i

STAKEHOLDERS’ PARTICIPATION IN THE DEVELOPMENT OF IAS 1

AND THEIR VIEW OF A PRINCIPLE-BASED DISCLOSURE

by:

REDYA PURNA

232011017

WORKING PAPER

Submitted to the Faculty of Economics and Business

to Fulfill a Part of the Requirements to Achieve

the Bachelor of Economics Degree

FACULTY : ECONOMICS & BUSINESS

STUDY PROGRAM : ACCOUNTANCY

SATYA WACANA CHRISTIAN UNIVERSITY

SALATIGA

2015

ii

FAKULTAS EKONOMIKA DAN BISNIS

UNIVERSITAS KRISTEN SATYA WACANA

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Telp : (0298) 21212, 311881

Telex 22364 ukwsa ia

Salatiga 50711 – Indonesia

Fax. (0298) 213433

STATEMENT OF AUTHENTICITY OF THE WORKING PAPER The undersigned below

Name : Redya Purna

NIM : 232011017

Study Program: ACCOUNTING

Faculty of Economics and Business

Satya Wacana Christian University

Salatiga

states that the working paper,

Title : Stakeholders‘ Participation in the Development of IAS 1

and Their View of a Principle-Based Disclosure

Supervisor : Like Soegiono, SE, MSi

Examined date: January 23, 2015

is really the result of my own work.

In this working paper there is no partially or wholly idea or writing from

other people that I take by copying or duplicating in the form of sentence or

symbol which I claim as my own idea without giving credits to the original

author.

If it is subsequently proven that I claim other people‘s idea or writing as my

own, I am ready to face the consequences as stated by the rules that applies in the

Faculty of Economics and Business, Satya Wacana Christian University,

including a revocation of the degree that I have achieved.

Salatiga, January 2015

The writer

REDYA PURNA

iii

STAKEHOLDERS’ PARTICIPATION IN THE DEVELOPMENT OF IAS 1

AND THEIR VIEW OF A PRINCIPLE-BASED DISCLOSURE

by :

REDYA PURNA

232011017

WORKING PAPER

Submitted to the Faculty of Economics and Business

to Fulfill a Part of the Requirements to Achieve

the Bachelor of Economics Degree

FACULTY : ECONOMICS & BUSINESS

STUDY PROGRAM : ACCOUNTANCY

Agreed by:

LIKE SOEGIONO, SE, MSi

SUPERVISOR

STUDY PROGRAM OF ACCOUNTANCY

FACULTY OF ECONOMICS AND BUSINESS

SATYA WACANA CHRISTIAN UNIVERSITY

SALATIGA

2015

iv

ACKNOWLEDGMENT

The researcher acknowledges that there are many people who help,

support, and motivate the researcher while he undergoes his study at Satya

Wacana Christian University and writes this working paper

Therefore, the researcher would like to express his biggest gratitude to the

following people and parties:

Mrs Like Soegiono, SE, MSi as a thesis supervisor in the writing of this working

paper who has given the researcher her time, energy, and ideas in the

process of completing this working paper.

Mrs Elisabeth Penti Kurniawati, SE, MAk as an academic supervisor to the

researcher who has helped the researcher in the process of study by giving

guidance and insights.

Every Lecturer at FEB-SWCU who has shared his/her knowledge and experience

while the researcher undergoes his study.

Every Administration Staff at FEB-SWCU who has helped the researcher in the

administration process while studying.

Accounting Competition Supervisors, Mrs Yeterina Widi Nugrahanti SE, M.Acc,

Mr Paskah Ika Nugroho SE, Msi, & Mr Ari Budi Kristanto SE, MM, who

have helped and supported the researcher while competing in various

accounting competitions.

Yosua, Ardy, Garry, & Agung as the researcher‘s best friends.

The researcher‘s accounting competition partners and best friends, Garry, Agung,

Ardy, Gilang, & Venny who have shared moments of joy and

disappointment with the researcher.

v

Astrid, Mateus, Ifo, Robby, Fiona, Iva, Mellisa, Vania CK, Vania Yunita, Cia,

Carolin, Ayu, Stephen Boe, Ian, Epafras, Adit Tori, Frenny, Stevano,

Rendy Suswanto, Rion, and Yonathan, as good friends of the researcher

while undergoing his study.

The researcher‘s juniors and mentor students, Pauline, Oni, Nico, Rendy,

Stephanie, Christine, Sundari, Ruben, Eki, & Claudia.

Every Assistant Lecturer in the Faculty of Economics and Business,

Every person and parties that have not been mentioned above.

God bless.

Salatiga, January 2015

Researcher

vi

MOTTO

Intelligence plus character - that is the goal of true education

(Martin Luther King Jr.)

Whether you think you can, or you think you can‘t—you‘re

right

(Henry Ford)

Be proud, but never satisfied

(Christian Guzman)

Intelligence is the ability to adapt to change

(Stephen Hawking)

The future depends on what we do in the present

(Mahatma Gandhi)

vii

PREFACE

The International Accounting Standards Board welcomes suggestions

from numerous parties around the globe in the development of its standards. The

purpose of this paper is to see the involvement of those parties (in this case

referred as ―stakeholders‖) in the development of IAS 1 through comment letters.

This paper also aims to see which one between principle-based accounting and

rule-based accounting is preferred by the stakeholders.

This working paper is written to fulfill one of the requirements to obtain a

Bachelor of Economics degree at the School of Accountancy, Faculty of

Economics & Business, Satya Wacana Christian University. The researcher is

aware that this paper is far from perfect. Hence the researcher welcomes all

suggestions and critics to improve this paper. Hopefully this paper will contribute

to the accounting world by increasing knowledge of international accounting

standards development.

Salatiga, January 2015

Researcher

viii

TABLE OF CONTENTS

Title Page.................................................................................................. i

Statement of Authenticity of the Working Paper.................................... ii

Agreement/Validation Page..................................................................... iii

Acknowledgment..................................................................................... iv

Motto....................................................................................................... vi

Preface..................................................................................................... vii

Table of Contents..................................................................................... viii

List of Tables............................................................................................ ix

List of Appendix...................................................................................... x

Abstract.................................................................................................... 1

1. INTRODUCTION............................................................................... 1

2. LITERATURE REVIEW.................................................................... 3

Previous Studies........................................................................... 3

The Amendments......................................................................... 6

Principle-Based Accounting........................................................ 9

3. METHODOLOGY.............................................................................. 11

4. RESULTS............................................................................................ 13

The Participant Composition....................................................... 13

Stakeholders‘ Level of Support................................................... 15

Stakeholders‘ View on Principle-Based Accounting.................. 19

5. CONCLUSIONS AND SUGGESTIONS.......................................... 24

REFFERENCES..................................................................................... 26

APPENDIX............................................................................................ 29

ix

LIST OF TABLES

TABLE 1. Criteria for Assessing Principle-Based or Rule-Based

Standard................................................................................. 11

TABLE 2. Criteria for Assessing the Participant‘s Answers.................. 12

TABLE 3. The Composition of the Participants..................................... 13

TABLE 4. The Participants‘ Responds towards the Amendments......... 17

TABLE 5. Assessing the Amended IAS 1.............................................. 21

x

LIST OF APPENDIX

APPENDIX 1. Questions Listed in ED/2014/01............................... 29

APPENDIX 2. List of Participants.................................................... 30

APPENDIX 3. Stakeholders Composition Based on Country and

Interest Group.......................................................... 33

APPENDIX 4. Example of a Comment Letter.................................. 35

1

Stakeholders’ Participation in the Development of IAS 1

and Their View of a Principle-Based Disclosure

ABSTRACT

Throughout the years, the IASB has been involving public opinion

in the development of International Accounting Standards. The

goal of this paper is to see the participation of major stakeholder

groups around the world in the development of IAS 1 via comment

letters, and their view of a principle-based accounting.

This paper confirms that the amended IAS 1 (as proposed by the

IASB in ED/2014/01) is leaning more towards a principle-based

accounting. The results show that overall, stakeholders around the

world agree with the intention of the amendments proposed by the

IASB, and at the same time agree with accounting standards that

are leaning more towards principle-base.

Keywords: Stakeholders, comment letters, International

Accounting Standard, principle-based accounting, rule-based

accounting

1. INTRODUCTION

The International Accounting Standards Board (IASB) considers

presentation and disclosure as parts of its revision of the Conceptual Framework

for Financial Reporting. That work will help the IASB when it develops new

Standards or amends existing Standards. To complement the Conceptual

Framework project, in 2013 the IASB started its Disclosure Initiative. The

Disclosure Initiative is made up of a number of projects (both short-term and

medium-term) and activities that explore how presentation and disclosure

principles and requirements in existing Standards can be improved. (IASB 2014)

Exposure Draft Disclosure Initiative: Proposed Amendments to IAS 1

(ED/2014/01) is the result of a short-term project under the Disclosure Initiative.

It proposes narrow-focus clarifying amendments to IAS 1 Presentation of

Financial Statements to address some of the concerns about existing presentation

2

and disclosure requirements, and to ensure that entities are able to use judgment

when applying that Standard. (IASB 2014)

This IASB project is in accordance with what the Group of 100 (G100, i.e.

an organization of chief financial officers from Australia‘s largest business

enterprises with the purpose of advancing Australia‘s financial competitiveness)

proposed in its publication Less is More in 2009. This project is a response to an

invitation by Sir David Tweedie (the IASB Chairman, 2001-2011) to develop a

set of principles for guiding decisions when we determine disclosures required by

accounting standards.

G100 believes that a principle-based framework is necessary for assessing

current disclosures and developing new disclosure requirements. G100 argues that

many entities and users are questioning the value that the disclosure requirements

of International Financial Reporting Standards (IFRS) bring to users of financial

reports. The volume and complexity of disclosure have a negative impact by

distracting users from the information relevant to their decision making. There is a

risk that quantity outweighs quality (G100, 2009).

ED/2014/01 Disclosure Initiative: Proposed Amendments to IAS 1, was

published by the IASB on March 25, 2014. Although July 23, 2014 was the

deadline for submitting comment letters, the IASB accepted comment letters

submitted after the deadline. The last comment letter was received and published

by the IASB on August 19, 2014. A total of 118 comment letters have been

received and published by the IASB on their website (www.ifrs.org).

This research aims to see the participation of different types of

stakeholders around the globe and their opinion of the amendment of IAS 1 that is

leaning towards a principle-based approach. This research is similar to a research

by Huian (2013) related to ED/2009/12 Financial Instruments: Amortized Cost

and Impairment. The previous research aims for a specific view of stakeholders‘

support to the new standards for Financial Instrument. This research aims for a

broader view since IAS 1 is related to all reporting entities required to use IFRS as

their basis for reporting, and observes the stakeholders‘ point of view regarding a

more principle-based approach in accounting. Besides the 2 reasons above, the

3

different year of issuance of the exposure draft itself can lead to different sets of

stakeholders commenting on the draft based on their country/continent, since

some countries (e.g. Indonesia) had just recently begun to fully adopt IFRS since

2012 (Phase 1 - except for IAS 41, IFRS 1, and IFRIC 15) (DSAK 2014).

The researcher addresses a set of research questions as follows:

1. How are the stakeholders who submit comment letters regarding

ED/2014/01 composed based on their interest and country/continent?

2. What level of support do the stakeholders show regarding the amendment

upon IAS 1 as stated in the exposure draft?

3. Based on the answers to research question 2, how does the public react to

accounting standards that are leaning more towards principle-base?

The outcome of this paper can become a reference for standard-setting-

bodies when they develop new standards for accounting, especially standards that

are more principle-based. At the same time, the researcher also hopes that this

paper will benefit the readers by giving more understanding about the

development process of accounting standards, especially international accounting

standards.

This paper is organized as follows: section 2 describes the main findings

of relevant literature, the amendments of IAS described by the ED/2014/01, and

the criteria for assessing principle-based and rule-based regulatory. Section 3

describes the research methodology. Section 4 provides the results, and divided

into three parts to answer each research question. Section 5 provides conclusions

and suggestions.

2. LITERATURE REVIEW

Previous Studies

To give opportunities to interested parties to discuss and debate their

proposals, the standard-setters undertake a range of outreach and stakeholder

communication activities. There are several ways in which companies and

4

individuals can influence the development of a financial reporting standard:

comment letters, round-table meetings, individual meetings with organizations or

representative bodies or webinars, live webcasts and online surveys (Huian 2013).

Some studies such as Sutton (1984), Tandy & Wilburn (1996), Georgiou

(2002), Georgiou (2005), Georgiou (2010), and Huian (2013), have addressed the

subject of stakeholders‘ participation in the accounting standard setting process.

Most of these studies use the analysis of comment letters submitted by the

stakeholders to reach their goal. The stakeholders are parties who submit

comment letters in response to the standard setter‘s exposure drafts (Huian 2013).

Provided below are the group of stakeholders as proposed by Huian (2013) with

some modification:

1. Accounting Profession comprises professional accounting bodies, public

accounting firms, and other accounting groups. Their participation in the

accounting standard setting process is of common knowledge because they

have provided important resources to IASC/IASB in the form of finance,

personnel, technical expertise, and members for many of the IASC/IASB‘s

committees (Cortese et al. 2010).

2. Users include financial analysts and financial investors. Users‘

participation in the development of new accounting standards is motivated

by the obtaining of standards that provide useful information in financial

statement (Durocher 2007). Accounting standard setters value their input

and ask them to clearly state their needs by clearly commenting on them

(IASB).

3. Preparers include entities obligated to prepare financial statement in

accordance to the IFRS. Prepares‘ strong engagement in lobbying on

accounting standards is motivated by the revenue and earnings pressures

on top management or by the consequences on management

compensations (Zeff 2008).

4. Business Association consists of organizations composed by Users,

Preparers, or other interested groups besides the accounting association.

5

5. Regulators consist of accounting standard setters, stock exchange

regulators, and other government entities. National accounting standard

setters have always been considered key constituents by the IASB (Street

2006). Also, the international board has been aware of the significant role

played by regulators in achieving the main IASB‘s objective, i.e. high

quality global standards, and has paid special attention to their opinions

(IASCF 2010).

6. Others are represented mainly by academic communities and individuals

whose affiliation cannot be clearly established.

Exposure Drafts are the IASB‘s main vehicle for consulting the public. An

Exposure Draft sets out a specific proposal in the form of a proposed Standard (or

amendment to an existing Standard). The development of an Exposure Draft

begins with the IASB considering: issues on the basis of staff research and

recommendations; comments received on any Discussion Paper; and suggestions

made by the IFRS Advisory Council, Consultative groups, and accounting

standard-setters, and arising from public education sessions. After resolving issues

at its meetings, the IASB instructs the staff to draft the Exposure Draft. When the

draft has been completed, and the IASB has balloted on it, the IASB publishes it

for public comment (IASB). Some people might question if the IASB really does

take the public opinion into consideration when they develop accounting

standards, but recent evidence from the comment hearing of ED/2009/12 in 2009

related to financial instruments has proven that the IASB does listen to the

public‘s opinion. ED/2009/12 generated a lot of discontent from the stakeholders,

as a result the IASB decided to publish a supplement on the ED in 2011 in which

it proposed significant changes to the most disapproved principle (Huian 2013).

The stakeholders‘ comment and position towards a certain exposure draft

may vary depending on their interest. According to the capture theory, all

members of society are economically rational; therefore, each of the stakeholders

will try to influence the standard setting body into developing standards that

benefits them the most. In the presence of diverse and often conflicting interest,

6

the standard setting body should strike a balance between them by making

political choices. An ideal standard setting process would allow stakeholders to

contribute to standard setting, but also prevent any one party to dominating the

process (Godfrey et al. 2010).

The number of stakeholders that send comment letters from a certain

country or continent may also vary. Larson (2007) suggested that the number of

participants for each continent may vary, depending on the countries‘ position

towards the international accounting standards.

EU responses dominated, which might be expected given that the

EU required its 7,000 listed companies to prepare consolidated

accounts using IFRS in 2005. Low responses came from the USA,

which is not expected to require US companies to use IFRS, and

Canada, which did not until January 2006 approve a five-year plan

to converge Canadian GAAP with IFRS. Responses from countries

requiring the use of IFRS ‗equivalents‘ produced mixed results.

For example, Australia and New Zealand, which adopted

‗equivalents‘ that were quite close to IFRS, provided a relatively

large number of responses. Conversely, Malaysia and Singapore,

which adopted ‗equivalents‘ not in full agreement with IFRS,

generated responses from only their national accounting standard-

setters (Larson 2007).

The Amendments

The Exposure Draft (ED/2014/01) published by the IASB contains

proposed amendments to IAS 1 Presentation of Financial Statements. The

amendments were resulted mainly from the IASB‘s Disclosure Initiative (as

described in the Introduction). One proposal comes from a submission to the IFRS

Interpretations Committee (regarding presentation of items of other

comprehensive income arising from equity-accounted investments). Because the

proposed amendments to IAS 1 are similar in nature, they are considered by the

IASB at the same time and are presented in one Exposure Draft. (IASB 2014)

Related to those issue, the IASB provides 3 sets of questions listed in

ED/2014/01. Each question respectively calls for public view regarding: (1)

Disclosure Initiative amendments, (2) Presentation of items of other

7

comprehensive income arising from equity-accounted investments, and (3) The

transition provisions and effective date of the amendments.

Question (1) of the exposure draft regarding Disclosure Initiative

amendments consists of 4 sections. Participants are asked whether they agree or

disagree with each section. Described below are the 4 sections and the overview

of each section as quoted from the exposure draft:

A. Materiality

The IASB proposes to amend the materiality requirements in IAS 1 to

emphasize that:

a) entities shall not aggregate or disaggregate information in a manner that

obscures useful information;

b) the materiality requirements apply to the statement(s) of profit or loss and

other comprehensive income, statement of financial position, statement of

cash flows and statements of changes in equity and to the notes; and

c) when a Standard requires a specific disclosure, the resulting information

shall be assessed to determine whether it is material and consequently

whether presentation or disclosure of that information is warranted.

B. Information to be presented in the Statement of Financial Position or the

Statement(s) of Profit or Loss and other Comprehensive Income

The IASB proposes to amend the requirements for presentation in the

statement of financial position and in the statement(s) of profit or loss and

other comprehensive income by:

a) clarifying that the presentation requirements for line items may be fulfilled

by disaggregating a specific line item; and

b) introducing requirements for an entity when presenting subtotals in

accordance with paragraphs 55 and 85 of IAS 1.

C. Notes

The IASB proposes to amend the requirements regarding the structure of the

notes by:

8

a) emphasizing that the understandability and comparability of its financial

statements should be considered by an entity when deciding the systematic

order for the notes; and

b) clarifying that entities have flexibility as to the systematic order for the

notes, which does not need to be in the order listed in paragraph 114 of

IAS 1.

D. Disclosure of Accounting Policies

The IASB proposes to remove the guidance in paragraph 120 of IAS 1 for

identifying a significant accounting policy, including removing unhelpful

examples.

Question (2) of the exposure draft asks whether the public agrees with the

proposed amendment to IAS 1 which arises from the presentation of items of

other comprehensive income arising from equity-accounted investments. The

amendment clarifies that entities shall present the share of other comprehensive

income of associates and joint ventures accounted for using the equity method:

a) by whether those items will or will not be subsequently reclassified to profit or

loss (as intended in the 2011 amendments to IAS 1); and

b) presented in aggregate as a single line item within those classifications.

Question (3) of the exposure draft asks for public opinions regarding the

transition provision and effective date of the amendments to IAS 1. Provided

below are the IASB‘s suggestions upon the effective date of the amendment as

quoted from paragraph 139N of the exposure draft.

Disclosure Initiative (Amendments to IAS 1), issued in [date],

amended paragraphs 29–31, 54, 82, 82A, and 113–117, added

paragraphs 30A, 55A, 85A–85B, and 113A, replaced paragraph

115 in full and deleted paragraph 120. An entity shall apply those

amendments from the effective date of [date]. Earlier application is

permitted. If an entity applies those amendments for an earlier

period it shall disclose that fact. (IASB 2014)

The IASB also decided that there will not be any transition provisions

upon implementing the standards. The IASB did not consider that additional

transition provisions were necessary or beneficial.

9

To answer research question 3 regarding public view upon standards that

are leaning toward a principle-based approach, this research will focus more on

the answers of question (1) of the exposure draft, since the issue related to the

question (disclosure initiative) has a broader coverage upon the financial

statement.

Principle-Based Accounting

The researcher believes that the standards in accounting itself have never

been a pure principle-based or rule-based regulatory system. The regulatory

system is always a mixture of both (Heffes 2004, Burgemeestre et al. 2009, Illiano

2012). For this reason the researcher has always used the term ―leaning towards‖

when describing whether the standards are ―more‖ principle-based or rule-based.

In the debate between rules and principles we often see a tendency

to classify legislative systems as either principle-based or rule-

based. The advantages of principles are then depicted as the

disadvantages of rules, and vice versa. However, in practice the

distinction is not so clear cut. In fact, most regulatory systems

contain a mixture of rules and principles. Rules may become more

principle-like through the addition of qualifications and exceptions,

whereas principles may become more rule-like by the addition of

best-practices and requirements. (Burgemeestre et al. 2009)

The question is not which approach is better, but how to search for the best

mixture between a principle-based and a rule-based regulatory system.

One reason why relatively younger standard setting regimes appear

more principles-based is that they have not had as much time to

accrete rules. Therefore, every accounting standard will exist

somewhere along a spectrum between rules and principles. The

goal must be to seek the ‗sweet spot‘ on that spectrum.

(Burgemeestre et al. 2009)

Although the IASB never stated that the amendments in the exposure draft

related to disclosure initiative are leaning towards principle-based regulatory, the

researcher is sure (provided in section 4) that these new standards are more

principle-based by using the criteria provided by Cunningham (2007) and

Burgeemestre et al. (2009) to localize a regulative system on the continuum.

10

Cunningham (2007) provided 3 dimensions to distinguish between principle-

based or rule-based regulatory system, while Burgeemestre et al. (2009) proposed

4 additional characteristics to help distinguish if a single standard is leaning

toward principle-based or rule-based. Provided below are the 7 criteria as quoted

from Burgeemestre et al. (2009):

1. The temporal dimension indicates when the content of a regulation is

provided: rules define boundaries ex ante, i.e., before adoption and

implementation, whereas a principle is settled ex post, when compliance is

being audited. A rule-based system initially requires more effort from the

regulator, because details need to be fixed in advance; a principle-based

system requires effort from the subject.

2. The conceptual dimension distinguishes between principles and rules by the

properties of being general versus specific, abstract versus concrete, and

universal versus particular. The number of clarifications, details, exceptions,

or limitations may serve as an indicator.

3. The functional dimension considers the relative discretionary power of the

participants in the regulative process. Rules are defined by the regulator.

Principles tend to give more space for interpretation to both subjects and

auditors.

4. A declarative representation specifies what situation is required. How this

should be achieved is left to the discretion of the implementer. Procedural

descriptions specify how (i.e. by what actions) an objective should be

achieved. Generally principles are formulated in a declarative way; typical

rules are procedural.

5. What knowledge is needed to apply a regulation? Applying rules requires

relatively little knowledge. Knowledge of the rule itself and the concepts

involved suffice. Applying principles requires more knowledge, such as

knowledge of the context and of all other relevant principles.

6. How are exceptions handled? A form of reasoning may be defeasible, in the

sense that exceptions may occur and overrule the original line of reasoning, or

strict, in the sense that no exceptions are allowed.

11

7. To resolve conflicts between different exceptions we need a kind of priority

order or weight. In other words: for principles there is a conflict resolution

mechanism; for rules no conflicts are possible.

Table 1: Criteria for Assessing Principle-Based or Rule-Based Standard

Dimension Typical Principles Typical Rules

1. Temporal Ex post Ex ante

2. Conceptual General/ universal/ abstract Specific/ particular/ concrete

3. Functional Large discretionary power Little discretionary power

4. Representation Declarative (what) Procedural (how)

5. Knowledge needed Quite a lot Relatively little

6. Exception handling Allow for exception

(defeasible)

All or nothing (strict)

7. Conflict resolution By weight (trade off) No conflicts possible

(Source: Burgeemestre et al. 2009)

3. METHODOLOGY

Content analysis upon the comment letters is used to analyze the

stakeholders‘ participation and level of support regarding the amendments of IAS

1 provided in the Exposure Draft Disclosure Initiative: Proposed Amendments to

IAS 1 (ED/2014/01). All of the comment letters are obtained from the IASB‘s

website (www.ifrs.org), while information related to the stakeholders that submit

the letters is obtained from their respective website (if possible) or other various

sources from the internet.

The total number of letters submitted and analyzed is 118. Responses to

the questions provided by the ED/2014/01 (Q1a, Q1b, Q1c, Q1d, Q2, and Q3) are

assessed using a scoring system that distinguishes the participants‘ answers into

four different support levels, that is: Agreement, Partial Agreement, Partial

Disagreement, and Disagreement.

The participants‘ answers are categorized into ―Agreement‖ when they

simply state that they agree with the amendments (usually by simply stating ―yes‖

or ―yes we agree‖) with or without the reasons of their support. ―Partial

Agreement‖ is chosen when the participants agree with the intention of the

amendments but they demand something from the IASB that does not change the

current amendments proposed by the IASB in the exposure draft. Similar to

12

―Partial Agreement‖, the ―Partial Disagreement‖ level of support is also a part of

the agreement opinion but with a difference level of support. ―Partial

Disagreement‖ is chosen when the participants agree with the intention of the

amendments but they demand something from the IASB that changes the current

amendments proposed by the IASB in the exposure draft, or the participants

disagree with some part of the amendments, although on the whole they still agree

with the amendment. Contrary to the other 3 levels of support, the

―Disagreement‖ is chosen when the answers provided by the participants imply

that they do not agree with the intention of the amendments proposed by the

IASB. Provided in table 2 are the detailed criteria for assessing the answers.

Table 2: Criteria for Assessing the Participants‘ Answers

Level of

Support

Criteria for Assessing

Agreement The answer implies that the participant simply agrees with the intention of the

proposed amendment without demanding anything else from the IASB.

Partial

Agreement

The answer implies that the participant agrees with the intention of the

amendment but he/she also demands something from the IASB including:

1. Additional guidance for applying the standards

2. Examples of application to provide further understanding of the

standards

3. Change of other standards so that they are in line with the

amendments of IAS 1

4. Further clarification from the IASB regarding the standards

Partial

Disagreement

The answer implies that the participant generally agrees with the intention of

the amendment, but there are certain conditions below that are met:

1. The participants disagree with the wording or language aspects of the

new standards

2. The participants disagree with some parts of the amendment

3. For participants that are in form of an organization, some of the

members do not agree with the amendment

Disagreement The answer implies that the participant does not agree with the intention of the

amendment. Source: Huian (2013) with some modification

Besides content analysis, the researcher will also use previous literature

and cases to explain the standing of the stakeholders regarding a more principle-

based standard. This will be provided in the 3rd

part of section 4.

13

4. RESULTS

This section is divided into 3 parts to provide answers to the 3 research

questions. The first part provide answers to research question 1, while the other 2

parts answer research questions 2 and 3 respectively.

The Participant Composition

Regarding the exposure draft, stakeholders from 37 countries submitted their

answers through comment letters (a total of 118 comment letters) to show their

responses to the amendments addressed in ED/2014/01. This number is slightly

higher than the previous research (Huian 2013) regarding ED/2009/12 that was

related to financial instruments where stakeholders from 35 countries were

involved, although there is a decrease in the overall number of comment letters,

where a total of 197 comment letters submitted regarding ED/2009/12. This

difference is not surprising since exposure drafts related to financial instruments

project have always been attracting more response from the public (Chatam et al.

2010, Huian 2013).

Table 3: The Composition of the Participants

Country Total % Accounting

Profession Regulator Preparer User

Business

Association Others

Asia 20 17 6 10 1 1 2 0

Australia- 7 6 2 3 1 0 1 0

Oceania

Europe 54 46 14 12 13 0 13 2

Africa 6 5 4 1 1 0 0 0

North 8 7 1 2 2 1 2 0

America

South 6 5 0 3 1 0 0 2

America

International 17 14 11 4 0 1 1 0

Total 118 100 38 35 19 3 19 4

Percentage 100% 31% 30% 16% 3% 17% 3%

Source: Researcher‘s analyzing worksheet

An interesting finding is that the Accounting profession and the Regulators

are the two groups of stakeholders that submitted the highest number of comment

letters. Combined they represent 61 percent of the total comment letters, almost

14

twice the amount of comment letters submitted by the groups of stakeholders that

are the actual users of the standard. In this case, the users of the standard are the

preparers and users of financial statements, and also the business association that

consist of both users and preparers. These three group of stakeholders combined

only represent 36 percent of the total comment letters.

In line with several studies before (Durocher et al. 2007, Gîrbină 2007,

Huian 2013), this research has proven that users‘ participation in the standard

setting process through comment letters is still very low, with the users group of

stakeholders only represents about 3 percent (three letters) of the total 118

comment letters received by the IASB. However, if we include the business

association group of stakeholders as users, the number rises significantly to 19

percent. Nevertheless, the low amount of response is still an issue that needs to be

addressed by the IASB (Huian 2013). Because financial statements are provided

mostly for the users (IASB), it will be hard for the standard setters if the users do

not state what they need or give their point of view regarding the standards.

Besides the users, the academics‘ participation has also been very low,

with only two academics included in the total of four letters submitted by the

―others‖ group of stakeholders. This fact is also supported by previous studies

which stated that the academics participation in the developing process of

accounting standards has always been low throughout the years (Tandy &

Wilburn 1996, George 2004, Larson et al. 2011). Those studies also suggested

that the IASB should encourage the academic community to take part in the

standard settings process. Academics are not affected by the standards in the same

way as users, preparers, auditors, government agencies, special interest groups,

and so on. As a result, their outlook and positions can be counted on to offer an

unbiased look at proposals and alternatives (Larson et al. 2011).

From the geographical perspective, Europe (46%) is still the continent

with the most submitter of comment letters, with the United Kingdom (14 letters,

24% in Europe or 12% worldwide) being the country with the most submitter in

Europe and worldwide. This finding is also in line with the previous studies

(Larson 2007, Huian 2013). Asia came in 2nd

with 20 letters (17%) and

15

International bodies are in 3rd

with 17 letters (14%). International bodies are

mostly composed of CPA firms that operates in a global scale (all the Big 4 and

several of world known CPA firms such as Grant Thornton, Crowe Horwath, and

BDO), international regulators (IMF, IAASB, IAIS, and IOSCO) and other

international organizations /associations such as the IMA and The Corporate

Reporting Users Forum.

Stakeholders’ Level of Support

Most of the participants provided their answer by following the general

structure of the questions in the exposure draft (ED/2014/01), although there are

some participants that only provided a general view upon the amendments. The

majority of participants responded to all of the questions, while some others only

answered several questions that are in their interest. Some participants answered

the questions by simply stating ―yes‖ or ―no‖, while most of the participants

provided reasons behind their answers.

As shown in table 4, most of the stakeholders agreed with the amendments

proposed in the exposure draft. Most of the stakeholders agree that the financial

statements these days provide a long explanation that contains a lot of

unnecessary information. This can lead to an overload of information. Romney et

al. (2009) explained that an information overload occurs when the limits to the

amount of information the human mind can effectively absorb and process are

passed. Information overload is costly since it reduces the decision-making

quality. The stakeholders‘ point of view related to each of the specific questions

provided in the exposure draft are provided below.

Regarding Q1a (Materiality), the most common support level showed by

the stakeholders is the ―partial agreement‖ level of support (42%). Most of the

stakeholders that provided a ―partial agreement‖ level of support suggested the

IASB to provide additional guidelines for assessing the materiality of an

information.

In general, we agree that the proposed amendments relate to areas

in which the application of judgement can result in clearer

16

communication to users of financial statements. However, we are

concerned that the proposed amendments do not provide sufficient

guidance to assist in the application of that judgement and, as such,

are unlikely to result in significant changes in practice (Deloitte).

Only one participant showed disagreement toward the amendments related

to Q1a. The disagreement was shown by Volkswagen AG which argued that the

IFRS reporters would still have to prepare all information to decide and document

whether it is material or not.

On the other hand, regarding Q1b, related to Information to be presented

in the statement of financial position or the statement(s) of profit or loss and other

comprehensive income, the ―partial disagreement‖ level of support is the majority

level of support shown by the stakeholders (47%). The stakeholders agree with

the intention of the amendments, but most of them disagree with the wording of

some paragraphs. They argue that some of the words in the new paragraphs

proposed in the exposure draft could be misleading. Some of them proposed a

new paragraph of their version that they think is more appropriate for the context,

while some others suggested some words in the paragraph to be deleted or

substituted with another term.

Para 55A (a) states that when an entity presents subtotals in

accordance with Para 55, those subtotals shall be made up of items

recognised and measured in accordance with IFRSs. Similarly, Para

85A (a) states that when an entity presents subtotals in accordance

with Para 85, those subtotals shall be made up of items recognised

and measured in accordance with IFRSs. As financial statements

are prepared in accordance with IFRSs, MICPA is of the view that

the two paragraphs are redundant as they appear to imply that there

could be a situation where subtotals are not recognised and

measured in accordance with IFRSs. Additionally, MICPA is of

the view that Para 85A (d) is not required. The decision of whether

certain subtotals should be displayed with more prominence or not

should be left to the judgement of the preparer (MICPA).

17

Table 4: The Participants‘ Responds towards the Amendments0..

NoA = Number of Answers

Q1a (Materiality)

Q1b (Information to be presented in the statement of financial position or the statement(s) of profit or loss

and other comprehensive income)

Q1c (Notes)

Q1d (Disclosure of accounting policy)

Q2 (Presentation of items of other comprehensive income arising from equity-accounted investments)

Q3 (The transition provisions and effective date of the amendments)

Accounting Profession (Number of Letters: 38)

Question Agreement

Partial

Agreement

Partial

Disagreement Disagreement No Comment

NoA % NoA % NoA % NoA % NoA %

Q1a 8 21% 17 45% 13 34% 0 0% 0 0%

Q1b 8 21% 10 26% 18 47% 0 0% 2 5%

Q1c 17 45% 9 24% 10 26% 0 0% 2 5%

Q1d 14 37% 13 34% 8 21% 1 3% 2 5%

Q2 24 63% 5 13% 6 16% 0 0% 3 8%

Q3 28 74% 3 8% 3 8% 0 0% 4 11%

Business Association (Number of Letters: 19)

Question Agreement

Partial

Agreement

Partial

Disagreement Disagreement No Comment

NoA % NoA % NoA % NoA % NoA %

Q1a 8 42% 6 32% 5 26% 0 0% 0 0%

Q1b 6 32% 0 0% 11 58% 0 0% 2 11%

Q1c 11 58% 1 5% 5 26% 0 0% 2 11%

Q1d 9 47% 5 26% 0 0% 0 0% 5 26%

Q2 11 58% 0 0% 4 21% 1 5% 3 16%

Q3 11 58% 1 5% 1 5% 0 0% 6 32%

Others (Number of Letters: 4)

Question Agreement

Partial

Agreement

Partial

Disagreement Disagreement No Comment

NoA % NoA % NoA % NoA % NoA %

Q1a 1 25% 1 25% 1 25% 0 0% 1 25%

Q1b 0 0% 1 25% 1 25% 0 0% 2 50%

Q1c 0 0% 1 25% 1 25% 0 0% 2 50%

Q1d 1 25% 1 25% 0 0% 1 25% 1 25%

Q2 1 25% 0 0% 1 25% 0 0% 2 50%

Q3 1 25% 0 0% 0 0% 1 25% 2 50%

18

Source: Researcher‘s analyzing worksheet

For the rest of the questions, ―Agreement‖ is the level of support that is

mostly shown by the stakeholders, with the following percentage respectively for

Preparer (Number of Letters: 19)

Question Agreement

Partial

Agreement

Partial

Disagreement Disagreement No Comment

NoA % NoA % NoA % NoA % NoA %

Q1a 6 32% 7 37% 5 26% 1 5% 0 0%

Q1b 4 21% 5 26% 10 53% 0 0% 0 0%

Q1c 10 53% 3 16% 5 26% 0 0% 1 5%

Q1d 10 53% 4 21% 3 16% 1 5% 1 5%

Q2 13 68% 3 16% 1 5% 0 0% 2 11%

Q3 13 68% 1 5% 2 11% 0 0% 3 16%

Regulator (Number of Letters: 35)

Question Agreement

Partial

Agreement

Partial

Disagreement Disagreement No Comment

NoA % NoA % NoA % NoA % NoA %

Q1a 8 23% 15 43% 11 31% 0 0% 1 3%

Q1b 6 17% 10 29% 15 43% 1 3% 3 9%

Q1c 9 26% 12 34% 9 26% 1 3% 4 11%

Q1d 11 31% 11 31% 6 17% 3 9% 4 11%

Q2 19 54% 2 6% 4 11% 1 3% 9 26%

Q3 19 54% 3 9% 3 9% 1 3% 9 26%

User (Number of Letters: 3)

Question Agreement

Partial

Agreement

Partial

Disagreement Disagreement No Comment

NoA % NoA % NoA % NoA % NoA %

Q1a 0 0% 3 100% 0 0% 0 0% 0 0%

Q1b 0 0% 3 100% 0 0% 0 0% 0 0%

Q1c 0 0% 0 0% 1 33% 2 67% 0 0%

Q1d 0 0% 0 0% 2 67% 0 0% 1 33%

Q2 1 33% 1 33% 1 33% 0 0% 0 0%

Q3 1 33% 0 0% 0 0% 0 0% 2 67%

Total (Number of Letters: 118)

Question Agreement

Partial

Agreement

Partial

Disagreement Disagreement No Comment

NoA % NoA % NoA % NoA % NoA %

Q1a 31 26% 49 42% 35 30% 1 1% 2 2%

Q1b 24 20% 29 25% 55 47% 1 1% 9 8%

Q1c 47 40% 26 22% 31 26% 3 3% 11 9%

Q1d 45 38% 34 29% 19 16% 6 5% 14 12%

Q2 69 58% 11 9% 17 14% 2 2% 19 16%

Q3 73 62% 8 7% 9 8% 2 2% 26 22%

19

each question: Q1c (40%), Q1d (38%), Q2 (58%), Q3 (62%). From all the six

questions provided in the exposure draft, Q1d is the question with the most

―disagreement‖ opinion from the participants (5%). One of the disagreement

responses that the researcher decides to take note is the response from the

University of Gothenburg, Sweden. They provided opinion on the question based

on their research regarding disclosures on judgment and estimation uncertainty in

the preparation of financial statements. They argue that in practice, preparers are

driven more by incentives and enforcement than by information about underlying

economic phenomena in making disclosure choices related to principles-based

mandatory disclosures. Therefore, the outcome of the proposed amendments may

not be as intended.

The most unanswered question is Q3 (22%), related to the transition

provision and effective date of the amendments to IAS 1. This question also

generated the highest ―agreement‖ level of support (62%) from the participants.

Stakeholders’ View on Principle-Based Accounting

Before discussing more about the stakeholders‘ stand on principle-based

accounting, the researcher made sure that the new IAS 1 resulting from the

amendments (especially amendments covered by Q1 of the exposure draft) is

leaning more toward a principle-based regulatory system by matching it with the

criteria written in section 2. Provided below are the results of the assessment:

1. Under the amended standard, the reporting entity must interpret what is

meant by materiality, which information is material and which is not. This

interpretation is verified afterwards, when the financial report is audited.

2. Since the disclosure of accounting policies is based on materiality, the

IASB proposes to remove the guidance for identifying a significant

accounting policy, including removing unhelpful examples. This makes

the standard more abstract.

3. Under the amended standard, the reporting entities are driven to report

information that is ―material‖. The IASB does not determine a specific

rule to identify whether certain information is material or not. Hence it is

20

open to interpretation by the reporters to determine whether certain

information is material or not. The same goes to the auditors. They are free

to determine whether the subject has reported all ―material‖ information.

4. The amended standard specifies what situation is required, that financial

reporters should consider the materiality of certain information when they

forge the financial statement. How this should be achieved is left to the

discretion of the implementer.

5. Applying the amended standard requires more knowledge from the

preparers. Since the IASB does not provide a clear guidance on assessing

materiality, the preparers will have to use their judgment. They are

required to have more understanding of what information is material

enough or needed by the users of their financial report for decision

making.

6. Although the IASB has provided guidance on the order list of the notes

(listed in paragraph 114 of IAS 1), the amended standard stated that the

reporting entities have flexibility to decide the systematic order for the

notes. In this case, they do not have to follow the order listed in paragraph

114.

7. Related to conflicts in the standards arriving from the amendment,

conflicts may arise from implementing other standard that requires

disclosure of certain information. Some IFRSs identify information

required to be presented or disclosed in the financial statements of an

entity. Notwithstanding these specific requirements, an entity shall assess

whether all of that information needs to be presented or disclosed, or

whether some of the information is immaterial, and presenting or

disclosing it would reduce the understandability of its financial statements

by detracting from the material information. If the information is deemed

immaterial and would reduce the understandability, then the entity should

not disclose it.

21

Table 5: Assessing the Amended IAS 1

Dimension Amended IAS 1

1. Temporal Ex post, verified by the auditor

2. Conceptual More General/ universal/ abstract

3. Functional More for Preparers and Auditors

4. Representation Declarative with no specific guidance

5. Knowledge needed More regarding materiality and

Understandability

6. Exception handling Allow for exception as long as it is more

―understandable‖

7. Conflict resolution By weight (trade off) on the

understandability of the financial statements

Source: Researcher‘s analyzing worksheet

This finding has confirmed that the amended IAS 1 as proposed by

ED/2014/01 could be seen as a more principle-based standard. Combined with the

results provided in the second part of section 4, we can see that the stakeholders

support the idea of a more principle-based standard. This finding is not something

new, as quoted from Heffes (2004). Back in 2004, Grant Thornton conducted a

survey of their mid-sized clients. Fully 80 percent said "Yes" when asked "Should

we adopt a principles-based approach to accounting standards?". Of the

participants "yeses," 69 percent were from public companies, and 85 percent from

private companies

Although overall the stakeholders agree with the idea of a more principle-

based standard, some stakeholders think that the current amendment is leaning too

much toward principle-based. This could be seen from the high number of ―partial

agreement‖ responses from the stakeholders. Most of the partial agreement

responses demanded additional guidance in assessing materiality. This would

cause the standard to be less principle-based than it currently is as proposed by the

exposure draft, though in the bigger picture the amended standard is still more

principle-based than the original standard.

The finding that the stakeholders prefer principle-based regulatory can be

a sign that people do not think that the rigid rule-based regulatory in accounting

really provides the ―safety‖ edge anymore, either for the user or for the preparer.

For the users, whether it is a rule-based or principle-based system, if the preparer

intends to manipulate the financial statement, then they will still find a way to

22

breach the rigid rule-based regulatory system (Nelson et al. 2002). In fact, back in

2003, PricewaterhouseCoopers (PwC) placed a full-page advertisement in the

Wall Street Journal stating that rule-based system encourages creative accounting

(Mano et al. 2006). The advertisement, as cited from the CPA Journal (2006)

said:

Rules-based systems encourage creativity (and not the good kind)

in financial reporting. They allow some to stretch the limits of what

is permissible under the law, even though it may not be ethically or

morally acceptable. A principles-based system requires companies

to report and auditors to audit the substance or business purpose of

transactions; not merely whether they can qualify as acceptable

under incredibly complex or overly technical rules. A rules-based

system allows managers to ignore the substance and instead ask

'Where in the rules does it say I can't do this?'.

From the preparers and auditors perspective, following a rigid rule-based

system does not really make them safe from lawsuits and litigations. An example

of this is the Continental Vending case that took place in the United States back in

1969 that later on became a reference for other cases. According to the CPA

Journal (Mano et al. 2006) the Continental Vending case was one of the first

major criminal cases successfully brought against auditors. Charges against the

auditors involved in the case included the violation of U.S. securities laws by

certifying a document the auditors knew to be false. The auditors were engaged to

audit Continental Vending Machine Corporation. A Continental affiliate, Valley

Commercial Corporation, borrowed a large sum of money from Continental.

Valley then loaned the funds to a dominant officer and significant shareholder of

both Valley and Continental. The auditors learned that the dominant officer would

not be able to repay Valley, and the auditors knew that as a consequence Valley

would be unable to repay Continental. Nevertheless, the Continental financial

statements showed the receivable from Valley as an asset, with only a relatively

obscure footnote explaining the circumstances surrounding the receivable. As

cited from CPA Journal (Mano et al. 2006), Continental Vending actually went

bankrupt not long after the issuance of their financial statements:

23

Continental never did collect payments from Valley on the

receivable in question; in fact. Continental went bankrupt shortly

after the financial statements were issued. When the U.S.

government brought criminal charges against the auditors, the

auditors maintained that they properly followed generally accepted

auditing standards (GAAS) during the audit and that the footnote

also complied with applicable standards. Moreover, several experts

testified that the footnote disclosure explaining the receivable from

Valley complied with generally accepted accounting principles

(GAAP) and that the auditors had followed GAAS.

Near the end of the trial, the district court judge instructed the jury that

mere compliance with professional accounting standards was not a complete

defense. Rather, the critical test was whether the financial statements fairly

represented Continental's financial status. The jury found the defendants guilty.

On appeal, the appellate court held that the district court judge did not err in his

instructions to the jury. The appellate court judge in Continental Vending, in

refusing to find error in the district court's jury instructions, clearly told the

accounting profession that "fairly presented ... in accordance with generally

accepted accounting principles" is two statements rather than one. Furthermore,

the clear message was that if one is to prevail over the other, it must be "fairly

presented." "Fairly presented" is principle-based accounting, and "in accordance

with GAAP" is rule-based accounting (Mano et al. 2006).

One way that court decisions effectively become part of law is by being

cited by other courts in future cases. Law comes into existence not only through

legislation, but also by regulation and litigation. Laws from all three sources are

binding, one source no less so than another. Numerous subsequent cases have

favorably cited Continental Vending, including the Second and Ninth Circuit

cases of Natelli and Sumo (Mano et al. 2006). Although this case happened in the

U.S., the case itself sends a message to the world that hiding behind a set of rigid

and detailed rules provided by a rule-based regulatory system does not guarantee

that one would be invulnerable to lawsuits and litigations.

Provided above are the possible reasons why stakeholders, especially users

and preparers, do not contend against principle-based regulatory in accounting.

The researcher focuses more on past practices and events in searching for a

24

possible answer, although there could be more reasons why the stakeholders act

this way. In the never-ending debate between rule-based and principle-based

accounting, there cannot really be a winner since the goal itself should not be

which is better, but where in between should a standard be established.

5. CONCLUSIONS AND SUGGESTIONS

The goal of this paper is to see the involvement of stakeholders across the

globe in developing international accounting standard and their view regarding the

amendments of IAS 1 that is leaning towards principle based accounting through

the submission of comment letters on the ED/2014/01. The finding shows that

stakeholders from every continent (except Antarctica) participated in the process,

though Europe, in line with previous studies (Larson 2007, Huian 2013) is still the

continent with the most submitter of comment letters.

From the content analysis of the 118 comment letters, the researcher did

not find much mixed opinion from the stakeholders. Overall, the stakeholder

groups agreed with the intention of the amendments, though some requested

additional guidance from the IASB for implementing the standards.

Additional concern that should be addressed by the IASB is the low

number of participants from the users and academic community. Both of them can

provide useful insights to the IASB, since users are the main audience of the

financial statements, and the academic community can contribute a neutral

opinion to the IASB.

This paper has also proven that, based on the 7 criteria of assessing

principle-based and rule-based standards proposed by Cunningham (2007) and

Burgeemestre et al. (2009), the amended IAS 1 is leaning more towards a

principle-based regulatory system. From this finding, together with the findings

provided above, we can say that stakeholders nowadays tend to agree more with

principle-based regulatory in accounting. Based on previous literature, the

researcher has concluded that one possible reason behind this is that the

stakeholders, especially the users of the standards do not feel the ―safety‖ edge

anymore in accounting that is regulated by rule-based standard. For the users of

25

financial statements, PwC argued that rule-based standard encourages preparers to

do ―creative accounting‖. While for the preparers and auditors, the Continental

Vending case, which is later being cited in subsequent cases and became a law

itself, has proven that following a set of rigid rule-based standard does not

guarantee one to be free from litigation if the spirit of financial reporting itself is

not applied.

This paper confirms that the public overall agrees with the new amended

IAS 1 that is more principle based and suggests that the IASB should continue

with their Disclosure Initiative project. Public will not content on principle-based

disclosures as long as the IASB can find the perfect place along the ―spectrum‖ to

put their standards.

The researcher is aware of certain limitations of this paper. First, the

research method for assessing the participants‘ response – content analysis –

entails subjectivity, especially when assessing the answers that do not clearly

suggest the respondent‘s agreement or disagreement. Secondly, the researcher

uses a case that happened in a certain country to try to explain the behavior of

stakeholders across the globe by generalizing it. In reality there can be more

reason in why the stakeholders support the principle-based accounting.

Future research is necessary to explore other reasons why stakeholders

nowadays tend to support principle-based accounting. Also, further research can

examine the development of the accounting standard in a certain country and the

role of their standard setting body in involving stakeholders in the development of

accounting standards, taken for example Indonesia where transparency in the

standards development process is still very limited. The same approach can also

be applied to see the willingness of stakeholders from a certain country to

participate in the accounting standards development process.

26

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29

APPENDIX

Appendix 1

Questions Listed in ED/2014/01

Question 1—Disclosure Initiative amendments

The amendments to IAS 1 arising from the Disclosure Initiative aim to make narrow-focus

amendments that will clarify some of its presentation and disclosure requirements to ensure entities

are able to use judgment when applying that Standard. The amendments respond to concerns that the

wording of some of the requirements in

IAS 1 may have prevented the use of such judgment. The proposed amendments relate to:

(a) materiality and aggregation (see paragraphs 29–31 and BC1–8 of this Exposure Draft);

(b) statement of financial position and statement of profit or loss and other comprehensive income

(see paragraphs 54, 55A, 82, 85A and 85B and BC9–BC15 of this Exposure Draft);

(c) notes structure (see paragraphs 113–117 and BC16–BC19 of this Exposure Draft); and

(d) disclosure of accounting policies (see paragraphs 120 and BC20–BC22 of this Exposure Draft).

Do you agree with each of the amendments? Do you have any concerns about, or alternative

suggestions for, any of the proposed amendments?

Question 2—Presentation of items of other comprehensive income arising from

equity-accounted investments

Do you agree with the IASB‘s proposal to amend IAS 1 for the presentation of items of other

comprehensive income arising from equity-accounted investments amendments (see paragraphs 82A,

BC1–BC6 and the Guidance on implementing IAS 1)? If not, why and what alternative do you

propose?

Question 3—Transition provisions and effective date

Do you agree with the proposed transition provisions for the amendments to IAS 1 as described in

this Exposure Draft (see paragraphs 139N and BC23–BC25)? If not, why and what alternative do you

propose?

30

Appendix 2

List of Participants

No. Affiliation Category

1 Individual Others

2 Israel Accounting Standards Board Regulator

3 A.S.A. Abfall Service AG Preparer

4 International Monetary Fund Regulator

5 Israel Securities Authority Regulator

6 Swedish Enterprise Accounting Group Accounting Profession

7 Financial Executives International Canada (FEI) Business Association

8 Institute for the Accountancy Profession in Sweden (FAR) Accounting Profession

9 European Securities and Markets Authority Regulator

10 European Records of IFRS Consolidated Accounts Accounting Profession

11 Norwegian Accounting Standards Board Regulator

12 Grant Thornton International Ltd Accounting Profession

13 ACTEO Business Association

14 French Association of Private Companies (AFEP) Business Association

15 Mouvement des Enterprise de France (MEDEF) Business Association

16 CPA Australia Ltd Accounting Profession

17 The Institute of Chartered Accountants in Australia (ICAA) Accounting Profession

18 The Heads of Treasuries Accounting and Reporting Advisory

Committee Regulator

19 The Malaysian Institute of Certified Public Accountants Accounting Profession

20 The Group of 100 (G100) Business Association

21 Accounting Standards Committee of Germany (ASCG) Regulator

22 The Hong Kong Association of Banks (HKAB) Business Association

23 The Institute of Chartered Accountants of India Accounting Profession

24 Moore Stephens LLP Accounting Profession

25 The German Banking Industry Committee Regulator

26 Insurance Europe Preparer

27 International Auditing and Assurance Standards Board (IAASB) Regulator

28 Association for Participation in the Development of Accounting

Regulations for Family owned Entities (VMEBF) Business Association

29 Kingston Smith LLP Accounting Profession

30 Canadian Securities Administrators Regulator

31 University of Genoa Others

32 South African Institute of Chartered Accountants (SAICA) Accounting Profession

33 Institute of Management Accountants, Inc. (IMA) Accounting Profession

34 Financial Reporting Council (FRC) Regulator

35 International Association of Insurance Supervisors (IAIS) Regulator

36 Autorité des normes comptables (ANC) [French standard-setting

body]

Regulator

31

No. Affiliation Category

37 The Institute of Certified Public Accountants in Ireland (CPA) Accounting Profession

38 Finansrådet [Danish Bankers Association] Business Association

39 University of Gothenburg Others

40 Crowe Horwath International Accounting Profession

41 Institute of International Finance (IIF) Business Association

42 Volkswagen AG Preparer

43 Accounting Standards Board of Japan (ASBJ) Regulator

44 Brazilian Committee for Accounting Pronouncements (CPC) Regulator

45 Standard Chartered Bank Preparer

46 Institute of Chartered Accountants in England and Wales (ICAEW) Accounting Profession

47 Zambia Institute of Chartered Accountants (ZICA) Accounting Profession

48 SwissHoldings (Federation of Industrial and Service Groups in

Switzerland) Business Association

49 Belgian Accounting Standards Board (BASB) Regulator

50 External Reporting Board (XRB) Regulator

51 Hydro-Québec Preparer

52 The Institute of Certified Public Accountants of Rwanda (ICPAR) Accounting Profession

53 Canadian Accounting Standards Board (AcSB) Regulator

54 Deloitte Touche Tohmatsu Limited Accounting Profession

55 Austrian Financial Reporting and Auditing Committee (AFRAC) Regulator

56 Australia and New Zealand Banking Group Limited (ANZ) Preparer

57 Securities Analysts Association of Japan (SAAJ) User

58 Baker Tilly UK Audit LLP Accounting Profession

59 European Financial Reporting Advisory Group (EFRAG) Accounting Profession

60 Institute of Public Auditors in Germany (IDW) Accounting Profession

61 Telefónica, S.A. Preparer

62 The Life Insurance Association of Japan (LIAJ) Business Association

63 China Accounting Standards Committee (CASC) Regulator

64 Hong Kong Institute of Certified Public Accountants (HKICPA) Accounting Profession

65 Institute of Singapore Chartered Accountants (ISCA) Accounting Profession

66 Korea Accounting Standards Board (KASB) Regulator

67 Wipro Limited Preparer

68 RSM International Accounting Profession

69 REPSOL Preparer

70 Singapore Accounting Standards Council Regulator

71 National Organization for Financial Accounting and Reporting

Standards Regulator

72 Linde Group Preparer

73 German Insurance Association (GDV) Business Association

74 Association of Investment Companies (AIC) Business Association

75 Financial Reporting Council Mauritius (FRC) Regulator

76 Canada Pension Plan Investment Board (CPPIB) Business Association

77 The 100 Group of Finance Directors Business Association

32

No. Affiliation Category

78 Chartered Accountants Ireland Accounting Profession

79 PricewaterhouseCoopers LLP (PwC) Accounting Profession

80 Ernst & Young Global Limited Accounting Profession

81 Federation of European Accountants (FEE) Accounting Profession

82 Credit Suisse Preparer

83 Institute of Chartered Accountants of Scotland (ICAS) Accounting Profession

84 Audit Oversight Board, Securities Commission Malaysia Regulator

85 Malaysian Accounting Standards Board (MASB) Regulator

86 The Japanese Institute of Certified Public Accountants (JICPA) Accounting Profession

87 European Insurance and Occupational Pensions Authority (EIOPA) Regulator

88 Institute of Certified Public Accountants of Kenya (ICPAK) Accounting Profession

89 Association of Chartered Certified Accountants (ACCA) Accounting Profession

90 Polish Accounting Standards Committee (PASC) Regulator

91 European Banking Authority (EBA) Regulator

92 Petrobras Preparer

93 Consejo Mexicano de Normas de Información Financiera (CINIF) Regulator

94 Securities and Exchange Board of India (SEBI) Regulator

95 Quoted Companies Alliance Business Association

96 Deutsche Bank AG [UK] Preparer

97 BusinessEurope Business Association

98 Association of Accounting Technicians (AAT) Accounting Profession

99 Center for Capital Markets Competitiveness (CCMC) Business Association

100 Aflac, Inc. Preparer

101 British Private Equity and Venture Capital Association (BVCA) Business Association

102 British Telecommunications plc (BT) Preparer

103 Nestle S.A. Preparer

104 Shell International BV Preparer

105 BDO Accounting Profession

106 Group of Latin-American Accounting Standard Setters (GLASS) Regulator

107 KPMG IFRG Limited Accounting Profession

108 Liberty Holdings Limited Preparer

109 International Organization of Securities Commissions (IOSCO) Regulator

110 Investment Management Association (IMA) Business Association

111 Chartered Institute of Public Finance and Accountancy (CIPFA) Accounting Profession

112 Standard & Poor's Ratings Services User

113 Allianz SE Preparer

114 Asian-Oceanian Standard-Setters Group (AOSSG) Regulator

115 Australian Accounting Standards Board (AASB) Regulator

116 The Institute of Chartered Accountants of Sri Lanka (CA Sri Lanka) Accounting Profession

117 Individual Others

118 The Corporate Reporting Users Forum (CRUF) User

33

Appendix 3

Stakeholders Composition Based on Country and Interest Group

Country Total Accounting

Regulator Preparer User Business

Others Amount Profession Association

Asia 1

1

China 1

1

Hong Kong 2 1

1

India 3 1 1 1

Israel 2

2

Japan 4 1 1

1 1

Korea 1

1

Malaysia 3 1 2

Singapore 2 1 1

Sri Lanka 1 1

Total Asia 20 6 10 1 1 2 0

Australia 6 2 2 1

1

New Zealand 1

1

Total

Australia 7 2 3 1 0 1 0

Oceania

Austria 2

1 1

Belgium 1

1

Denmark 1

1

Europe 9 3 3 1

2

France 4

1

3

Germany 8 1 2 3

2

Ireland 2 2

Italy 1

1

Netherlands 1

1

Norway 1

1

Poland 1

1

Russia 1

1

Spain 2

2

Sweden 3 2

1

Switzerland 3

2

1

United

Kingdom 14 6 1 3

4

Total

Europe 54 14 12 13 0 13 2

Kenya 1 1

Mauritius 1

1

Rwanda 1 1

South Africa 2 1

1

Zambia 1 1

34

Country Total Accounting

Profession Regulator Preparer User

Business

Association Others

Total Africa 6 4 1 1 0 0 0

Canada 5

2 1

2

United States 3

1 1 1

Total North

8 1 2 2 1 2 0 America

Brazil 3

1 1

1

Mexico 1

1

Peru 1

1

South

America 1

1

Total South

6 0 3 1 0 0 2 America

International 17 11 4 0 1 1 0

Total 118 38 35 19 3 19 4

Percentage 100% 31% 30% 16% 3% 17% 3%

35

Appendix 4

Example of a Comment Letter

18 July 2014

Mr Hans Hoogervorst

Chairman

The International Accounting Standards Board

30 Cannon Street

London EC4M 6XH

United Kingdom

Dear Hans

ED/2014/1 Disclosure Initiative (Proposed Amendments to IAS 1)

Thank you for the opportunity to comment on ED/2014/1 Disclosure Initiative (Proposed

Amendments to IAS 1). ED/2014/1 has been exposed in New Zealand and some

constituents may make comments directly to you.

We support the Disclosure Initiative project, of which ED/2014/1 is the first step. As you

will be aware, in New Zealand we have been particularly concerned with the proliferation

of disclosures in IFRS. The 2011 report1by New Zealand Institute of Chartered

Accountants and the Institute of Chartered Accountants of Scotland encapsulated this

view in its title: ―Losing the Excess Baggage–reducing disclosures in financial statements

to what‘s important‖.

We note that concerns about ‗disclosure overload‘ are not limited to the for-profit sector

as we also have concerns about the extent of disclosures in the standards applied by New

Zealand not-for-profit entities in both public and private sectors. For this reason, we have

recently issued an explanatory guide on materiality for those entities2, which should make

preparers think about the information that users would consider important to be presented

and disclosed.

We also support the general freeing up of the requirements around presentation and

disclosure as this gives preparers an opportunity to ensure that financial statements

communicate relevant information in the most useful manner for users.

1Losing the Excess Baggage–reducing disclosures in financial statements to what’s important, Recommendations from a

Joint Working Group of the Institute of CharteredAccountants of Scotland and the New Zealand Institute of Chartered

Accountants (2011) 137pp. 2Explanatory Guide A7: Materiality for Public Benefit Entities (May 2014), External Reporting Board, 14pp.

36

We particularly support the changes to paragraph 31 as currently drafted. The paragraph

reinforces the overarching nature of the test for materiality and clarifies its application to

disclosure requirements in IFRS. We also support the emphasis on user needs at the end

of paragraph 31, which we see as the primary criterion for disclosure. Reference to

understandability in reducing the clutter which results from the inclusion of immaterial

information is also useful.

We also agree that both aggregation and disaggregation need to be dealt with.

Our responses to the questions in ED/2014/1 are set out in Appendix 1, and some

comments on drafting matters are set out in Appendix 2of this letter. If you have any

queries or require clarification about the issues raised in this letter, please contact Judith

Pinny(judith.pinny@xrb.govt.nz) or me.

Yours sincerely

Kimberley Crook

Chair – New Zealand Accounting Standards Board

37

Appendix 1 of the Letter

ED/2014/1 Disclosure Initiative (Proposed Amendments to IAS 1)

Questions for respondents

Question 1 - Disclosure Initiative amendments

The amendments to IAS 1 arising from the Disclosure Initiative aim to makenarrow-

focus amendments that will clarify some of its presentation and disclosurerequirements

to ensure entities are able to use judgment when applying that Standard.The

amendments respond to concerns that the wording of some of the requirements inIAS 1

may have prevented the use of such judgement.

The proposed amendments relate to:

(a) materiality and aggregation (see paragraphs 29–31 and BC1–8 of this

Exposure Draft);

(b) statement of financial position and statement of profit or loss and other

comprehensive income (see paragraphs 54, 55A, 82, 85A and 85B and

BC9–BC15 of this Exposure Draft);

(c) notes structure (see paragraphs 113–117 and BC16–BC19 of this

Exposure Draft); and

(d) disclosure of accounting policies (see paragraphs 120 and BC20–BC22

of this Exposure Draft).

Do you agree with each of the amendments? Do you have any concerns about,

oralternative suggestions for, any of the proposed amendments?

Part (a) materiality and aggregation (see paragraphs 29–31 and BC1–8 of this

Exposure Draft);

1. We generally support ED/2014/1, and particularly support the changes to paragraph 31.

Those changes reinforce the overarching nature of materiality, clarifies its application to

disclosure requirements in IFRS and emphasise that information must meet user needs. In

our view, this guidance will help to address difficulties in applying materiality in practice,

which is a contributing factor to the problem of excessive disclosures.

2. We note that there are some proposed changes to terminology. We believe that it is

important that accounting standards are clear and use consistent terminology. We

38

understand that the changes made to distinguish presentation from disclosure were for

clarity.

3. However, we are concerned that the terms presentation and disclosure have not been

applied consistently throughout IAS 1, nor throughout the suite of IFRS standards. In our

view, a review should be carried out to ensure consistent use of these terms.Paragraphs 1-

3 in Appendix 2 of this letter provide examples of where terminology is inconsistent.

4. In addition, we think it would be helpful to have a term that encompasses both

presentation and disclosure, as there are circumstances in the standards where such a term

would apply. We note that the IPSASB has considered this matter and come up with an

overarching term. We encourage the IASB to collaborate with the IPSASB in this area.

Part (b) statement of financial position and statement of profit or loss and

othercomprehensive income (see paragraphs 54, 55A, 82, 85A and 85B and BC9–

BC15of this Exposure Draft);

5. We note that these proposals do not relate to materiality or disclosure overload, rather

they relate to the separate issue of ―non-GAAP‖ measures. We understand that the

motivation for the proposals is to minimise the use of ―non-GAAP‖ measures while

providing some flexibility with presentation.

6. However we believe a more fundamental review of the presentation of sub-totals needs to

be done in the medium term. The presentation of sub-totals can affect the usefulness and

understandability of financial statements in both a positive and negative way.

7. We therefore believe that this issue should be considered more comprehensively in the

disclosure research project.

Part (c) notes structure (see paragraphs 113–117 and BC16–BC19 of this Exposure

Draft).

8. Webroadly support these proposalsas this gives preparers an opportunity to ensure that

financial statements communicate relevant information in the most useful manner for

users.

9. We question whether there is sufficient guidance to focus preparers on disclosing

accounting policiesthat are relevant to the entity‘s circumstances,are understandable to

users, and avoid technical language where possible. One of the main problems in practice

with accounting policies is that some entities include lengthy descriptions of the

39

requirements contained in standards in their policies. Accounting policies should not be a

lengthy description of the requirements of an IFRS on a particular topic; rather they

should focus on the key accounting policies, particularly where choices or judgments

have been made. We suggest that guidance is added into paragraph 119 to encourage

entity-specific accounting policy disclosures and discourage ―boiler-plate‖ disclosures.

Part (d) disclosure of accounting policies (see paragraphs 120 and BC20–BC22 of

this Exposure Draft).

10. We agree with the proposal to delete paragraph 120 of IAS 1.

Question 2- Presentation of items of other comprehensive income arising

fromequity-accounted investments

Do you agree with the IASB's proposal to amend IAS 1 for the presentation of items of

other comprehensive income arising from equity-accounted investments amendments

(see paragraphs 82A, BC1–BC6 and the Guidance on implementing IAS 1)?

If not, why and what alternative do you propose?

11. We agree with this proposal.

Question 3 - Transition provisions and effective date

Do you agree with the proposed transition provisions for the amendments to IAS 1 as

described in this Exposure Draft (see paragraphs 139N and BC23–BC25)?

If not, why and what alternative do you propose?

12. We agree in principle with the proposed transitional provisions.

40

Appendix 2 of the Letter

Drafting Comments

Consistent use of Terminology

1. The proposed amendments do not consistently use the terms ―presentation‖ and

―disclosure‖, nor do they go far enough to ensure consistent use of the terms throughout

IAS 1.

2. Examples of inconsistent use of terminology in ED/2014/1 are paragraphs 112, 113 and

114. Each of these paragraphs refers to the entity ―presenting notes‖ rather than

―disclosing notes‖ (see below).

112 The notes shall:

(a) presentinformation about the basis of preparation of the financial statements

and the specific accounting policies used in accordance with paragraphs 117–

124;

113 An entity shall, as far as practicable, present notes in a systematic manner.

114 Alternatively, when determining a systematic order for the notes, an entity may

presents its notesin the following order, to assist users of the financialstatements to

understand how the notes relate to the entity‘sfinancial statements and to compare

them with financial statements of other entities:

3. An example of inconsistent use of terminology in a part of IAS 1 that has not been

amended is the heading before paragraph 77, and paragraph 77itself. The heading uses the

word ―present‖, and paragraph 77 uses the word ―disclose‖, but the heading and the

paragraph are referring to both the primary financial statements and the notes.

Disaggregation: Paragraph 54

4. We find the example in paragraph 54, which disaggregates property, plant and equipment

(PPE), unhelpful. Even for an entity with a large amount of PPE, it‘s not clear in what

circumstances it would be relevant to disaggregate PPE on the face of the financial

statements. Because it is not clear when this might be useful, it might have the effect of

encouraging unnecessary disaggregation on the face of the financial statements. If the

amendment is retained, we suggest making it clear the circumstances where

disaggregation would be relevant and the extent of such disaggregation.

41

Sub-totals: Paragraphs 55A and 85A

5. To facilitate users‘ understanding of the financial statements, an entity may present sub-

totals other than sub-totals required by paragraphs 55 and 85. However, paragraphs 55A

and 85A restrict themselves by using the phrase ―in accordance with paragraph [55 or

85]‖. The restriction is unnecessarily limiting, and in our view should be deleted, because

the requirements of paragraphs 55A and 85A should apply to the presentation of all sub-

totals.

6. It is unclear from the term ―be made up of items recognised and measured in accordance

with IFRS‖ in paragraphs 55A(a) and 85A(a), the extent to which information can be

disaggregated and still comply with IFRS.

7. Paragraphs 45 and 46 of IAS 1 address the need to consistently present information, with

certain exceptions. Paragraphs 55A(c) and 85A(c) also require consistent presentation

from period to period, but with no exceptions. If there is a good reason, such as a

significant change in an entity‘s operations, which means a different presentation is more

appropriate, it appears to be allowed under paragraph 45(a), but restricted by paragraphs

55A(c) and 85A(c). Therefore, we are unclear about the need for paragraphs 55A(c) and

85A(c).

8. There is no equivalent to paragraph 85A(d) in paragraph 55A. We disagree with the

rationale provided in BC 14(c) about this, as there are subtotals and totals in the balance

sheet. Accordingly, we are of the view that the equivalent to paragraph 85A(d) should be

included in paragraph 55A.

Transitional provisions

9. We note two drafting errors in paragraph 139N:

a) There should not be a reference to paragraph 82A, as there is no paragraph 82A

in ED/2014.01

b) Paragraph 139N should be included in the list of added paragraphs.