The debate of stewardship vs economic decision making

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The local perspective of private shareholders." Or "to what extent fair value measurement aids local private shareholders".

Background Information:

According to the IASB Framework for the Preparation and Presentation of Financial Statements, financial statements are to have a general purpose in order to meet information needs of a wide range of users of accounting information. Furthermore the IASB framework states that if the financial statements meet the investor's needs, since they are the providers of risk capital to the entity, financial statements are deemed to provide adequate information for the residual users.

"While all of the information needs of these users cannot be met by financial statements, there are needs which are common to all users. As investors are providers of risk capital to the entity, the provision of financial statements that meet their needs will also meet most of the needs of other users that financial statements can satisfy". [F.10]

Shareholders are also the parties to whom the financial statements are officially presented by management, in the case where separation of ownership is present. Such facts show that shareholders can be reputed to be the major "clients" of financial statements. Thereby financial statements should be set to cater for their needs.

Shareholders are presumed to use financial information for two main reasons;

Economic decision making: use financial information to value their equity

Stewardship: to supervise the work of the management who are administrating their equity.

The adoption of fair value accounting is perhaps one of the most controversial issues currently being faced by the accountancy world. Both the IASB and the FASB have been working on this issue for a number of years. Presently the main areas of influence of fair value accounting are agriculture and financial instruments. However in the nearby future fair value measurement is likely to be extended to other assets, especially in the light of the fact of the IASB's perceived preference for fair value measurement.

"The IASB believes that fair value measurement under IFRS and GAAP is already consistent. Also, the IASB and the FASB will continue to work together to ensure that applying fair value in an inactive market is accounted for consistently" [1] .

Fair value accounting is being promoted since it provides a better means of valuation of a company. On the other hand defendants of historical cost measurement value the role such measurement plays in the assessment of stewardship.

Shareholders are divided into two main categories, private individuals and institutional investors. Due to lack of knowledge commonly found within private individual shareholders, there are concerns on the extent fair value accounting will impact their decision making.

Need for the study:

In the light of the contemporary "hot" debate of whether assets and liabilities should be valued at fair value or at cost, how will such possible scenario affect local private shareholders? The dissertation's objective is to identify the current needs of private shareholders and what they identify as valuable information. The dissertation shall then examine to what extent fair value accounting shall aid private shareholders in satisfying their requirements.

Research Methodology:

The dissertation will be of a qualitative nature. The aim of such dissertation is to achieve a deep understanding of what local private shareholders value as relevant information, and to examine whether the emerging concept of fair value accounting will be providing such users more relevant accounting information. The aim of the study is not to generalise findings but to obtain rich description on the underlying topic.

The method being taken into consideration to gather the qualitative data is setting of focus groups with shareholders. Such group discussions provide direct evidence about similarities and differences in participant's opinions. Participants are not required to answer for every question enabling them to build on one another's response. Furthermore by acting as a moderator I can ensure that the discussion is always on track.

Finally, focus groups can be considered as a more plausible solution when compared to open ended interviews with shareholders. The response rate of shareholders to a focus group is likely to be greater when compared to a personal one on one interview. The main limitation of using focus groups is perhaps the risk that people influence each other's response. As a result the response of participants can be different than the response that would have been generated from a private one on one interview.

As a population sample, shareholders from two local companies are going to be considered. These companies are Bank of Valletta and HSBC. The choice fell on these companies because due to the recent changes to IAS 39 and IFRS 7, fair value measurement had a considerable impact on the banking sector. Thereby due to such fact shareholders can be even more affected with the underlying subject. Two focus groups are planned to be set, one with BOV shareholders and one with HSBC shareholders, with groups ranging from six to twelve members. Shareholder's list can be obtained from the Malta Financial Services Authority. The sampled population will exclude overseas shareholders, trusts and investment companies, thereby focusing solely on local private shareholders.

Chapters Overview:

Introduction: will focus on the emergence of fair value as a measurement tool and its prospective usage. Furthermore fair value will be compared and contrasted with cost based valuation. The introduction will also include an examination of how each valuation method caters for the individual private shareholders' requirements.

Literature Review: literature review can be focused on two aspects being the debate of fair value measurement versus cost based measurement, and the debate of whether private shareholders use accounting information mostly for economic decision making, or to assess stewardship.

Research Methodology: in this section I shall describe how the results were achieved, explaining how the data was collected and analyzed. This section shall contain the weaknesses and limitations of the research methods and methodology used. In the methodology I shall also include any problems that I anticipated and explain any steps taken to prevent them from occurring.

Findings: this part of dissertation will contain the information generated from the focus groups. Results will be presented, interpreted and discussed in this section.

Conclusion: this part will provide concluding insights on the research, and recommendations of other research questions that can be tackled to improve the research on the area. The main aspects to be tackled in this section are: what has been learnt from the results? How can this knowledge be used? What are the shortcomings of the research?