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For decades, the reporting entity concept has been the foundation of differential reporting in Australia. Those entities classified as ‘reporting entities’ are, prima facie, required to produce full GAAP-based financial reports while other (non-reporting) entities are generally able to produce less complex and shorter ‘special purpose’ financial reports. In recent years, the application of the concept, as originally set out in the Statement of Accounting Concepts (SAC) 1 Definition of the Reporting Entity, has been criticized on several grounds—particularly, that it does not yield the reporting outcomes originally intended by regulators. Our analysis of 1,546 companies lodging financial statements with the corporate regulator in Australia (ASIC) shows the principles-based criteria in SAC 1, designed to indicate the existence of a reporting entity, do not systematically explain its application by entities. Our findings are relevant for policy makers, researchers, and regulators concerned with how these choices might be more effectively regulated in future and whether this is best done through principles-based or rules-based approaches.
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PETER CAREY, BRAD POTTER,AND GEORGE TANEWSKI
Application of the Reporting Entity Concept
in Australia
For decades, the reporting entity concept has been the foundation of dif-
ferential reporting in Australia. Those entities classified as ‘reporting enti-
ties’ are, prima facie, required to produce full GAAP-based financial
reports while other (non-reporting) entities are generally able to produce
less complex and shorter ‘special purpose’ financial reports. In recent years,
the application of the concept, as originally set out in the Statement of
Accounting Concepts (SAC) 1 Definition of the Reporting Entity, has been
criticized on several grounds—particularly, that it does not yield the report-
ing outcomes originally intended by regulators. Our analysis of 1,546 com-
panies lodging financial statements with the corporate regulator in
Australia (ASIC) shows the principles-based criteria in SAC 1,designed to
indicate the existence of a reporting entity, do not systematically explain its
application by entities. Our findings are relevant for policy makers,
researchers, and regulators concerned with how these choices might be
more effectively regulated in future and whether this is best done through
principles-based or rules-based approaches.
Key words: Differential reporting; Principles based; Private companies;
Reporting entity; Rules based; SAC 1.
We examine the reporting practices of (i) privately held and (ii) not-for-profit
companies lodging financial statements with the Australian Securities and Invest-
ments Commission (ASIC). Despite their economic and social importance,1
Peter Carey (p.carey@deakin.edu.au) is a Professor in the School ofAccounting,Economics and Finance
at Deakin University. George Tanewski (g.tanewski@deakin.edu.au) is a Professor in the School of
Accounting, Economics and Finance at Deakin University.Brad Potter (bnpotter@unimelb.edu.au) is an
Associate Professor in the Department of Accounting, The University of Melbourne.
The authors are grateful to Graeme Dean, Roger Simnett, participants at research seminars at Deakin,
Monash and La Trobe Universities, the University of Sydney, and participants at the Accounting and
Finance Association of Australia and New Zealand (AFAANZ) 2013 conference and the Asia-Pacific
Interdisciplinary Research in Accounting (APIRA) conference 2013 for their helpful comments on
earlier drafts. They also acknowledge the financial assistance and helpful support of the Australian
Accounting Standards Board (AASB). The authors were engaged by the AASB to prepare a research
report dealing with entities lodging financial statements that involved obtaining access to Australian
Securities and Investments Commission (ASIC) data. The authors thank the AASB and ASIC for
permitting the use of that same data for the purposes of this article as part of a pilot exercise. The authors
are also grateful to an anonymous referee and to the editor for helpful comments on earlier drafts.
1There are approximately two million small-to-medium size private businesses in Australia, represent-
ing around 99% of all actively trading businesses and approximately 60% of all private sector
employment (Commonwealth of Australia, 2011). Similarly, in the US there are approximately 29
million private and not-for-profit companies, representing about 99% of all employer firms and more
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relatively little is known about the accounting and reporting practices by these
companies. We specifically focus on the factors affecting the decision by privately
held and not-for-profit companies to apply the reporting entity concept.This study is
the first large scale empirical examination of the application of the reporting entity
concept.
For over two decades, the reporting entity concept has been the foundation
of differential reporting in Australia. A primary implication of the concept is that
those entities considered to be reporting entities are, prima facie, required to
produce full GAAP-based, or ‘general purpose’ financial reports (GPFR) (Ball,
1988; AARF/AASB, 1990).Those entities not considered to be reporting entities are
generally able to produce less complex and shorter ‘special purpose’ financial
reports (SPFR) based on lesser standards of reporting, referred to in some regions
as ‘little GAAP’ (AARF/AASB, 1990; Collis et al., 2004).2
Our study is motivated by the ongoing interest of central rule-making agencies
and accounting associations worldwide in understanding not only the financial
reporting practices of private and/or small companies (Schipper, 2010), but also in
developing a common conceptual framework that includes a single set of principles
for guiding differential reporting by entities (Pounder, 2010). Regulators interna-
tionally have for some time adopted varying approaches to implementing differen-
tial reporting. For example, since the 1980s in the UK, specific size thresholds set out
in the Companies Act 1985 have been used to determine the types of financial
statements produced by large, small and medium-size companies.3In this setting,
‘large’ companies—public or private—were required to produce full GAAP-based
financial statements, while lower disclosure requirements typically applied to other
entities. In 1997 differential reporting in the UK was further revised and simplified.
With the introduction of ‘Financial Reporting Standards for Smaller Entities’
(FRSSE) in 2006, ‘small’ companies could file abbreviated financial statements that
have considerably reduced disclosure compared to full GAAP (Jarvis and Collis,
2003).4Similarly, in 1997 New Zealand standard setters introduced provisions into
than 50% of all private sector employees (Allee and Yohn, 2009).Accordingly, accounting regulators
have for some time acknowledged the importance of entities in the sector for job creation,
entrepreneurialism, and the overall vitality of the nation’s economy (FASB/AICPA, 2006).
2There are five accounting standards that specifically affect the content of SPFRs produced inAustralia.
These standards are: AASB 101 Presentation of Financial Statements; AASB 107 Cash Flow State-
ments; AASB 108 Accounting Policies, Changes in Accounting Estimates and Errors; AASB 1048
Interpretation of Standards; and AASB 1031 Materiality.
3Under the Act, a ‘small’ (medium-size) company was one with (i) turnover of not more than £2.8
(£11.2) million, (ii) totals for key assets of not more than £1.4 (£5.6) million, and (iii) no more than 50
(250) employees.
4As part of these reforms, the classification as ‘medium-size’ was discontinued, and the threshold tests
for ‘small’ entities were amended. Specifically, under the requirements of Article 382(3) of the Com-
panies Act 2006, the revised qualifying conditions for a small company are (i) turnover of less than
£5.6 million, (ii) gross assets are less than £2.8 million, and/or (iii) the company has fewer than 50
employees. Under the revised framework, ‘a small company’ can opt to prepare abbreviated financial
statements in accordance with FRSSE, which exclude a copy of the directors’ report or the profit and
loss account, but which includes an abbreviated balance sheet.
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their accounting standards to allow certain reporting exemptions for companies that
were not publicly accountable and were either ‘small’ or owner-managed.5More
recently in December 2009, Canadian regulators introduced new accounting stan-
dards for private enterprises. These standards also applied the concept of ‘public
accountability’ to determine whether a company should produce full International
Financial Reporting Standards (IFRS) financial statements or a reduced form of
reporting, based on ‘made in Canada’ GAAP standards specifically designed
for smaller private companies (CICA, 2010). Prior to the introduction of the new
standard in 2009, Canadian private companies were able to adopt a reduced form of
reporting if they were not publicly accountable and subject to the owners’ consent
(Rennie and Senkow, 2009).
Currently in the US there is no established framework for differential reporting
(Lisowsky and Minnis, 2013). However, both the Financial Accounting Standards
Board (FASB) and the American Institute of CPAs (AICPA) have, over an
extended period, examined various issues relating to the application of US GAAP to
private and/or small companies (e.g., AICPA 1976, 1981, 1996, 2005, 2013; FASB
1981, 1983; FASB/AICPA, 2006). As an example, in its widely cited 2005 Taskforce
report, the AICPA examined two specific questions in relation to private company
reporting, namely, (i) whether the financial statements prepared in accordance with
GAAP meet the needs of users and (ii) whether the costs of providing GAAP
financial statements for these entities is justified relative to the benefits they provide
to users.The topic remains on the agenda with the AICPA recently releasing a set of
specific requirements to guide private companies in applying its Financial Reporting
Framework for Small- and Medium-Sized Entities (AICPA, 2013).
The International Accounting Standards Board (IASB) has also recently sought
to address the issue of differential reporting (IASB, 2010). In March 2010, the FASB
and the IASB issued a joint Exposure Draft (ED) on the concept of the reporting
entity and its related principles (FASB/IASB, 2010). It appears that the objective of
doing so was to explore the potential for the reporting entity concept to become the
basis for implementing differential reporting—to ensure that larger, more economi-
cally and politically significant entities prepare full GAAP-based financial reports
(AASB, 2010e; Pounder, 2010). There is some indication that had the IASB not
suspended its Conceptual Framework project in 2010, the proposals set out in the
ED would have been adopted (IASB, 2012).Differential reporting and the reporting
entity concept remain on the agenda of the Australian Accounting Standards Board
(AASB, 2010a, 2010b, 2010c, 2010d) and regulators in the UK, New Zealand and
Hong Kong (HKSA, 2004; Kamnikar et al., 2012).
According to SAC 1, entities are required to self-determine whether they meet
the definition of a reporting entity (AARF/AASB, 1990; Langfield-Smith, 1991;
Australian Securities Commission, 1992). The classification rests primarily on
whether there are potential users dependent on GPFR as their primary information
5The concept of ‘public accountability’ applicable in New Zealand is consistent with that embedded in
IFRS for SMEs (IASB, 2010) and is based on the entity’s capacity to raise debt or equity capital as well
as its coercive power to tax, rate, or levy to obtain public funds.
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source in making and evaluating decisions regarding the allocation of scarce
resources.There are no specific threshold tests or detailed guidelines to assist in the
implementation of the concept. Rather,broad,principles-based criteria are set out in
SAC 1 to assist the identification of reporting entities, based on the separation of
management from economic interest, the economic and political importance of the
entities and their financial characteristics. According to SAC 1, the greater the
separation of management from economic interest and the more economically,
politically, and financially significant an entity, the more likely there will be depen-
dant users relying on the financial statements as their primary information source,
suggesting classification as a reporting entity. The criteria set out in SAC 1 remain,
however, indicative only. Despite significant debate, accounting regulators in Aus-
tralia have typically avoided imposing quantitative rules to structure the application
of the concept.6As a consequence, the decision remains largely a matter of judge-
ment, and the reporting entity concept is generally considered to be ‘principles
based’ (see also Walker, 2007).
A message that is emerging from the foregoing discussion is that accounting
standard setters internationally have adopted different approaches to implementing
differential reporting (Hoogervorst, 2012).With the exception of the public account-
ability concept embedded in IFRS for small-to-medium sized entities (SMEs) and
adopted in countries such as New Zealand and Canada, regulatory solutions for
differential reporting have tended to be more rules based, often relying on detailed
guidance and ‘bright line’ tests to determine what should be reported by the entities
affected. Further, while several jurisdictions now apply the ‘public accountability’
concept, Australia is unique in its use of the principles-based reporting entity
concept as the basis of differential reporting (Potter et al., 2013). Thus one of the
primary contributions of this study is to inform the debate regarding the efficacy of
principles-based versus rules-based accounting standards. In the US, the debate is
ongoing. In the context of increasing concern that US standards have become too
rules based,7there is an indication from the US regulators that a more principles-
based approach to standard setting is becoming increasingly likely (US House of
Representatives, 2002; SEC, 2008; Agoglia et al., 2011). While IFRS are generally
regarded as ‘principles based’, the IASB appears to be moving toward an even
greater reliance on principles, following the recommendations in the joint report by
The Institute of Chartered Accountants of Scotland and the New Zealand Institute
of Chartered Accountants (2011) produced for the IASB. Key recommendations in
6It is noted that the case for providing additional rules to shape the implementation of principles-based
standards is complex. According to Schipper (2003) for example, the inclusion of detailed rules, such
as scope exceptions and alternative treatments, can assist in meeting constituent concerns and avoid
conflicts with other regulations. At the same time, the impact on the comparability, relevance and
reliability of the information is not yet clear (see also Nelson, 2003; Benston et al., 2006; Agoglia et al.,
2011).There is also the view that with detailed implementation guidance there is a risk that rules-based
standards may become so precise they invite opportunistic interpretation by corporate executives
(Nelson, 2003; Agoglia et al. 2011; Collins et al., 2012).
7We note that while there is general agreement that US standards are primarily rules based, there
remains some debate on this point (see Collins et al. 2012).
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the report included a significant reduction in the volume of mandatory disclosures
required under existing IFRS and greater application of the principles in the IASB’s
2010 Conceptual Framework for Financial Reporting.
Little empirical insight is available into the reporting choices made by SMEs. A
number of studies have examined the usefulness of GAAP-based financial state-
ments for informing the decisions made by stakeholders of private and/or not-for-
profit entities (e.g.,AICPA, 2005; Botosan et al., 2006; Bharath et al., 2008; Allee and
Yohn, 2009). A consistent theme identified in the findings of this work is that when
GAAP statements are prepared, they appear to provide useful information to users
(AICPA, 2005).8Few studies examine the factors affecting the decision to produce
GAAP-based financial statements (e.g., Walker, 2007; Lisowsky and Minnis, 2013).
Specifically relevant to this study, Walker (2007) concludes from a case study analy-
sis that the reporting entity concept was not being applied as intended by policy
makers.
The conventional rationale for the application of the reporting entity concept is
two-fold. First, it is designed to enable the provision of information that is useful for
the decisions made by users of financial statements (Ball, 1988).The implicit assump-
tion is that the user needs of larger, more economically and socially significant
entities may be different to those of smaller, ‘less significant’ entities (Rennie and
Senkow, 2009). Second and related, the concept is designed to enable non-reporting
entities to be relieved of the costs of compliance with full GAAP when those costs
exceed the benefits of reporting (Langfield-Smith, 1991; Brailsford and Ramsay,
1993).
Based on our analysis of a sample of 1,546 privately held and not-for-profit
company reports,results indicate that whether an entity classifies itself as a reporting
entity is largely driven by factors other than those identified in SAC 1.While we find
weak evidence from logistic and piecewise regression analyses that size, debt and
separation of management from economic interest explain the decision by large
private and limited by guarantee companies to produce GPFRs, the explanatory
power of these variables is economically unimportant. Further, a number of anec-
dotes reported in the study suggest that the principles-based criteria in SAC 1 do not
systematically explain reporting entity choices made by private and not-for-profit
companies.
There are several potential implications for entities that do not correctly apply the
reporting entity concept. For example, suppose an entity prepares a SPFR that
should have more appropriately prepared a GPFR in line with full GAAP. Even
though both types of reports are audited, entities lodging SPFRs, which typically
contain lower levels of disclosures compared to the requirements in Australian
Accounting Standards, create potential information risk and may increase the
8For example,Allee and Yohn (2009) use logistic regression analyses to compare the characteristics of
privately held small businesses in the US that choose to produce and use financial statements with
those that do not. They find that the size of firm, firm growth, and the limited liability organizational
form are all associated with increased demand for financial statements,providing corroboration of the
usefulness of GAAP-based financial statements for these entities.
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companies’ cost of debt/capital. Inconsistent application of the reporting entity
concept also has implications for future regulation. For example, the AASB might
consider eliminating the concept, or perhaps work to reduce the discretion available
in its application through the introduction of specific, quantitative tests for relevant
entities. The AASB could work with policy makers to raise the size thresholds for
companies required to lodge financial statements with ASIC, thus reducing the
compliance obligation for smaller companies.Such changes might assist the account-
ing profession to achieve more consistent financial reporting outcomes.
BACKGROUND AND HYPOTHESES
Application of the Principles-based Reporting Entity Concept in Australia
Currently in Australia, approximately 22,0009privately held and not-for-profit com-
panies lodge financial statements annually with ASIC in compliance with the Cor-
porations Act 2001. ASIC defines five categories of privately held and not-for-profit
companies: (1) large for-profit private companies (a private company satisfying at
least two of the three size criteria, see section ‘Sample Selection and Data’ for
further details); (2) small private companies lodging at the direction of ASIC or at
the request of shareholders; (3) foreign-controlled companies; (4) unlisted public
companies other than those limited by guarantee—which include a range of entities
such as finance and insurance companies; and (5) public companies limited by
guarantee—which mainly comprise clubs, institutes and societies.
Since its introduction in 1991, the reporting entity concept has provided the
framework for differential reporting in Australia. The concept relies on the prin-
ciple that entities self-determine whether there are potential users who are depen-
dent on GPFRs as their primary information source when making and evaluating
decisions regarding the allocation of scarce resources (Ball, 1988; AARF/AASB,
1990). SAC 1, which defines and explains the concept, provides no specific thresh-
old tests or detailed guidelines to assist in identifying reporting entities, but rather
it uses broad criteria that relate to the separation of management from economic
interest, the economic and political importance of the entities and their financial
characteristics.
The application of the reporting entity concept is not mandated by any applicable
accounting standard in Australia but, instead, is endorsed via the Accounting Pro-
fessional and Ethical Standard APES 205 Conformity with Accounting Standards.10
Under APES 205, entities regarded as ‘reporting entities’ are required to comply
with all SACs and Accounting Standards in producing GPFRs. Examples of entities
typically considered to be reporting entities are provided in various regulations,
9In the financial year ending June 2011, there were 21, 711 for-profit private and not-for-profit compa-
nies that lodged financial reports with the ASIC.
10 Accounting and Professional Ethical Standards are developed by the Accounting and Professional
Ethical Standards Board (APESB). Established by the professional accounting bodies in Australia in
2006, the APESB is the organization that defines a code of professional conduct that members of the
professional accounting bodies in Australia are required to follow.
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policy statements and accounting standards such as AASB 1053 Application of
Tiers of Australian Accounting Standards and include companies that are publicly
accountable, trusts which raise funds from the public, government-controlled enti-
ties, and government departments.
SAC 1 acknowledges the subjectivity involved in applying the reporting entity
concept and specifically identifies the following indicative factors to assist in deter-
mining the likelihood that users exist who depend on GPFRs: (1) the spread of
ownership/membership of the entity (SAC 1, para. 20); (2) the economic or political
importance of the entity and the potential for its activities to significantly impact
the welfare of external parties (i.e., employer or employee associations) (SAC 1,
para.21); and (3) the financial characteristics of the entity such as size (e.g., value of
sales or assets, or number of employees or customers) and its relative level of
indebtedness to external parties (SAC 1, para.22).
In 2005, ASIC conducted an internal review of an unspecified sample of reports
lodged by companies and identified inconsistent application of the reporting entity
concept (ASIC, 2005). More specifically, ASIC found a number of entities that
self-classified as non-reporting entities should have been classified as reporting
entities. The implication is that some of the entities preparing SPFRs might more
appropriately have prepared GPFRs. These companies were preparing financial
statements that contain significantly less financial information than if they had
prepared GPFRs.11 The assertions by ASIC have not been subject to large scale
empirical verification of the nature undertaken in this study.
At various times over the past decade, researchers have engaged in debate about
the relative merits of principles-based versus rules-based accounting standards
(Nelson, 2003; Schipper, 2003; Agoglia et al., 2011; Collins et al., 2012). Principles-
based accounting standards by nature allow for more professional judgement and a
potential negative consequence is greater variation in accounting policy choice,
which can undermine comparability. Empirical research investigating the implica-
tions of principles-based versus rules-based approaches to accounting regulation has
produced mixed evidence as to whether reporting outcomes are systematically
different. For example, Hoffman and Patton (2002) find that reporting outcomes
from principles-based standards are not systematically different to those outcomes
from applying rules-based standards.Further, while Agoglia et al. (2011) and Collins
et al. (2012) find that reporting under rules-based accounting standards is more
conservative, it is not clear from these studies that principles-based accounting
standards lead to greater variation in reporting outcomes. In contrast, Psaros and
Trotman (2004) find more aggressive reporting under rules-based standards
than under principles-based standards. Few studies have considered the decision
to produce financial reports, specifically those produced by privately held and
11 The nature and content of SPFRs have not been meaningfully defined. Implicit in SAC 1 (e.g.,
paragraphs 33–37) is that a SPFR is a financial report other than a GPFR (AARF/AASB, 1990).
Deegan (2012) defines a SPFR more specifically as ‘a financial statement designed to meet the needs
of a specific group or to satisfy a specific purpose’ (p. 5). Regardless,the relevant point is that SPFRs
represented a lower level of disclosure relative to those reports prepared under full GAAP.
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not-for-profit companies. In a recent study, Lisowsky and Minnis (2013) provide
insight into the decision by privately held firms in the US to produce financial
reports in the absence of detailed rules guiding the decision and find significant
variation in reporting choice across all firm sizes.
In the Australian setting and specifically relevant to this study, Walker (2007)
examines the application of the principles-based reporting entity concept and finds
a failure of the accounting professionals to apply the concept in the manner intended
by the regulator. Based on analysis of four reporting instances involving various
industries and entities,12 Walker (2007) concludes that in the absence of detailed
rules guiding the application of the reporting entity concept, there is little reason
to expect full compliance by entities. Implicit in the conclusion by Walker is that
companies will tend towards the lower cost ‘non-reporting entity’ option (see also,
AAA/FASC, 2006).
In response to concerns about the application of the reporting entity concept, in
May 2007 the AASB released an Invitation to Comment ITC 12: Request for
Comment on a Proposed Differential Reporting in Australia and IASB ‘Exposure
Draft on a Proposed IFRS for Small and Medium-sized Entities’. This was followed
in February 2010 by ED 192 Revised Differential Reporting Framework, with
these documents recommending a revised approach to reporting for these entities.
However, following feedback from constituents to both ITC 12 and ED 192, the
AASB subsequently issued AASB 1053 Application of the Tiers of Australian
Accounting Standards, which uses the concept of public accountability and which
limits changes to the current reporting framework to the introduction of a second
tier of reporting requirements, involving reduced disclosure for non-publicly
accountable entities producing GPFRs (Potter et al., 2013). The standard did not
address directly the reporting entity issue, with the AASB, instead, commissioning
the authors of the present study to investigate the financial reporting practices by
these entities in Australia to inform future regulatory policy developments for these
entities. This paper draws on the evidence used in the investigation.
Hypotheses
This study’s primary objective is to investigate how the principles-based reporting
entity concept is being applied in Australia and whether the concept is delivering the
reporting outcomes originally intended by regulators. As there is some evidence to
suggest that entities may not be applying the content of SAC 1 in the manner
intended by regulators (e.g.,ASIC 2005; Walker, 2007), we thus examine whether the
factors proposed in SAC 1, indicative of a reporting entity, adequately determine
whether an entity produces a general purpose financial report.
The broad criteria set out in SAC 1 for identifying a reporting entity proxy for
the demand for financial information. As such, the criteria are consistent with an
established body of research literature, which is often described as focusing on
12 Walker (2007) analysed financial reporting practices of (i) trustees of superannuation funds, (ii)
operators of residential aged care facilities, (iii) managers of registered investment schemes, and (iv)
charities.
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‘contracting’ issues. According to this literature, those entities for which there is a
greater demand for financial information for external monitoring of performance
and accountability, will make different reporting choices and produce higher
quality reports (see for example, Watts 2003a, 2003b; Ball and Shivakumar, 2005;
Bharath et al., 2008; Allee and Yohn, 2009; Minnis, 2011; Lisowsky and Minnis,
2013). An inference from this literature is that in our sample, we should observe
associations between the factors outlined in SAC 1 and the decision to produce
GPFRs.
Allee and Yohn’s (2009) finding that firm size is significantly related to demand for
financial statements among small privately held businesses in the US, is consistent
with the sentiment underpinning SAC 1 that characteristics such as higher sales,
assets, and employees are indicative of the existence of a reporting entity (SAC 1
(para.22)). Similarly, according to Minnis (2011), privately held US firms that
produce audited financial statements have a significantly lower cost of debt com-
pared to privately held firms that do not produce audited financial statements.This
finding not only supports the argument that financial statements play an important
role in mitigating agency problems associated with debt, but also suggests that an
entity’s relative level of indebtedness to external parties such as creditors is indica-
tive of the existence of a reporting entity (see SAC 1 (para.22)).Finally, a large body
of research (e.g.,Jensen and Meckling, 1976; Fama and Jensen, 1983) documents that
ownership structure is related to the existence of firm-level agency problems.
An implication of this work is that entities with a greater spread of ownership/
membership are more likely to have users who depend on financial statements to
inform their decision making (SAC 1 (para.21)).These entities, we predict, will more
likely produce GPFRs to mitigate these agency problems.
To summarize, we seek to document empirically whether the reporting entity
concept is being applied consistently by privately held and not-for-profit companies
lodging financial statements with ASIC. We do so primarily by examining the extent
to which the decision to produce GPFRs is explained by the broad criteria set out in
SAC 1, criteria which are consistent with an established body of research literature.
This leads to the following three hypotheses.
H1: Companies lodging GPFRs are significantly larger than companies lodging
SPFRs.
H2: Companies lodging GPFRs demonstrate greater separation of management
from economic interest than companies lodging SPFRs.
H3: Companies lodging GPFRs have significantly higher levels of indebtedness
than companies lodging SPFRs.
METHOD
We analyze the characteristics of firms preparing GPFRs and SPFRs to understand
the application of the reporting entity concept. This involves empirically testing
for differences in the entities in the sample across a number of characteristics that
proxy for the factors outlined in SAC 1 to gauge whether these factors explain an
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organizations’ assessment of their reporting entity status.13 In addition,we document
for each group of companies a number of anecdotes to corroborate the extent of
variation in the application of the reporting entity concept by entities.
Sample Selection and Data
This study presents data based on random samples drawn from each of the five
categories of private and not-for-profit companies making annual lodgements of
financial reports to ASIC. A random sample of 1,546 companies was drawn from
2008–09 population counts provided by ASIC (seeTable 1). The data analyzed in this
study were hand collected from PDF copies of company lodgements obtained from
ASIC in April 2011. The data years subject to analysis were the most recently
available annual report years—with most report years ending in 2009 and 2010.14
As shown in Table 1, there were 5,097 large private companies lodging financial
reports with ASIC in 2008–09 and an initial random15 sample of 357 entities was
drawn from this group. To augment missing company lodgements and gaps in
company year observations, we obtained additional company lodgement data in
September 2012 and as a result our final random sample for large private companies
was 394. Under the Corporations Act 2001 a proprietary company (hereafter ‘private
company’) is defined as one that is limited by share capital, has fewer than 20
non-employee shareholders and has not raised money from the public.These private
companies are regarded as ‘large’ if they satisfy two or more of the following size
tests: (1) consolidated revenue of $25 million or more; (2) consolidated gross assets
13 Evidence regarding the second indicative factor in SAC 1, ‘social and political importance’, is more
circumstantial and can be implied from the discussion of the anecdotes presented in the results.
14 It should be noted that because the analysis in this study covers the years up to 2010, it does not
examine the impact of changes in the reporting patterns following the issue of AASB 1053 in 2010.
15 Due to data constraints, we were unable to stratify the sample beyond entity type. While the sample
is generalizable across the five types of entities characterized in this study,the possibility exists that it
may not be generalizable across entities of all sizes and industries.
Table 1
ENTITIES LODGING FINANCIAL REPORTS WITH ASIC
Type of Entity Population 2008–09 Sample
Large private companies 5,097 394
Foreign-owned companies 2,237 340
Small private companies—financial report requested by ASIC 131 95
Unlisted public companies 3,884 347
Public companies limited by guarantee 9,673 370
Total: 21,022 1,546
APPLICATION OF THE REPORTING ENTITY CONCEPT IN AUSTRALIA
469
© 2014 Accounting Foundation, The University of Sydney
of $12.5 million or more; (3) 50 or more employees of the group.16 The Corporations
Act 2001 requires all large proprietary companies, unless grandfathered,17 to lodge a
directors’ report and an audited financial report with ASIC.
As shown in Table 1, there were 2,237 foreign-owned companies registered with
ASIC in 2008–09. Under Part 5B.2 of the Corporations Act 2001, a foreign company
(i.e., a company incorporated or unincorporated body formed in an external terri-
tory of Australia or outside Australia) wishing to carry on business in Australia
must be registered and these companies are required to lodge financial statements
with ASIC. Sections 9 and 292(2)(b) of Part 2M of the Corporations Act 2001, as well
as the ‘control test’ in AASB 127 Consolidated and Separate Financial Statements,
are used to determine whether a private company is considered to be ‘controlled’ by
a foreign-owned company. A random sample of 340 companies was drawn for this
group of entities.
Under Section 294(1) Part 2M.3 of the Corporations Act 2001, ASIC or share-
holders with 5% or more of the voting capital may direct a small private company to
prepare and lodge a financial report with ASIC. The rationale for this requirement
is to ensure that shareholders in these small companies have ‘adequate access to
financial information without imposing an unreasonable burden on small compa-
nies’ (Australian Commonwealth Treasury, 2006, p. 3). In addition, ASIC might
direct a company to lodge an audited financial report because of a dispute between
shareholders or the entity might have committed a ‘strict liability offence’ such as
abrogation of directors’ duties. In 2008–09, 131 small private companies filed finan-
cial reports with ASIC. A random sample of 95 companies was drawn from this
group.
Unlisted public companies include companies limited only by shares, a small
number of ‘no-liability’ (mining) public companies and public companies limited by
both shares and by guarantee.As can be seen from Table 1, public companies limited
by guarantee are classified separately by ASIC. Unlisted public companies differ
from large private companies in their capacity to have more than 50 non-employee
members and to offer shares to the public. In a sense, this suggests unlisted public
companies have broadly similar legislative obligations under the Corporations Act
2001 as a listed public company. However, in contrast to a listed public company,the
shares of unlisted public companies are not included on the official list of a securities
exchange.All unlisted public companies registered under the Corporations Act 2001
16 It should be noted that the definition of a large proprietary (private) company contained in the
Corporations Act 2001 is not linked in any direct way to the reporting entity concept outlined in
SAC 1.
17 ‘Grandfathered’ is a legal term used to describe a situation in which an old regulation continues to
apply to some existing situation. In this case,a ‘grandfathered’ private company is a company that was
formerly granted an exemption from lodging an audited financial report based on criteria in s319(4)
of the Corporations Act, that is, the company continues to meet the ‘exempt proprietary company’
definition at all times since 30 June 1994; the company was ‘large’ at end of first financial year ending
after 9 December 1995; the company had the financial report audited for 1993 and each subsequent
year; the company lodged notice within four months of the end of the first financial year ending after
9 December 1995.
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© 2014 Accounting Foundation, The University of Sydney
must have at least three directors,two of whom must be Australian residents.Similar
to the other types of entities in our sample and despite their definition as ‘public’,
these companies can choose to produce either a GPFR or a SPFR depending on
their reporting entity status. There were 3,884 (see Table 1) unlisted public compa-
nies required to submit an audited financial report with the corporate regulator in
the financial year 2008–09. A random sample of 347 companies was drawn for this
group.
Public companies limited by guarantee must comply with the broader legislation
that applies to all public companies.Unless otherwise exempt, these companies must
include the words ‘Limited’ or ‘Ltd’ after their name. Common examples of compa-
nies in this group are sports and recreation-related organizations,community service
organizations,education-related institutions,and religious organizations (Australian
Commonwealth Treasury, 2007).
Under the Corporations Act 2001, public companies limited by guarantee do not
have the power to issue shares to members. Instead, each member guarantees to
pay a nominal amount specified in the company’s constitution in the event that
the company goes into liquidation, thus limiting the potential liability of the com-
pany’s members. Unlisted public companies tend to be significantly larger than
limited-by-guarantee companies and because of their share capital structure they
are more likely to have a profit motive compared to limited by guarantee companies
(Australian Commonwealth Treasury, 2007). There were 9,673 public companies
limited by guarantee that lodged audited financial reports with ASIC in the financial
year 2008–09 and a random sample of 370 companies was drawn from this group.A
summary of the descriptive statistics for the five groups of entities is presented in
Table 2.
Empirical Models and Measures
Two sets of logistic regression models are specified in this paper, which test the
expectation that companies lodging GPFRs will be significantly larger, have greater
separation of management from economic interest, and have higher levels of indebt-
edness. The first set of six models predicts discrete outcomes for large private
companies lodging GPFRs on the basis of the following three sets of reporting
entity indicative characteristics: (1) size of company, which is proxied by the natural
logarithm of trading revenue (lnTrading), the natural logarithm of total assets
(lnTotal_Assets), and the natural logarithm of employees (lnEmployees); (2) sepa-
ration of management from economic interest, which is proxied by the binary
variable more than 1 member (Mem_Dum); and (3) levels of indebtedness, which is
proxied by the natural logarithm of creditors (lnCreditors) and the natural logarithm
of total liabilities (lnTotal_Liabilities).
ln ln _ ln _
P
PGPFR X X X
Trading Mem Dum Total Lia
101 2 3
=+ + +
ββ β β
bbilities u+(1)
ln __ln_
P
PGPFR X X X
Total Assets Mem Dum Total
101 2 3
=+ + +
ββ β β
LLiabilities u+(2)
APPLICATION OF THE REPORTING ENTITY CONCEPT IN AUSTRALIA
471
© 2014 Accounting Foundation, The University of Sydney
Table 2
SUMMARY STATISTICS FOR THE FIVE GROUPS OF ENTITIES
Large Private NMean
$million
Median
$million
SD
$million
Skewness Kurtosis Min
$million
Max
$million
Trading 336 162.0 45.9 589.0 9.707665 107.8854 0 7,480.0
Total Assets 372 341.0 39.7 1,530.0 9.244323 100.7384 0 20,100.0
Employees 333 321.2 102 802.8 6.107729 49.5714 0 7,879.0
Members 334 2.9 1 5.7 6.566147 52.6399 0 58.0
Creditors 342 84.6 8.9 318.0 7.467432 68.8249 0 3,670.0
Liabilities 372 221.0 24.0 879.0 7.797708 72.6227 0 9,730.0
Foreign-owned
Trading 211 25.3 5.6 134.0 12.80538 175.9596 0 1,880.0
Total Assets 317 32.3 4.5 139.0 11.61856 166.7227 0 2,130.0
Employees 4 1.3 1 1.3 0.652024 2.0970 0 3.0
Members 33 13.7 0 37.3 3.263687 12.5460 0 164.0
Creditors 267 7.4 0.899 30.2 9.806802 113.4847 0 390.0
Liabilities 317 15.2 2.1 50.5 6.584861 51.8674 0 474.0
Small Private
Trading 81 39.0 2.2 176.0 7.231339 57.7080 0 1,470.0
Total Assets 91 74.8 2.4 327.0 5.841023 37.7322 0 2,370.0
Employees 11 21.1 0 31.8 0.958719 2.2190 0 80.0
Members 1 4 4 4 4.0
Creditors 85 28.1 0.184 236.0 9.046611 82.8984 0 2,180.0
Liabilities 91 60.3 1.03 313.0 6.52604 44.9413 0 2,370.0
Unlisted Public
Trading 230 210.0 2.0 1,590.0 11.71206 149.5831 0 21,500.0
Total Assets 319 390.0 4.0 2,060.0 9.253415 104.0227 0 $26.7
Employees 0
Members 0
Creditors 280 116.0 0.804 572.0 6.469509 48.2183 0 5,310.0
Liabilities 319 305.0 1.2 1,860.0 10.28335 122.2670 0 24,900.0
Limited By Guarantee
Trading 212 3.3 0.328 15.6 9.333235 97.0338 0 180.0
Total Assets 353 7.8 0.616 40.6 11.2763 148.3151 0 599.0
Employees 8 50.6 4 89.4 1.61564 4.1472 0 250.0
Members 143 731.4 29 1,919.1 3.839735 18.6151 0 12,464.0
Creditors 317 0.851 0.070 3.6 9.439491 102.7543 0 42.0
Liabilities 353 $3.3 0.117 18.8 10.45765 127.1911 0 265.0
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© 2014 Accounting Foundation, The University of Sydney
ln ln _ ln _
P
PGPFR X X X
Employees Mem Dum Total L
101 2 3
=+ + +
ββ β β
iiabilities u+(3)
ln ln _ ln
P
PGPFR X X X
Trading Mem Dum Creditors
101 2 3
=+ + +
ββ β β
++ u(4)
ln ln _ _ ln
P
PGPFR X X X
Total Assets Mem Dum Cred
101 2 3
=+ + +
ββ β β
iitors u+(5)
ln ln _ ln
P
PGPFR X X X
Employees Mem Dum Credito
101 2 3
=+ + +
ββ β β
rrs u+(6)
where,:
GPFR is a binary variable, equal to 1 if the company has lodged a GPFR, 0
otherwise;
lnTrading is measured by the natural log of the companies’ total consolidated
revenue;
lnTotal_Assets is measured by the natural log of the companies’ total assets;
lnEmployees is measured by the natural log of the companies’ total number of
employees;
Mem_Dum is a binary variable, equal to 1 if the company has more than 1 member,
0 otherwise;
lnCreditors is measured by the natural log of the total dollar value the entity owes to
its suppliers, and;
lnTotal_Liabilities is measured by the natural log of the companies’ total
liabilities.
The second set of logistic regression analyses were used to predict the discrete
outcomes of small private, foreign-owned, unlisted public, and limited by guarantee
companies lodging GPFRs. Data on number of employees (lnEmployees) and the
separation of management from economic interest proxy (i.e., more than 1
member—Mem_Dum), were excluded from the logistic regression analyses for
these four groups of companies as data for these variables are not required by ASIC
and thus rarely disclosed by entities. These models were based on the following
indicative characteristics:
1. size of company—proxied by the variables lnTrading and lnTotal_Assets,
and;
2. levels of indebtedness—proxied by the variables lnCreditors and
lnTotal_Liabilities.
ln ln ln _
P
PGPFR X X u
Trading Total Liabilities
101 2
=+ + +
ββ β
(7)
ln ln _ ln _
P
PGPFR X X
Total Assets Total Liabiliti
101 2
=+ +
ββ β
ees u+(8)
APPLICATION OF THE REPORTING ENTITY CONCEPT IN AUSTRALIA
473
© 2014 Accounting Foundation, The University of Sydney
ln ln ln
P
PGPFR X X u
Trading Creditors
101 2
=+ + +
ββ β
(9)
ln ln _ ln
P
PGPFR X X u
Total Assets Creditors
101 2
=+ + +
ββ β
(10)
RESULTS
Distribution of Entities Producing GPFRs and SPFRs
The overwhelming majority of large private (79.9%), foreign-owned (84.4%), and
small private companies (75.8%) lodge SPFRs with ASIC, whereas a majority of
unlisted public companies (69.7%) and public companies limited by guarantee
(66%) produce GPFRs (see Table 3).
The finding that approximately one third of public companies prepared SPFRs is
somewhat surprising, particularly since public companies, by definition have poten-
tially dependent users and therefore face a greater demand for financial informa-
tion. Similarly, the finding that 15.6 (20.1%) of foreign-owned (large) companies
prepare GPFRs appears to be relatively low, particularly given the size of some
entities in the sample.18 If the application of the reporting entity concept adequately
distinguishes those entities for which the demand for information is highest, we
would expect to see a higher proportion of firms across the five categories producing
GPFRs than was actually observed. In order to better understand these firms’
decisions regarding their reporting entity status, the next section compares the
characteristics of firms preparing GPFRs and SPFRs.
Univariate Analysis of Entities Producing GPFRs and SPFRs
Indicative factors outlined in SAC 1 that proxy for the existence of a reporting entity
were compared between entities lodging a SPFR and a GPFR. To do so, we use
18 The alternative view is that since principles-based regulations may not yield consistent reporting
choices, particularly where the responsibility for compliance continues to rest with report preparers,
the result should not be surprising at all (Walker, 2007).
Table 3
DISTRIBUTION OF ENTITIES LODGING GPFRS VERSUS SPFRS WITH ASIC
Large
Private
Companies
Foreign-
Owned
Companies
Small
Private
Companies
Unlisted
Public
Companies
Limited by
Guarantee
Companies
Totals
Freq. % Freq. % Freq. % Freq. % Freq. % Freq. %
GPFR 79 20.1 53 15.6 23 24.2 242 69.7 239 66.0 636 41.4
SPFR 315 79.9 287 84.4 72 75.8 105 30.3 123 34.0 902 58.6
Total 394 100.0 340 100.0 95 100.0 347 100.0 362* 100.0 1,538* 100.0
* We were unable to determine the type of report lodged for eight limited by guarantee companies. In
addition, for two of these entities financial statement data were missing.
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© 2014 Accounting Foundation, The University of Sydney
independent samples t-tests and two-sample Wilcoxon rank-sum (Mann-Whitney)
tests to examine mean and median differences on the factors between the two
groups.The expectation is that if entities in the sample are applying factors identified
in SAC 1 in determining their reporting entity status, there should be statistically
significant differences in the mean (median) values across the sample.
Large private companies Results presented in Table 4 show that, consistent with
Lisowsky and Minnis (2013), firms preparing GPFRs are significantly larger than
firms preparing SPFRs as measured by trading revenue, total assets and number of
employees.19
It is expected that our proxy for the ‘separation of management from economic
interest’ (Binary variable equal to 1 if the company has more than one shareholder)
will capture entities where there is greater potential for agency conflict, revealing
instances where there is greater demand for high quality financial reporting. In such
instances we might expect a higher likelihood that GPFRs will be prepared. When
there is only one member/shareholder, the likelihood of agency conflict is lower,
suggesting a lower incidence of GPFRs being prepared.20 Our results do not show
any greater spread of ownership/membership for large private companies producing
GPFRs than for those producing SPFRs.This suggests that the widening of separa-
tion between management and ownership/members does not impact the decision by
these entities to classify as a reporting entity and lodge GPFRs.
According to SAC 1, another indicator of the existence of users who are depen-
dent on GPFRs is the entities’ level of indebtedness. Greater levels of indebtedness
can indicate greater demand for financial information in making and evaluating
lending decisions (Watts, 2003a; Ball and Shivakumar, 2005; Minnis, 2011). We use
the natural log of the total dollar value owing to creditors and the dollar value of
total liabilities to proxy for the firm’s ‘indebtedness’, both of which show significant
mean and median differences among large private companies between the GPFRs
and SPFRs groups.These results suggest that the type of financial statement differs
with larger companies and with greater levels of indebtedness.
Foreign-owned, small private, unlisted public, and public companies limited by guar-
antee Univariate results presented in Table 4 demonstrate that foreign-owned,
small private, and unlisted public companies lodging SPFRs are not significantly
smaller than GPFR firms based on trading revenue or indebtedness. In other words,
the factors identified in SAC 1 that proxy for the existence of dependant users do not
seem to impact the decision to produce GPFRs for these entities.
19 In additional analysis (not reported), because trading revenue and total assets are significantly
skewed, we normalize these variables by using natural logarithmic procedures (i.e., to reduce the
standard deviation) and to corroborate the t-test and the Wilcoxon rank-sum test results. Results from
this additional analysis confirm that firms preparing GPFRs are, on average, larger than firms pre-
paring SPFRs.
20 A number of companies in the sample had issued one share only, which was held by the manager of
the entity.
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© 2014 Accounting Foundation, The University of Sydney
Table 4
UNIVARIATE TESTS ON INDICATIVE FACTORS
Large Private
Companies
Foreign-owned
Companies
Small Private
Companies
Unlisted Public
Companies
Limited by
Guarantee Companies
GPFR
$million
SPFR
$million
GPFR
$million
SPFR
$million
GPFR
$million
SPFR
$million
GPFR
$million
SPFR
$million
GPFR
$million
SPFR
$million
Trading Mean 312.00 ***$125.00 20.90 23.30 7.80 48.10 231.00 54.400 4.80 **0.31
Median 64.50 ***43.50 3.60 5.80 1.10 3.40 2.40 **0.361 0.67 ***0.04
Total Assets Mean 821.00 **199.00 36.10 31.00 4.60 *94.40 461.00 162.000 8.20 6.70
Median 78.10 ***34.10 3.70 4.30 1.30 4.80 3.30 2.400 1.30 ***0.11
Employees Mean 592.00 ***243.00 ————— —
Median 146.00 **103.00 ————— —
Members Mean 4 3 — — — —
Median 1 1 — — — —
Creditors Mean 168.00 ***58.40 10.70 6.00 1.90 34.60 128.00 *38.20 0.953 0.64
Median 26.80 ***8.30 0.72 0.91 0.15 0.23 0.68 0.28 0.124 ***0.01
Liabilities Mean 476.10 ***143.00 21.20 12.40 2.70 *76.40 384.00 *69.90 3.800 2.30
Median 46.10 ***19.40 2.50 2.10 0.31 *3.10 1.10 0.59 0.272 **0.01
t-tests are adjusted for unequal variances and two-sample Wilcoxon rank-sum (Mann-Whitney) tests on median differences are also conducted. Variables
that proxy for ‘size’ and ‘indebtedness’ were normalized by using natural logarithmic (not reported in Table 2) procedures to provide corroboration of the
t-test and the Wilcoxon rank-sum test results.
*, **, *** significant at the thresholds of 5%, 1% and 0.1%, respectively.
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However, results for the public companies limited by guarantee sample show
variables that proxy for size (i.e., trading revenue and total assets) and indebtedness
(i.e.,creditors and liabilities) are associated with the decision by these entities to lodge
GPFRs.
Logistic Regressions of Entities Producing GPFRs and SPFRs
Separate logistic regression models were estimated for the five groups of entities in
our sample. For the large private company sample, six characteristics are examined
(lnTrading, lnTotal_Assets, lnEmployees, Mem_Dum, lnCreditors and lnTotal_
Liabilities) to test hypotheses 1, 2 and 3. For the other four groups of companies, the
analysis is based on four variables (lnTrading, lnTotal_Assets, lnCreditors and
lnTotal_Liabilities) to test hypotheses 1 and 3.
All logistic regression models are controlled for non-independently and identi-
cally distributed disturbance variances by estimating robust standard errors of the
variance-covariance estimates (VCE) using the Huber-White sandwich estimator,
which, essentially, estimates conditionally heteroscedastic errors of the regression
model. As some of the SAC 1 characteristics are highly correlated, suggesting pos-
sible multicollinearity concerns, we conduct six separate logistic regression models
on the large private company cohort using various combinations of size and indebt-
edness factors and four separate logistic regression models on the foreign-owned,
small private, unlisted public, and public companies limited by guarantee groups.
Large private companies An examination of the results of the six logistic regres-
sion models for the large private company cohort indicates that the predictors, as a
set, adequately distinguish demand for GPFRs and SPFRs [χ2= 10.15, df =3, p<.05;
χ2= 16.13, df =3,p<.001; χ2= 25.93, df =3,p<.000; χ2= 8.40, df =3,p<.05; χ2= 18.04,
df =3, p<.001; χ2= 16.30, df =3, p<.001, respectively, for models 1 to 6], and these
predictors account on average for around 7% of the variance in the six models
(Pseudo-R2ranging from .0448 to .1004). According to the Wald criterion, lnTrading
and lnEmployees are non-significant predictors of the decision to produce GPFRs,
whereas lnTotal_Assets,lnCreditors, lnTotal_Liabilities and Mem_Dum are statisti-
cally significant predictors of the preparation of GPFRs in some of the models.
Notwithstanding this statistically significant result, it is important to distinguish
between statistical significance and economic importance in this study (McCloskey
and Ziliak, 1996; Ziliak and McCloskey, 2004). While the six models are statistically
significant in distinguishing between large private companies lodging GPFRs and
SPFRs, they only explain reporting choice around 7% of the time. Even though size,
debt and separation of ownership and control are statistically significant in explain-
ing the decision to produce GPFRs, the explanatory power of these variables is
economically unimportant. It is difficult to see how many of the large private com-
panies lodging SPFRs were not classified as reporting entities,based on their trading
revenue, total assets and number of employees. That is, approximately 71% of large
private companies have trading revenue of more than $25 million, 84.3% have total
assets that exceed $12.5 million, and 76.1% have more than 50 employees. Recall
that these tests are mandated in the Corporations Act 2001 as indicating the classi-
fication of the private company as ‘large’. If an entity satisfies at least two of these
APPLICATION OF THE REPORTING ENTITY CONCEPT IN AUSTRALIA
477
© 2014 Accounting Foundation, The University of Sydney
tests,it is considered under the Act to be more significant and thus subject to greater
governance and compliance accountabilities. These same entities are not being
systematically classified as reporting entities and producing GPFRs.
Foreign-owned, small, unlisted public, and public companies limited by guaran-
tee Logistic regression analyses were also undertaken to understand more fully the
decision by foreign-owned, small, unlisted public, and public companies limited
by guarantee to lodge GPFRs. Variables used in these four models are lnTrading,
lnTotal_Assets,lnCreditors,lnTotal_Liabilities. Variables measuring number of
employees and number of shareholders are excluded because this information is not
required by ASIC and therefore rarely reported by entities.
An examination of the results of the logistic regression models for foreign-owned,
small private, and unlisted public companies indicate that the predictors, as a set,
do not distinguish GPFR and SPFR (see Table 5, Panels A and B, which show
non-significant model chi-square results for these three groups). Taken together, the
results support the conclusion that the lodgement of GPFRs by these entities do not
appear to depend on the indicative factors outlined in SAC 1.
However, an assessment of the logistic regression model for the public company
limited by guarantee cohort indicates that the predictors, as a set, adequately distin-
guish GPFRs and SPFRs [χ2= 20.88, df =2,p<.000; χ2= 23.27, df =2, p<.000;χ2= 22.10,
df =2, p<.000;χ2= 25.73, df =2, p<.000,respectively]. According to theWald criterion,
lnTrading (z= 1.78, p<.010), lnTotal_Assets (z= 2.20, p<.05), lnTotal_Liabilities (z=
2.18, p<.05) and lnCreditors (z= 3.31, p= .005 and z= 2.33, p<.01), explaining
approximately 13% of the variance in the six models (Pseudo-R2ranging from .1022
to .1641). Results suggest that both size and indebtedness influence whether public
companies limited by guarantee are classified as reporting entities and produce
GPFRs. However, as in the analysis on large private companies, the models have
relatively low explanatory power and are therefore economically unimportant.
In summary, the results demonstrate that the factors identified in SAC 1 as
indicative of the existence of a reporting entity do not systematically explain the
application of the reporting entity concept by entities across the five samples of
companies. Where statistically significant results are identified, their economic
importance is trivial as indicated by the low R-square values.Thus the models do not
sufficiently explain reporting choice by these companies.
Robustness Tests—Large Private Companies
As the logistic regression analysis identifies size and debt as significant predictors
distinguishing GPFRs and SPFRs among large private companies, we therefore
undertake a more refined analysis over different ranges of size and indebtedness
levels to ascertain the impact of these characteristics on the decision to classify as a
reporting entity. Additional piecewise logistic regression models using b-spline
smoothing techniques were specified for this cohort.21 This technique is appropriate
21 Piecewise logistic regressions are not conducted on the foreign-owned, small private, and unlisted
public company groups because these models do not distinguish demand for GPFRs and SPFRs.
Similarly, the analysis was not conducted on the public company limited by guarantee cohort since
some variables (relating to membership/ownership) were not available.
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© 2014 Accounting Foundation, The University of Sydney
for a number of reasons. First, preliminary tests showed that the size and indebted-
ness proxies all exhibit different incremental slopes when regressed on the decision
to produce GPFRs, indicating that size and debt are not a continuous function of
that decision. Using a linear b-spline smoothing procedure creates continuous
Table 5
LOGISTIC REGRESSION RESULTS ON SAC 1 INDICATIVE FACTORS
Panel A Large Private
Companies
Foreign-owned
Companies
Small Private
Companies
Unlisted
Public
Companies
Limited by
Guarantee
Companies
LnTrading 1.082613
(0.66)
.951854
(−0.36)
.751222
(−1.11)
1.016243
(0.24)
1.182084
(1.78)*
Mem_Dum 1.808579
(1.89)*
——
LnTotal_Liabilities 1.314210
(2.45)**
1.036143
(0.27)
1.017469
(0.09)
1.018610
(0.29)
1.293926
(2.18)**
Constant .000454
(−3.39)***
.271412
(−0.73)
19.25787
(1.40)
1.790412
(0.74)
.019070
(−3.46)***
N 291 220 68 204 184
Wald χ210.15** 0.13 3.84 0.45 20.88***
Psuedo-R20.0574 0.0007 0.0495 0.0019 0.1379
LnTotal_Assets 1.34982
(1.81)*
1.11394
(1.45)
1.05654
(−1.42)
1.03442
(0.40)
1.27720
(2.20)**
Mem_Dum 1.751415
(1.86)*
——
LnTotal_Liabilities 1.083938
(0.57)
.965258
(−0.42)
.764695
(1.64)
1.005813
(0.08)
1.122397
(1.34)
Constant .000238
(−4.60)***
.059106
(−2.39)**
6.161114
(1.27)
1.435325
(0.56)
.023822
(−3.68)***
N 330 308 88 305 309
Wald χ216.13*** 2.24 6.93** 1.00 23.27***
Psuedo-R20.0665 0.0070 0.0619 0.0028 0.1022
LnEmployees 1.074273
(0.69)
——
Mem_Dum 2.060196
(2.18)**
——
LnTotal_Liabilities 1.556757
(4.39)***
——
Constant .000059
(−5.60)***
——
N270 — —
Wald χ225.93*** —
Psuedo-R20.1004 — —
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© 2014 Accounting Foundation, The University of Sydney
Table 5
CONTINUED
Panel B Large Private
Companies
Foreign-owned
Companies
Small Private
Companies
Unlisted
Public
Companies
Limited by
Guarantee
Companies
LnTrading 1.180059
(1.06)
.939242
(−0.48)
.695400
(−1.57)
1.060919
(0.85)
1.141477
(1.47)
Mem_Dum 1.760015
(1.86)*
——
LnCreditors 1.177187
(1.61)
1.014482
(0.13)
1.143885
(0.73)
.964378
(−0.55)
1.480273
(3.31)***
Constant .000806
(−2.83)***
.474802
(−0.42)
12.806450
(1.12)
2.053993
(0.93)
.008628
(−3.69)***
N 279 215 63 201 175
Wald χ28.40** 0.25 2.94 0.73 22.10***
Psuedo-R20.0448 0.0014 0.0465 0.0029 0.1641
LnTotal_Assets 1.546785
(3.23)***
1.064728
(0.88)
.823804
(−1.36)
1.056495
(0.74)
1.203718
(1.60)
Mem_Dum 1.874772
(2.06)**
——
LnCreditors .994476
(−0.06)
1.035674
(0.55)
1.037959
(0.27)
1.016322
(0.25)
1.276171
(2.33)**
Constant .000093
(−4.77)***
.047297
(−2.54)**
3.282564
(0.79)
.903888
(−0.14)
.015074
(−3.79)***
N302 288 78 287 289
Wald χ218.04*** 1.50 2.87 2.53 25.73***
Psuedo-R20.0784 0.0065 0.0235 0.0079 0.1197
LnEmployees 1.142856
(1.21)
——
Mem_Dum 1.682036
(1.62)
——
LnCreditors 1.393523
(3.23)***
——
Constant .0004921
(−4.48)***
——
N257 — — —
Wald χ216.30*** —
Psuedo-R20.0745 — —
The regression coefficients are the odds ratios associated with the probability of lodging a GPFR and the
associated z-values are shown in parentheses.
*, **, *** significant at the thresholds of 10%, 5%, and 1%, respectively.
ABACUS
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© 2014 Accounting Foundation, The University of Sydney
regression functions by connecting various piecewise linear segments, which recog-
nize the existence of different reporting entity choice relationships for different
ranges of size and debt levels.22 Second,b-spline procedures are beneficial for skewed
data as it restricts tails to linearity by providing a conservative estimate for the tail
regions thus reducing the influence of extreme outliers (see de Boor, 1978). Third,
because approximately 80% of the large private company sample lodges SPFRs, the
linear b-spline smoothing procedures control for non-independently and identically
distributed disturbance variances (i.e., heteroscedasticity) in the regression model.
Results from the piecewise regression reported in Table 6 do not find support for
the hypothesized positive association between GPFR and size (H1), across the three
size measures of trading revenue, total assets, and number of employees. Indeed,
size is a significant predictor in only two of the six piecewise regressions models and
contrary to expectation, there is a negative association between the number of
employees and likelihood of lodging a GPFR within two employee categories (i.e.,
between 50 and 100 and >100) and within one of the total asset categories (i.e.,<$12.5
million). It is noteworthy that results from the piecewise regressions also reveal that
smaller companies as measured by total assets are more likely to be non-reporting
entities,but that larger companies are not associated with the choice to be a reporting
entity. Accordingly, these results demonstrate that size is not a primary factor in the
determination of a reporting entity as explained in SAC 1 paragraph 22.
Results from the piecewise regressions also do not support the hypothesized
positive association between the decision to produce GPFRs and the level of indebt-
edness (i.e., LnCreditors/LnTotal_Liabilities) (H3). While LnCreditors is a signifi-
cant predictor in all three piecewise regressions models, contrary to expectations,
the negative association between the level of creditors and likelihood of lodging
a GPFR indicates that companies with higher levels of creditors are more likely
to be classified as non-reporting entities and issue SPFRs. Similarly, while
LnTotal_Liabilities is a significant predictor in all three piecewise regressions
models,contrary to expectations results suggest that companies with higher levels of
debt are more likely to be classified as non-reporting entities, preferring to issue
SPFRs. It is noteworthy that results from the piecewise procedure reveal that
companies with lower to medium levels of indebtedness (i.e., LnCreditors and
LnTotal_Liabilities) are more likely to be non-reporting entities, whereas higher
levels of indebtedness are not associated with the choice to be a reporting entity.
Results from piecewise procedure are thus inconclusive as to the hypothesized
impact of indebtedness on reporting entity choices by large private companies.
In contrast to the results on H1 and H3, results from the piecewise regressions
support the hypothesized positive association between GPFR and Mem_Dum (i.e.,
separation of management from economic interest measured) in all six models (H2).
22 We use piecewise linear splines with three internal knots for the untransformed size proxies (i.e., size
variables not subject to natural logarithmic transformations), that is, trading revenue at $25 million,
$50 million, and $100 million;total assets at $12.5 million, $25 million,and $50 million, and employees
at 50, 100, and 500. Similarly, three internal knots are used for the untransformed indebtedness
proxies,that is,creditors at $5 million, $10 million, and $25 million,and total liabilities at $12.5 million,
$25 million, and $50 million.
APPLICATION OF THE REPORTING ENTITY CONCEPT IN AUSTRALIA
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Table 6
PIECEWISE LOGISTIC B-SPLINE REGRESSION RESULTS ON SAC 1
INDICATIVE FACTORS
Panel A Large Private
Companies
Panel B Large Private
Companies
Panel C Large Private
Companies
Trading1
(<$25m)
.7105423
(−0.77)
Total_Assets1
(<$12.5m)
.4884276
(−0.95)
Employees1
(<50)
.6166599
(−1.13)
Trading2
($25m–$50m)
.7823625
(−0.57)
Total_Assets2
($25m–$50m)
1.191702
(0.29)
Employees2
(50–100)
.5417767
(−1.15)
Trading3
(>$50m)
.7492247
(−0.63)
Total_Assets3
(>$50m)
.6270041
(−0.88)
Employees3
(>100)
.5175122
(−1.56)
Mem_Dum 1.836794
(2.01)**
Mem_Dum 1.6849710
(1.80)*
Mem_Dum 1.7850380
(1.96)**
Total_Liabilities1
(<$12.5m)
.3665983
(−2.30)**
Total_Liabilities1
(<$12.5m)
.3750198
(−1.59)
Total_Liabilities1
(<$12.5m)
.3608369
(−2.64)***
Total_Liabilities2
($12.5m–$25m)
.2226827
(−2.83)***
Total_Liabilities2
($12.5m–$25m)
.2500522
(−2.16)**
Total_Liabilities2
($12.5m–$25m)
.2221344
(−2.97)***
Total_Liabilities3
(>25m)
.5792046
(−1.31)
Total_Liabilities3
(>25m)
.7794260
(−0.52)
Total_Liabilities3
(>25m)
.6957493
(−0.91)
Constant .4770345
(−2.71)***
Constant .4258289
(−3.82)**
Constant .6226368
(−1.39)
N301 N334 N326
Wald χ220.46*** Wald χ223.35*** Wald χ223.33***
Psuedo-R20.0646 Psuedo-R20.0671 Psuedo-R20.0688
Panel D Large Private
Companies
Panel E Large Private
Companies
Panel F Large Private
Companies
Trading1
(<$25m)
.5943761
(−1.06)
Total_Assets1
(<$12.5m)
.1675252
(−2.17)**
Employees1
(<50)
.5121838
(−1.47)
Trading2
($25m–$50m)
.6091874
(−1.10)
Total_Assets2
($25m–$50m)
.6248345
(−0.96)
Employees2
(50–100)
.3565462
(−1.90)*
Trading3
(>$50m)
.6404530
(−0.97)
Total_Assets3
(>$50m)
.5144387
(−1.43)
Employees3
(>100)
.4318588
(−1.93)*
Mem_Dum 1.8682780
(2.04)**
Mem_Dum 1.7976590
(1.96)*
Mem_Dum 1.965240
(2.21)**
Creditors1
(<$5m)
.5036568
(−1.56)
Creditors1
(<$5m)
.6283472
(−1.01)
Creditors1
(<$5m)
.4209516
(−2.32)**
Creditors2
($5m–$10m)
.2605645
(−2.49)**
Creditors2
($5m–$10m)
.3779114
(−1.78)*
Creditors2
($5m–$10m)
.2741260
(−2.66)***
Creditors3
(>$10m)
.2463730
(−2.91)***
Creditors3
(>$10m)
.2943341
(−2.39)**
Creditors3
(>$10m)
.2252022
(−3.13)***
Constant .5841388
(−1.92)*
Constant .5330851
(−2.66)***
Constant .8950394
(−0.30)
N286 N306 N298
Wald χ223.06*** Wald χ228.75*** Wald χ226.96***
Psuedo-R20.0752 Psuedo-R20.0873 Psuedo-R20.0842
The regression coefficients are the odds ratios associated with the probability of lodging a GPFR and the associated
z-values are shown in parentheses.
*, **, *** significant at the thresholds of 10%, 5%, and 1%, respectively.
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© 2014 Accounting Foundation, The University of Sydney
Similarly, Mem_Dum is significant in five of the six logistic regression models.
Findings appear to confirm that separation of management from economic interest
is influential in reporting entity choices by large private companies as highlighted in
SAC 1 paragraph 20.
Similar to the logistic regression results, on average, around 7.5% of the variance
is accounted for by the various combinations of explanatory variables in the
six piecewise regression models (Pseudo-R2ranging from .0646 to .0873). These
low R-square values demonstrate that the indicative factors in SAC 1 provide only
limited explanation as to companies’ application of the reporting entity concept.
Where statistically significant results are identified, their economic importance is
trivial, explaining reporting choice by these companies less than 10% of the time.
Anecdotes of Entities Producing GPFRs and SPFRs
While empirical tests are helpful to shed light on drivers of the decision to imple-
ment the reporting entity concept, they do not fully allow an appreciation of the
variation in reporting choices made. Accordingly, we augment our analysis by pro-
viding some insights through anecdotes that highlight the unpredictable application
of the reporting entity concept.
Large private companies These anecdotes illustrate some of the variation observed
among this cohort of companies.
1. In the sample there were four aged care providers, all of which collected bonds
from residents living in the entities’ facilities. Three of the four companies were
classified as reporting entities and produced GPFRs and one of the four indicated
they were not a reporting entity and produced a SPFR. The non-reporting entity
had over $20m in resident bonds (liabilities), employed more than 100 staff and
had more than $1m in trade creditors.
2. A company owned by one shareholder disclosed that it had 500 employees and
had ‘trade payables’ of $244b, one of the largest trade payable amounts (i.e.,in the
top one percentile) for this cohort of companies. It had classified itself as a
non-reporting entity and produced a SPFR.
3. A global financial services firm producing a SPFR had the second largest amount
of ‘trade and other payables’ of $219.7b among the large proprietary companies.
This amount included $475m owed to other persons and unsecured external
borrowings, including client segregated funds, of $208m. Two other entities in the
same industry and with similar financial profiles produced GPFRs.
4. A global engineering company producing a SPFR reported in 2009 that it had
only one member, 4,488 employees, ‘trade payables’ worth $96b, and ‘amounts
due to customers under engineering contracts’ of $160b. In the balance sheet, the
total amount of ‘current trade payables’ (which includes the two amounts men-
tioned above) is $292b, which is one of the largest current trade payable amounts
for firms producing a SPFR.
5. A management services company stated their sole business purpose was to
provide administration services and staff to the wider group. The company
APPLICATION OF THE REPORTING ENTITY CONCEPT IN AUSTRALIA
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© 2014 Accounting Foundation, The University of Sydney
reported that it had $100m in assets, more than $15m in trade creditors and more
than 50 employees who were charged out to the group. This entity was not
classified as a reporting entity and thus produced a SPFR.
Foreign-owned companies The following anecdotes highlight the unpredictable
application of the reporting entity concept among foreign-owned companies.
1. Consistent with the other four sample groups examined, there is a discrepancy
with how similar-sized companies were classified. In the sample, ten companies
had revenues over $100m and assets over $50m. Four of these companies were
classified as reporting entities and produced GPFRs, while six companies indi-
cated they were not reporting entities and produced SPFRs.
2. A foreign-controlled company that manufactures and sells aggregate, concrete,
concrete piping, and concrete precast products in Australia, commonly regarded
as one of the few largest firms in its industry globally, classified itself as a non-
reporting entity and produced a SPFR. This entity reported revenues of $1.7b in
2009.
3. In the sample there were four financial service companies that all had reported
revenues of less than $10m. Two of the four companies were classified as report-
ing entities and produced GPFRs, while two indicated they were not reporting
entities and produced SPFRs. One of the non-reporting entities had over $6m in
revenues and over $150m in assets.
Unlisted public companies The following are some anecdotes from the unlisted
public company cohort.
1. In the sample there were five financial services companies all reporting revenues
of less than $1m. Three of the five companies were classified as reporting entities
and thus produced GPFRs,while two of the five indicated they were not reporting
entities and thus produced SPFRs. One of the non-reporting entities had over
$12m in assets.
2. Five unlisted public companies reported revenues ranging between $130m and
$200m and assets ranging between $26m and $600m. Two of these companies
were classified as reporting entities and produced GPFRs, while three companies
indicated they were not reporting entities and produced SPFRs. One of the
non-reporting entities had revenues of $183m and assets of $600m.
3. A mining company, involved in iron ore and copper-gold exploration, reported
revenues of $1.5b and total assets of $2.8b in 2008. This entity had classified itself
as a non-reporting entity and produced SPFRs.
Public companies limited by guarantee The following anecdotes highlight variation
observed in the public company limited by guarantee group.
1. In the sample, nine companies reported revenues of less than $1m.Three of these
companies were classified as reporting entities and produced GPFRs, while six
companies indicated they were not reporting entities and produced SPFRs. One
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of the non-reporting entities had revenues of more than $750,000 and assets of
more than $17.4m in comparison to one of the reporting entities that had rev-
enues of less than $400,000 and assets of just over $350,000.
2. In the sample there were six sport and recreation clubs that all reported revenues
of less than $500,000. Three of the six companies were classified as reporting
entities and produced GPFRs, while three indicated they were not a reporting
entity and produced SPFRs.
The above-mentioned anecdotes highlight the discrepancies and inconsistent
application of the reporting entity concept even among companies of similar size,
economic and political significance and debt levels. Indeed, these anecdotes demon-
strate that the principles-based criteria in SAC 1, designed to guide the application,
do not systematically explain the reporting decisions made by company directors.
DISCUSSION AND CONCLUSIONS
This study provides large-scale empirical evidence on the reporting choices of five
categories of private and not-for-profit companies lodging financial reports with the
ASIC. Our results indicate that a small minority of large private (20.1%), foreign-
owned (15.6%), and small (24.2%) private companies produce GPFRs, while for
unlisted public companies (69.7%) and public companies limited by guarantee
(66%), GPFRs were more common. The proportion of firms preparing GPFRs
across the five categories is lower than was expected. More specifically, around one
third of public companies prepared SPFRs, notwithstanding that it is reasonable to
expect that these entities could have potential users who are dependent on the
entity’s financial statements as a basis for making and evaluating resource allocation
decisions.
To better understand these firms’ decisions regarding their reporting entity status,
we test for systematic differences between firms preparing GPFRs and SPFRs based
around the indicative factors identified in SAC 1, that is, company size, levels of
indebtedness, and separation of management from economic interest. We find no
evidence from logistic regression analyses that size and levels of indebtedness
explain the decision by foreign companies, small private and unlisted public com-
panies to produce GPFR. Regression models for these cohorts are not significant,
showing no variation between the explanatory variables and reporting entity choice.
While we find some evidence of an association between the decision to prepare
GPFRs and size, levels of indebtedness, and separation of management from eco-
nomic interest in large private companies, and between GPFRs and size and levels
of indebtedness in limited by guarantee companies, the explanatory power of the
logistic regression models is low.Where statistically significant results are identified,
their economic importance is trivial as indicated by the low R-square values ranging
between 4% and 16% of the variance, suggesting that the SAC 1 indicative factors
do not sufficiently explain reporting choice by these companies. Results from addi-
tional piecewise regression analyses on the large company sample provide incon-
clusive and, in some cases, contrary evidence on the impact of SAC 1 indicative
APPLICATION OF THE REPORTING ENTITY CONCEPT IN AUSTRALIA
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© 2014 Accounting Foundation, The University of Sydney
factors on reporting entity choices. Further, a number of anecdotes reported in the
paper reveal significant variation in reporting choice among companies of similar
size,economic and political significance, and debt levels.Taken together,our findings
from multiple approaches used in this study indicate that the principles-based cri-
teria in SAC 1 do not systematically explain the decision by entities to classify as a
reporting entity.
Our findings are relevant to regulators seeking to develop a robust framework for
differential reporting. Our analysis indicates that the principles-based reporting
concept is not delivering the consistent reporting outcomes originally intended by
standard setters,thus undermining the comparability of the reports produced.Judge-
ment required to implement the reporting entity concept creates a problem for
monitoring compliance. In the absence of systematic patterns of disclosure or quan-
titative tests to guide the application of the reporting entity concept, it is difficult to
know how regulators might enforce compliance in future. Developing an appropri-
ate regulatory solution to address this imbalance will be complex (Benston et al.,
2006; Schipper, 2003).23 At the time of writing, it is not clear whether policy makers
will re-consider the relevance of the reporting entity concept, or alternatively
whether tighter tests will be needed to standardize its application.
From this study, there are a number of interesting avenues for further research.
One such avenue is to develop an enhanced understanding of the implications of the
reporting choices made by firms on the quality of information reported. There is a
well-developed literature that positions financial reports as economic goods the
quality of which is a function of user demand (e.g., Ball et al., 2000; Ball et al., 2003;
Ball and Shivakumar, 2005). If the reporting entity concept is applied as intended by
regulators,those entities for which there is greater demand for financial information
should produce full GAAP-based financial statements, which in turn should be
of higher quality. The criteria contained in SAC 1 proxy for the demand for high
quality financial information, and our findings suggest that these factors do not
determine the reporting outcomes we observe. This creates opportunity for further
work to document empirically the determinants of the quality of the financial
reports of these entities, thus extending the literature by complementing existing
demand-based explanations.
Second and related, there is opportunity to explore more deeply the costs and
benefits associated with producing full-GAAP based financial statements for these
entities. Prima facie,there is a presumption that the preparation of full GAAP-based
financial reports will lead to an improvement in the measurement of the economic
performance of the entities involved. Proponents of this view argue that accrual-
based reports enable greater efficiencies in both the allocation of scarce economic
resources and in the contracting relationships formed by the entities involved (Ball,
23 The results appear to support ASIC’s concerns expressed in Regulatory Guide 85 (2005) concerning
the inconsistent application of the reporting entity concept. More importantly, as all financial report
lodgements with ASIC are required to be audited,our empirical investigation suggests variation in the
attitudes of auditors toward the application of the reporting entity concept, providing some support
to the suggestion that the benefits of principles-based regulations may be oversold (Walker, 2007).
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© 2014 Accounting Foundation, The University of Sydney
2006). Notwithstanding these claimed benefits, the usefulness and economic benefits
of applying existing GAAP to these smaller entities continues to be debated vigor-
ously (see, for example, AAA/FASC, 2006). Research that addresses such issues
would enhance the existing understanding of the reporting practices of these socially
and economically important entities.
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APPLICATION OF THE REPORTING ENTITY CONCEPT IN AUSTRALIA
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... Australia for charities, in order to better understand the incentives for a charity to report in accordance with a more comprehensive financial reporting framework than that which is the minimum permissible. The examination of the differential reporting framework as well as the effects of regulatory change is also a timely issue that is of interest to charities, accounting firms, regulators, and academics (Carey et al., 2014a(Carey et al., , 2014bACNC, 2015;Linnenluecke et al., 2017;AASB, 2017AASB, , 2019aAASB, , 2019bACNC, 2018b;Gilchrist and Simnett, 2019;Potter et al., 2019). In particular, the results from this study have direct implications for regulators and standard-setters in Australia, principally the ACNC and the AASB, which are both proposing changes to the financial reporting frameworks for not-for-profit (NFP) entities. ...
... On the other hand, Walker identifies that significant variations in the size of the charities, the state-based legislations and the types of charities make compliance with a principles-based rule highly unlikely. Carey et al. (2014a) examine the explanatory power of SAC 1 factors for the financial reporting framework choice for 489 private companies, 340 foreignowned companies, 347 unlisted public companies, and 370 public companies limited by guarantee, with the sample provided by ASIC from 2008-09 populations of such registered companies. Using a model that included variables to proxy for each of the three SAC 1 factors, 12 their findings show discrepancies and inconsistent application of the reporting entity concept among these firms when choosing between GPFS and SPFS. ...
... 16 It is recognized that the size of an entity is also a financial characteristic. Since size has been considered in the second indicative factor to measure the economic or political importance, it is not discussed here, consistent with Carey et al. (2014a). This is a matter of categorization and does not affect the results with regard the significance of the factors or the models. ...
Article
While voluntary disclosure theory posits that profit‐oriented companies voluntarily disclose information to increase their market value, this does not explain why a charity would report in accordance with a more comprehensive financial reporting framework than required. Using a unique financial reporting framework choice available in Australia, our study examines factors associated with large charities’ choice of a General Purpose Financial Statements (GPFS) reporting framework, which encompasses expansive financial reporting requirements, versus a Special Purpose Financial Statements (SPFS) reporting framework, where management, within limits, effectively chooses that subset of accounting standards applicable to that charity. For those preparing GPFS, we then examine the factors that determine those charities that report in accordance with the complete set of Australian Accounting Standards (Tier 1) versus Reduced Disclosure Requirements (Tier 2). Using manually collected data from 11,471 large‐registered charities for 2014–2016, we find that the economic importance of the charity, its funding sources, and level of indebtedness are significant in explaining charities choosing a more comprehensive financial reporting framework. Further, we find a substantial increase in the proportion of large charities electing to disclose GPFS‐Tier 2 over this three‐year window. The choice of a large audit firm (Big 4 and mid‐tier audit firms) is significantly associated with charities both lodging more comprehensive GPFS, and also reporting GPFS in accordance with the less onerous GPFS‐Tier 2 framework. Our results provide insights into voluntary reporting choices made by charities and inform charities, accounting firms, and regulators of factors influencing charities’ choice of financial reporting frameworks.
... In summary, this study contributes to the voluntary disclosure literature by examining a unique financial reporting framework choice currently available in Australia for charities, in order to better understand the incentives for a charity to report in accordance with a more comprehensive financial reporting framework than that which is the minimum permissible. The examination of the differential reporting framework as well as the effects of regulatory change is also a timely issue that is of interest to charities, accounting firms, regulators and academics (Carey et al., 2014a;2014b;ACNC, 2015;Linnenluecke et al., 2017;AASB, 2017;2019a;2019b;ACNC, 2018b;Gilchrist and Simnett, 2019;Potter et al., 2019). In particular, the results from this study have direct implications for regulators and standard-setters in Australia, principally the ACNC and the AASB, which are both proposing changes to the financial reporting frameworks for not-for-profit (NFP) entities. ...
... The third SAC 1 factor pertains to the financial characteristics of the entity (para 22), with a focus on its relative level of indebtedness to external parties. 16 Higher levels of indebtedness, as proxied by both the debt-to-asset ratio and total liabilities, can be associated with a demand for higher quality financial information (Hay and Davis, 2004;Carey et al., 2014a). From a resource dependency theory perspective, a higher level of indebtedness can reflect an entity's financial reliance on creditors, which is expected to result in greater demand for financial information, as stated in the following hypothesis: ...
... As outlined in 16 It is recognized that the size of an entity is also a financial characteristic. Since size has been considered in the second indicative factor to measure the economic or political importance, it is not discussed here, consistent with Carey et al. (2014a). This is a matter of categorization and does not affect the results with regard the significance of the factors or the models. ...
... 13 Statement of Accounting Concepts 1 (SAC 1) and AASB 1053 Application of Tiers of Australian Accounting Standards, Available at: http://aasb.gov.au and presentation requirements of Tier 1 accounting standards but contains substantially reduced disclosure requirements. 14 There is some evidence that private NFPOs are starting to report under RDR, notwithstanding that there has been a considerable lag in the take up (Carey et al., 2014;Yang, 2018). ...
... Consequently, researchers claim that the reporting entity concept may be applied inconsistently by different entities. Carey et al. (2014), using the principles-based criteria in SAC 1, examined over 1,500 private companies and companies limited by guarantee, and found that the proportion preparing GPFRs is lower than expected based on factors indicating a need to produce GPFRs, while the proportion with these factors that are producing SPFRs is significant and growing. The authors concluded entities use SPFR because of their belief that presenting GPFRs is a more expensive option for acquittal than SPFRs. ...
Article
The examination of public and private not‐for‐profit sector financial reporting has been a topic of interest on a cyclical basis in Australia over the last 30 years. Traditional topics have included examinations of the intended and unintended consequences of specific standards, the accountability value of financial reports, transaction neutrality, compliance with the accounting standards, and more recently, the prospective implications of new, differently focused reporting standards considering such issues as income measurement and outcomes reporting. With increased recent attention from standard setters and regulators, and greater data availability, the opportunities for undertaking impactful research in these and related areas are increasing. In this paper, we focus on research that has examined the following questions: (i) Which private and public NFPOs lodge financial reports and what is reported; (ii) Who are the users and what are their information needs? (iii) Which private and public NFPs should lodge financial reports and what should be included in them; and (iv) How should the accounting frameworks for NFP sector reporting be set? For each of these issues, we identify the research gaps and opportunities for further research.
... Until the eighties papers in TAR and in other leading journals have mostly incorporated multiple inductive studies on accounting theories, for example, critical analysis of accounting principles (Rorem, 1937), corporate entity fiction and accounting theory (Husband, 1938), addressing current problems in accounting (Vance, 1944), review of current developments (Herrick, 1950), course contents framing (Walden, 1951), association with large firms (Suojanen, 1954), inductive approach (Schrader, 1962), statement writing (Sterling, 1967), Chambers's views (Iselin, 1968), events approach (Sorter, 1969), research perspectives (Wheeler, 1970), review of Accounting Principles Board Statement (Schattke, 1972), Littleton on accounting thought (Bedford & Ziegler, 1975). The accounting researches since the 1980s primarily have focused on practice aspects of accounting adopting deductive approach, and even the trend is continuing in this decade, for example, standards implementation guidance (Proell & Nelson, 2007), PAT (Jeanjean & Ramirez, 2009), accounting errors and system approach (Adams & Hester, 2013), reporting entity concept (Carey, Potter, & Tanewski, 2014), blended learning in accounting (Weil & Silva, 2014), accounting conservatism (Xie, 2015), accounting policy making (Sudana, 2016), articulation of accounting principles (Rutherford, 2016), accounting and gender-cultural imperialism (Davie, 2017). The trends of studies since last nine decades have shifted focuses from inductive approach to deductive approach. ...
Article
The study attempts to assay the relevance of accounting theories by adopting a cross-sectional research design through survey from randomly chosen graduate and post graduate commerce students of Tripura, a north-eastern Indian state. Based on literature research hypotheses and a model are formed; the reliability and validity of the instrument is checked before the final survey. The inferential statistics indicate likely to conclude that pedagogy impacts perception on accounting theories which in turn influence practices, accounting standards, financial statements, and accounting researches. It acknowledges few limitations; practice implications and policy importance are indicated and draws a roadmap for further studies.
... Nonetheless, the area has attracted a lot of attention in recent publications and is starting to emerge as one of the healthiest and most fruitful research streams. There are many emerging areas in audit research, including competition and pricing (Carson, 2013;Carson et al., 2014;Ciconte et al., 2015;Dutillieux et al., 2013;Kend et al., 2014;van der Laan and Christodoulou, 2012); the effects of regulatory change (Carey et al., 2014;Houghton et al., 2013;Lee et al., 2013); trust (Howieson, 2013); reputation (Bigus, 2015); and audit judgement and decision making (Trotman et al., 2011). ...
Article
This paper uses bibliographic mapping techniques to map the research conversation in four Pacific Basin accounting journals listed on the Social Sciences Citation Index (Abacus, Accounting and Finance, Australian Accounting Review, and the Australian Journal of Management). We identify the main research streams in these journals as Accounting Standards, Environmental Accounting, Earnings Management, Disclosure, Conservatism, Auditing, Impairment, Cost of Capital, and Corporate Governance. We critically review each research stream, identify emerging research trends, and suggest an agenda for future research on accounting in the Pacific Basin.
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We provide evidence on the application of the reporting entity concept by Australian charities by correlating the type of financial report with the indicators of reporting entity status posited under Statement of Accounting Concepts 1 (SAC1). In addition, we present evidence on the quality of charity financial reporting by investigating compliance with certain requirements of Australian accounting and auditing standards. We examine a random sample of 574 charities, comprising 10% of large charities that lodged financial reports with the Australian Charities and Not‐for‐Profits Commission in 2014. We find that while some indicators of reporting status are statistically significant in explaining reporting choice, their economic significance is weak. Consequently, we conclude that the application of the reporting entity concept is inconsistent, and raise questions about the effectiveness of SAC1 and the quality of charity financial reporting.
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Since 2010, proprietary companies have had a choice of preparing three types of financial reports that vary in scope. We find that between 2010 and 2015, most proprietary companies in our random sample chose the lowest scope option, with very low quality financial reports. Few adopted the new option provided by AASB 1053 Application of Tiers of Australian Accounting Standards. The characteristics of the firms that adopted each type of report are consistent with the regulator's intention. Our findings should provide a better understanding of how accounting standards impact practice, and should assist regulators to reform private company financial reporting.
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Kademeli finansal raporlama kavramı, bu araştırmanın odak noktasıdır. Çalışmada, ilk olarak, Avustralya’daki uygulama geçmişten günümüze incelenmiş, bu ülkedeki kademeli finansal raporlamanın yeni çerçevesini oluşturan iki kademeli yaklaşımın nasıl oluşturulduğu açıklanmıştır. Bu bağlamda, çalışmada, Kademe 2’de benimsenen finansal tablo açıklamaları azaltılmış tam set UFRS’nin nasıl geliştirildiği tartışılmış ve son olarak Avustralya’daki uygulama esas alınarak Türkiye’deki finansal raporlama için üç kademeli yaklaşım önerisinde bulunulmuştur.
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This paper develops recommendations for simplified decision-useful SME financial reporting in Australia - a country that has traditionally allowed a wide range of reporting standards to be used by these entities. Drawing on interviews and comment letters from a number of stakeholders, and data from a survey of users of financial statements of non-publicly accountable unlisted entities, we analyse stakeholder arguments for and against SMEs providing less detailed reports, and identify the line items that might be most useful to users for decision-making.
Book
This book is based on the author's experience with calculations involving polynomial splines. It presents those parts of the theory which are especially useful in calculations and stresses the representation of splines as linear combinations of B-splines. After two chapters summarizing polynomial approximation, a rigorous discussion of elementary spline theory is given involving linear, cubic and parabolic splines. The computational handling of piecewise polynomial functions (of one variable) of arbitrary order is the subject of chapters VII and VIII, while chapters IX, X, and XI are devoted to B-splines. The distances from splines with fixed and with variable knots is discussed in chapter XII. The remaining five chapters concern specific approximation methods, interpolation, smoothing and least-squares approximation, the solution of an ordinary differential equation by collocation, curve fitting, and surface fitting. The present text version differs from the original in several respects. The book is now typeset (in plain TeX), the Fortran programs now make use of Fortran 77 features. The figures have been redrawn with the aid of Matlab, various errors have been corrected, and many more formal statements have been provided with proofs. Further, all formal statements and equations have been numbered by the same numbering system, to make it easier to find any particular item. A major change has occured in Chapters IX-XI where the B-spline theory is now developed directly from the recurrence relations without recourse to divided differences. This has brought in knot insertion as a powerful tool for providing simple proofs concerning the shape-preserving properties of the B-spline series.
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This paper analyzes the survival of organizations in which decision agents do not bear a major share of the wealth effects of their decisions. This is what the literature on large corporations calls separation of 'ownership' and 'control.' Such separation of decision and risk bearing functions is also common to organizations like large professional partnerships, financial mutuals and nonprofits. We contend that separation of decision and risk bearing functions survives in these organizations in part because of the benefits of specialization of management and risk bearing but also because of an effective common approach to controlling the implied agency problems. In particular, the contract structures of all these organizations separate the ratification and monitoring of decisions from the initiation and implementation of the decisions.
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This paper is the first in a two-part series on conservatism in accounting. Part I examines alternative explanations for conservatism in accounting and their implications for accounting regulators. Part II summarizes the empirical evidence on conservatism, its consistency with alternative explanations, and opportunities for future research. The evidence is consistent with conservatism's existence and, in varying degrees, the various explanations. Conservatism is defined as the differential verifiability required for recognition of profits versus losses. Its extreme form is the traditional conservatism adage: "anticipate no profit, but anticipate all losses." Despite criticism, conservatism has survived in accounting for many centuries and appears to have increased in the last 30 years. The alternative explanations for conservatism are contracting, shareholder litigation, taxation, and accounting regulation. The evidence in Part II suggests the contracting and shareholder litigation explanations are most important. Evidence on the effects of taxation and regulation is weaker, but consistent with those explanations playing a role. Earnings management could produce some of the evidence on conservatism, but cannot be the prime explanation. The explanations and evidence have important implications for accounting regulators. FASB attempts to ban conservatism in order to achieve "neutrality of information" without understanding the reasons conservatism existed and prospered for so long are likely to fail and produce unintended consequences. Successful elimination of conservatism will change managerial behavior and impose significant costs on investors and the economy in general. Similarly, researchers and regulators who propose the inclusion of capitalized unverifiable future cash flows in financial reports should consider the costs generated by their proposal's effect on managerial behavior.
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We examine the financial reporting practices of small privately held businesses that are not subject to SEC regulation. Specifically, we determine the factors associated with the production and use of financial statements for firms that have discretion in the preparation of financial statements and do not face the demands of public equity markets. In addition, for firms that prepare financial statements, we determine the factors associated with the sophistication of the financial statements in terms of whether the financials are compiled, reviewed, and/or audited by a professional accountant and whether the firm produces accrual-based financial statements. Finally, we examine the potential benefits afforded firms producing financial statements, having audited financial statements, and having accrual-based financial statements. We find that firms with audited financial statements benefit in the form of greater access to credit and that firms with accrual-based financial statements benefit in the form of a lower cost of credit.
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In this paper we draw on recent progress in the theory of (1) property rights, (2) agency, and (3) finance to develop a theory of ownership structure for the firm.1 In addition to tying together elements of the theory of each of these three areas, our analysis casts new light on and has implications for a variety of issues in the professional and popular literature, such as the definition of the firm, the “separation of ownership and control,” the “social responsibility” of business, the definition of a “corporate objective function,” the determination of an optimal capital structure, the specification of the content of credit agreements, the theory of organizations, and the supply side of the completeness-of-markets problem.
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SYNOPSIS This archival study addresses whether the presence or absence of “bright lines” in a lease accounting standard influences the classification of leases as capital or operating. To the best of our knowledge, our study is the first archival research to address the association between lease classification decisions and the use of U.S. GAAP and IFRS lease accounting standards. We examine firms' lease classification decisions using 2007–2009 data from a matched sample of members of the Fortune Global 500 that report under U.S. GAAP and IFRS. Consistent with experimental work by Agoglia et al. (2011), we find strong evidence that U.S. GAAP firms using a lease standard containing bright-line guidance (i.e., ASC 840) are more likely to classify leases as operating than IFRS firms adhering to a lease accounting standard that lacks the bright lines of the U.S. standard (i.e., IAS 17). Also consistent with Agoglia et al. (2011), we find little evidence of increased dispersion accompanying financial reporting under IFRS. In fact, we find some evidence suggesting the use of IFRS may actually lead to lower dispersion in reporting outcomes.
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We provide new evidence on the production of audited GAAP financial statements by large U.S. privately held firms. We find that over 60% of these firms, which control $4 trillion of assets, do not produce audited GAAP financial statements. Using across industry, within industry, and within firm tests over time, our analyses reveal that several important characteristics — such as profitability, firm age, growth, ownership changes, and presence of intangibles — partially explain this variation. These findings are consistent with financial statements reducing information asymmetry and serving a stewardship role. However, economically substantial variation remains unexplained by traditional variables. Our findings suggest that incomplete contracting and alternative mechanisms, such as relationships and tangible assets, are useful alternatives to producing audited GAAP financial statements, even for large firms. Our study informs researchers, standard setters, and regulators on the actual use of audited GAAP financial statements in the broader U.S. economy and raises additional questions for future research.
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This paper first describes the components of a conventional cost‐benefit analysis, a decision tool that is widely used to evaluate large public‐sector projects such as dams. It then compares a conventional cost‐benefit analysis to the approaches used by financial reporting standard‐setters and others to evaluate the costs and benefits of changes in authoritative accounting guidance. The last portion of the paper describes how accounting research provides analyses of effects of changes in accounting standards and describes how these effects‐analyses differ from, and are similar to, a conventional cost‐benefit analysis.