FORUM Article

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

Brad Potter, The University of Melbourne

Tom Ravlic, Taxpayers Australia

Sue Wright, Macquarie University

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

I t is difficult to argue against the long-held view thataccounting standards should be developed whichenable the preparation of financial reports that

provide information that is useful for decision makingby users who rely on those reports (see, for example,Fitzgerald 1936; Goldberg 1956; Belkaoui 1978, 1980).By doing so, the reporting function will also assist inreducing information asymmetry between preparers andusers of financial reports, providing capital markets theopportunity to function effectively. However, the processof developing accounting standards frequently highlightsdifferences between the viewpoints of preparers of thereports and users of the information. Further, financialreporting imposes significant costs on preparers,including direct costs associated with developing andmaintaining accounting systems, auditing and reportpreparation, as well as indirect (‘proprietary’) costsassociated with reporting.1 All of these differentperspectives and interests must be balanced by regulatorsin developing regulations that guide the information tobe reported.

The standards determined by the Australian Account-ing Standards Board (AASB) to prescribe appropriateaccounting policies in Australia have, for the past decadeor so, reflected those of the International AccountingStandards Board (IASB), which are primarily focused onreporting by larger entities in the for-profit sector. Forsmaller entities,2 however, the AASB has recently chosen

not to reflect the IASB’s ‘IFRS for SMEs’3 standardand instead has developed its own Reduced DisclosureRequirements (RDR) for reporting. This represents amove toward a two-tier reporting system, which incor-porates recognition and measurement approaches andtechniques embedded throughout existing InternationalFinancial Reporting Standards (IFRS).

By examining the development of the Board’sapproach to differential reporting in Australia, this studyexploits a unique opportunity to analyse the processthrough which regulations are created and justified.Since we do so by examining various communicationsbetween the accounting regulator and the stakeholders,we can shed light on the complex processes throughwhich resulting regulations might come, through time,to reflect the concerns of those stakeholders.

We show that in the context of differential reporting,the Board appears to have evolved its stance to becomemore responsive to the viewpoints expressed by diversestakeholders. The resulting process for developing theensuing regulation is more inclusive, although somewhatlonger in duration than has typically been the case for

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

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B. Potter, T. Ravlic & S. Wright Developing Accounting Regulations That Reflect Public Viewpoints

previous standards. The regulator has become moreopen to debate and disagreement, and its decisionmaking more inclusive of public viewpoints. In callingfor research to inform its debates and decisions, it hasmoved from being independent of scholarly critiques toactively commissioning such research.4 Its actions seemto reflect a greater appreciation of the need to informregulatory debates by recourse to objective researchevidence, and to rely less on discursive/normativearguments as a primary basis for justifying advocatedreforms. Regulators have been routinely criticised for aprimary reliance on such arguments in the past (Potter2002; Young 1996).

The Forces that Shape AccountingStandard Setting

We contribute to the literature that explores the myriadfactors that impact the diverse processes throughwhich regulations are developed and implemented. Inrecent decades, researchers have come to understandaccounting not just as a technical practice, but alsoas an important social and institutional practice,with implications for the actions of individualsand the functioning of organisations and societies.This has prompted various streams of literature,including those focusing on the rhetoric and theassociated images that appear to underpin muchaccounting regulation and practice (Walters-York 1996;Young 2003), rhetoric and images that have, untilrecently, remained largely unquestioned and poorlyunderstood.

The rhetoric and images underpinning accountingregulation and practice include portraying accountingas a neutral and unbiased tool for measuring andrepresenting pre-existing organisational and socialreality, and depicting particular changes to regulationand practice as cognate with progress towards better,more relevant information and more informed decisions(Carnegie and Napier 1996). These depictions ofaccounting have enabled accounting regulators andother advocates to promote and justify changes toaccounting regulations and practices, even thoughthe benefits for organisations and stakeholders maybe questioned. This has occurred through officialpresentations, research published in quasi-academic andprofessional journals, and in public lectures, despite alack of robust evidence to support the proposed reforms(Potter 1999; Young 1996).

An implication of the above is that fundamentalchanges to accounting regulation can and do occurin rigid and programmed ways, with little if anycritical evaluation and without considering a rangeof implementation issues or a range of alternative

treatments or solutions (Young 1996). The generalconclusion drawn by researchers in this area is thatchanges to the accounting domain often occur throughlargely discursive means, and are functions of the mannerin which particular accounting ‘issues’ are identified anddefined and also functions of the ‘solutions’ that are putforward to resolve them. This is particularly the casewhere the resolution of issues through the applicationof advocated accounting approaches and techniques ismade to appear so appropriate that it is held to be self-evident (Kent 2000; Miller 1991; Power 1991, 1996, 1997;Ryan 1995, 1998; Young 1994, 1996).

When accounting regulators and other advocatesportray accounting in standardised and programmedways, the nature and extent of the changes can beoversimplified, the benefits of applying the advocatedpolicy or approach can be overstated, and the applicationcan be made to appear more effective and appropriatethan should be the case (Power 1995, 1997). Even inlight of evidence contrary to the advocated accountingtreatment, prior research documents regulators astypically reluctant to deviate from their intendedcourse (Potter 2005; Young 2005). This can, in turn,restrict the scope of the accounting standards thatare ultimately developed when specific and unique ac-counting issues emerge (Hines 1991; Young 1994, 1995,1996).

Consistent with these themes, Young (2003) exploredthe rhetorical strategies employed by the US FinancialAccounting Standards Board (FASB) when new stan-dards are put forward, promoted and justified. Accordingto Young (2003: 622), the standard-setting processmay be appropriately considered to be an ‘exercisein persuasion’, where FASB members and staff arecontinuously engaged in efforts to convince interestedparties that the FASB’s work is ‘valuable, appropriate,useful and correct’ (Young 2003: 627). According toYoung (2003), these persuasive efforts cover a range ofactivities and occur through various forums, includingspeeches delivered by staff each year, articles prepared foraccounting publications, and through the preparationof various documents including exposure drafts andaccounting standards.

These themes provide a broad reference point fromwhich we explore the development of differentialreporting in Australia. We show that the AASB’sinitial proposal for SME reporting was underpinned byassumptions about the current state of SME reporting,and the costs and benefits and other implementationissues associated with moving to a new framework.A key motivation for the AASB to address this issueseems to be the Australian Securities and InvestmentCommission’s (ASIC) Regulatory Guide 85 (2005),which reviewed a small but undisclosed number ofSME reports, identifying problems with the application

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of the reporting entity concept and also reportingquality. Even though there was little understandinginitially of the nature and extent of the problemsthat existed or the implementation issues associatedwith any likely solution, the AASB seemingly had aproblem in need of a solution. As later sections ofthis paper show, while the Board initially appearedlikely to define the problem and the solution to SMEreporting in a particular way, more recently therehas been a greater willingness to consider alternativesolutions and to seek further research to inform thedevelopment of appropriate solutions. This constitutes asomewhat unique setting, with regulators often criticisedin the past for addressing ‘new’ accounting problems inprogrammed and standardised ways and for a reluctanceto deviate from the initial solution advocated (Potter2002; Young 1995).

Background to Differential Reporting

The notion that entities with different characteristics(most often size/significance) should prepare financialreports containing different information has beenembedded in financial reporting regulation and practicein Australia for decades. The development of guidelinesfor this ‘differential’ form of reporting dates back tothe development of the conceptual framework by theAustralian Accounting Research Foundation (AARF) inthe mid-1980s. The appointment of Ms Jan McCaheyto the Foundation in 1986 seemed to bring a greaterawareness of reporting issues for smaller entities (see, forexample, McCahey 1986). A key reporting issue at thetime was the ‘accounting standards overload problem’which is said to arise when entities are required toproduce financial reports that meet a higher reportingstandard than should be the case given the presentand potential users of the reports. McCahey’s workincluded consolidating the literature from different partsof the world – most notably the United States – onaccounting standards overload, distinguishing generallyaccepted accounting principles for large and smallentities that are often referred to as ‘big GAAP’ and ‘littleGAAP’.

In 1989, the AARF published a discussion paperon accounting standards overload (McCahey andRamsay 1989), which was designed to assist Australianaccounting regulators to incorporate the notion of‘differential reporting’ in light of the then developingconceptual framework. The discussion paper precededthe release of a series of exposure drafts dealing withthe four statements of accounting concepts that weredeveloped and exposed for public comment in thefollowing years. In August 1990, the Statement ofAccounting Concepts (SAC) 1 Definition of the Reporting

Entity, which defined the concept of the reporting entityand set in place the basis for determining the types ofentities that should report and the level of informationrequired from each, was released. Under SAC 1, areporting entity is one for whom it is reasonable to expectthe existence of users dependent on the informationin general purpose financial statements for makingand evaluating decisions about the allocation of scarceresources (AARF/AASB 1990, para. 40). While at thetime no specific size tests were developed to implementthe concept, there were additional guidelines thatpreparers were encouraged to consider in its application.Such guidelines included the economic and socialsignificance of the entity, whether and to what extentthere was a separation of management and economicownership, as well as some general indicators includingfinancial and non-financial information (AARF/AASB1990, para 20–22).

In December 1991, the AARF issued Legislative PolicyDiscussion Paper No 1 entitled ‘The Reporting EntityConcept: Implementation Under the Corporations Law’,written by Mr Ian Langfield-Smith, then secretary ofthe Legislation Review Board (LRB).5 The discussionpaper explored the consequences of the introductionof the conceptual framework for financial reporting inAustralia, and (again) proposed differential reporting tobe the solution to the accounting standards overloadproblem.

For some time after the implementation of SAC 1,it appears that any objective size tests to guide theapplication of the reporting entity concept, specified forexample in terms of an entity’s assets, revenue, and/ornumber of employees, were resisted by accountingregulators in favour of retaining a degree of flexibilityin application. The consequence of applying the conceptwas that general purpose financial statements wererequired from only those entities that deemed theyhad users relying on the reports as their primaryinformation source for decision making. The principlesset down in the framework had no direct legal backing,and so consistent application of the concept dependedupon its subjective application by the preparers of thereports.

A size test was introduced for small private companiesin the First Corporate Law Simplification Act, enactedin 1995, exempting many entities from having tolodge financial statements.6 That reflected the prevailingview that prima facie, it was inappropriate for entitiesbelow a certain size to be required to lodge auditedfinancial statements prepared according to ‘applicableaccounting standards’. The reporting compliance burdenon not-for-profit entities was relieved much later, withthe Corporate Reporting Reform Act (2010), whichestablished a new set of thresholds for these entities onthe assertion that the cost of preparing audited financial

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statements under GAAP returned little or no benefit tothe entity or its stakeholders.7

The Adoption of International FinancialReporting Standards in Australia

The adoption of IFRS8 was first signalled publiclywith the enactment of the Corporate Law EconomicReform Program (CLERP) (1999), which amended theCorporations Act and took responsibility for overseeingthe accounting standard-setting process away from ASICin favour of the newly formed Financial ReportingCouncil (FRC). At least in part as a response to concernsof business practitioners that accounting standards werebeing set by academics and others without currentbusiness experience, the CLERP reforms contained ananalysis of a range of financial reporting regimes acrossthe globe. One of the first decisions of the FRC was thatAustralia would adopt IFRS as issued by the IASB forfinancial years beginning on or after 1 January 2005. Thedecision to adopt IFRS does not appear to have beensubject to a broad community due process, but was adecision that was made at the specific direction of thethen Treasurer Mr Peter Costello.

Australia’s adoption of IFRS applied to all entities thatwere obliged to prepare financial statements under theCorporations Act 2001, regardless of size, as well as publicsector and not-for-profit sector entities.9 It was duringthe implementation of IFRS that criticism of its use inthe context of smaller entities began to emerge publicly.This had been recognised as a potential problem by theIASB almost from the beginning of IFRS, on the groundsthat full IFRS were too detailed for the needs of usersof SME reports and too costly for smaller entities toproduce.

In the latter part of 2002 the issue of sector-neutral10 accounting standards arose again, with theFRC issuing a directive requiring standards to bedeveloped for both private and public sector financialreporting.11 The directive brought with it a degreeof public controversy, including a significant split inopinion between the incumbent chairs of AASB andFRC, Mr Keith Alfredson and Mr Jeff Lucy, respectively.Was it appropriate or even possible to bring into theone accrual accounting framework both GAAP andgovernment finance statistics? How viable was a sector-neutral financial reporting framework – particularlygiven diversity in ownership structure and businessfocus of entities across the sector? The implication ofthis directive was the dismantling of the existing publicsector-based accounting standards and incorporationof public sector issues into the existing corpus ofaccounting standards. Given this, it was evident thatthe financial reporting practices of SMEs, which mightinclude charities and other not-for-profits, had to bedealt with somehow.

Professor David Boymal succeeded Alfredson as thechairman of the AASB in November 2003. He was thesecond chair appointed under the revised standard-setting regime overseen by the FRC and it was Boymal’stask to facilitate IFRS adoption. Australian entitiesrequired to comply with IFRS needed to plan to usethe new standards not only for reporting periods endingfrom 1 January 2005 but also for comparative figuresfor the preceding year. In other words, IFRS adoptionrequired an entity’s numbers to be ‘retro-fitted’ tothe new accounting standards. This was challengingenough for companies that were using major accountingfirms to provide them with advice, but was even moreconfronting for smaller entities that had to seek advisoryservices.

A Policy on Differential Reporting

The early adoption of IFRS and the formation ofthe FRC to oversee accounting standards in Australiaeffectively reduced the standard-setting role of the AASBconsiderably, and so it was reasonable to assume thatAustralia would adopt IFRS for SMEs. However, in July2009, Mr Kevin Stevenson was appointed as the newAASB permanent chairman. One of Stevenson’s firstprojects as chairman was to re-open the differentialreporting debate. While not immediately ruling out theadoption of IFRS for SMEs, the early signs were thatany SME stance the Stevenson-led Board would takewould reflect the importance of consistent recognitionand measurement across all entities rather than allowingmodified recognition and measurement approaches forsmaller organisations.

In October 2009, the AASB announced Invitation toComment (ITC) 12, seeking comment on Australia’sadoption of IFRS for SMEs. The issue of differentialreporting gave the AASB an opportunity to again playan independent role in the development of accountingstandards. By seeking public comment, which ultimatelyinfluenced the stance taken by the Board, and bycommissioning independent research to inform policy,the AASB signalled a move toward a more open andinclusive approach. Until this point, the discussion anddebate on differential reporting had been based primarilyon deductively derived assumptions about the costs andbenefits of financial reporting for smaller entities. Few,if any, of the arguments or assumptions were based onrigorous research on the issues being considered.

The responses to ITC 12 were substantial in volume,reflecting the controversial nature of the issue. Variousinterest groups put forward alternative proposals witha similar objective: to enable the move to a systemof differential reporting to address the high costof producing full GAAP financial statements. Thecosts associated with complying with recognition and

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measurement approaches embedded in IFRS were aparticular concern. The then National Institute ofAccountants’12 submission to the Board proposeda model with three tiers, two of which embeddedrecognition and measurement in accordance withIFRS but with disclosure differences, and a third tierincorporating the notion of special purpose financialstatements (SPFS).

The case in focus: Differential reporting

There are four primary documents that provide the basisfor our critique of the development of a differentialreporting standard in Australia:

(i) Invitation to Comment (ITC) 12 ‘Request for Com-ment on a Proposed Revised Differential ReportingRegime for Australia’ and IASB ‘Exposure Draftof a Proposed IFRS for Small and Medium-sizedEntities’ (May 2007);

(ii) AASB Consultation Paper: ‘Differential FinancialReporting – Reduced Disclosure Requirements’(February 2010);

(iii) AASB Exposure Draft (ED) 192: ‘Revised Differen-tial Reporting Framework’ (February 2010);

(iv) AASB 1053 ‘Application of Tiers of AustralianAccounting Standards’ (June 2010).

An analysis of these documents demonstrates theevolution in the AASB’s approach to developing the newreporting regime with significant input from the public.At the time of writing, and in response to feedbackreceived on earlier documents, the Board had delayedformal implementation of part of the project untilfurther research is performed.

ITC 12

ITC 12, released in May 2007, contained the originalproposals for the revised framework, based on the notionof ‘public accountability’. The AASB sought commenton any aspect of the document as well as a number ofspecific questions. The main tenets of the framework arereproduced below:

(a) The application of Australian equivalents to IFRS tothe general purpose financial reports of:

(i) For-profit entities that meet the IASB’s defini-tion of a publicly accountable13 entity;

(ii) For-profit entities that are not identifiedas publicly accountable under the IASB’sdefinition, but are important from a publicinterest perspective based on nominated sizethresholds;

(iii) Not-for-profit entities that exceed nominatedsize thresholds; and

(iv) Public sector entities that exceed nominated sizethresholds.

(b) The application of an Australian equivalent to theIFRS for SMEs to the general purpose financialreports of:

(i) For-profit entities that do not meet the IASB’sdefinition of a publicly accountable entity, or donot fall under (a)(ii) above;

(ii) Not-for-profit entities that fall below nominatedsize thresholds; and

(iii) Public sector entities that fall below nominatedsize thresholds.

(c) All financial reports on a public register or otherwisemade available to the public at large to be regarded asgeneral purpose financial reports. (AASB 2007: iv-v)

ITC 12 endorsed in substance the basic tenets ofthe IFRS solution to the SME reporting issue, andwas consistent with ASIC’s (2005) Regulatory Guide85, which determined that the reporting entity conceptwas not always being appropriately applied. Under theproposed framework, the application of AASB standardswould no longer depend on whether entities werereporting entities but rather would be based on thetype of reports produced and the concept of ‘publicaccountability’. This signalled a significant change fromthe differential reporting approach that had existedin Australia for decades. Also under the proposeddifferential reporting framework as outlined in ITC 12,size would be a primary basis on which differentialreporting was implemented.

ITC 12 contained nominated size thresholds, since itwas the Board’s preliminary view that the size of entitiesshould be used as a primary determinant of reportingresponsibility. The preface to ITC 12 contained details ofthe size thresholds that were proposed:

For-profit entities:

• Consolidated Revenue for the financial year of theentity and the entities it controls (if any) $500m;and

• Consolidated Assets at financial year end of theentity and the entities it controls (if any) $250m.

Not-for-profit private sector entities:

• Consolidated Revenue for the financial year of theentity and the entities it controls (if any) $25m; and

• Consolidated Assets at the end of the financial yearof the entity and the entities it controls (if any)$12.5 m.

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Public sector entities:

• Consolidated Revenue for the financial year of theentity and the entities it controls (if any) $25m; and

• Consolidated Assets at the end of the financial yearof the entity and the entities it controls (if any)$12.5 m.

The stated rationales for the change to the reportingentity concept included that it was not used in otherjurisdictions, and that there was confusion regarding itsappropriate application – a view seemingly informed bythe content of ASIC’s (2005) Regulation 85. However,the AASB had known since its introduction that thereporting entity concept was unique to Australia, so thisalone did not drive change. Also, there was no rigorousevidence of any confusion over the application of thereporting entity concept – which had been in use foralmost three decades. The rationale for the AASB’s policyon SME reporting was based less on evidence regardingits claimed benefits, and more on assertions about thecosts and benefits of not acting. Part of the rationale wasset out in ITC 12 (ix) and is reproduced below:

a) the reporting entity concept is not used internation-ally for the purpose of determining the applicationof accounting standards. Amongst major standardsetters, some of which have a differential reportingregime in place, Australia is the only jurisdictionthat uses the concept of reporting entity in theapplication paragraphs of its accounting standardsfor differential reporting purposes;

b) Australia has adopted IFRS, which apply to generalpurpose financial reports, rather than reportingentities; and

c) under the current differential reporting regime,various interpretations have been developed aroundthe reporting entity concept that have had mixedsuccess, such as an interpretation that non-reporting entities should apply the recognition andmeasurement requirements in Standards, but needonly apply some of the presentation and disclosurerequirements.

ITC 12 was put forward as a solution to the problem of‘accounting standards overload’ identified by McCaheyin 1986. A key justification for the approach in ITC12 was to reduce the cost of reporting for smallerentities. However, this did not sit well given that oneof the implications of extending IFRS was that allfinancial reports made available to the public, includingall financial statements of corporations lodged withcentral authorities such as ASIC, and also the reportsof cooperatives, incorporated associations and otherentities lodged with relevant state authorities, wouldbe covered. The implicit assumption in ITC 12 was

that lowering the reporting requirements for someentities compared to their burden under full IFRSwould reduce reporting costs. If all appropriate entitieswere applying IFRS recognition and measurement andthe new standard resulted in fewer disclosures, thenthis argument would hold: reducing the quantity ofdisclosure would represent a cost saving. Howeverthat assumption was seemingly not based on whatlittle evidence existed about the adoption of IFRS. Forexample in 2010, Handley reported the findings of asurvey of accounting practitioners, which examined theaccounting standards being used to produce generalpurpose and special purpose financial statements.According to Handley (2010), less than 50% of thosesurveyed indicated that they were aware of the contentof the AASB’s proposed policy on differential reporting.Further, just over 47% of those surveyed who wereemployed in non-publicly accountable organisationsindicated that they would use IFRS for SMEs as analternative to full IFRS, suggesting that the net benefit ofadopting the standard may be less clear. Finally, only 44%of those surveyed who were preparing SPFS14 indicatedthat they were doing so by applying recognition andmeasurement approaches in IFRS. Thus, if some entitieswere not applying IFRS recognition and measurementbut would have to do so if preparing reports under theframework put forward under ITC 12, the differentialreporting standard could in fact add to the cost ofreporting, rather than reduce it. On reflection, whatwas needed was a rigorous and robust examination ofthe current reporting practices of those entities likelyto be affected by the new standard. However, the AASBdid not call for, or commission, such research at thattime.

The Board received considerable feedback on itsproposals in response to ITC 12. Its response to thisfeedback and its subsequent actions signalled a changein its approach to standard setting. More specifically,the Board began redeliberating ITC 12 proposals inlight of the comments received. It established roundtablediscussions in Sydney and Melbourne to draw out theviews of the various contributors to ITC 12 and to movethe discussion towards common understanding and aresolution of differences. Rather than moving quickly,the Board would take more than 30 months to releasethe next documents relating to the project.

Consultation Paper and ED 192

The next iteration of documents relating to the projectappeared in early 2010 and showed the result of theAASB’s redeliberations on a number of key points.First, in the Consultation Paper, the Board carefullystrengthened its rationale for the project, again citinga reduction in the cost of reporting and inconsistencies

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in the application of the reporting entity concept as keydrivers for change:

4.2 A commonly voiced concern is that the existingframework does not allow entities that have limitedexternal users a set of requirements that are lessburdensome than full IFRS as adopted in Australia,but would nevertheless lead to GPFS.

4.3 Another related concern raised is that entitiesare asserted to be ‘abusing’ the reporting en-tity concept by claiming to be non-reportingentities and preparing SPFS when they shouldbe preparing GPFS. An impetus for this is thedesire to avoid the cost and exposure that wouldcome from applying full IFRS as adopted inAustralia.

4.4 A further related concern is that many of theregulators requiring the preparation and lodgementof financial statements may not have given sufficientconsideration to the nature of the information theyrequire and the needs of any external users of thatinformation. (AASB 2010c: 12)

Second, in ED 192, in which the AASB outlinedits proposed differential reporting regime, it signalleda major refocus of Australian Accounting Standardsaway from the reporting entity concept, refocusing thedifferential reporting solution around the nature andtype of reports, rather than the entity preparing thosereports. The Board revised its proposed framework,dispensing with size tests15 and proposing a frameworkconsisting of two tiers:

(a) A revised differential reporting framework wouldconsist of two tiers of reporting requirements forpreparing GPFS:

Tier 1: Full IFRS as adopted in Australia; andTier 2: A Reduced Disclosure Regime(b) A Reduced Disclosure Regime (RDR) that

retains the full IFRS recognition and measurementrequirements and substantially reduced disclosurescorresponding to those requirements;

(c) Publicly accountable for-profit private sector en-tities should apply Tier 1, and non-publicly accountablefor-profit private sector entities have a choice of applyingTier 1 or Tier 2;

(d) Not-for-profit private sector entities should havea choice of applying Tier 1 or Tier 2;

(e) Public sector entities should have a choice ofapplying Tier 1 or Tier 2, except:

(i) Federal, State and Territory Governments;(ii) Local Governments; and(iii) Universities;should apply Tier 1. (AASB 2010b: para.18)

Third, the AASB amended the type of entities that wererequired to produce GPFS, which reduced the reporting

burden of some entities moving to the new differentialreporting world. The type of entities was amended fromthose lodging documents on the public record to thefollowing:

General purpose statements are general purpose if:

(a) They satisfy the following two conditions:

(i) They are publicly available, whether under a legalmandate or voluntarily and

(ii) They are either:

(A) prepared in accordance with Australian AccountingStandards under a legal mandate or held out to be soprepared; or

(B) required to be GPFS under a legal mandate or heldout to be GPFS.

(b) They are held out as having been prepared inaccordance with Australian Accounting Standards orheld out as being GPFS (AASB 2010b: para. 27).

The Consultation Paper highlighted the potentialeffects of the new differential reporting regime onnon-listed entities, some of which would be able toreport under second-tier requirements. Those entitiesincluded:

a) Approximately 7 000 large for-profit proprietarycompanies that lodge financial statements withASIC. Whether these companies face an increasedor decreased reporting burden depends on whethertheir current reporting is GPFS under IFRS or SPFS.

b) Approximately 11 000 public companies limited byguarantee that lodge financial statements with ASIC,if they are not-for-profit entities and Tier 1 reportsare not required by their regulators.

c) Approximately 7 000 unlisted public companies lim-ited by shares, which are not publicly accountable.

d) Potentially thousands of public sector entities.e) Potentially thousands of entities not established

under the Corporations Act in the not-for-profitsector. (AASB 2010c: para.5.3)

No longer was IFRS for SMEs the cornerstoneof the differential reporting project. To summarise,the grounds for moving away from the internationalstandard appear to be based on three potentialimpediments to its successful introduction:

(i) there was a lack of understanding amongstAustralian practitioners about what IFRS for SMEsentailed (see, for example, Handley 2010);

(ii) there were potential implications of IFRS for SMEsfor the application of taxation laws. When IFRSwere first adopted in Australia, there was little orno consideration of the full impact of its adoptionon other laws that depend on accounting numbers,such as taxation, and it was decided not to repeat

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this oversight. Only with the consideration of itsimplications on taxation law could it be said that afull regulatory impact analysis of a move to IFRS forSMEs had been thought through (see, for example,AASB 2010b: para.87);

(iii) there had been no policy consideration of theneed for extensive re-education of current andfuture practitioners if there were to be two setsof standards in operation. This would impose costson individuals, as well as on professional bodiesand tertiary institutions (see, for example, AASB2010c: para.5.10).

Significantly, there was also evidence of caution fromthe Board, indicating a softening of its previous approachtowards reform:

The proposals are not held out as the complete or finalanswer . . . The focus of the initial reforms is through theAustralian differential reporting framework and benefitsonly those entities that would be able to apply Tier 2requirements. The AASB will continue its deliberationson a revised differential reporting regime with a view tofurther improvements. The AASB is of the view that thereforms proposed in this Paper should not be delayedwhile consideration of other possible areas of reformcontinues. (AASB 2010c: 6)

There was also a recognition that the reporting burdenfor some entities might increase:

As indicated, it is anticipated that the disclosure regimeproposed in this paper would substantially reduce thedisclosure burden of the great majority of preparers ofGPFS. It would also clarify the circumstances in whichfinancial statements are regarded as GPFS. However, itis acknowledged that it may also indirectly lead to anincrease in the reporting burden of entities currentlylodging on public registers financial statements that arenot GPFS. Section 9 clarifies that the phrase ‘prepared inaccordance with Accounting Standards’, means preparedin accordance with all reporting requirements undera Tier and not a subset of them. This will impact onentities that lodge special purpose financial statementswhen such statements are required to comply, or are heldout as complying with, Accounting Standards. (AASB2010c: 7)

While now clearly more circumspect than before,there is still a degree of rhetoric and persuasionevident in the Board’s approach. There are a numberof testable propositions in the Consultation Paper –particularly those relating to the asserted usefulness andcomparability of the information as well as implicationsfor costs. Such research was not conducted prior to therelease of the Exposure Draft, although such points weredebated at length during the exposure period for thestandard.

In the Consultation Paper, the Board outlinedthe asserted costs and benefits of different solutionsto the issue, using terms such as ‘significant’ and‘unchanged’, and generalisations such as ‘all’ and‘many’, without any reference to measures or large-scalestudies of reporting behaviour by Australian companieson which such conclusions could rely. For example,referring to preparers under RDR, under the summaryheadings ‘Significantly reduced preparation costs’ and‘Significantly reduced audit and assurance costs’, theConsultation Paper (17) states that:

The number of disclosures an entity would be requiredto make under RDR is likely to be a fraction of thoseunder full IFRS as adopted in Australia; andThe extent of audit and assurance work in connectionwith the GPFS is expected to be reduced with acommensurate reduction of costs.

For users, under the summary heading ‘Unchangedusefulness to users’, the possibility that informationproduced under reduced disclosure requirements mightnot be as relevant for users is entirely turned around inpassages such as that reproduced below:

Users, including analysts who represent them, willbe faced with a substantially reduced volume ofinformation. This may mean that the GPFS preparedunder the RDR are less useful. However, on the basis thatthe RDR has been designed to meet the particular needsof users of GPFS of such entities, the information thatwould no longer be provided is regarded as being lessrelevant, and therefore, of less value to those users. Forthe same reason, the financial statements may be moreunderstandable and, therefore, more useful to users.

Via the Consultation Paper, users are advised that theirneeds were considered when RDR was designed, and thatthe information that is not provided under RDR was lessrelevant to them.

AASB 1053

At its May 2010 meeting, the Board decided to deferthe final decision about the future of the reportingentity concept in preparing GPFS until the secondstage of implementing the project, pending furtherresearch (AASB 2010a). AASB 1053 was released in June2010 to establish the basis of the Board’s DifferentialReporting framework – and was applicable for annualreporting periods beginning on or after 1 July 2013. Inessence, consistent with ED 192, AASB 1053 providesthe mechanism for non-publicly accountable entities toprepare financial statements containing a lower levelof disclosure. At the same time, the standard did notaddress the reporting entity issue, deciding insteadto commission research into the application of the

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Developing Accounting Regulations That Reflect Public Viewpoints B. Potter, T. Ravlic & S. Wright

concept16 to inform future policy. The results of theresearch commissioned by the Board to inform theproject were not yet known at the time of writing.

Discussion and Conclusion

In this paper we have explored the evolution ofthe AASB’s Differential Reporting project. We havedocumented iterations of the reporting model thathave developed over time, as stakeholders were at firstinformed, then consulted, and as feedback was obtainedand incorporated. Our evaluation reveals the emergenceover time of a more responsive and engaging regulator,in contrast to the determination of accounting standardsin other contexts. The AASB has engaged with relevantstakeholders through the process of developing thisregulation, drawing out debate and conflict betweenvarious interest groups, responding to feedback, andcalling for research into the topic prior to its eventual fullimplementation. The regulator has listened to the diverseviewpoints of stakeholders, and has amended its report-ing model in response. Nevertheless, its prior approachof relying more on rhetoric and argument through itsvarious documents in defending some of the policychoices made has continued, albeit it to a lesser extent.

The analysis in the paper suggests interesting avenuesfor further research. For example, more work is neededto elaborate on the workings of regulatory bodies aroundparticular issues. Is the personality of the regulatoryboard a function of the individuals within it, or are suchcharacteristics driven more broadly by environmentaland institutional factors that affect the form andoperations of the regulator?

We have noted that the original iterations ofdifferential reporting were based largely on discursiverepresentations about the costs and benefits of thesuggested reforms for which there was little or noevidence in support – even though empirical evidenceon the costs and benefits of reporting could have beensought. The AASB developed and announced changesto reporting policy with little input related to publicconsultation or systematic research, even research fromwithin its own ranks. The concept of the reporting entity,for example, although designed to limit the burden onsmaller entities, did not fully reflect the research papersof McCahey or Langfield-Smith written at the time ofSAC 1. Rather than draw on academic reflections onthe issue, the decision in 1999 to pass responsibilityfor overseeing accounting standards to the FRC was amove away from broad community involvement in dueprocess.

In contrast, under the chairmanship of KevinStevenson since 2009, the AASB has set differentialreporting policy by drawing input from the public,including from academics, professional bodies andindividuals. The AASB has allowed debate and criticism,

and has placed extensive documentation in the publicdomain. It has deliberated carefully before arriving at aposition, and it has judiciously chosen to commissionacademic research on pertinent matters. It can now bedescribed, at least in relation to this project, as a moreconsultative and potentially responsive standard-settingbody.

Notes

1 There is an argument to suggest that a firm’s decision to discloseinformation to investors is influenced, at least to some degree,by a concern that such disclosures can damage their competitiveposition in product markets. (For further reading, see Healy andPalepu 2001.)

2 The term ‘small and medium-sized entities’ is widely usedin relation to this group. The label is commonly used todescribe those entities that are sufficiently small enough in anyjurisdiction such that the benefits of preparing full generallyaccepted accounting principles (GAAP) financial statements maybe questioned.

3 The full title of the standard issued by the international regulatoris International Financial Reporting Standard (IFRS) for Small andMedium-sized Entities (SMEs), issued in July 2009.

4 Differential reporting is not the only ‘current’ project forwhich the Board seems more inclusive. For example, Howieson(2012) details research undertaken for the Board to inform itsConsolidated Financial Statements project.

5 The LRB was a board under the then AARF whose rolewas to review all existing and proposed Commonwealthlegislation (other than taxation legislation), official Common-wealth reports and other documents to identify matters thatwere directly relevant to the accounting profession (Burrows1996).

6 A proprietary company was defined as small if it met at least two ofthe following tests: (a) the consolidated gross operating revenuefor the financial year of the company and the entities it controls(if any) is less than $10 million; (b) the value of the consolidatedgross assets at the end of the financial year of the company and theentities it controls (if any) is less than $5 million; (c) the companyand the entities it controls (if any) have fewer than 50 employeesat the end of the financial year.

7 It is also worth noting that the reporting population historicallyrequired to produce general purpose financial reports underGAAP in Australia is smaller in number than the entities that haveno GAAP-based reporting or lodgement obligation to federal orstate authorities and agencies.

8 The standards issued by the International Accounting StandardsCommittee were originally known as International AccountingStandards (IAS). When the responsibility for setting standardsmoved to the IASB somewhere around 2001, the name ofthe standards changed to ‘International Financial ReportingStandards’ (IFRS).

9 This was not the same in other international jurisdictions, withthe European adoption, for example, only for listed companiestrading in a single European market.

10 Sector neutrality refers to an accounting framework that has oneset of accounting standards that caters for all sectors.

11 This was at a time when the FRC was also working on theharmonisation of GAAP and Government Finance Statistics(GFS). GFS refers to the statistical framework, developed by theInternational Monetary Fund/World Bank, and which for yearshad been implemented by the Australian Bureau of Statistics forgovernment entities in Australia.

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B. Potter, T. Ravlic & S. Wright Developing Accounting Regulations That Reflect Public Viewpoints

12 In 2011, the National Institute of Accountants changed its nameto the Institute of Public Accountants.

13 A ‘publicly accountable’ entity is defined as one that trades itssecurities on a public market, or holds assets in a fiduciary capacityas their primary business, such as a bank.

14 In earlier documents relating to accounting regulation, the labeltypically given to financial reports prepared for those withoutthe power to demand information specific to their needs wasgeneral purpose financial reports (GPFR). More recently, thelabel commonly used, particularly in contemporary accountingstandards and association regulatory documents is generalpurpose financial statements (GPFS). For the purposes of thispaper, the terms are interchangeable.

15 The Board cited a number of reasons for dispensing with thesize tests, which related to the anticipated practical concerns ofidentifying appropriate cut-offs across sectors and maintainingthe relevance of these cut-offs over time.

16 The research has been commissioned by the Board primarily toexamine two key issues: (i) whether there is consistency in theway that the reporting entity concept is being applied by entities;and (ii) to document the reporting choices made by those entitiesclassified as non-reporting entities.

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