Lecture 8: Accounting standard-setting processes

Overview and readings

Overview:
- Understanding global standard setting (SS) in the IFRS era
- Theories of SS the usual suspects:
o Public-Interest Theory PubIT
o Regulatory Capture Theory RCT
o Private-Interest Theory PrivIT
- Can IASB be captured?
- Variation around the edges of adoption
- AASB 1053 and IFRS for SMEs
- Ram and Newberrys paper
Readings all in the readings pack
- GHHT Standard setting and the political environment
- Ram and Newberry IFRS for SMEs

Standard setting in Australia
- A-IFRS were adopted in Australia from 1 January 2005
- Limited role for a distinct standard setting process in Australia now.
Fundamentally we have agreed to adopt all core rules/principles
- However, Aus paragraphs, some additional disclosure requirements and
reporting entity concept
- Increasing variation around the edges e.g. AASB 1053 and IFRS for
SMEs

Financial Reporting
Council
Strategic direction and
advice to the AASB.
Appoints AASB Board
members.
Australian Accounting
Standards Board
Responsibility for
formulating accounting
standards
Office of the
Australian Accounting
Standards Board
Technical and
administrative services
and advice to the AASB.





AASB How they describe the standard setting process



International standard setting process
The International Accounting Standards Board (IASB) is an independent group
of 16 experts with an appropriate mix of recent practical experience in setting
accounting standards, in preparing, auditing, or suing financial reports, and in
accounting education. Broad geographical diversity is also required.





International setting process how the IASB represents it


An independent body, assumed SS responsibilities in 2001
Staff are asked to identify, review and raise issues that might warrant the IASBs
attention. In addition, the IASB raises and discusses potential agenda items in the
light of comments from other standard-setters and other interested parties, the
IFRS Advisory Council and the IFRS interpretations Committee.
The IASB received requests from constituents to interpret, review or amend
existing publications.
The IASBs discussions of potential projects and its decisions to adopt new
projects in public IASB meetings. Before reaching such decisions the IASB
consults the IFRS Advisory Council and accounting standard-setting bodies on
proposed agenda items and setting priorities.
Exposure drafts are then developed by assigning teams and subject to public
comment.

Standard-setting how theory represents it
Public interest, regulatory capture and private interest theory
GHHT, pp. 386-393
All based on mainstream economics standard-setting as a form of regulation, of
state intervention/interference in markets
Each theory describes the expected roles of 3 basic categories of players:
- Producers fundamentally reporting entities
- Consumers consider users as specified in the AASB Framework
- Government Although PrivIT is more explicit, PubIT and RCT also
assume an authoritative state apparatus within a defined physical
territoty

SS theories
- Various consumers and producers have more or less power than each
other some groups are powerful, sophisticated organisations with
access to expertise
- Where do various players fit within these theories? For example, is the
accounting profession a consumer or a producer? Does it matter?
- These theories were developed pre-IFRS and so assume a national SS
arena with national players. Where would IASB fit within these theories?

Public Interest Theory PubIT
- Acknowledges possibility of market failure
- Market Failure occurs:
o Lack of competition (consider the market for producing financial
statements for any one reporting entity is effectively a monopoly)
or barriers to entry
o Information asymmetry between buys and sellers
o The public good nature of some products, where the provisions of
the product to a group makes it equally and freely available to
other individuals
- Consumers role express their information needs clearly
- Producers role do what they are told
- Governments role intervene to deal with consumers needs but in a
rather passive way adjudicates between views of different interests
doesnt have its own agenda
Are these assumptions realistic?
And if public interest theory applies, what we expect standards to look
like?
Does PubIT explain some or all of AASB 3, AASB 10 and AASB 8?

Regulatory Capture Theory RCT
- Again, government seen as a passive mediator between interests but
achievement of solution in the public interest is unlikely
- Regulation has wealth effects most on regulatees who have the most
incentive & resources to lobby they capture the regulators by capturing
the administration, implementation and evaluation of regulation
- Self-interest is more explicitly modelled: powerful players motivated by
perceived wealth effects will lobby until marginal benefit equals marginal
cost of lobbying
- General public/consumers have small stakes in SS and lack organisation
- What is capture?
o Control of regulation/the regulator
o Coordinating i.e. aligning the regulators activities with ones
own agenda
o Neutralising/debilitating the regulator
o Co-opting/persuading the regulator to take ones own position
(GHHT, p. 388)
- Capture is most likely when:
o The number of regulatees is small
o Regulators staff have regular contact with regulatees staff; and
either have an industry background or have prospects of
employment by regulatee
o Regulatees control the needed information
o Information and product are complex
o Regulator is poorly resourced (GHHT, p. 389)




Private Interest Theory PrivIT
- Government not passive: has significant and valuable coercive power that
can be the source of wealth redistribution, and also has its own self
interest
- Government are self-interest wealth maximisers who sell state power to
the highest bidder. Thus wealth will be transferred from those with less
political power to those with more: you get the regulation you pay for ..
unlikely to be in the public interest
- proof of this theory therefore requires evidence of a transaction
- Highest bidders likely to be producers who are best organised & best
able to bear the costs of lobbying & regulation

Applying these theories to practice
Do you think the assumptions in RCT and PrivIT are more realist than
PubIT?
And if RCT/PrivIT apply, what would we expect standards to look like?
o Does RCT/PrivIT explain some or all of AASB 3, AASB 10, AASB 8?
o Consider Corporations Amendment (Corporate Reporting
Reform) Bill 2010

SS theories in the IFRS era
- 100+ countries now use IFRS. Europe, Australia, South Africa went IFRS
in 2005. China is moving down that path; USA, India, Japan are
negotiating, there is momentum!
- Arguments in support of IFRS adoption are: increased efficiency,
comparability, quality; an integrated capital market is a good thing and
one set of standards for all is part of such a market; you have to be
there to be competitive, to have access to capital, markets etc.
- For example, the Big N operate globally and want to be able to work
unhindered by variations in local regulations. Having one set of standards
applicable everywhere is cost efficient for them is this as important as
the content of the standard?
- Conversely, arguments against come largely from those who do not
operate in the globalised capital market small business, with unique
accounting issues that are not well addressed by IFRS more on this
later on this lecture
- Who is government now in our IFRS era? AASB? Where does IFRS fit
within those 3 traditional theories?
- Is IASB too big and well controlled to be captured?
- Lacking a powerful world government behind the IFRS, facing a complex
array of players & interests and needing the support of national
governments is it easier or harder to resist capture or being bought?
- Australia: those supporting IFRS adopting include government,
profession, parts of corporate sector, ASX
- In GHHTs view, Australias role in international SS post-2005 has
declined, but government may be happy with this perhaps this reflects
governments own agenda (PrivIT?) & maybe Australia corporates were
happy to trade off a reduced ability to influence going forward for the
perceived benefits of global comparability (RCT & PrivIT?)
- Australia was one of the earlier adopters of IFRS as championed by the
Howard Liberal government

Can IFRS be captured? From their website:
- Measures taken by the IASB to protect itself from being captured
1. Wide geographical spread of IASB members
At present 16 members
Current 16 members: UK 1, USA 4, France 1, Sweden 1, Japan 1, China
1, South Africa 1, Australia/New Zealand 1, India/USA -1, Seoul 1, Germany
1, Netherlands 1
Professional competence and practical experience are the main qualifications for
being an IASB member (const. 25)
Board to contain a mixture of auditors, preparers, users and academics
Geographical balance also sought: from 2012:
4 from Asia/Oceania
4 from Europe
4 from North America
1 each from Africa and South America
2from any area
Members must agree contractually to act in the public interest (Const. 29)
There is not a conflict of interest policy (March 09)
2. Independence of Board Members
Trustees must ensure that IASB is, and is seen to be independent. Full-time
members must sever all employment relationships & not hold any position
involving economic incentives that might threaten independence. Rights to
return to an employer are not permitted.
3. Transparency and consultation process
- Public can attend meetings; also broadcast/archived on the IASB website
- Exposure drafts (etc) are publicly available as are comment letters and
the IASBs reactions thereto
- IASB holds public hearings & meets extensively with
preparer/user/academic & other groups
- IASB liaises with nation/regional standard-setters
- IASB consults with IFRS Advisory Council
4. Oversight of the IASB
- IFRF parent body to the IASB (although IASB solely responsible for
standards)
- Foundation trustees appoint IASB members, exercise oversight over the
IASB and raise funds
- Trustees must formally commit to working in public interests
- 22 Trustees 6 from Asia/Oceania, 6 from Europe, 6 from North America,
1 from Africa, 1 from South Africa, 2 from any area subject to . . . overall
geographical balance
- 2 will normally be from prominent international accounting firms
- mix of trustees to broadly reflect worlds capital market and diversity of
geographical & professional backgrounds, inc. auditors, preparers, users,
academics and officials serving public interest
- Trustees must now engage with a monitoring board consisting of national
& international regulators when appointing trustees, IASB, IFRS Advisory
Council & IFRIC members
The Monitoring Board will provide a formal link between the Trustees
and public authorities: replicating links between national SS bodies and
such authorities
IASC Foundation is seeking legitimacy with national
regulators/politicians
Current Trustees:
o Come from wide geographical location
o Have a mix of background (Big N, SS/Regulator, prepare, user,
professional body and former politicians/senior bureaucrats)
5. Funding

SS theories in the IFRS era
GHHT questions the utility of RCT & PrivIT to Australia post 2005
BUT: perhaps its an issue of being more subtle about how the IASB can be
captured (RCT) and how it can be bought (PrivIT) and by whom. Analysing self-
interest (and public interest) is now much more complex
Our 3 theories assume a sovereign state apparatus with coercive power.
Arguably, there is no international government we are in the realm of
geopolitics/international relations
And complex networks of players
PubIT
o SS at national level is hard enough even if done with the public
interest in mind
o Working out what is in the public interest is even harder globally
wen the diversity of nations/economics/histories is factored in!
RCT
o While there may still be an incentive to capture the IASB who
could capture it and how?
o While there may still be an incentive to buy the IASB who could
buy it and how?
o PS buying now includes not just money but also political capture
e.g. sanctioning/enforcement of IFRS at national level
Variation around the edges
But is capture of IFRS necessary?
What does adoption of IFRS really mean?
Consider:
o Reporting entity concept
o IFRS for SMEs
o AASB 1053 Application of Tiers of Australian Accounting
Standards (June 2010). Allows for a reduced level of reporting for
entities that do not have public accountability. Same recognition
and measurement requirements as full IFRS, but less disclosures.
Public accountability focuses primarily on publicly listed entities
a narrowing of the focus of reporting entities


Is IFRS well suited to the needs of SMEs and developing
countries?
A key selling feature of IFRS has been its globally accepted and
understood status beneficial to global capital markets etc.
Is the complexity of IFRS therefore the best solution for developing
countries and small to medium enterprises?
Consider the following organisations. Consider who the users of their
financial statements would be, and also the resources potentially
available to those organisations to work with the complexity of IFRS:
o A jute mill in Bangladesh
o A small organic vineyard in Australia
o Small retailers
o Small vendors

Is IFRS well suited to these sorts of organisations?
Do they operate in international capital markets?
Do users of their financial statements need complex disclosures about
financial instruments, intangibles, impairment, segments, related party
transactions etc.?
Are the accounting needs of these different SMEs the same?
Would our solution in Australia reporting entity concept and AASB 1053
be an adequate solution for the above 4 entities?

Ram and Newberrys paper
Background:
- need for SME standard and possibly distinct standards for developing
countries
- IASB took on board the project of examining the need for a specific raft of
accounting standards for SMEs
Rationale:
- Ram and Newberry explore the role of the IASBs due process in
developing its FIRS for SMEs standard
Use of theory?
- the authors consider whether the example explored better reflects the
ideas of Richardson and Eberlein (2011) or Botzem (2012). That is, a
public due process is intended to ensure that standards reflect the will of
the people, or is the due process simply there as communicative function
with no commitment to change standards under consideration?
Method:
- interview with key players involved in this project
- document analysis
Some findings:
- The IASB had developed a stance to maintain all recognition and
measurement criteria but to reduce disclosure requirements where
necessary before the project was added to its agenda in July 2003
- Consider the tensions between the IASBs desire to maintain its stance
and the stated reasons for undertaking the project.
- Some modification of recognition requirements (e.g. no option to revalue
PPE. Contrast to AASB 1053 which does not modify recognition
requirements)
- Due process followed in the case of the SME standard barely reflected the
will of people but was more included towards acting as a communicative
function for the IASB without any commitment to change its stance on the
SME standard
- It showed that by going beyond the information available in the public
domain a better understanding of standard setting activity can be
obtained.

Conclusions
- We should be cautions about arguments like compliance with AASB is
necessary in order to provide a true and fair view
- Standard setting involves compromise and debate. The outcome is often
messy accounting standards that are complex to apply and result in
information of debateable utility to users
- The process represented on AASB/IASB websites (e.g.. opening an issue
for debate and considering the perspectives provided, before drawing a
conclusion), may not always reflect reality
- What exactly does adoption of IFRS mean and what are the implications
of more recent suggestions of variation around the edges?
-