LITERATURE REVIEW
4.3 International practices
4.3.1 Historical overview
4.3.1.1 United States of America
With effect from April 1978, the United States of America's (USA) standard-setter the Financial Accounting Standards Board (FASB) no longer required non-public enterprises to report earnings per share and segment information (Stanga & Tiller, 1983:63). This represents the earliest efforts of a standard-setter known to the author to implement a form of differential corporate reporting. In the USA, it was subsequently legislated that only public companies are required to prepare financial statements in accordance with US GAAP (Mersereau,2002:30).
Non-public USA enterprises, for example, private companies, are permitted to prepare their financial statements in accordance with an other comprehensive basis of accounting (OCBOA) commonly, the tax basis or modified cash basis of accounting (Edwards,2004:40). The effect of this legislation has resulted in entity form, that is, the listed-unlisted divide, being the threshold for differential reporting in the USA.
Currently in the USA, the American Institute of Certified Public Accountants' (AICPA) Private Company Financial Reporting Task Force is studying the issue of financial reporting for privately held businesses. Further, although not directly a differential reporting initiative, the FASB has established a small business advisory committee to obtain more active involvement from the small business community in the development of accounting standards in the USA (Edwards,2004:40).
4.3.1.2 Australia
In 1990, differential reporting came into effect in Australia when the Australian Accounting Research Foundation (AARF) introduced the concept of the reporting entity in its statement of accounting concepts SAC 1 (AARF,1990:para2). The concept of the reporting entity is tied to the information needs of users (paral2) and is not dependent on: (i) the sector, public or private, within which the entity operates; (ii) the purpose for which the entity was created; or (iii) the manner in which the entity is constituted (paral3). When it is reasonable to expect that no users are dependent upon information contained in general purpose financial reports for economic decision-making about an entity, it need not prepare general purpose financial statements, that is, Australian GAAP compliant financial statements (para36). However, other parties may require the entity to prepare Australian GAAP compliant financial statements (para33). For example, Section 45A of the Australian Companies Act requires bigger Australian companies (refer to table 4-1) to prepare Australian GAAP compliant financial statements (SAICA,2001b:2). Australian non-reporting entities may choose to prepare their financial statements in accordance with another appropriate disclosed comprehensive basis of accounting.
The overriding characteristic of an Australian reporting entity is that its users are dependent on general purpose financial reports for information for making and evaluating resource allocation decisions (AARF,1990:paral2)..For entities in respect of which it is not readily apparent that users are dependent on their general purpose financial reports for information for making and evaluating resource allocation decisions, SAC 1 provides the following inconclusive factors that, amongst others, are applied in judging whether an entity is a reporting entity (paral9):
• Ownership/membership of the entity is widely spread (para20).
• Management of the entity is separate from its owners/members (para20).
• The entity is economically or politically important, for example, entities that dominate a market (para21).
• The entity is large (para22).
• The entity has large liabilities (para22).
4.3.1.3 New Zealand
In 1994, differential reporting was implemented in New Zealand when the Institute of Chartered Accountants of New Zealand (ICANZ) issued its framework for differential reporting (Baskerville & Simpkins,1997:14). The differential reporting framework was revised in 1997 and 2002 (ICANZ,2002). The 1997 revision primarily increased the quantitative threshold for differential reporting (Baskersville et al, 1997:15) and the 2002 revision extended the differential reporting options available to qualifying entities (ICANZ,2002). Like their Australian counterparts, the ICANZ justify their differential reporting options on cost-benefit considerations underpinned by user needs (para3.2-3.3). However, differential reporting options in New Zealand take the form of full exemption from selected New Zealand financial reporting standards and partial exemption from others (Baskerville et al, 1997:17).
The differential reporting framework makes provision for differential reporting in respect of New Zealand entities that do not have public accountability and (para4.25):
• all of its owners are members of its governing body; or
• it is not large in size (refer to table 4-1).
A further differential corporate reporting threshold exists in New Zealand as an exempt company need only present its financial statements in accordance with the less onerous matters prescribed by the Governor-General by Order of Council (ICANZ,2002:para4.7). An exempt company is defined in Section 2 of the Financial Reporting Act as, amongst other requirements, having a turnover not exceeding $1 000 000 and the value of its total assets not exceeding
$450 000. This additional differential reporting threshold has the effect of imposing minimal corporate reporting requirements on very small New Zealand companies.
4.3.1.4 The United Kingdom
In 1997, differential reporting became effective in the United Kingdom (UK) when the Accounting Standards Board issued its financial reporting standard for smaller enterprises (FRSSE) (Mersereau,2002:30). Under FRSSE, qualifying entities were initially exempted from the requirement to prepare a cash flow statement and were subject to relaxed presentation and disclosure requirements (Walton, 1998:3). Through a number of revisions FRSSE later included
limited measurement simplifications (ICAEW,2001). The threshold for the application of FRSSE is primarily quantitative tests, as set out in table 4-1. However, certain entities that have public accountability are barred from applying FRSSE. FRSSE takes the form of a standalone document that is applicable to qualifying companies' financial reporting in Great Britain, Northern Ireland and the Republic of Ireland.
4.3.1.5 Canada
In January 2002, progressive differential corporate reporting options became effective for non- publicly-accountable Canadian private companies when the Canadian Accounting Standards Board (AcSB) introduced Section 1300 - Differential reporting into the Canadian Institute of Chartered Accountants' (CICA) Handbook (CICA;2002a:i). To qualify for differential reporting options, an entity must have no public accountability (Mersereau,2002:30). Six differential reporting options were initially made available to qualifying entities (32). Further, the AcSB undertook to examine all differential reporting issues as new accounting standards are developed. To give effect to this, the AcSB established the Small Business Enterprises Advisory Committee that was subsequently renamed the Differential Reporting Advisory Committee (DRAC) (31). DRAC recommends differential corporate reporting options to the AcSB using a cost-benefit decision model (Edwards,2004:39). Application of the model requires assessment of:
• the benefits to non-manager owners and creditors of a proposed differential reporting option in relation to the fundamental qualitative characteristics of understandability, relevance and reliability; and
• the preparation costs, communication costs, specialised expert costs and related audit or review costs.
As a result of DRAC's efforts, two additional differential reporting options are in the process of being finalised (38).