Reading (Recommended)

Question 1

Who wrote “How is the IFRS for SME accepted in the European context?”

Answer 1

Quagli and Paolini, 2012

Question 2

What is “How is the IFRS for SME accepted in the European context?” looking at?

Answer 2

Questionnaire on the public consultation of the IFRS for SMEs, promoted by the European Commission.

Question 3

What do the results of “How is the IFRS for SME accepted in the European context?” show? What are the challenges these results bring with them?

Answer 3

There is a strong difference between users and preparers and also between Countries regarding the position toward the IFRS for the SMEs.
This issue will represent a strong challenge for the European policy on accounting matters because it will force the European Regulator to choose a solution in conditions of substantial diversity of desired preferences among stakeholders.

Question 4

What two opposite forces exert their influence around the debate of differential reporting in a European Context? “How is the IFRS for SME accepted in the European context?”

Answer 4

From one side, even if the IFRS for SMEs is designed for a worldwide application, in the EU context the publication of IFRS for SMEs arrives when the EU has planned a strong reduction of administrative burden for companies. A large part of firms feel an excessive burden in applying the system of rules developed by the European Commission. In this way, the IFRS for SME could find a good acceptance because they resemble a simplification of full IFRS.

On the other hand, the EU has for a long time adopted some directives to harmonise financial statements among the Member States. After the endorsement of full IFRS for publicly listed companies in 2002 and continuously updated Directives for national harmonised regulations, the adoption also of a third option, the IFRS for SME could generate excessive confusion at a macro-level of the whole accounting system for European Companies.

Question 5

What is the aim of IFRS for SMEs?

Answer 5

Aims at giving an international complete set of accounting rules to companies that a) do not have public accountability and b) publish general purpose financial statements for external users.

The premise for this issue consists in the fact that the IFRS are mainly addressed to satisfy the informative needs of sophisticated external users who operate in financial markets.

Question 6

How is the IFRS for SMEs compared to IFRS? “How is the IFRS for SME accepted in the European context?”

Answer 6

1. Some topics included in IFS for SMEs are omitted because they are not relevant for typical SMEs, such as segment reporting or interim reporting.
2. Various accounting options allowed by full IFRS are not in the IFRS for SMEs such as revaluation model.

Question 7

Examples of how IFRS for SMEs simplifies some recognition and measurement topics.

Answer 7

1. Borrowing costs must be recognised as expenses without increasing the cost of the linked asset.
2. R&D costs must be recognised as expenses.
3. The annual review of residual value, useful life and depreciation method of tangible and intangible assets is not required.

Question 8

What was the hypotheses of the questionnaire? “How is the IFRS for SME accepted in the European context?”

Answer 8

1. That both users and preparers should express a positive evaluation of the standard.
2. The second research question is to understand whether countries where the respondents operate influences the IFRS for SME evaluation.

Question 9

What were the predicted outcomes of the questionnaire? “How is the IFRS for SME accepted in the European context?”

Answer 9

A positive evaluation on the IFRS for SMEs will regard most of all the Anglo-Nordic respondents who are presumed favourable to the standard, due to their cultural tradition of great transparency in financial statements and the prevalence of substance over form.
The remaining two classes, German speaking and Latin respondents, are presumed to express a general negative view toward the IFRS for SMEs for the opposite reasons.

Question 10

Criticisms of IFRS for SMEs. “How is the IFRS for SME accepted in the European context?”

Answer 10

• Absence of deeper study of user needs
• Inadequateness of the IFRS for SMEs Framework to catch the real aspect of SMEs
• Lack of explanations concerning the simplification of approach used by IASB
• Absence of reference to tax and legal problems.

Question 11

How does size affect the perceived benefit of IFRS for SMEs? “How is the IFRS for SME accepted in the European context?”

Answer 11

Larger size implies a more sophisticated financial reporting environment in terms of number and diversity of users and of stakeholders structure.
A large part of respondents don’t see benefits from the international comparability of financial statements and the weak knowledge of IFRS demonstrated by smaller firms influence the capability to understand the real costs and benefits deriving from the IFRS adoption.

Question 12

Why do users require IFRS for SMEs? What use can they get from it? “How is the IFRS for SME accepted in the European context?”

Answer 12

Banks- main users of SMEs financial statements. Usually banks demand very detailed information about financial conditions of SMEs and financial statements are not enough to satisfy their needs.

Suppliers are very interested in indebtedness, average payment time, while competitors use financial statements for comparisons .

Question 13

QUESTION 1: General opinion on IFRS for SMEs in European context. “How is the IFRS for SME accepted in the European context?”

Answer 13

Strong prevalence of disagreement with the opportunity to adopt the IFRS for SMEs. 74 no and 27 yes.
However, predominantly no countries such as German- speaking countries had a greater number of respondents.

Preparers- 2/3 said no. Main reason is difficulty in applying the standard.

Medium companies are strongly oriented towards the standard and large against. Maybe because larger companies see IFRS as alternative.

CRITICISMS:

1. Excessive complexity for small companies.
2. Very limited utility of this standard only for companies engaged in international trade and activity.
3. The limited increase in comparability, or, for certain aspects, the decreasing comparability

Question 14

Q2: Benefits for preparers and users. “How is the IFRS for SME accepted in the European context?”

Answer 14

Many don’t believe there are many: Many respondents affirm that comparability already exists under European Directives and with IFRS for SMEs comparability is damaged by many accounting options.

Increased international comparability.

Many users affirm to be already able to analyse SMEs financial statements, even without IFRS for SMEs.

Question 15

Q5-9: Relationships with legal European accounting framework. “How is the IFRS for SME accepted in the European context?”

Answer 15

Potential incompatibility between the standard and the Directives to be assessed.
There are many alternatives for adoption such as; an inclusion of the standard directly in Directives, a freedom of choice given to member states, a modification of Directives to guarantee a substantial homogeneity with IFRS for SMEs.

In general, the answers by respondents show all companies should stay within the scope of the Directives.
Users: majority want to include IFRS for SMEs within Directives.
Preparers: Opposed to.

Favourable response: increased comparability and thus facilitate trade within Europe.

Unfavourable: IFRS may only be adopted optionally and that it is too complicated.

Reasons for rejecting any further adjustment of EU directives:

1. Could be damage of accounting harmonisation pursued by EU.
2. The increasing diversity and “ambiguity” of accounting methods, which are all in accordance with EU Directives, makes the Directives useless for the interpretation of specific accounting issues and the development of new methods.
3. Subsequent revisions of IFRS for SMEs will surely result in further conflicts and will cause a constant need for adaptation of EU Directives.

Question 16

Who wrote “Environmental reporting: Towards enhanced information quality”?

Answer 16

Raiborn et al, 2011

Question 17

Why is information about a firm’s environmental costs important to external and internal stakeholders? “Environmental reporting: Towards enhanced information quality”, Raiborn et all, 2011

Answer 17

Might be assessing firm for risk, determining firm value, and investing investment opportunities.

Question 18

What is the problem with a lot of current environmental costs? “Environmental reporting: Towards enhanced information quality”, Raiborn et all, 2011

Answer 18

They are only partially reflected in today’s financial statements and environmental reporting disclosures.
Traditional accounting systems and reporting have contributed to this disclosure problem.
Environmental costs are often aggregated with other costs, are buried within accounts, or are omitted entirely. because of measurement issues.

Some have to be disclosed (purchase of emissions allowance), others do not (installation of scrubbers to remove toxic chemicals) need to be separately disclosed.

Some are easy to measure, some are not.

Such a deficiency of information may paint an incomplete and possibly drastically inaccurate business picture that can lead to McNamara Fallacy.

Financial accounting generally recognises items that can be measured by distinct exchanges and accounted for in monetary units.

Information currently provided does not meet stakeholder expectations.
Dawkins and Lewis (2003) found that over 50% of surveyed investors rated the quality of corporate environmental and social disclosures as poor.

Narrative information rarely read by analysts.

Question 19

What is McNamara Fallacy? “Environmental reporting: Towards enhanced information quality”, Raiborn et al, 2011

Answer 19

1. Measure whatever can be easily measured.
2. Disregard that which cannot be measured easily.
3. Presume that which cannot be measured easily is not important.
4. Presume that which cannot be measured easily does not exist.

Question 20

Relationship between environmental disclosure and environmental impact. “Environmental reporting: Towards enhanced information quality”, Raiborn et al, 2011

Answer 20

Disclosing more info does not necessarily translate into action that benefit either the environment or the firm’s economic situation.

Recent studies have shown that firms that voluntarily disclose more environmental information tend to pollute less than their tighter- lipped counterparts.

Increased media and stakeholder scrutiny that accompanies these disclosures may reinforce the tendency to act in an environmentally responsible manner.

More information does not necessarily mean better environmental stewardship, because incentives exist for poorly-performing firms to disclose even more than is required in attempt to appease stakeholders.

Lower performers are likelier to have material events that must be reported in SEC filings and annual reports, leading to more info being disclosed.

Effect of environment on share prices can provide incentives to perform in a more environmentally responsible manner. Positive correlation between share price and environment.

Question 21

Mandatory environmental reporting. “Environmental reporting: Towards enhanced information quality”, Raiborn et al, 2011

Answer 21

Intent is to ensure disclosure and consistency in reporting environmentally-related liabilities across firms.

SFAS No.5 states that a loss must be both probable and reasonably estimable before it can be recognised.

Designation as a potentially responsible party (PRP) under the Comprehensive Environmental Response, Compensation and Liability Act suggest that a liability is probable.
However, the nature of the liability claims and the number of PRPs specified can mean that determining the liability amount for a single PRP is difficult.
SEC requires that all environmental liabilities be reported unless the firm can prove that the liability will not be of interest to investors.

Environmental items requiring accounting or disclosure recognition include:

• Information on site remediation projects, such as current and future costs, and remediation trends.
• Contamination due to environmental health and safety problems.
• Legal and regulatory compliance issues.

Question 22

Voluntary reporting. “Environmental reporting: Towards enhanced information quality”, Raiborn et al, 2011

Answer 22

Optional nature means that disclosures vary in both quantity and type of the information provided.

Research suggest that organisations with the following characteristics are more apt to provide voluntary environmental disclosures:

• Financial strength
• In environmentally-sensitive industry
• Large and diverse shareholder ownership
• Previously engaged in environmental legal proceedings.
• Affected by substantial media exposure regarding environmental activities
• Previous, and likely additional, environmental difficulties
• Previous targeting by environmental groups.

Increasing number of firms using Global Reporting Initiative (GRI) framework.
Content and quality of voluntary information under these guidelines is more comparable and less varied.

This information most commonly requested by internal stakeholders.

Question 23

External Reporting. “Environmental reporting: Towards enhanced information quality”, Raiborn et al, 2011

Answer 23

Organisational stakeholders are most concerned with the “big picture” that indicates how the company addresses the environmental impacts of its business activities.

Disclosures in external environmental reports:
OPERATIONS:
-Greenhouse gas and other emission data
-Fines or penalties for non compliance with environmental guidelines
-Eco-friendly capital investments
-Performance measurements
-Internal or external assurance of environmental data
-Contributions to local and global conservation and sustainability projects.

PLANS AND STRATEGIES:

• Organisational strategy, philosophy, and policies relative to the environment and sustainability issues.
• Environmental action plan
• R&D activities resulting in eco-friendly and recyclable products.

Information should be:

• Understandable
• relevant
• reported in a timely manner
• provide users with info that will help them confirm past decisions or make decisions about the future
• reliable
• unbiased
• verifiable
• consistently from period to period
• balance, clear, accurate, timely, reliable, comparable

Question 24

Internal reporting. “Environmental reporting: Towards enhanced information quality”, Raiborn et al, 2011

Answer 24

Primarily concerned with identifying and disclosing the costs and benefits of various environmental activities and investments.

Cost may be ascertainable but benefits are often indeterminate and qualitative.

Question 25

Four common objectives to measure and evaluate a firm’s environmental performance. “Environmental reporting: Towards enhanced information quality”, Raiborn et al, 2011

Answer 25

1. To provide transparency for interactions and driving forces of environmental activities
2. To provide a consistent measure of environmental performance that will allow trends to be determined
3. To enhance decision making ability based on the environmental information generated
4. To allow stakeholder participation in discussions about environmental performance

Question 26

Environmental costs. “Environmental reporting: Towards enhanced information quality”, Raiborn et al, 2011

Answer 26

Compliance costs- prevention and appraisals
Prevention costs- incurred to preclude environmental failure from occurring
Appraisal costs- Incurred to monitor and compensate for problems not eliminated through prevention activities.

Non-compliance costs- internal and external failure
Internal failure- are incurred to remedy environmental problems before they have affected outside stakeholders.
External failure costs- incurred to address environmental hazards, fines, penalties and litigation after an environmental problem has affected outside stakeholders and the environment. Should also reflect reputation damage.

Costs of environmental protection should be less than the cost of responding to environmental damage.

Question 27

Symptoms of moral distress. “Managing moral distress: A strategy for resolving ethical dilemmas.” (Perry, 2011)

Answer 27

Right vs right- don’t raise questions of whether to be ethical, but how to be ethical. Confronted by a variety of options that could be the right thing to do.
Right vs wrong
“The right thing to do”- Keeping commitments, steadfast loyalty, and trustworthiness. Personal values
Corporate code of values as well.

Loyalty to one individual may result in disloyalty to another.
This choice between two rights could result in a wrong.
Conflicted between short term benefit and long term implications.

Moral distress- guilt, sweaty palms, headache.

Question 28

Who wrote “Managing moral distress: A strategy for resolving ethical dilemmas.”?

Answer 28

Perry, 2011

Question 29

Step 1 of dealing with moral distress. “Managing moral distress: A strategy for resolving ethical dilemmas.” (Perry, 2011)

Answer 29

Pay attention to your gut.
Must first recognise existence of ethical conflict.
Awareness is the prerequisite to responsible action, and ethical blindness can be difficult to avoid.

If someone is paying attention, the body will often indicate that something about the action to be performed or the consequences that will ensue feels “off”.

Instinctual.
Insight of modern moral psychology and neuroscience- suggests that emotional reactions are not as irrational or irrelevant as one once thought.

Unconscious perception of ethical or moral dissonance deserves our full attention.

However, acting solely on the basis of emotion or gut feeling may prove irresponsible.

Must consider facts.

Question 30

Step 2: gather facts. “Managing moral distress: A strategy for resolving ethical dilemmas.” (Perry, 2011)

Answer 30

Must be consciously aware that an ethical dilemma exists.
Gather as may relevant facts as possible.

Imperative that you understand and articulate as clearly as possible those precise situational dynamics that are creating the moral distress at hand.

Ethical dilemma may be mitigated during early phase of analysis, as gathering and clarifying relevant facts could reveal misunderstanding or ignorance that- once addressed negates the issue entirely.

Or collection of facts only further confirms the existence of a dilemma.

Question 31

Step three: Engage your moral imagination. “Managing moral distress: A strategy for resolving ethical dilemmas.” (Perry, 2011)

Answer 31

Clarify the parameters of the dilemma.
Mark Johnson defines moral imagination as “an ability to imaginatively discern various possibilities for acting within a given situation and to envision the potential help and harm that are likely to result from a given action.”

Use relevant facts in tandem with intuition to imagine as many viable options as possible.

Goal to eliminate potential regrets that may stem from failure to recognise and consider the full range of actions available.

May be more fruitful if one is able to dialogue with a trusted colleague or wise friend.

Ideally should yield several practical options.

Question 32

Step 4: Interrogate your options. “Managing moral distress: A strategy for resolving ethical dilemmas.” (Perry, 2011)

Answer 32

Interrogate each option.
Critically examining the options that your moral imaginations and instincts have yielded is a continuation of the systematic and reflective deliberation that shapes this strategy.
Questions:
- Who are the stakeholders who will be impacted by this option?
-What duties/ responsibilities do I owe these stakeholders?
-Does this option see the least amount of foreseeable suffering?
-Would I prefer this option if I were the one adversely impacted by it?
-How would I feel if everyone selected this option in a similar situation?
- Are human rights, rules/regulations of my profession, corporate/organisations codes of conduct, or laws implicated by my decision to pursue this option?
-What type of person might I become if I choose this option and ones similar to it on a continuing basis?
-Could I defend the decision?

Question 33

Step 5: Act and Review. “Managing moral distress: A strategy for resolving ethical dilemmas.” (Perry, 2011)

Answer 33

Select and implement option that survives as the best course of action.
More sophisticated rationale than “it felt like the right thing to do”.
May be pressed for more rigorous explanation.
5 step strategy should yield such a defence.
Review actions and consequences.
Consider two questions:
1. What can I personally do to have more support and/or be better prepared in case I’m confronted with a similar dilemma in future?
2. What can I do to change/improve the culture/structure of my organisation so that similar dilemmas can be avoided in future?

Question 34

Will you even see dilemma in front of you? “Managing moral distress: A strategy for resolving ethical dilemmas.” (Perry, 2011)

Answer 34

Research indicates that our ability to even recognise an ethical dilemma in our midst may be compromised by a host of factors.
E.g. implicit prejudice, obedience to authority, and the tyranny of time pressure.

Implicit Association Test: measures test takers conscious and unconscious attitudes toward people of different race, sexual orientations, and physical characteristics.

Harvard researchers analysed data from 2.5 million individuals to determine that at least 75% of test takers show a bias favouring individuals who appear to be young, affluent, and white.

Allegiance to authority figures can also have an adverse influence upon one’s moral judgement. E.g. Nazi’s.

Stanley Milgram- designed a study examining the extent to which authority can dull one’s ethical sensibilities.
Recruited volunteers, who were told they were taking part in a study to improve learning.

Under supervision of a researcher in a white lab coat, they were instructed to administer electrical shocks each time the “learner” (actor) on other side of partition got a question wrong.

Actor continued making mistakes and shocks got progressively stronger. Actor made increasingly aggravated actions.

All volunteers progressed to 300 volts.
12 continued under direction to administer shocks to 450 volts, which was clearly labelled SEVERE.

Explained afterwards that they were just doing as told.

TIME PRESSURE:
Studied in 1970s by Princeton University.
Seminary students told they were enrolling in a research study about religious education, researchers directed the seminarians to take a prescribed path to a nearby building where they would deliver an impromptu sermon on the parable of the Good Samaritan.
All took the same path but with different degrees of time pressure.
Near the building they encountered an actor, slumped in a doorway, pretending to be in obvious distress.
63% in low hurry stopped
45% in medium hurry
10% in high hurry

Blinded by time pressure.

Question 35

Who wrote reporting economic- not accounting- profit?

Answer 35

Arthur, 2001

Question 36

Effect of high inflation rates. “Reporting economic, not accounting- profit” (Arthur, 2001)

Answer 36

Caused re-examination of many of our economic and social principles and have brought some principles and have brought some of our traditional institutions under closer scrutiny, not only by such groups as public advocates, the media, and regulatory agencies, but also the general public at large.

Concern- large firms may be gouging consumers by taking advantage of an unfair market position to charge exorbitant prices.

Clouded by a lack of info.
There are conflicts between data offered by the industry and those published by politicians, consumer advocates, and the media.

Market conditions for more than a decade have depressed stock prices to the point where investors have not obtained a return on their investment.

Inflation and tax rates have caused returns on equity investments, from both dividends and price appreciation, to be less than increases in investor’s operating or living costs.
Little profit motivation for risk- takers.

Question 37

Accounting profit vs economic profit. “Reporting economic, not accounting- profit” (Arthur, 2001)

Answer 37

Accounting profit is what is generally used by media.

Accounting profit- the excess of revenue received for a finite period of time over the costs incurred to generate that revenue.

Tax on business should apply to income and not increases in capital, since it is assumed that future income would result from capital increases.
Result of this is that public believes profit is the same as cash remaining in hands of corporate owners for their personal gain.
NOT TRUE

Generally accepted that a profit is not earned until all factors in the production of goods and services are compensated.

Compensation to providers of natural resources and labour, have traditionally been viewed by accountants also as expenses of doing business.
Even compensation to suppliers of debt capital.
BUT compensation to the suppliers of equity capital is not an expense before reported accounting profit, classified as distributions of profit.

THIS IS A DIFFERENCE as economists see it as a necessary cost of doing business.

Accounting profit will be considerably higher than economic profit.

The percentage of accounting profit that corporations have paid in dividends has tended to range between 40 and 55%.

To an economist a profit is the return to the “risk-taker” after all the factors of production (land, labour and capital) have received their just compensation.

Economic profit takes into account for inflated costs of replacing assets.

Question 38

Who are the risk takers? “Reporting economic, not accounting- profit” (Arthur, 2001)

Answer 38

Small businesses- same people who have supplied the real estate, performed the labour, performed the labour, and put up the capital.

Large corporations- factors of production are more distinguishable and compensation to each should be evident in reported financial statements.

Question 39

Inflated costs of replacing assets. “Reporting economic, not accounting- profit” (Arthur, 2001)

Answer 39

Weakness in accounting profit also results fro the fact that it only reflects historical financial transactions that occur within a prescribed time period.

Prudent investors know that a higher price will have to be paid to replace assets in future to simply stay in business.

These costs are costs to be deducted from revenue before profits are recognised and reflect another difference between accounting and economic profit.

Due to inflation.

If businesses are to remain sound they are forced to increase prices at a rate that will enable them to meet inflated costs tomorrow.

Question 40

Social responsibility. “Reporting economic, not accounting- profit” (Arthur, 2001)

Answer 40

Results in a different accounting and economic profit.
Results from requirements by the government and society generally that business invest in capital intended for the social good rather than for future profit.

Costs can include expenses for health and safety, customers, special costs of training the handicapped and minorities, taxes.

No longer true that all capital expenditures improve wealth or future profit potential.

Question 41

Calculating economic profit. “Reporting economic, not accounting- profit” (Arthur, 2001)

Answer 41

A portion of the growth in or replacement of assets is financed with debt capital and by a reduction in cash balances.

Two changes in the presentation of financial statements are suggested.

1. An addendum to the traditional income statement would make those readers who tend to look only at the bottom line aware of economic profit.
2. For more sophisticated reader of financial statements- change to SoFP. Separate internally generated cash from external cash transactions.