Associate Professor Karen Handley

Action research project. How SMEs report and account for Intangible Assets and Intellectual Capital.

Financial reporting for unlisted entities in Australia is unique in the world, and has been the subject of change and uncertainty regarding future change in recent years. One of the future changes is the proposed removal of the reporting entity concept, which currently determines the requirements for financial reporting for unlisted entities (Hamidi-Ravari, 2014). The reporting entity concept allows companies to self-assess whether there are users of their financial statements and, if not, to produce Special Purpose Financial Statements (SPFS) rather than General Purpose Financial Statements (GPFS). This translates directly into lower costs for those entities producing SPFS, because GPFS require compliance with IFRS measurement and recognition principles.

In the absence of the reporting entity concept, regulators will be required to provide directives regarding which entities should produce GPFS. The determination of these directives is difficult. Some suggestions already appear in AASB documents. First, SAC1 includes some guidance for entities that are uncertain about the existence of users. These indicators include financial characteristics, the separation of management and ownership interest and economic or political importance. Research commissioned by the AASB and ASIC indicates inconsistent interpretation of these principles in practice. Second, ITC12 suggests defined thresholds relating to turnover and assets (AASB, 2007). This approach was not repeated in ED192 after criticism from practitioners (AASB, 2009). Third, ITC12 suggests that a measure of ‘public accountability’ could be tied to the publishing of financial statements on a website or filing with ASIC. Filing with ASIC translates to a size measure as well, as the Corporations Act 2001 stipulates that filing is linked to thresholds determined by turnover, assets and number of employees. In addition, these thresholds have not been revised for quite some time. Whatever new thresholds are set by the regulators in the absence of the reporting entity concept, some entities that previously produced SPFS are likely to have to now produce GPFS, resulting in an increased cost burden for these entities.

In addition, very little is known about Australian unlisted entities. This is because their financial statements are expensive to source, as ASIC charges a fee for access. The cost puts access to a viable dataset for empirical research beyond the reach of most university research teams, and manual coding from PDF reports adds to this burden. To support this research project, the Faculty of Business and Economics at Macquarie University has agreed to purchase a single-year sample of financial data for 2000 unlisted companies from Dun and Bradstreet. We will augment this by accessing company websites and publicly available documents. Using this data, this project then seeks to empirically and systematically investigate the possible thresholds to use as triggers for different reporting standards in the place of the reporting entity concept. In an adaptation of a study by Eirle and Helduser (2013), different criteria that should signal the existence of external users are statistically tested against potential thresholds to find those that are significantly related. The research question that will be examined in this study is ‘How effectively do different criteria capture likely users of financial reports?’ 

References:
AASB, 2007. ITC 12 - Request for comment on a proposed revised differential reporting regime for Australia and IASB Exposure draft of a proposed IFRS for small and medium-sized entities. Available: http://www.aasb.com.au/search-result.aspx?search=gefl%C2%9Dk%C2%A0%C2%99%C2%A6%C2%95%C2%9C%C2%A9a%60s%C2%AF%C2%9Aa%C2%A9}%C2%89%C2%B0IY\ [Accessed 13 July 2009].

AASB, 2009. Differential financial reporting - Reducing disclosure requirements. Available: http://www.aasb.gov.au/admin/file/content105/c9/AASB_Consultation_Paper.pdf [Accessed 7 December 2009].

Eirle, B and Helduser, C. 2013. What drives SMEs need to provide internationally comparable accounting information? - Empirical evidence from Germany. Working paper. Available: http://ssrn.com/abstract=2267349

Hamidi-Ravari, A. 2014. AASB Essay 2014-1 The critical role of the reporting entity concept in Australian financial reporting. In: AASB RESEARCH CENTRE (ed.) AASB Essay Series.

This  project aims to investigate the requirements and involvement of users of SME General Purpose Financial Statements, in the environment of the introduction of an Australia–specific differential reporting standard in Australia.  The requirements of users of financial reports for entities that are not listed have not been studied in any depth.  An earlier survey has documented the standards used in financial reports in Australia in early 2010, prior to the implementation of an Australian-specific standard for non-publicly accountable reporting entities.  This survey has been reported in The Charter (Handley, 2010). One of the interesting findings of this survey was that there was not uniform application of the AASB’s financial standards across the spectrum of Australian entities represented in the study.  As part of this survey, we asked respondents to indicate the direct recipients of their financial reports.  This study expands on this work through the medium of survey and interviews to examine more closely those aspects of reporting that are useful for decision making about entities in the SME sector. In the context of the debate regarding an increased number of entities in this sector that may be required to produce General Purpose Financial Statements, it is very important to establish if there are any real users of these reports that cannot demand Special Purpose Financial Statements, and if they are, what information they need.  Also of interest in this study is the inclusion of users in the process to create the standard.  There is criticism that users are not included in the deliberations that precede the introduction of a standard, and there is very little evidence of user involvement in the letters in response to calls from the AASB to comment.  However, there is evidence that the professional bodies and other representative bodies have canvassed their membership or  constituents in preparation of their submissions.  This research study seeks to explore via interviews and the survey instrument how users of these statements are involved in the process.  The survey will be distributed in the newsletter of the Institute of Chartered Accountants in Australia as well as e-mailed directly to a database of volunteers which was created in the first survey and by approaching the writers of comment letters to Exposure Draft 192 (ED 192).  In addition, key parties involved in the process of producing the standard will be interviewed in person to establish how users requirements were established by them, and how they prioritized the different and often conflicting requirements.  This study will inform on ways to include users in future standards setting procedures in Australia.