
From the content analysis of the 118 comment letters, the researcher did
not find much mixed opinion from the stakeholders. Overall, the stakeholder
groups agreed with the intention of the amendments, though some requested
additional guidance from the IASB for implementing the standards.
Additional concern that should be addressed by the IASB is the low
number of participants from the users and academic community. Both of them can
provide useful insights to the IASB, since users are the main audience of the
financial statements, and the academic community can contribute a neutral
opinion to the IASB.
This paper has also proven that, based on the 7 criteria of assessing
principle-based and rule-based standards proposed by Cunningham (2007) and
Burgeemestre et al. (2009), the amended IAS 1 is leaning more towards a
principle-based regulatory system. From this finding, together with the findings
provided above, we can say that stakeholders nowadays tend to agree more with
principle-based regulatory in accounting. Based on previous literature, the
researcher has concluded that one possible reason behind this is that the
stakeholders, especially the users of the standards do not feel the ―safety‖ edge
anymore in accounting that is regulated by rule-based standard. For the users of
25
financial statements, PwC argued that rule-based standard encourages preparers to
do ―creative accounting‖. While for the preparers and auditors, the Continental
Vending case, which is later being cited in subsequent cases and became a law
itself, has proven that following a set of rigid rule-based standard does not
guarantee one to be free from litigation if the spirit of financial reporting itself is
not applied.
This paper confirms that the public overall agrees with the new amended
IAS 1 that is more principle based and suggests that the IASB should continue
with their Disclosure Initiative project. Public will not content on principle-based
disclosures as long as the IASB can find the perfect place along the ―spectrum‖ to
put their standards.
The researcher is aware of certain limitations of this paper. First, the
research method for assessing the participants‘ response – content analysis –
entails subjectivity, especially when assessing the answers that do not clearly
suggest the respondent‘s agreement or disagreement. Secondly, the researcher
uses a case that happened in a certain country to try to explain the behavior of
stakeholders across the globe by generalizing it. In reality there can be more
reason in why the stakeholders support the principle-based accounting.
Future research is necessary to explore other reasons why stakeholders
nowadays tend to support principle-based accounting. Also, further research can
examine the development of the accounting standard in a certain country and the
role of their standard setting body in involving stakeholders in the development of
accounting standards, taken for example Indonesia where transparency in the
standards development process is still very limited. The same approach can also
be applied to see the willingness of stakeholders from a certain country to
participate in the accounting standards development process.
26
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29
APPENDIX
Appendix 1
Questions Listed in ED/2014/01
Question 1—Disclosure Initiative amendments
The amendments to IAS 1 arising from the Disclosure Initiative aim to make narrow-focus
amendments that will clarify some of its presentation and disclosure requirements to ensure entities
are able to use judgment when applying that Standard. The amendments respond to concerns that the
wording of some of the requirements in
IAS 1 may have prevented the use of such judgment. The proposed amendments relate to:
(a) materiality and aggregation (see paragraphs 29–31 and BC1–8 of this Exposure Draft);
(b) statement of financial position and statement of profit or loss and other comprehensive income
(see paragraphs 54, 55A, 82, 85A and 85B and BC9–BC15 of this Exposure Draft);
(c) notes structure (see paragraphs 113–117 and BC16–BC19 of this Exposure Draft); and
(d) disclosure of accounting policies (see paragraphs 120 and BC20–BC22 of this Exposure Draft).
Do you agree with each of the amendments? Do you have any concerns about, or alternative
suggestions for, any of the proposed amendments?
Question 2—Presentation of items of other comprehensive income arising from
equity-accounted investments
Do you agree with the IASB‘s proposal to amend IAS 1 for the presentation of items of other
comprehensive income arising from equity-accounted investments amendments (see paragraphs 82A,
BC1–BC6 and the Guidance on implementing IAS 1)? If not, why and what alternative do you
propose?
Question 3—Transition provisions and effective date
Do you agree with the proposed transition provisions for the amendments to IAS 1 as described in
this Exposure Draft (see paragraphs 139N and BC23–BC25)? If not, why and what alternative do you
propose?
30
Appendix 2
List of Participants
No. Affiliation Category
1 Individual Others
2 Israel Accounting Standards Board Regulator
3 A.S.A. Abfall Service AG Preparer
4 International Monetary Fund Regulator
5 Israel Securities Authority Regulator
6 Swedish Enterprise Accounting Group Accounting Profession
7 Financial Executives International Canada (FEI) Business Association
8 Institute for the Accountancy Profession in Sweden (FAR) Accounting Profession
9 European Securities and Markets Authority Regulator
10 European Records of IFRS Consolidated Accounts Accounting Profession
11 Norwegian Accounting Standards Board Regulator
12 Grant Thornton International Ltd Accounting Profession
13 ACTEO Business Association
14 French Association of Private Companies (AFEP) Business Association
15 Mouvement des Enterprise de France (MEDEF) Business Association
16 CPA Australia Ltd Accounting Profession
17 The Institute of Chartered Accountants in Australia (ICAA) Accounting Profession
18 The Heads of Treasuries Accounting and Reporting Advisory
Committee Regulator
19 The Malaysian Institute of Certified Public Accountants Accounting Profession
20 The Group of 100 (G100) Business Association
21 Accounting Standards Committee of Germany (ASCG) Regulator
22 The Hong Kong Association of Banks (HKAB) Business Association
23 The Institute of Chartered Accountants of India Accounting Profession
24 Moore Stephens LLP Accounting Profession
25 The German Banking Industry Committee Regulator
26 Insurance Europe Preparer
27 International Auditing and Assurance Standards Board (IAASB) Regulator
28 Association for Participation in the Development of Accounting
Regulations for Family owned Entities (VMEBF) Business Association
29 Kingston Smith LLP Accounting Profession
30 Canadian Securities Administrators Regulator
31 University of Genoa Others
32 South African Institute of Chartered Accountants (SAICA) Accounting Profession
33 Institute of Management Accountants, Inc. (IMA) Accounting Profession
34 Financial Reporting Council (FRC) Regulator
35 International Association of Insurance Supervisors (IAIS) Regulator
36 Autorité des normes comptables (ANC) [French standard-setting
body]
Regulator
31
No. Affiliation Category
37 The Institute of Certified Public Accountants in Ireland (CPA) Accounting Profession
38 Finansrådet [Danish Bankers Association] Business Association
39 University of Gothenburg Others
40 Crowe Horwath International Accounting Profession
41 Institute of International Finance (IIF) Business Association
42 Volkswagen AG Preparer
43 Accounting Standards Board of Japan (ASBJ) Regulator
44 Brazilian Committee for Accounting Pronouncements (CPC) Regulator
45 Standard Chartered Bank Preparer
46 Institute of Chartered Accountants in England and Wales (ICAEW) Accounting Profession
47 Zambia Institute of Chartered Accountants (ZICA) Accounting Profession
48 SwissHoldings (Federation of Industrial and Service Groups in
Switzerland) Business Association
49 Belgian Accounting Standards Board (BASB) Regulator
50 External Reporting Board (XRB) Regulator
51 Hydro-Québec Preparer
52 The Institute of Certified Public Accountants of Rwanda (ICPAR) Accounting Profession
53 Canadian Accounting Standards Board (AcSB) Regulator
54 Deloitte Touche Tohmatsu Limited Accounting Profession
55 Austrian Financial Reporting and Auditing Committee (AFRAC) Regulator
56 Australia and New Zealand Banking Group Limited (ANZ) Preparer
57 Securities Analysts Association of Japan (SAAJ) User
58 Baker Tilly UK Audit LLP Accounting Profession
59 European Financial Reporting Advisory Group (EFRAG) Accounting Profession
60 Institute of Public Auditors in Germany (IDW) Accounting Profession
61 Telefónica, S.A. Preparer
62 The Life Insurance Association of Japan (LIAJ) Business Association
63 China Accounting Standards Committee (CASC) Regulator
64 Hong Kong Institute of Certified Public Accountants (HKICPA) Accounting Profession
65 Institute of Singapore Chartered Accountants (ISCA) Accounting Profession
66 Korea Accounting Standards Board (KASB) Regulator
67 Wipro Limited Preparer
68 RSM International Accounting Profession
69 REPSOL Preparer
70 Singapore Accounting Standards Council Regulator
71 National Organization for Financial Accounting and Reporting
Standards Regulator
72 Linde Group Preparer
73 German Insurance Association (GDV) Business Association
74 Association of Investment Companies (AIC) Business Association
75 Financial Reporting Council Mauritius (FRC) Regulator
76 Canada Pension Plan Investment Board (CPPIB) Business Association
77 The 100 Group of Finance Directors Business Association
32
No. Affiliation Category
78 Chartered Accountants Ireland Accounting Profession
79 PricewaterhouseCoopers LLP (PwC) Accounting Profession
80 Ernst & Young Global Limited Accounting Profession
81 Federation of European Accountants (FEE) Accounting Profession
82 Credit Suisse Preparer
83 Institute of Chartered Accountants of Scotland (ICAS) Accounting Profession
84 Audit Oversight Board, Securities Commission Malaysia Regulator
85 Malaysian Accounting Standards Board (MASB) Regulator
86 The Japanese Institute of Certified Public Accountants (JICPA) Accounting Profession
87 European Insurance and Occupational Pensions Authority (EIOPA) Regulator
88 Institute of Certified Public Accountants of Kenya (ICPAK) Accounting Profession
89 Association of Chartered Certified Accountants (ACCA) Accounting Profession
90 Polish Accounting Standards Committee (PASC) Regulator
91 European Banking Authority (EBA) Regulator
92 Petrobras Preparer
93 Consejo Mexicano de Normas de Información Financiera (CINIF) Regulator
94 Securities and Exchange Board of India (SEBI) Regulator
95 Quoted Companies Alliance Business Association
96 Deutsche Bank AG [UK] Preparer
97 BusinessEurope Business Association
98 Association of Accounting Technicians (AAT) Accounting Profession
99 Center for Capital Markets Competitiveness (CCMC) Business Association
100 Aflac, Inc. Preparer
101 British Private Equity and Venture Capital Association (BVCA) Business Association
102 British Telecommunications plc (BT) Preparer
103 Nestle S.A. Preparer
104 Shell International BV Preparer
105 BDO Accounting Profession
106 Group of Latin-American Accounting Standard Setters (GLASS) Regulator
107 KPMG IFRG Limited Accounting Profession
108 Liberty Holdings Limited Preparer
109 International Organization of Securities Commissions (IOSCO) Regulator
110 Investment Management Association (IMA) Business Association
111 Chartered Institute of Public Finance and Accountancy (CIPFA) Accounting Profession
112 Standard & Poor's Ratings Services User
113 Allianz SE Preparer
114 Asian-Oceanian Standard-Setters Group (AOSSG) Regulator
115 Australian Accounting Standards Board (AASB) Regulator
116 The Institute of Chartered Accountants of Sri Lanka (CA Sri Lanka) Accounting Profession
117 Individual Others
118 The Corporate Reporting Users Forum (CRUF) User
33
Appendix 3
Stakeholders Composition Based on Country and Interest Group
Country Total Accounting
Regulator Preparer User Business
Others Amount Profession Association
Asia 1
1
China 1
1
Hong Kong 2 1
1
India 3 1 1 1
Israel 2
2
Japan 4 1 1
1 1
Korea 1
1
Malaysia 3 1 2
Singapore 2 1 1
Sri Lanka 1 1
Total Asia 20 6 10 1 1 2 0
Australia 6 2 2 1
1
New Zealand 1
1
Total
Australia 7 2 3 1 0 1 0
Oceania
Austria 2
1 1
Belgium 1
1
Denmark 1
1
Europe 9 3 3 1
2
France 4
1
3
Germany 8 1 2 3
2
Ireland 2 2
Italy 1
1
Netherlands 1
1
Norway 1
1
Poland 1
1
Russia 1
1
Spain 2
2
Sweden 3 2
1
Switzerland 3
2
1
United
Kingdom 14 6 1 3
4
Total
Europe 54 14 12 13 0 13 2
Kenya 1 1
Mauritius 1
1
Rwanda 1 1
South Africa 2 1
1
Zambia 1 1
34
Country Total Accounting
Profession Regulator Preparer User
Business
Association Others
Total Africa 6 4 1 1 0 0 0
Canada 5
2 1
2
United States 3
1 1 1
Total North
8 1 2 2 1 2 0 America
Brazil 3
1 1
1
Mexico 1
1
Peru 1
1
South
America 1
1
Total South
6 0 3 1 0 0 2 America
International 17 11 4 0 1 1 0
Total 118 38 35 19 3 19 4
Percentage 100% 31% 30% 16% 3% 17% 3%
35
Appendix 4
Example of a Comment Letter
18 July 2014
Mr Hans Hoogervorst
Chairman
The International Accounting Standards Board
30 Cannon Street
London EC4M 6XH
United Kingdom
Dear Hans
ED/2014/1 Disclosure Initiative (Proposed Amendments to IAS 1)
Thank you for the opportunity to comment on ED/2014/1 Disclosure Initiative (Proposed
Amendments to IAS 1). ED/2014/1 has been exposed in New Zealand and some
constituents may make comments directly to you.
We support the Disclosure Initiative project, of which ED/2014/1 is the first step. As you
will be aware, in New Zealand we have been particularly concerned with the proliferation
of disclosures in IFRS. The 2011 report1by New Zealand Institute of Chartered
Accountants and the Institute of Chartered Accountants of Scotland encapsulated this
view in its title: ―Losing the Excess Baggage–reducing disclosures in financial statements
to what‘s important‖.
We note that concerns about ‗disclosure overload‘ are not limited to the for-profit sector
as we also have concerns about the extent of disclosures in the standards applied by New
Zealand not-for-profit entities in both public and private sectors. For this reason, we have
recently issued an explanatory guide on materiality for those entities2, which should make
preparers think about the information that users would consider important to be presented
and disclosed.
We also support the general freeing up of the requirements around presentation and
disclosure as this gives preparers an opportunity to ensure that financial statements
communicate relevant information in the most useful manner for users.
1Losing the Excess Baggage–reducing disclosures in financial statements to what’s important, Recommendations from a
Joint Working Group of the Institute of CharteredAccountants of Scotland and the New Zealand Institute of Chartered
Accountants (2011) 137pp. 2Explanatory Guide A7: Materiality for Public Benefit Entities (May 2014), External Reporting Board, 14pp.
36
We particularly support the changes to paragraph 31 as currently drafted. The paragraph
reinforces the overarching nature of the test for materiality and clarifies its application to
disclosure requirements in IFRS. We also support the emphasis on user needs at the end
of paragraph 31, which we see as the primary criterion for disclosure. Reference to
understandability in reducing the clutter which results from the inclusion of immaterial
information is also useful.
We also agree that both aggregation and disaggregation need to be dealt with.
Our responses to the questions in ED/2014/1 are set out in Appendix 1, and some
comments on drafting matters are set out in Appendix 2of this letter. If you have any
queries or require clarification about the issues raised in this letter, please contact Judith
Pinny([email protected]) or me.
Yours sincerely
Kimberley Crook
Chair – New Zealand Accounting Standards Board
37
Appendix 1 of the Letter
ED/2014/1 Disclosure Initiative (Proposed Amendments to IAS 1)
Questions for respondents
Question 1 - Disclosure Initiative amendments
The amendments to IAS 1 arising from the Disclosure Initiative aim to makenarrow-
focus amendments that will clarify some of its presentation and disclosurerequirements
to ensure entities are able to use judgment when applying that Standard.The
amendments respond to concerns that the wording of some of the requirements inIAS 1
may have prevented the use of such judgement.
The proposed amendments relate to:
(a) materiality and aggregation (see paragraphs 29–31 and BC1–8 of this
Exposure Draft);
(b) statement of financial position and statement of profit or loss and other
comprehensive income (see paragraphs 54, 55A, 82, 85A and 85B and
BC9–BC15 of this Exposure Draft);
(c) notes structure (see paragraphs 113–117 and BC16–BC19 of this
Exposure Draft); and
(d) disclosure of accounting policies (see paragraphs 120 and BC20–BC22
of this Exposure Draft).
Do you agree with each of the amendments? Do you have any concerns about,
oralternative suggestions for, any of the proposed amendments?
Part (a) materiality and aggregation (see paragraphs 29–31 and BC1–8 of this
Exposure Draft);
1. We generally support ED/2014/1, and particularly support the changes to paragraph 31.
Those changes reinforce the overarching nature of materiality, clarifies its application to
disclosure requirements in IFRS and emphasise that information must meet user needs. In
our view, this guidance will help to address difficulties in applying materiality in practice,
which is a contributing factor to the problem of excessive disclosures.
2. We note that there are some proposed changes to terminology. We believe that it is
important that accounting standards are clear and use consistent terminology. We
38
understand that the changes made to distinguish presentation from disclosure were for
clarity.
3. However, we are concerned that the terms presentation and disclosure have not been
applied consistently throughout IAS 1, nor throughout the suite of IFRS standards. In our
view, a review should be carried out to ensure consistent use of these terms.Paragraphs 1-
3 in Appendix 2 of this letter provide examples of where terminology is inconsistent.
4. In addition, we think it would be helpful to have a term that encompasses both
presentation and disclosure, as there are circumstances in the standards where such a term
would apply. We note that the IPSASB has considered this matter and come up with an
overarching term. We encourage the IASB to collaborate with the IPSASB in this area.
Part (b) statement of financial position and statement of profit or loss and
othercomprehensive income (see paragraphs 54, 55A, 82, 85A and 85B and BC9–
BC15of this Exposure Draft);
5. We note that these proposals do not relate to materiality or disclosure overload, rather
they relate to the separate issue of ―non-GAAP‖ measures. We understand that the
motivation for the proposals is to minimise the use of ―non-GAAP‖ measures while
providing some flexibility with presentation.
6. However we believe a more fundamental review of the presentation of sub-totals needs to
be done in the medium term. The presentation of sub-totals can affect the usefulness and
understandability of financial statements in both a positive and negative way.
7. We therefore believe that this issue should be considered more comprehensively in the
disclosure research project.
Part (c) notes structure (see paragraphs 113–117 and BC16–BC19 of this Exposure
Draft).
8. Webroadly support these proposalsas this gives preparers an opportunity to ensure that
financial statements communicate relevant information in the most useful manner for
users.
9. We question whether there is sufficient guidance to focus preparers on disclosing
accounting policiesthat are relevant to the entity‘s circumstances,are understandable to
users, and avoid technical language where possible. One of the main problems in practice
with accounting policies is that some entities include lengthy descriptions of the
39
requirements contained in standards in their policies. Accounting policies should not be a
lengthy description of the requirements of an IFRS on a particular topic; rather they
should focus on the key accounting policies, particularly where choices or judgments
have been made. We suggest that guidance is added into paragraph 119 to encourage
entity-specific accounting policy disclosures and discourage ―boiler-plate‖ disclosures.
Part (d) disclosure of accounting policies (see paragraphs 120 and BC20–BC22 of
this Exposure Draft).
10. We agree with the proposal to delete paragraph 120 of IAS 1.
Question 2- Presentation of items of other comprehensive income arising
fromequity-accounted investments
Do you agree with the IASB's proposal to amend IAS 1 for the presentation of items of
other comprehensive income arising from equity-accounted investments amendments
(see paragraphs 82A, BC1–BC6 and the Guidance on implementing IAS 1)?
If not, why and what alternative do you propose?
11. We agree with this proposal.
Question 3 - Transition provisions and effective date
Do you agree with the proposed transition provisions for the amendments to IAS 1 as
described in this Exposure Draft (see paragraphs 139N and BC23–BC25)?
If not, why and what alternative do you propose?
12. We agree in principle with the proposed transitional provisions.
40
Appendix 2 of the Letter
Drafting Comments
Consistent use of Terminology
1. The proposed amendments do not consistently use the terms ―presentation‖ and
―disclosure‖, nor do they go far enough to ensure consistent use of the terms throughout
IAS 1.
2. Examples of inconsistent use of terminology in ED/2014/1 are paragraphs 112, 113 and
114. Each of these paragraphs refers to the entity ―presenting notes‖ rather than
―disclosing notes‖ (see below).
112 The notes shall:
(a) presentinformation about the basis of preparation of the financial statements
and the specific accounting policies used in accordance with paragraphs 117–
124;
113 An entity shall, as far as practicable, present notes in a systematic manner.
114 Alternatively, when determining a systematic order for the notes, an entity may
presents its notesin the following order, to assist users of the financialstatements to
understand how the notes relate to the entity‘sfinancial statements and to compare
them with financial statements of other entities:
3. An example of inconsistent use of terminology in a part of IAS 1 that has not been
amended is the heading before paragraph 77, and paragraph 77itself. The heading uses the
word ―present‖, and paragraph 77 uses the word ―disclose‖, but the heading and the
paragraph are referring to both the primary financial statements and the notes.
Disaggregation: Paragraph 54
4. We find the example in paragraph 54, which disaggregates property, plant and equipment
(PPE), unhelpful. Even for an entity with a large amount of PPE, it‘s not clear in what
circumstances it would be relevant to disaggregate PPE on the face of the financial
statements. Because it is not clear when this might be useful, it might have the effect of
encouraging unnecessary disaggregation on the face of the financial statements. If the
amendment is retained, we suggest making it clear the circumstances where
disaggregation would be relevant and the extent of such disaggregation.
41
Sub-totals: Paragraphs 55A and 85A
5. To facilitate users‘ understanding of the financial statements, an entity may present sub-
totals other than sub-totals required by paragraphs 55 and 85. However, paragraphs 55A
and 85A restrict themselves by using the phrase ―in accordance with paragraph [55 or
85]‖. The restriction is unnecessarily limiting, and in our view should be deleted, because
the requirements of paragraphs 55A and 85A should apply to the presentation of all sub-
totals.
6. It is unclear from the term ―be made up of items recognised and measured in accordance
with IFRS‖ in paragraphs 55A(a) and 85A(a), the extent to which information can be
disaggregated and still comply with IFRS.
7. Paragraphs 45 and 46 of IAS 1 address the need to consistently present information, with
certain exceptions. Paragraphs 55A(c) and 85A(c) also require consistent presentation
from period to period, but with no exceptions. If there is a good reason, such as a
significant change in an entity‘s operations, which means a different presentation is more
appropriate, it appears to be allowed under paragraph 45(a), but restricted by paragraphs
55A(c) and 85A(c). Therefore, we are unclear about the need for paragraphs 55A(c) and
85A(c).
8. There is no equivalent to paragraph 85A(d) in paragraph 55A. We disagree with the
rationale provided in BC 14(c) about this, as there are subtotals and totals in the balance
sheet. Accordingly, we are of the view that the equivalent to paragraph 85A(d) should be
included in paragraph 55A.
Transitional provisions
9. We note two drafting errors in paragraph 139N:
a) There should not be a reference to paragraph 82A, as there is no paragraph 82A
in ED/2014.01
b) Paragraph 139N should be included in the list of added paragraphs.