In October 2004, the IASB and the US FASB began a project to create a common conceptual framework, bringing together the existing IASB Framework and the FASB Conceptual Framework. One objective of this framework is to provide information about an entity to external users who may be unable to acquire the information through other means. As before emphasis is being placed on relevance, comparability, understand ability, materiality and transparency. Presentation of comprehensive income statements is important under these characteristics. Under the Conceptual Framework of Accounting, one purpose of the preparation and presentation of financial statements is to "assist preparers, auditors and users" (IASB, FASB., 2009, pg. 02) with primary users being investors (potential/current). This implies that financial statements should be presented in the least complicated form which allows them to be prepared and more importantly interpreted with relative ease while still following the regulations of International Accounting Standards.
This subject matter is both topical and timely. Banking entities, before this economic downturn, abused the position given to them by government, corporate governance and regulating bodies via the exploitation of loop holes within the financial system and by conducting in the maltreatment of accounting standards to emphasis their balance sheets worth (Kirkpatrick., 2009). It is important that a full justified and open set of financial statements is made clear to that of the user, now more than ever, to correlation in line with The Corporate Report (1975) and the ability of corporations "to fulfill its reporting responsibility" (Connolly,. 2009, pg. 04).
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In this section we will look at previous research done on how presentation and formats enhance accounting clarity and thereby aid users and the public in understanding and monitoring an entities position.
Firstly, Maines and McDaniel (2000) pointed out that presentation format of the comprehensive income statement affects investors judgments about the reporting entity and can hinder them in processing the information given.
Tarca et al's (2008) examine the worth of two differing formats of income statement. This was achieved through the conduction of an experimental study into investigating "the potential benefits of providing information via an alternative format of the income statement" (Tarca et al., 2008, pg. 02) known as the matrix format (Appendix). The associated relationship of the alteration to that of the matrix format was investigated through a comparable study into the "accuracy, difficulty (ease of use) and [the] confidence of subjects in extracting specific informationâ€¦presented in the matrix format relative to the same information as reported under the 2005 version of IAS 1 Presentation of Financial Statements" (Tarca et al., 2008, pg. 04), allowing for both clear concise comparisons and sound testing of their hypotheses. Their findings indicated that accuracy, speed and confidence of subjects in extracting specific information increased under the Matrix Format. The accuracy, ease of use and confidence of data extraction experienced by participants was of a significant improvement. The findings of the research seem encouraging and positively correlated to that of the matrix format, even though critiques of the study find it unsupportive (Yolrabil 2009) and un-relevant (Henry, Holzmann., 2008) with clear flaws (King et al., 1999).
Hirst and Hopkins (1998) "investigated whether clear disclosure of comprehensive income facilitates detection of earnings management by buy-side financial analysts and predictably affects their security price judgments" (Hirst and Hopkins (1998), pg. 2). Investors must often search through numerous notes and non-financial information to identify relevant information that better reflects the position of the entity. In an experiment, in which 96 analysts participated, Hirst and Hopkins found that a clear statement of comprehensive income increases transparency of earnings management and thereby gives a fairer and more accurate insight into the entity. It is due to this enhanced transparency that in June 1997 the FASB issued SFAS No. 130, Reporting Comprehensive Income, which requires a full set of financial statements that reports an entities comprehensive income along with its components. The objective of SFAS No. 130 was that "if used with related disclosure and other information in the financial statements, the information provided by the reporting comprehensive income would assist investors creditors and others financial statement users in assessing an enterprises economic activities and its timing and magnitude of future cash flows" (FASB 1997, Para 12).
Pundits and Philips (2004), however, found that where an entity suffers a loss from other comprehensive income they are more likely to display this loss in the statement of changes in stockholders` equity rather then in the statement of comprehensive income. This makes comprehensive income information less noticeable thereby conflicting with FASB 1997.
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Hunton et al (2006) showed that reporting comprehensive income in a performance statement decreases the possibility of managers engaging in earnings management. This is due to the fact the statement of changes equity is not viewed as importantly in determining valuation and therefore investors and the public are less likely to assess it in determining entity performance.
Hirst et al. (2004) examined how banks measure and present their comprehensive income statement affects risk and valuation assessment. They found that with a clearer and fuller accounting presentation risk assessment can be more accurately distinguished and "fair value information is higher with full fair value accounting".
Barker (2010, pg. 2) "addresses an important issue of presentation in the financial statements, namely the distinction between, on the one hand, the obligations and associated flows arising from the provision of finance to an entity ('financing') and, on the other hand, all other activities of the entity ('operating')". He found that no accounting standards has a clear definition for financing activities and therefore no consistent accounting treatment allowing for inconsistency which may led to investors being unable to accurately distinguish between financing activities and other operating activities of an entity.
Thus, the evidence implies that presentation of comprehensive income can affect user's decision, create an inaccurate reflection of an entity and confuse users in arriving at a judgment of the entities position. It is due to these previous findings why I believe this is an interesting area to investigate how the accounting profession and the presentation of the comprehensive income statement can influence investors and the public in ways which may not be in their best interest.
My research will be an extension of that undertaken by Tarca et al (2008). They tested their hypothesis using a sample of analysis, accountants and MBA students. They referred to analysis and accountants as sophisticated users and MBA as less-sophisticated users. However, as an MBA student, you are required to obtain at "least three years of relevant work experience in a supervisory or managerial capacity" (University of Ulster., 2010). You also undertake at least two modules concerning that of accountancy (Queens University Belfast., 2010). This means that, with the relevant work experience (to which financial knowledge would play a large part) alongside the academic learning offered, MBA students would have a previous knowledge of financial statements (and their analysis) prior to the study. Therefore, within the research sample frame, there is no representation of those that do not have financial knowledge but may be a primary user (an investor). This group will be the main focus of my study.
The object of the task is to build a data set based on the above sample which can be used in testing three hypotheses:
The research method I will adopted is similar to that adopted by Tarca et al (2008) which was an experimental survey, incorporated into that of a case study .
An exploratory study into the area of the income statement allows the researchers to "seek new insight; to ask questions [and to] clarify their understanding of the problem" (Arksey & Knight., 1999, pg. 133) associated with the current IAS 1 Income statement format.
A mixed methods approach to the collection of data will be adopted, leaning slightly towards that of a more qualitative research paper with aspects of quantitative findings "which you would assume to be present within any financial based study" (Ryan et al., 2002, pg. 133).
I will prepare three financial reports, one in the current IAS 1 format (Appendix 1), the second will be of Matrix format (Appendix 2) and finally the common conceptual framework, bring together the existing IASB Framework and the FASB Conceptual Framework, this will allow for the research to be both valid and generalisable as all versions of the financial statements will contain the same financial information, but in a different formats.
The case study will contain opened ended questions (not multiple choice) which will include competency questions and re-measurement questions indicating a good overall scale of questioning. The removal of multiple choice questioning gives the researchers "the ability to synthesize and evaluate information or apply knowledge to complex problems" (Williams., 1973, pg. 665). Questions will be of the same nature of those asked by Tarca et al., 2008 (Appendix 3).
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A cross sectional study will be performed to "consider subjects time constraints" (Tarca et al., 2008, pg. 191) and, regarding the nature of the research topic, a longitudinal study may not be appropriate and could possibly led to validity issues in the long run. This is particularly relevant regarding "the ever changing accounting environment and International Accounting Standards" (Sawani., n.d. pg 01). Anonymity will be given to all subjects, validating the research in accordance with the code of practice on research ethics, Section 3.15, (2007, pg. 04).
Interviews could then be carried out from which subject would provide feed back on which format they found clearest. However, as the sample group will be working class I believe a simple questionnaire would be more appropriate (less time consuming) and effective. Subjects would be asked to comment on the following questions:
Which format did you find easiest to extract information from?
Would you invest in the entity based on the information you extracted?
Which formats helped/hindered you in reaching your decision to question 2?
How do you believe your preferred format could be adjusted to give an even clear position of the entity?
With the feedback from the questionnaire along with the experimental survey I would be able to test my hypotheses and determine the affects of formats and presentation on the extraction of information.
Questionnaires will then be handed out to CAP1, CAP2 and FES students attending Queens. The questionnaires will be of a similar nature to that stated earlier with the main question being:
With your accounting background how do you think the current comprehensive income statement could be made more user friendly to the general public?
The feedback will provide a good basis's for recommended changes which may be correlated to recommendation give by the non-sophisticated users.
Overall I would expect the simplest and clearest layout to achieve the highest Mean Accuracy, Competency and Confidence scores with the lowest mean time taken. People we previous accounting experience would be expected to achieve high scores across all formats. While those with minimium to no accounting experience would expected to score quite poorly on more complex formats.
With a clearer layout subjects should be able to determine the possition of the entity along with any streaghts and weckness such as revenues in relation to expenses. I would expected those with a history in accounting to have more ideas of how the comprehensive income statement could be made more efficient and effective while non-sophisicated users way have views to make other technical information clearer and understandable to the general public.
Accounting information as we know has predictive values. I would expect sophisticated users to choose the best businesses to invest in using the majority of formats. Non-sophisticated users may be unable to determine future predictive values if the format is unclear with irrelevant information.
Also it would be interesting to see if the general public know what the accounts are saying about the entity, what period the accounts are for, how notes may better reflect the future gains and losses and how factors such as depreciation and revaluations affect the accounts.
Accounting is the "systematic recording, reporting and Analysis of financial transactions of a business" (investorwords). It aids both managers and the public such as investors in making decisions. It is a profession that demands clarity and honest preparation and presentation that reflects a true and fair position of an entity at a give time.
In times of poor economic settings investors are more careful in deciding which business to invest in. Examples such as the dramatic decrease and bale out Anglo Irish Bank Plc by the Irish government indicate the need for a clear and relevant presentation of annual accounts.
Accounts must be presented in such a way that allows users such as investors and the general public to extract information which is meaningful and most importantly accurate and it is due to this reason I believe this area fits under the heading "The accounting profession and the public interest".