The application of the decision-usefulness theory to the standard setting on non-financial information
Name: Henk-Jan Spit Student number: S1928872 Study: Master Accountancy & Controlling
University: Rijksuniversiteit Groningen Email: H.spit.1@student.rug.nl Counsellor: dhr. D.A. de Waard
Assessor: dhr. L. Wielens Datum: January 23, 2017
Abstract
Currently the IASB’s approach to standard setting is based on the ‘decision-usefulness theory of accounting to investors’ and aimed at setting requirements for the measurement and reporting of financial information. Were the IASB to make it an objective to set standards on Non-Financial
Information (NFI), they should reconsider the users and uses of general purpose financial reporting. The evidence presented in this thesis shows that NFI is useful to a broader stakeholder audience than just the investors. Besides the assessment of future cash flows by investors, the NFI is also useful to the assessment of a company’s Licence to Operate by the stakeholders other than the investor. This Thesis ultimately leads to the ‘Decision-usefulness theory of Non-Financial Accounting to Stakeholders’ and could be used as a frame of reference to the standard setting on NFI.
Preface
Dear Reader,
I’m proud to present the Thesis that I have written to complete the Master Accountancy & Controlling at the Rijksuniversiteit Groningen.
Hereby I would like to thank Dick de Waard and Jan Niewold for their counselling. Furthermore, I thank my colleagues of FSO Zwolle for their hard work on our joint clients, so I was able to write this Thesis. And last, but certainly not least, I want to thank my future wife and children for their support along the way!
I hope you enjoy reading this Thesis as much as it enjoys me to be able to say that I have completed my study!
Henk-Jan Spit
Table of contents
Abstract 2 Preface 3 Table of contents 4 1 Introduction 5 2 Theory 62.1 The established standard setters and their current approach to standard setting 6
2.1.1 Defining the established standard setters 6
2.1.2 IASB’s approach to standard setting 7
2.2 Decision-usefulness 7
2.2.1 Users of the financial statement 8
2.2.2 Uses of the financial statement 8
2.2.3 Nature of accounting 9
2.2.4 The IASB’s conceptual framework and the decision-usefulness theory 10
2.3 Non-Financial Information 11
2.3.1 Definition of information in respect to decision making 12
2.3.2 The landscape 12
2.3.3 Complete framework 13
2.3.4 Users and uses of NFI 14
2.4 Research questions 16
3 Method 17
4 Results 18
4.1 Standard setting process 18
4.1.1 Governance of the IFRS Foundation 18
4.1.2 The IASB’s standard setting process 19
4.2 Application of the decision-usefulness theory 21
4.2.1 Subjects interviewed 21
4.2.2 Results 22
4.3 Amendments to the conceptual framework 23
4.3.1 Standards for NFI the IASB’s responsibility? 24
4.3.2 Amending the conceptual framework 24
5 Conclusions and discussion 25
5.1 Main question 27
5.2 Discussion 27
References 29
1
Introduction
Globalization, the response to the financial crisis, heightened expectation of corporate transparency and accountability, actual and prospective scarcity of natural resources, population growth and environ-mental concerns, have changed the way that business is conducted and how businesses create value (IIRC, 2011). Value creation is only partially captured by current financial statements, since the financial statement mainly reflects financial and manufactured capital (EY, 2016). Other forms of capital, like the ones identified by the International Integrated Reporting Committee (IIRC), are intellectual, human, social and relationship, and natural (IIRC, 2011). These capitals are not, or only partially, visible in current financial statements (IIRC, 2016). If this non-financial information were to be disclosed, it would enable decision makers to analyse the impact a company has on society at large (EY, 2016).
Regarding non-financial information, the European Parliament put directive 2014/95/EU into force (FEE, 2014). From 2017 the directive requires large European companies to disclose information on at least environmental, social, and employee-related matters, as well as on the respect for human rights, anti-corruption, and bribery issues (FEE, 2016). But setting standard for non-financial information is not jet an objective of the established accounting standard setters. For example, the International
Accounting Standards Board (IASB) states: ‘The objective of general purpose financial reporting is to provide financial information about the reporting entity that is useful to existing and potential investors, lenders and other creditors in making decisions about providing resources to the entity’ (IASB, 2012). Therefore, the standards of the established standard setters do not yet include requirements for the non-financial information described above.
Recently one of the members of the International Organization of Securities Commissions (IOSCO), an organisation representing the world’s securities regulators and who closely work together with the IASB to develop and implement IFRS standards, called upon the IASB to set standards on non-financial information (AFM, 2016). If the established standard setters are to make it an objective to include requirements for non-financial information in their standards, they will need to make choices on what events should be accounted for, how they should be measured and how they should be communicated. Standard setters base their choices of alternative ways to present accounting information on their believe of which technique will produce the most useful information for economic decisions by investors (Bell 1987 and Williams 2015). This infers that the non-financial information ought to be decision useful to investors as well, were it to be disclosed. Standard setters have embedded the use of this theory in their objectives for their approach to standards setting. But currently the established standard setters only use the decision-usefulness theory to infer the nature and the types of financial information that the investor needs for economic decisions (Staubus, 1999). The decision-usefulness theory is not used by the established standard setters to study the use of non-financial information in decision making. The theory might therefore not yet be able to set out an approach for standard setters to make choices on what events should be accounted for, how they should be measured and how they should be
communicated to the user when it comes to non-financial information.
The current form om the decision-usefulness theory might therefore not yet be suitable for the
established standard setters in making decisions on the nature and type of non-financial information to disclose. This leads to the main question:
Is the decision-usefulness theory suitable for the established standard setters for their approach to future standard setting on non-financial information?
In chapter 2 the literature regarding the established standard setters and their current approach to standard setting will be studied together with the literature on Non-financial information. This results in three research questions. In chapter 3 the method that is used to gather the data to answers the
research questions is elaborated, followed by a description of the results derived from the analysis of the collected evidence (Chapter 4). This thesis will conclude with the answers to the research questions and the conclusions drawn (Chapter 5).
2
Theory
Because this thesis revolves around the question how standard setters can approach the standard setting regarding NFI, the first paragraph of this chapter defines the established standard setters and their current approach to standard setting (paragraph 2.1). In paragraph 2.2 the decision-usefulness theory currently applied by the established standard setters in their standard setting approach will be put apart, followed by a discussion on non-financial information (paragraph 2.3). This chapter will end with the definition of the research questions (paragraph 2.4).
2.1 The established standard setters and their current approach to
standard setting
2.1.1 Defining the established standard setters
The Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) have developed (and are still developing) the only two global-scale systems of financial reporting (IASB, 2012). The FASB aims to improve financial reporting under Generally Accepted Accounting Principles (GAAP) for the benefit of investors of financial information in the United States (U.S.) capital markets (FASB, 2016), where the IASB sets the global accounting standards – International Financial Reporting Standards (IFRS).
The IASB’s mission is one of convergence to global accounting standards. In a statement, they declared that their aim is to develop a single set of high quality, understandable and enforceable global
accounting standards that require high quality, transparent and comparable information in financial statement and other financial information to help participants in the world’s capital markets and other users make economic decisions (IASB, 2001).
On November 15, 2007, the United Stated Securities and Exchange Commission (SEC) voted to allow foreign companies to submit financial statements to the Commission without having to include a
reconciliation from IFRS data to US GAAP, but only if the financial statements are prepared using IFRS as issued by the IASB. The SEC states that the purpose of the requirement to use the IASB-approved version is ‘to encourage the development of IFRS as a uniform global standard…’ (SEC, 2007). On August 27, 2008, the SEC proposed a roadmap toward global accounting standards. The proposed multi-year plan sets out several milestones that could lead to the use of IFRS by U.S. issuers (SEC, 2008). Since the announcement was made, the SEC has been working on methods to incorporate the international statements into the U.S. Reporting Systems (SEC, 2011).
Because of the worldwide commitment to IFRS and the FASB’s movement towards IFRS, I see the IASB as the main (future) standard setter. Therefore, the IASB is designated as the established standard setter in the remainder of this thesis. In the next paragraph the IASB’s approach to standard setting for
2.1.2 IASB’s approach to standard setting
In their approach to standard setting, the IASB developed a ‘conceptual framework’. In general terms, a conceptual framework is a statement of generally accepted theoretical principles which forms the frame of reference for a particular field of enquiry.
The framework starts with a discussion of the objective of general purpose financial reporting. The IASB defined the objective of general purpose financial reporting as:
‘to provide financial information about the reporting entity that is useful to existing and potential investors, lenders and other creditors [collectively, ‘providers of capital’] in making decisions about providing resources to the entity.’ (IASB, 2010)
Based on the IASB’s objective, the financial reporting is concerned with providing useful financial information to help investors make economic decisions. The decision-usefulness theory will be discussed in more detail in paragraph 2.2.
2.2 Decision-usefulness
Before the decision-usefulness theory is elaborated in more detail, it’s important to understand that the Decision-usefulness theory is part of a broader concept, the Financial Accounting Theory (FAT). The problem that FAT tries to tackle, is that some parties to business transactions have an information advantage over others. When this is the case, information asymmetry occurs. There are two types of information asymmetry. The first type is adverse selection. Adverse selection occurs when firm management or other insiders have an information advantage over outside investors. The insiders can exploit this advantage at the expense of the outside investors (Scott, 2012). Scott notes that financial accounting and reporting is a mechanism to control adverse selection, because it requires inside information to be converted to outside information which creates a ‘level playing field’ trough full
disclosure of useful information to investors. The decision-usefulness theory studies which information is useful to the users of financial information when making an economic decision. Once the information that is useful to the investor has been identified, standard setters can set standards that require
companies to account and report this useful information. Moral hazard is the second type of information asymmetry. This type arises when the manager’s effort in running the firm is unobservable by the investor. Management might not devote enough effort in running the firm in the best interest of the investors (Scott, 2012). As an investor, you want useful information to assess how efficiently
management have used resources. Evaluating the management performance is called stewardship or accountability. The standard setter should set standards that requires companies to account and report information that allows the investor to evaluate the management effort.
Because the Conceptual framework of the IASB only recognises the decision-usefulness theory and the fact that the IASB has not made it an objective to provide information to enable stewardship, I will not consider the effects of stewardship on the standard setting of the IASB. Hereafter, the decision-usefulness theory will be elaborated.
The decision-usefulness theory can be applied in any situation you want to determine which information is useful to a particular decision maker. For example, when commuters want to know the quickest route from A to B, providing information about the length of traffic jams on the alternative routes available will be useful in the decision-making process. Basically, the decision-usefulness theory is a theory that infers the information needed (useful information) by certain decision makers (users) in making a particular
decision (uses). When applied to accounting standard setting, the theory is known as the ‘decision-usefulness theory of accounting to investors’ (hereafter the decision-‘decision-usefulness theory) (Staubus, 2000).
First, the users and uses of the accounting information are elaborated. Once it has been determined which information is useful to the uses and users, choices need to be made on how to measure and report this information (paragraph 2.2.3). Lastly, it is explored if the IASB’s approach to standard setting include all the aspects of the decision-usefulness theory.
2.2.1 Users of the financial statement
Although the early stages the theory of decision-usefulness focused on the identification of the users of financial accounting information, it was soon concluded that the investor is the main user of financial reporting. These users make critical resources allocations decisions that affect the economy (Young, 2006). By providing information, financial reporting helps holders of capital to select the economic units which can use the capital most efficiently and avoid those firms which can’t use it efficiently (Staubus, 1961). In 1989 the focus on providing information to investors was formally adopted by the IASB, when the conceptual framework defined the investor as the primary user.
Therefore, the objective of accounting to investors became to provide useful financial information regarding an enterprise for the use of making investment decisions. The decision-usefulness theory lays out the approach the standard setters should use in making a choice between alternative ways to present accounting data. But in order to understand what information is useful to an investor, a major question must be addressed first: what are the decision problems of the investors? This is discussed in the next paragraph.
2.2.2 Uses of the financial statement
By understanding the decision problems the investors face, standard setters should be able to determine the information needs of investors. Standards can then be prepared with these information needs in mind. In other words, tailoring standards to the specific needs of investors will lead to improved decision-making.
To determine the specific needs of the investors, the decision-usefulness turned to theories in
economics and finance for assistance. It turned to the ‘single-person theory of decision’ and ‘theory of investments’ in particular (Scott, 2012). Based on these theories an investor must make a decision under conditions of uncertainty. In order to make this decision, the decision maker must receive information to determine the advantages and disadvantages of each of the possibilities. Therefore, the dilemma is to choose between alternative courses of action. Additional information allows the decision maker to revise the subjective assessment of the probabilities of each course of action, and make a better informed economic decision. Therefore, decision theory is relevant to accounting because the financial statement provides the decisions makers with additional information that is useful to the investors.
Investment decisions are cash flow-oriented decisions (Staubus, 2009). The decision maker is interested in any information on the future course of the firm’s cash balance and future cash receipts and
disbursements. The information reported by an organisation is of value to the investor if it’s useful in predicting the times and amounts of returns from the enterprise to the investor. Accounting can provide information about the times, amounts and uncertainty of future enterprise cash flows, i.e. of cash flow potentials. Therefore, standard setters should set accounting standards that provide the investors with evidence of the firm’s cash flow potential.
But how can accounting determine what events should be accounted for, how they should be measured and how they should be communicated? This will be discussed in the next paragraph.
2.2.3 Nature of accounting
The primary characteristics of accounting is that it deals with economic events (Staubus, 1961). After learning of an event the accounting department needs to account it. Accounting is defined as
‘identifying, classifying, and measuring, and then reporting, the effects of economic evens upon specific economic units’ (Staubus, 1961). This is done with the purpose of providing financial information which will be of assistance in making economic decisions.
But an economic event can be accounted for in many ways (for example measured in different ways by using different methods). For that reason, a framework of concepts and procedures has been developed to aid in making accounting decisions, i.e. choosing from alternative methods of accounting for
economic events. This framework results in a multiple-criteria approach for evaluating of different accounting methods (Staubus, 1976). The criteria that have been identified are:
I. Relevance;
The economic event is relevant to the decision-making of the investor if ‘…knowledge of its amount would help the decision maker evaluate the outcome of one of more of the alternative courses of action under consideration’ (Staubus 1976). It has to have a predictive value (Libby et al., 2012).
II. Reliability;
Information is reliable if it is accurate, unbiased and verifiable (Libby et al., 2012) or in other words it must be an accurate representation of the event (Staubus, 1976).
III. Comparability;
Comparability is important because it allows the investor to compare a set of financial statements with those of prior periods and those of other companies.
IV. Understandability;
The accounting data should be presented in such a way that an investor with a reasonable knowledge of business and finance, and the willingness to study the information, should be able to comprehend the information.
V. Timeliness;
The timeliness criteria require the information to be frequent (for example an annual report) and to be reported without too much lag i.e. there should not be too much time between the reporting period and the date the financial statement is issued (Staubus, 1976).
VI. Optimal disclosure; and
The optimal disclosure refers to the completeness of the information disclosed. Although the materiality and the cost of producing must be taken in consideration (Staubus, 1976).
VII. Cost of producing
The accounting activities cost money (salaries of the accounting department, audit fees, etc.). The production of accounting data must therefore be cost-benefit efficient.
VIII.Cost of Utilization
The cost of utilization of data is pictured by Staubus (1976) as follows ‘If the financial statement he [the investor] want to consider together; if he [the investor] must make his own additions, subtractions and divisions in order to obtain the sums, differences and ratios he [the investor] needs; if he must plough through many pages of details in order to extract the data he needs – all of these circumstances add to the costs of utilizing accounting data’
When choosing what financial information to disclose, trade-offs must be made between these criteria. Sometimes a bit of relevance must be scarified for some more reliability. But none of these seven criteria can be completely absent (Staubus, 1976). Staubus states that if an accounting method does not meet one of these criteria, it is not acceptable.
Subsequently, based on the last three paragraphs. when evaluating which events to account for, how they should be measured and how they should be communicated, the standard setter should follow the next steps:
Figure 1. Diagrammatic outline: features of the theory (Staubus, 2000)
If the IASB’s conceptual framework include all the features of the decision-usefulness theory (figure 1) is discussed in the next paragraph.
2.2.4 The IASB’s conceptual framework and the decision-usefulness theory
As discussed in paragraph 2.1.2 the IASB’s is concerned with providing useful financial information to help investors make economic decisions. The IASB considers the financial information to be useful if it enables the providers of capital to assess the prospects for future net cash inflows to an entity (IASB, 2010). This is because all decisions made by such providers of capital depend on their assessment of amount, timing and uncertainty of the entity’s future cash inflows (IASB, 2010).This shows that the conceptual framework focusses on the investor and recognised the cash flow-orientated decisions of the investor (features 2 and 3 of figure 1). What the conceptual framework doesn’t show is how the IASB identifies which information is relevant to the cash flow orientated
decisions (feature 4 of figure 1) and how they determine the cash flow potential (feature 5 of figure 1) of certain information. This will be the topic of research question 1 (please see paragraph 2.4).
Furthermore, the IASB applies qualitative characteristics (feature 6 of figure 1) when evaluating different ways to measure and present information:
Staubus (2000) IFRS Relevance X X Faithfull representation/Reliability X X Comparability X X Understandability X X Verifiability X** X Timeliness X X Completeness X X* Cost of producing X X Cost of utilization X X
* completeness is part of IFRS’ Relevance and is related to materiality: ‘information is material if omitting … it could influence the decision of the user of the financial information’ (ISAB, 2012).
** Not a separate criterion identified by Staubus, but this part of reliability (Libby et al., 2012). Thus, based on the statements made in the framework, the framework defines the users (the investor) and the uses (to supply the investor with financial information to enable them to assess the prospects for future net cash inflows in order to make an economic decision) of the general purpose financial reporting. Furthermore, it incorporates the criteria in order to make measurement and reporting choices. This approach therefore follows the approach set out by the decision-usefulness theory. How the IASB ascertain themselves that information is relevant and has a cash flow potential will be elaborated in paragraph 4.1. But based on an initial review of the conceptual framework, the IASB’s framework provides a theoretical basis for evaluating which events should be accounted for, how they should be measured and how they should be communicated to the investors (IASB, 2012).
The process depicted in figure 1 is currently applied by the IASB to the standard setting on financial information and sets out a structured approach in choosing among alternative ways to account and report. If this approach could also be applied in the standard setting to Non-Financial Information will be the topic of research question 2 (see paragraph 4.2). But before the research can be started, Non-financial information should be defined in more detail first. This is discussed in the next paragraph.
2.3 Non-Financial Information
In this paragraph, Non-Financial Information (NFI) is discussed. First, I will look at the general definition of information. Secondly, the promotors of standards for Non-Financial information and the nature of the NFI disclosed by these setters of alternative standards are being discussed (paragraph 2.3.1). Subsequently, the gaps between the current information disclosed by the established standard setter (IASB) and the available NFI will be put apart (paragraph 2.3.2), followed by the definition of NFI in the remainder of this thesis (2.3.3). This chapter ends with a discussion on the users and uses of NFI.
2.3.1 Definition of information in respect to decision making
The decision theory defines information as: Information is evidence that has the potential to affect an individual’s decision (Scott, 2012). But does NFI meet this definition?
Information disclosed is deemed value relevant if there is a significant association between the
accounting number and the equity market value (Barth et al., 2001). Researchers have been providing evidence for Value Relevance by testing if information disclosed by financial statement has an
association with the share price. The research value relevance indicates that non-financial information (Jennings et al.,1996; Hassel et al., 2005) have proven to be value relevant to investors. Based on the research on value relevance there is some evidence that suggests that the NFI affects an individual’s decision. Therefore, NFI meets the definition of information in respect to the decision making. This infers that NFI is relevant to include in the financial statement. But what types of NFI are available? This is being discussed in the next paragraph.
2.3.2 The landscape
In the introduction of this thesis it is explained that value creation is only partially captured by current financial statements, since the financial statement mainly reflects financial and manufactured capital (EY, 2016). The other forms of capital e.g. the non-financial information is only partially visible in current financial statements (IIRC, 2016).
The IIRC is an important promotor of alternative voluntary standards that include NFI. The IIRC is a global coalition of regulators, investors, companies, standard setters, the accounting profession and NGO’s and has developed the international Integrated Reporting Framework (IR). The primary purpose of IR is to explain to providers of financial capital how an organization creates value over time. The ability of an organization to create value for itself enables financial returns to the providers of financial capital. This ability is interrelated with the value the organizations creates for society at large through a wide range of activities, interactions and relationships. An integrated report aims to provide insight about the resources and relationships used and affected by an organization, which are collectively referred to as ‘Capitals’ in IR. The capitals (intellectual, human, social and relationship, and natural) are stocks of value that are increased, decreased, or transformed trough the activities and outputs of the organization. Therefore, these standard, which are discussed in more detail below, include NFI that is not reported under the standards of the established standard setters.
But the IIRC is not the only party with a different view on the direction corporate reporting should be heading. The IIRC started the ‘Corporate Reporting Dialogue (CRD)’ which is an initiative designed to respond to market calls for greater coherence, consistency and comparability between corporate reporting frameworks, standards and related requirements (IIRC, 2016). Besides the IIRC, the dialogue has seven more participants that have developed corporate reporting standards. Amongst the
participants are the two established standard setters (FASB and IASB) as discussed in paragraph 2.1. Hereafter, the other five organizations participating in the dialogue are highlighted:
1. Global Reporting Initiative (GRI)
The Global Sustainability Standards Board (GSSB) is responsible for setting the first globally accepted standards for sustainability reporting, known as the GRI Sustainability Reporting Standards. The GSSB is a NGO and is formed of members representing a range of expertise and multi-stakeholder perspectives on sustainability reporting. GRI represent the global best practice to report on a range of economic, environmental and social impacts.
2. ISO 26000 – Social responsibility (ISO)
ISO is an independent, non-governmental international organization that sets standards for certification purposes, not necessarily standards for corporate reporting. ISO 26000 is ‘the international standard developed to help organizations effectively assess and address those social responsibilities that are relevant and significant to their mission and vision; operations and processes; customers, employees, communities, and other stakeholders; and environmental impact’ (ISO, 2016). The goal of the standard is to contribute to global sustainable development. But the format of an organization's reporting is at the organization's discretion. ISO refers to GRI when it comes to guidelines for reporting on the
implementation of ISO 26000.
3. Sustainability Accounting Standards (SAS)
The Sustainability Accounting Standards Board (SASB) is an independent U.S. NGO. Their mission is to develop sustainability accounting standards (SAS) that help public corporations disclose material, decision-useful information to investors.
4. Carbon disclosure Project (CDP)
CDP is a non-profit organization that gathers environmental data from standardized reports submitted by its members (organizations). The collection of self-reported data from thousands of companies is supported by institutional investors. The data and insights are used to make better-informed decisions.
5. The Climate Standard Disclosure Board (CSDB) Framework
The CDSB Framework sets out an approach that helps organizations prepare and present environmental information in mainstream reports (such as annual reports), to provide consistent, comparable and clear decision-useful information for investors. The board exists from members from business and
environmental organizations.
Although there are more alternative reporting standards available then described above, the organizations participating in the dialogue see themselves as the ‘key organizations’ with regards to corporate reporting standards. This becomes apparent from the targets the Corporate Reporting Dialogue has set themselves: ‘The CRD will represent a meaningful response to market calls for
alignment of corporate reporting frameworks, standards and related requirements and a reduction in the reporting burden, by promoting proactive engagement between the key organizations.’ (IR, 2014). In the next paragraph the gap between the information disclosed by the IASB and available NFI is further looked into.
2.3.3 Complete framework
In respect to The Corporate Reporting Dialogue, the IIRC created a landscape map (CRD, 2016). The map provides an overview of the corporate reporting initiatives, as described in paragraph 2.1.1 and 2.3.1 of this thesis, and demonstrates the gaps between the participants’ reporting standards from the perspective of Integrated Reporting.
As discussed above, The IIRC and its IR aim to provide insight about the resources and relationships used and affected by an organization, referred to as capitals (the NFI). The capitals are categorized as
financial, manufactured, intellectual, human, social and relationship, and natural capital. The landscape map includes an overview of how each reporting initiative relates to the six capitals. Figure 1 shows the gaps between the NFI disclosed by the promotors of alternative standard and the Financial information disclosed by the IASB.
Figure 2. Scope of standards or framework through the lens of IR (IIRC, 2016)
From the perspective of the IIRC, the IASB only fully covers (shown as full circle in figure 2) the financial capital. But largely the NFI, provided by Integrated Reporting and the other promotors of alternative standards, are only partially covered (Shown as half a circle in figure 2) or not covered at all by the IASB. Thus, if the IASB is willing to broaden their scope and include NFI in their standards, they are yet to set standard on NFI regarding manufactured, intellectual, human, social and relationship, and natural capital.
But will the users of the general purpose financial reporting be using NFI were it to be disclosed? This will be discussed next.
2.3.4 Users and uses of NFI
According to the IASB the investor is the primary user of the financial reports (please see paragraph 2.2.1). But it is argued that companies are currently accountable to a wider stakeholder audience than just the existing and potential investors (FEE, 2015). The IASB’s Conceptual Framework acknowledges that users other than investors may find the general purpose financial reports useful, but the reports prepared in compliance with IFRS are not primarily directed at these other groups (IASB, 2014). The IIRC does recognize other stakeholders as users of reports compliant with the IR Framework: ‘an integrated report benefits all stakeholders interested in an organization’s ability to create value over time, including employees, customers, suppliers, business partners, local communities, legislators, regulators and policy-makers’ (IIRC, 2012).
But although other stakeholders might benefit from the NFI provided to them by IR, the investors are still the providers of financial capital. And because the IASB find financial reporting ‘…critically important to the effective functioning of capital markets, efficient capital allocation, global financial stability and
sustainable economic growth’ (IASB, 2014), the investor will most likely remain the primary user in the eyes of the IASB. This is underlined by a report written by the ‘Effect Analysis Consultative group’ that was established by the IASB to develop an agreed methodology for field testing and effect analyses of current and standards and standard being developed. The consultative group states the IASB ‘…should not tailor financial reporting to meet the needs of these other [stakeholder] parties.’ (IASB, 2014). Therefore, the only thing that will changes about the uses and users of financial reports, is that the definition of ‘financial information’ will be extended to ‘financial and non-financial information’ once the IASB recognizes the usefulness of NFI to the decision-making process of investors or when Financial Market Supervisory Authorities will formally ask the IASB for standards on NFI (please see chapter 1). But although the IASB’s objective is not to directly provide information to the other stakeholders mentioned by the IIRC, one cannot deny that these stakeholders have an (indirect) influence on what information needs to be disclosed to the investors. Stakeholders are ‘those groups and individuals who can affect, or are affected by, the achievement of an organizations mission’ (Freeman, 2010). Because the stakeholders can affect the ability of the entity to achieve its missions, Freeman’s stakeholder theory argues that in order to achieve the entities mission, the entity must identify each major stakeholder and the strategic issues that affect these stakeholders. Next, the entity must understand how to formulate, implement and monitor strategies for dealing with that stakeholder group.
For example, if the customers have concerns about the environmental impact of a company’s production process or children being employed (child labour), public pressure might lead to an entity considering altering their product design or manufacturing process. If these future alterations lead to an increase in costs, related to for example more expensive but durable materials, large investments in machines that reduce the carbon emission, or more expensive (non-child) labour, it might affect the entities ability to achieve its missions. Based on the decision-usefulness theory of accounting to investors, the investor is interested in any information on the future course of the firms’ cash balance and future cash receipts and disbursements. consequently, the investor would like to be provided with information about the entities current carbon emission, their goals on carbon emission and compliance with human-rights, and their strategy to achieve these goals.
As made clear in the example above, NFI can be useful in economic decision making by investors, The user and uses of NFI are therefore not necessarily different from those of financial information which puts no restrictions on the use of the decision-usefulness theory of accounting to investors to determine what events should be accounted for, how they should be measured and how they should be
2.4 Research questions
To answer the main question: ‘Is the decision-usefulness theory suitable for the established standard setters for their approach to future standard setting on non-financial information?’, the answer to several research questions must be found first.
In order to assess if the decision-usefulness theory is suitable for setting standards on non-financial information, it is important to know how the IASB currently applies the decision-usefulness theory and if they follow every step of the theory (see figure 1). In paragraph 2.1.2 the IASB’s approach to standard setting and their use of the decision-usefulness theory is discussed, but in the conceptual framework the IASB doesn’t state how they particularly apply the theory. For example, how do they assure themselves of the fact that their requirements for financial reporting yield the information that is useful to the investors? This leads to the second question:
1. How is the decision-usefulness theory applied by the IASB in setting standards for financial information?
Subsequently, it is important to understand how the decision-usefulness theory can be applied to standard setting on NFI. For example, are the users and uses of NFI the same as those of the financial information or do they differ? This will become clear when the next question is answered:
2. How can the decision-usefulness theory be applied in setting standards for Non-Financial information?
If the evidence gathered for question 2 shows that the decision-usefulness theory can be applied in setting standard on NFI in general, but the users, uses or criteria for choices of measurement and reporting differ from those of financial information, then the question arises how the IASB can incorporate the decision-usefulness theory of non-financial accounting in their approach to standard setting.
3. How can the IASB’s conceptual framework be amended to enable the IASB to set standards on Non-financial information?
In the next chapter the method for gathering and evaluating evidence to answer the research questions will be put apart.
3
Method
The research method comprises a case study. The case to be observed is the current standard setting process by the IASB. Because the standard setting is done through a public international consolation process (see paragraph 4.1), the process, the bodies involved, the procedures that need to be followed, the requirements that need to be met, etcetera, are publicly available and are therefore able to be studied in order to answer research question 1.
There are many outside parties (not directly related to the IFRS Foundation) involved in the standard setting process. These parties are consulted by the IASB during the entire process of standard
development (see paragraph 4.1). As will be put apart in paragraph 4.1.2, the IASB evaluates the costs and benefits –collectively called ‘the effects’- of the proposed standards. The Board continuously seeks information from preparers of financial information, users (investors, analysts and other stakeholders), auditors, academics and others (i.e. local regulators, local tax authorities and local standard setters) to asses these effects. This is being done so that the IASB can assure themselves that the new
requirements are cost-beneficial to the preparers and users of the information.
Because this thesis is about the decision-usefulness theory of accounting to investors, the goal is to identify how the IASB identifies the information needed (useful information) by the investors in making an economic decision e.g. the benefits of the proposed standers mentioned above. Therefore, I will interview one person involved in the standard setting process, someone representing the investor in the standard setting process, an academic with IFRS expertise and an auditor with IFRS expertise. For questionnaire see appendix A.
The choice of interviewing the standard setter and the investor are obvious choices. But the choice of the academic and the auditor might need further explanation. The IASB states that it assesses archival and experimental studies undertaken by academics, because it can provide evidence of the relevance of financial information (IFRS Foundation, 2014). Therefore academics play an important role in providing evidence on useful information that can then be incorporated in new proposed standards. If the requirements in a Standard are not clear, or if there is no guidance, there might be uncertainty about how to account for a particular type of transaction (IFRS Foundation, 2014). This could lead information not being optimal useful. Also, the auditors might provide feedback on compliance of the new requirements with the criteria as described in paragraph 2.2.3. Therefore, auditors play an important role in providing feedback about the information meeting the criteria for it to be considered useful.
The interviews with the subjects are recorded. After the interview the conversation will be punt into transcript and send to the subject for approval.
By Interviewing the selected experts evidence is gather regarding the subjects view on the way the decision-usefulness theory can be applied in the standard setting for NFI (research question 2). Furthermore, the experts insights about the application of the decision-usefulness theory of non-financial accounting and this outcome compared to the application of the decision-usefulness theory to financial information, is key to understand how the IASB’s framework needs to be amended (research question 3).
The data gather to answer question 2 and 3 will be evaluated by analysing the answers related to each feature set out by the decision-usefulness theory (see figure 1).
4
Results
In the next paragraphs the results, based on the evidence gathered, will be described. One paragraph will be devoted to each of the three research questions. Chapter 5 concludes on the research questions.
4.1 Standard setting process
In this paragraph the evidence that is gather regarding the first research question is described: How is the decision-usefulness theory applied by the IASB in setting standards for financial information? is described.
Before the way the decision-usefulness theory is applied to the standard setting of financial information is described (paragraph 4.1.2), it is worthy to outline the different parties involved in the standard setting process of the IASB (paragraph 4.1.1).
4.1.1 Governance of the IFRS Foundation
The IASB is the accounting standard setting body of the IFRS Foundation. The IFRS Foundation is the oversight body of the IASB and includes governance and oversight (executed by the ‘IFRS Foundation trustees’) and support operations (performed by the ‘IFRS foundation staff’). The organization is overseen by a ‘Monitoring Foundation Monitoring Board’. This structure is depicted below (figure 3).
Figure 3. Structure of the IFRS (IFRS foundation, 2016)
Furthermore, there are advisory bodies and committees involved in the standard setting process. Two of these are discussed in more detail. First, the IFRS Interpretations Committee. It is the interpretative body and assists the IASB in improving financial reporting trough identification, discussion and
resolution of financial reporting issues within the IFRS framework. Secondly, the IFRS Advisory Council. This is the formal advisory body to the IASB and the Trustees of the IFRS Foundation. It consists of representatives from groups that are affected by and interested in the IASB's work. The IASB consults the Advisory Council on several topics. Amongst other things, it provides advice on projects, especially on practical application and implementation issues, including matters relating to existing standards.
4.1.2 The IASB’s standard setting process
The IFRS is developed through an international consultation process, called the ‘due process’. The ‘Due Process Handbook’ (IFRS Foundation, 2013) of the IFRS Foundation describes the due process
requirements of the IASB and its Interpretation Committee. The due process comprises six stages, which are outlined below. Because the goal studying the standard setting process is to determine how the decision-usefulness theory is applied by the IASB (research question 1), some aspects of the standard setting process are left out in the description below (for example the emphasis of the study lies on the involvement of the investor in the standard setting process, which leaves out the involvement of the preparer of the information). The description will therefore not provide a full picture of the standard process, so that it gives a clear view on the way the decision-usefulness theory is applied.
1. Setting the agenda
The agenda is a work program that is a full list of current and future projects. To help the IASB in considering its agenda, the Foundation staff (staff) are asked to identify, review and raise issues that might warrant the IASB’s attention. Whether to add a project to the agenda (known as the ‘technical work program’) the IASB or its Interpretation Committee requires a project proposal and an assessment against the project criteria to assure whether a proposed agenda item will address users’ needs. When the IASB considers potential agenda items, it may decide that some issues require additional research before it can take a decision on whether to add the item to its agenda. Such issues may be addressed as ‘research projects’ on the IASB’s work plan. The purpose of the research program is to analyse possible issues by collecting evidence on the nature and extent of the perceived shortcoming and assessing potential ways to improve financial reporting or to remedy a deficiency. The research can also include an assessment of how investors are using information, identifying if investors need to collect additional information to supplement what is contained in the financial reports, or adjust the data. Analysis of independently prepared empirical research might also provide potential issues (IFRS Foundation, 2014).
Projects could lead to the development of a new standard, a major amendment to existing standards, or a narrow-scope project for the purpose of implementation and maintenance.
2. Planning the project
At this stage the IASB decides whether to conduct the project alone or jointly with another standard-setter. Furthermore, it considers to establish a consultative group and it selects the staff that will be working on the project. The consultative group is a specialist of expert advisory group and supports the IASB with additional practical experience and expertise.
3. Developing and publishing the Discussion Paper
After the research project has been planned, the IASB typically progresses with a discussion paper. The IASB develops the paper or its views on the basis of analysis drawn from staff research and
recommendations, as well as suggestions made by the IFRS Advisory Council, Consultative groups and standard-setters and presentations from invited parties. The discussion paper includes:
- a comprehensive overview of the issue;
- possible approaches in addressing the issue; and - the preliminary views of its authors or the IASB.
The IASB then invites the public to comment on the discussion paper. Once the comment period for the discussion paper ends, the project team analyses and summarizes the comment letters from the public.
The results of this analyses and a summery are provided to the IASB. If the IASB is satisfied that it has identified a financial reporting matter for which the IFRS requirements should be changed, the project is transformed from a ‘research project’ to a ‘standard-setting project’ on the technical program.
4. Developing and publishing the Exposure Draft
At the Exposure Draft stage the IASB sets out specific proposals for new or revised standards. Before it publishes the exposure draft, the IASB needs to assesses the likely costs of implementing proposed new or revised standards and ongoing costs and benefits associated of these new and revised standards. The IASB’s assessment of the costs and benefits associated with the new or revised standard is called the ‘Effect analysis’. The ‘Due process handbook’ of the IASB state that ‘In forming its judgement on the evaluation of the likely effects, the IASB considers issues such as:
…
(c) how the changes will improve the user’s ability to assess the future cash flows of an entity; (d) how the improvements to financial reporting will result in better economic decision-making; (e) the likely effect on compliance costs for preparers, both on initial application and on an ongoing
basis; and
(f) how the likely costs of analysis for users (including the costs of extracting data, identifying how the data has been measured and adjusting data for the purposes of including them in, for example, a valuation model) are affected. The IASB should take into account the costs incurred by users of financial statements when information is not available and the comparative
advantage that preparers have in developing information, when compared with the costs that users would incur to develop surrogate information.’ (IFRS Foundation, 2013).
The Board seeks information from preparers of financial information, users (investors and other stakeholders), auditors, academics and others (i.e. local regulators, local tax authorities and local standard setters) (IFRS Foundation, 2014) about the costs and benefits. Trough fieldwork such as meetings with interested parties, establishing specialist groups, and/or ‘Request For Information’ from the public, the IASB assesses the effects. Also, the IASB might undertake work that demonstrates why investors find the information disclosed by the proposed standard useful. Therefore, the analysis is not quantitative of sort, but instead a qualitative assessment.
When the IASB has reached general agreement on the technical matters in the project and has considered the likely effects of the proposals, it votes to have the technical staff the Exposure Draft balloting.
5. Developing and publishing the Standard
After the comment period on the exposure draft ends, the staff reviews the comment letters received from the public.
Because Investors are likely to be under-represented as submitters of comment letters, the IASB takes additional steps to consult investors on proposed standards. These additional steps could include surveys, private meetings, webcasts and meetings with representative groups. Feedback from this focused consultation with investors is considered and assessed along with the comment letters received from the public. The technical staff summarises the major issues that have come to their attention.
After resolving matters arising from the comment letters on the Exposure Draft, the IASB considers whether it should expose its revised proposals for public comment, for example by publishing a second Exposure Draft. This might be the case when substantial issues emerged during the comment period. Once the IASB is satisfied that it has addressed all matters, it instructs the staff to draft the standard. Finally, after the due process is completed and the IASB members have balloted in favor of publication, the Standard is issued.
6. Procedures after a Standard is issued
The Due process then enters the ‘post-publication and maintenance’ face. Directly after the standard is issued, meetings are held with interested parties, to help understand unexpected issues that have arisen from practical implementation.
Furthermore, once the Standard has been effective for two to three years, the Due Process requires the IASB to conduct a Post-Implementation Review (PIR) of each new standard of major amendment. In a PIR the IASB assesses the effect of the new requirements on the investor, preparers and auditors. To determine the scope of the review, the IASB makes preliminary enquiries with a broad range of
constituents. Also, the IASB consults the wider IFRS community to help identify areas where unexpected problems were encountered. These areas are identified by considering comments letters received, potentially supplemented by a review of financial statements, interviews, surveys and review of academic literature.
The outcome of this review may result in items being added to the IASB’s work plan. The Due process then again starts at step one as described above.
4.2 Application of the decision-usefulness theory
In this paragraph the evidence that is gather regarding the second research question is described: How can the decision-usefulness theory be applied in setting standards for Non-Financial information?
Before the results are put apart it is worthy to provide information about the backgrounds of the subjects that were interviewed, as this might support the validity of the results.
4.2.1 Subjects interviewed
The results that will be elaborated below are based on the evidence gather from interviews with tree participants. Their role in the standard setting process is described below:
Investor (hereafter ‘the Investor that was interviewed’)
The Investor is the policy advisor reporting & audit at a company that looks after the interests of institutional investors regarding corporate governance and sustainability. In that capacity, he is a member Capital Markets Advisory Committee (CMAC). As a member of the CMAC he provides input into concepts and proposals that the (IASB) is developing. This from the perspective if the investors.
Academic (hereafter ‘Academic’)
The Academic is a professor of Financial Accounting at a Dutch University. Furthermore, he is a former chairman of the Dutch standard setter (Raad voor de Jaarverslaggeving, or RJ). In that capacity, he has had discussions with the IASB. On a European level the RJ provided feedback on the IASB’s proposals trough the European Financial Reporting Advisory Group (EFRAG).
Auditor (hereafter ‘Auditor’)
The Auditor is the Global IFRS leader of a big four accountancy firm. He is responsible for keeping informed about the activities of the IASB and to make sure the IFRS is interpreted consistently in every office of the firm worldwide. In that capacity, he regularly consults with the IASB and the trustees of the IFRS Foundation. Furthermore, the Auditor is a former member of the Advisory Council and
Interpretation Committee of the IASB.
Because two of these subjects have been directly participating in the standard setting process of the IASB, I have not interviewed the standard setter separately.
4.2.2 Results
The results will be elaborated per feature of the decision-usefulness theory (please see figure 1), but before the results are put apart, it is important to determine the interviewees definition of NFI. Different perspectives on NFI could have an effect on the way the subjects interpret the uses and users of their definition of NFI. All the subjects indicated that NFI is an incredibly broad concept. Basically, it’s all information that is not financial and covers topics such as intellectual, environmental, social, ethical, human, etc.
NFI regarding these topics can be broken down into several categories of NFI. For instance, the investor and the academic that were interviewed distinguish verbal versus non-verbal (KPI’s or ratio’s). CO2 emission in metric tons, amount of employee related accidents, effectiveness rate of a medicine (in case of a pharmaceutical company) are examples of non-verbal NFI. Examples of verbal NFI are a risk
paragraph, an explanation of the business model or competitive landscape, and governance topics. This verbal NFI is more likely to be disclosed in the Directors’ Report.
The auditor on the other hand divides NFI into information that is needed to assess the financial performance or position of a firm and NFI that has no interface with the financial performance or position of the company. The former being information like environmental pollution that needs to be cleaned up or that could lead to claims for compensation. It must have a direct (future) financial consequence to influence the financial performance or position of the company. The latter being NFI that does not have a (future) financial consequence. According to the auditor, an example of this type of NFI is information about sustainability.
Users of NFI
After the NFI was defined by the subjects, they were asked about the users of NFI. All subjects state that the primary user of NFI is the investor. But the subjects, apart from the investor, indicated that NFI is also useful to other stakeholders.
Uses of NFI
According to all subjects, investors use NFI in the same was as financial information. This because just like the financial information, NFI helps the investor assess the future cash flows of a company. The
auditor furthermore adds that NFI that has no impact on the financial performance or position, does not impact the future cash flow, and is therefore less useful to the investor.
Why NFI is also useful to the other stakeholder is exemplified by the situation of Starbucks. According to the academic, that company didn’t disclose NFI about their tax structures and tried to pay the least amount of tax possible. When the general public found out, they called for a boycott of Starbucks in London. The Academic states that this indicates that the way businesses operate, which will probably be described in words (verbal) and is classified as NFI, can have an impact on how stakeholders choose to behave towards a company. An example provided by the auditor is about environmental information. Currently CO2 emission does not often lead to expenses and therefore has a low impact on the financial performance or position of a company. The academic and auditor state that this type of NFI is of interest to other stakeholders, because it helps the stakeholders to assess if the company’s behaviour is
acceptable in the general public’s view. It therefore enables the stakeholder to assess the company’s Licence to operate.
The auditor adds to the discussion of the uses of NFI, that events, where the NFI starts to materially impact the financial performance of a company, need to be converted to financial information. The example given by the auditor is in respect to the valuation of oil and gas reserves. If the reserves of all the oil and gas companies combined would be burned, the CO2 emission would exceed the cumulative CO2 limits set by national governments to halt the climate change. Consequently, these companies wouldn’t be able to sell all their reserves which could have a material impact on the valuation of the oil and gas reserves. If material, the information about climate change should be included in the
impairment test of the company’s assets. The NFI then starts to impact the financial performance of a company, which affects the future cash flow and the assessment of the investors.
Relevant information to cash flow decisions and evidence for cash flow potential
Above the subjects have given a few examples of NFI that is relevant to the assessment of future cash flows by investors and a few examples to assess the company’s Social Licence to operate. But at this point the subjects think it’s too early to say which NFI (for example information about sustainability) is relevant to the users (stakeholder including investors) and uses of NFI. The academic believes that a lot more research is needed before an answer to this questions can be founds. He states that this research is harder than the research regarding financial information, because of the diversity in stakeholders that are also interested in NFI.
Criteria for choices on measurement and reporting
The last feature of the decision-usefulness theory is to determine the qualitative characteristics that allow a standard setter to make measurement and reporting choices to NFI. When asked if the current qualitative characteristics of the IASB (as stated in the conceptual framework) are also applicable to NFI, the Academic and Investor state that that is the case. The Auditor found that he was not able to answer that question, and referred to the IIRC to answer that question.
4.3 Amendments to the conceptual framework
In this paragraph the evidence gathered regarding the third and last research question is described: How can the IASB’s conceptual framework be amended to enable the IASB to set standards on Non-financial information?
Before any needed changes to the framework are looked into, it’s good to establish what the subjects have to say about their view on the role of IASB in the standard setting of NFI.
4.3.1 Standards for NFI the IASB’s responsibility?
All the subjects interviewed indicated that some types of NFI can be useful to the investors. The objective of the IASB is to provide useful information to the investor. Shouldn’t the IASB make it an objective to set standards on NFI?
The academic doesn’t think it has to be the IASB that sets standards on NFI, because they are financial information orientated. If the IASB would make it an objective to set standards on NFI the IASB has to gain the expertise in regard to NFI. Furthermore, the IASB hasn’t set standards on the directors’ report (the main place for verbal NFI). The Investor that was interviewed was more explicit and stated that NFI is not the domain of the IASB. Their domain is financial reporting, and this has been the case for the last 30 years. He argues that it would cause a clash of cultures within the IASB if you ask them to set
standards on NFI. He continues by saying that the board of the IASB has a completely different mind-set than those of the standard setters on NFI (for example the IIRC). The Auditor states that the current standards already require companies to account and report NFI if it has a financial consequence (see paragraph 4.2.2 where material NFI needs to be converted to financial information), but when it comes to NFI that has no financial consequence, then it’s not the responsibility of the IASB to set standards on that type of NFI. But if they were assigned the task of setting standards on NFI, then the Auditor also states that the IASB does not have the necessary expertise. Furthermore, he believes that other board members should be appointed, because the current members are chosen based on their knowledge of financial reporting.
4.3.2 Amending the conceptual framework
As stated in paragraph 4.3.1 the subjects indicate that the standard setting on NFI by the IASB is a big ‘if’. Therefore, the changes that need to be made to the conceptual framework weren’t spoken about in much detail. But the subjects did give some examples of needed amendments if the IASB is to make it an objective to set standards for NFI.
The Auditor states that the framework is primarily aimed at the investor. If providing useful NFI becomes an objective, it should be considered to broaden the stakeholders defined within the framework.
Furthermore, the IASB’s current focus lays on the standards for the financial statement. Because of the verbal nature of some of the NFI, this type of information would most likely be disclosed within the director’s report. Therefore, making it an objective to also set standard on the director’s report might be inevitable.
The Investors that was interviewed furthermore adds that because of the nature, some NFI is not material to all companies. For example, CO2 is not as significant to labour intensive companies (EY or Randstand) compared to oil and gas companies (Shell). Currently, the standards for financial information are general and suitable to every type of company. The standards on NFI on the other hand should be more industry specific according to the Investor that was interviewed.
5
Conclusions and discussion
Before the main question is answered, I will first conclude on the tree research questions. How is the decision-usefulness theory applied by the IASB in setting standards for financial information?
The results show that the IASB focuses on providing financial information that is relevant (useful) to the decision making of the investors. When evaluating the likely effects of the proposed standards, the IASB considers how the changes improve the user’s ability to assess future cash flow potential and consults with investor on what information needs to be provided. Subsequently, when new standards have been drafted, the IASB might undertake work that demonstrates why investors should find the information, required by the proposed standard, useful. The conclusion is that the standard setting process of the IASB therefore follows all features of the decision-usefulness theory (figure 1) that needs consideration.
How can the decision-usefulness theory be applied in setting standards for Non-Financial information?
Based on the results, both the investor and other stakeholders are identified as the users of NFI. The investor uses the information to assess the future cash flows of the company. The NFI needed to assess the future cash flows is NFI regarding the financial performance or position of a firm. The other
stakeholders use the information to assess the company’s Social Licence to Operate (SLO). Or in other words, to assess the level of acceptance or approval by these stakeholders of the company’s operations.
Numerical statementFinancial
Impact on financial performance or position Impact on Licence to operate
Verbal Directors'report
More useful to investors
More useful to other stakeholders
Figure 4. categories of NFI and the usefulness to stakeholders.
M at er ia lN FI co nv er te d to FI
Furthermore, NFI in general can be divided into verbal and non-verbal (or numerical) information. Based on the results, both can be distinguished for NFI that is useful to assess the financial performance and the SLO of companies. Verbal NFI is more general of nature and is likely to be disclosed in the Director’s Report.
When the users and uses of NFI are combined in one concept, you get the model as shown above in figure 4. This model for NFI can be a basis for evaluating which NFI (for example information about sustainability or human resources) is relevant to which users and uses.
Trough empirical research or a process like the Due process of the IASB (see paragraph 4.1.2), evidence needs to be gathered to demonstrate what NFI has cash flow potential and what NFI has the potential to enable the assessment of the level of acceptance or approval of the company’s operations.
Once the NFI, that is useful to the decision making of the investors and other stakeholders has been identified, the qualitative characteristics that are applicable to financial information, are also applied to make choices between alternative methods of measurement and alternative ways to report the NFI. Based on Staubus (1976) decision-usefulness theory of accounting to investors, this leads to is the decision-usefulness theory of non-financial accounting to stakeholders (see figure 5).
How can the IASB’s conceptual framework be amended to enable the IASB to set standards on Non-financial information?
First of all, if the IASB is to make it an objective to include NFI in its standards, they need to decide if they want to broaden the audience of the annual reports. If they do, and they make it an objective to provide useful information to the other stakeholders, the decision-usefulness theory of Non-financial Information should be incorporated within the conceptual framework. The framework then also becomes a frame of reference for setting standards NFI for a wide range of stakeholders. Furthermore, the IASB must consider if they want to set standards for the Directors’ Report due to the verbal nature of some NFI. And lastly, the IASB must consider to set industry specific standards, because the measurement and reporting choices tend to be very specific per industry
5.1 Main question
Now the research questions have been answer, the main question remains:
Is the decision-usefulness theory suitable for the established standard setters for their approach to future standard setting on non-financial information?
In its essence the decision-usefulness theory is a theory that infers the information needed (useful information) by certain decision makers (users) in making a particular decision (uses). The way the theory has been applied to standard setting for financial information by the IASB is known as the ‘decision-usefulness theory of accounting to investors’. Because of the nature of NFI, the NFI is useful to a wider range of stakeholders. The stakeholders, other than the investors, make different decisions and therefore need useful information that differs from the information that is provided by the current standards that have been set by the application of the ‘decision-usefulness theory of accounting to investor’. Therefore, this variant of the decision-usefulness theory is not suitable for the standard setting on NFI.
When the users and uses of NFI are considered and incorporated in the decision-usefulness theory, it results in the decision-usefulness theory of Non-financial accounting to stakeholders.
5.2 Discussion
The model as depicted in figure 5 is a simplified representation of the decisions made and the information needed by investors and other stakeholders in order to enable a standard setter to
determine which information is useful to users and its decision. But the reality might be more complex. Some NFI might initially not be of direct interest to the investor, because at that moment it has a low impact on the financial performance or position. But if this NFI is of interest to the other stakeholders, and the other stakeholders act on this NFI (like boycotting a company because of the assessment of the SLO), then this can start to impact the financial performance or position of a company. The same goes for CO2 emission. Currently CO2 emission does not often lead to expenses and therefore has a low impact on the financial performance or position of a company. But the academic and auditor state that this type of NFI is of interest to other stakeholders, because it helps the stakeholders to assess if the company’s behaviour is acceptable in the general public’s view. If the other stakeholders act on this information (by choosing for a supplier that puts an effort in reducing CO2 emission) it can start to impact the financial performance or position of a company and becomes of interest to the investor. Then the information that is useful to the other stakeholder also becomes useful to the investor.
