Reporting the stewardship of management and providing decision useful information are the two main objectives of financial reporting as established in the conceptual frameworks of the IASB (International Accounting Standards Board, 2009b).This section discusses these two financial reporting objectives.
3.3.1 Stewardship
There is no commonly accepted definition of stewardship in the literature. The concept is subject to a variety of alternative interpretations (O’Connell, 2007). Birnberg (1980) suggests the notion of stewardship accounting evolved from the traditional custodial role contained in information that facilitates what might broadly be termed ‘accountability reporting’. In this sense the notion of stewardship discussed by Birnberg (1980), may be viewed as virtually synonymous with the concept of accountability (O’Connell, 2007).
In the IASB’s accounting standard IFRS for SMEs, the stewardship role of financial statements is designed to show the results of the stewardship of management for the entrusted resources (International Accounting Standards Board, 2009b). It is claimed that stewardship plays an important role in information dissemination where the owners are not the managers of the entity (Mala & Chand, 2015). One of the key features of large companies is the separation of ownership and control, with those who invest in the business entrusting responsibility for managing the business to the directors (Collis, 2003). Unlike large companies, the separation of ownership and control is not common in the majority of SMEs (Carsberg et al., 1985). As a consequence, the stewardship role of financial reporting may be “redundant” (Jarvis
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& Collis, 2003a). An owner can observe the behaviour of an employed manager on a daily basis (McMahon & Stanger, 1995).
3.3.2 Decision usefulness
The decision usefulness objective of financial reporting is to provide financial information about the reporting entity that is useful to existing and potential investors, lenders and other creditors in making decisions about providing resources to the entity (International Accounting Standards Board, 2010, p. 9). The rationale for the identification of users and uses of financial information is therefore, based on decision usefulness objective (Son, Marriott, & Marriott, 2006). The objective designates accounting as a process of providing the relevant information to the relevant decision makers (Gray, Owen, & Adams, 1996). Accordingly, useful information should be included in financial statements while subjective information is discouraged unless it provides users with crucial information (Ijiri, 1975).
The decision usefulness objective was first promoted by the Trueblood Report in the USA (Son et al., 2006). The American Institute of Certified Public Accountants (AICPA) asserts that the objective of financial statements is to provide information useful to investors and creditors for making economic decisions (American Institute of Certified Public Accountants, 1973). Although primary attention was devoted to investors and creditors, the AICPA explicitly acknowledged the existence of a variety of users, including employees, by declaring that “while users differ, economic decisions are similar” (American Institute of Certified Public Accountants, 1973, p. 18). The TruebloodReport states that the societal goals of an enterprise are as equally important as the economic goals (American Institute of Certified Public Accountants, 1973, p. 54). Therefore, enterprises should provide decision useful information to all the stakeholders, and not just the investors or creditors (American Institute of Certified Public Accountants, 1973, p. 54).
In the United Kingdom, the Corporate Report (Institute of Chartered Accountants in England and Wales, 1975) was an early attempt to discuss the decision usefulness perspective of financial statements (Dang-Duc et al., 2006). The Institute of Chartered Accountants in England and Wales (1975, p. 28) states the basic
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objective of corporate reports is to provide information useful to “those having reasonable rights to such information”. However, this statement is very much a matter of opinion as it was not tested empirically (Collis, 2003). The Corporate Report explicitly identifies the following as the users of accounting reports: equity investors, loan creditors, analysts-advisors, business contacts, employees, government and the general public (tax payers, ratepayers, consumers, political parties, and consumers and environmental protection societies) (Institute of Chartered Accountants in England and Wales, 1975, p. 17). Jarvis (1996) argues that users and their needs for financial information in this report were limited to public listed companies rather than smaller companies. Since the accounting standard IFRS for SMEs is based on the IASB’s 1989 conceptual framework (International Accounting Standards Board, 2009a), the following section discusses objectives of financial reporting with reference to the IASB’s 1989 conceptual framework.
IASB’s 1989 conceptual framework for the Preparation and Presentation of Financial Statements
The IASB’s 1989 framework stated the first objective of financial statements is to:
… provide information about the financial position, performance and cash flows of the entity that is useful for economic decision-making by a broad range of users who are not in a position to demand reports tailored to meet their particular information needs (International Accounting Standards Board, 2009b, p. 12).
The second objective is to report the results of the stewardship of management or the accountability of management for the resources entrusted to it (International Accounting Standards Board, 1989). Financial statement users identified in the IASB’s 1989 Framework for the Preparation and Presentation of Financial Statements include: investors; employees; lenders; suppliers and other trade creditors; customers; government and their agencies; and the public (International Accounting Standards Board, 2009b). Internal users such as managers are excluded as they have access to inside information (International Accounting Standards Board, 2009b). In this respect, Schiebel (2008, p. 4) contends that the financial
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statements prepared under the IASB framework are “designed to reduce information asymmetries between the insiders of a reporting entity and the various outsiders making economic decisions involving that entity”.
The IASB's aim in introducing new financial reporting standards for SMEs holds the concept of ‘user oriented financial information’ (International Accounting Standards Board, 2009b). The IASB points out that the differences between full IFRS and IFRS for SMEs should be established based on the accounting information needs of the users and cost-benefit considerations (International Accounting Standards Board, 2009a). Conversely, the IASB believes that a different framework for SMEs is not needed, since by fulfilling the needs of investors and creditors it also satisfies other categories of users (International Accounting Standards Board, 2009a, p. 33). The IASB argues that the information needs of users of SME financial statements were similar in most ways to those of users of publicly accountable entities’ financial statements (International Accounting Standards Board, 2004). Financial statement users identified by the IASB in the IFRS for SMEs include: banks; vendors; credit rating agencies; customers; and shareholders that are not also managers of SMEs (International Accounting Standards Board, 2009b). Even though, the IASB’s 1989 framework included government agencies as users of financial information, the accounting standard IFRS for SMEs did not consider them as users of SME financial information. Users such as owner- managers, and tax authorities are excluded from its scope as they have access to inside information (International Accounting Standards Board, 2009b). However, research identifies owner/directors and taxation authorities as the main users of the financial information of SMEs (see for example Di Pietra et al., 2008, Evans et al., 2005, and Sian and Roberts, 2006). Consequently, financial statements for SMEs frequently take their reference point from the national taxation authorities (Briciu, Groza, & Gânfalean, 2009; Devi & Samujh, 2014).
According to the decision usefulness objective, financial reporting framework needs to be derived through the financial information needs of the users at large. Jonas and Young (1998) and Young (2006) argues that a user perspective was emphasised frequently in financial accounting standards but in absence of empirical knowledge about information needs and users of financial statements. The decision-
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usefulness approach created by the standard setters has been documented but is not based on scientific research. Rather, it has emerged through a consultative process over time (Coetsee, 2010; McCartney, 2004). Therefore, determining the main users of SME financial information is necessary to assess the IASB’s view regarding the need for general purpose financial statements for SMEs. The following section discusses previous studies on users and uses of SME financial information.