This issue is the last of my editorship. After ten years (2009-2018), Financial Reporting changes editor, from me to Professor Giunta, University of Florence, and I will remain as associate editor of this journal. Let me say a few words on my engagement with this journal, just to keep the memory of our actions alive. We are getting old, you know…
This paper investigates the value relevance of the fair value hierarchy disclosed for financial instruments through a sample of 97 financial entities listed over the period 2011-2016 in the stock markets of 23 European countries. Its main objectives are threefold. First, by analysing the European setting, the paper means to study the value relevance of the fair value hierarchy to judge the choice of the International Accounting Standard Board (IASB) to extend the disclosure of the hierarchy to all the assets and liabilities. Second, the paper aims to evaluate the choice of abandoning management intent as a criterion for the classification and measurement of financial instruments investigating the effect that such an intent has on the value relevance of the fair value hierarchy. Finally, by studying the effect that exposure to risks has on the value relevance of the fair value hierarchical levels, the paper plans to investigate the implications that the disclosure of the hierarchy could have on the rules of Basel 3 capital adequacy. Formulating three different research hypotheses, the findings validate them providing evidence that the value relevance of fair value measurement depends on the source of inputs used to estimate fair value and that both management intent and the risk intensity of the asset book only affect the value relevance of the less reliable fair value estimates. These results are useful for standard setters and regulators. Actually, for the investors decisions, they suggest the importance of disclosing the fair value hierarchy for all the assets and liabilities as required by IFRS 13, as well as the advantage of replacing in IFRS 9 the management intent criterion with the business model test and the characteristics of the instruments for the classification and measurement of financial assets. For the future, the findings suggest the opportunity to introduce filters within the common equity tier 1 for the less reliable fair value estimates. This paper’s current and future implications for standard setters and regulators are to avoid earnings management and capital management behaviour possibly affecting the quality of financial reporting.
Nowadays, companies and markets are increasingly international and growing numbers of stakeholders are affected by the economic, social and environmental aspects of business, resulting in significant changes in how corporate information is both perceived and published. Over the last few years, this new scenario has led to many company boards voluntarily adopting an accounting and company performance communication tool, known as Integrated Reporting, (IR) which is a single disclosure document that satisfies stakeholders’ increasing need for communication. This study’s objective is to contribute to existing literature on the relationship between financial reporting and corporate governance, investigating into whether certain characteristics of the board – including numbers, gender, nationality, average age – influence decisions to adopt IR or not. The analysis was carried out on a sample of 120 Italian companies in different sectors for the year 2014. These results showed a positive relationship between the decision to use IR and the size of the board and the presence of female boardmembers, whereas the presence of foreign and older boardmembers had a negative effect on adopting IR.
Empirical studies consistently provide evidence that investors perceive qualitative disclosures as useful because they have significant effects on analysts’ forecast
revisions and a firm’s share price. But these results leave unanswered the question
of whether managers write qualitative disclosures to inform or mislead investors.
Based on the signaling theory, we consider two actions by the same manager: one
(insider trading) is a costly signal whilst the other (qualitative disclosure) is the cheap
signal. We then verify whether they are coherent. We investigate the content and the
verbal tone of the Letter of Shareholders and the insider trading from its author before and after the letter’s date of release and find that the costly signal (the insider
trading) is not coherent with the cheap signal (the disclosure). This finding indicates
that managers do not use qualitative disclosures to offer incremental information but
that they might use them to mislead investors.
This paper uses some major contributions from accounting institutional theory to discuss the process of convergence toward IFRS. Our analysis identifies the most influential institutions and the complex networks of relationships among institutions, offering a valuable contribution to a better understanding of the current state of diffusion of IFRS around the world and the current progress of the convergence process. We identify the different roles of some main institutions, grouping them into three categories and highlighting their main interactions in different contexts. We place global and international institutions such as IOSCO, EU and other international agencies such as the World Bank into the first category, since they have fostered the initial phase of the convergence process. Secondly, we find that the presence of institutions such as local government and standard setters, which play an intermediary role, mediates between the need to guarantee the implementation of the standards and the need to preserve pre-existing equilibria. Finally, we discuss the role played by the end-users of the standards. Our analysis shows that these institutions are the most critical forces. In fact, in the absence of a structured, led program that orients these forces toward IFRS, the convergence process could result in the proliferation of local systems of standards, increasing the risk that harmonisation is achieved only in name.
The Routledge Companion to Intellectual Capital aims to offer a ‘wideranging overview of an important field that has seen a diverse range of research developments in recent years’ (preface). To achieve this objective, the book covers several topics related to intellectual capital (IC) in different sectors and geographical regions. Consequently, it offers a thorough understanding of theory and practice in the field and provides case studies as illustrations.
|Related parties disclosure: Is a risk-based approach more effective?
Fabrizio Bava, Melchior Gromis di Trana, Donatella Busso, Piero Pisoni
|A theoretical contribution to 21st Century problems in financial reporting
David Alexander, Roberta Fasiello
|Global financial crisis and relevance of GRI disclosure in Italy. Insights from the stakeholder theory and the legitimacy theory
Luca Fornaciari, Caterina Pesci
|Potential of IFRS 8: Managerial “customization”, relevance of subsidiaries and separate financial statements
|Conceptual shifts in accounting: Transplanting the notion of boundary from financial to non-financial reporting
Laura Girella, Mario Abela, Elisa Rita Ferrari
|Dialogue with standard setters
Mario Monda, Raffaele Fiume
Following recent corporate scandals increased attention has been paid to Relat-ed Party Transactions (RPTs), since they have often played a central role in abuses and frauds. Regulators have consequently been obliged to strengthen current regu-lations, introducing new bans and requirements aimed at guaranteeing the substantial and economic fairness of RPTs and a proper level of transparency. This reaction is due to the high inherent risk of these transactions and because companies in crisis tend to resort to this type of operation. In Italy, the regulations on RPTs were completely revamped in 2010. The material RPTs that have to be disclosed through an ad hoc communication were defined by former regulations through qualitative criteria, whereas now a quantitative approach is used in order to reduce subjectivity. The initial results of the new regulations show that a higher number of RPTs has been disclosed to the market, thus improving transparency, but the effects of RPTs remain unreported in Income Statements. Through an online questionnaire this paper, starting from previous research, in-vestigates potential improvements supported by independent directors involved in the RPT evaluation process. These independent Directors are uniquely placed to shed light on the experience of the initial years of application of the new Regula-tion, which may help lawmakers, after the lengthy initial consultation process, in-evitably influenced by divergent (and non-independent) interests without the bene-fit of the hindsight that is now available. It is to be hoped that lawmakers will take note of these results and fine-tune the regulations accordingly, without necessarily abandoning the quantitative approach, in order to increase the transparency of the information made available on RPTs.
Keywords: Related party transactions, disclosure, IAS 24, quantitative criteria.
The Italian tradition known as ‘Economia Aziendale’ is longstanding and well known in Italy. It broadly spans the 20th Century, with its apotheosis appearing in the 1920s with Gino Zappa. It is not very well-known elsewhere. Its logical conclusions for financial reporting are not applied in practice in Italy, and indeed never have been. They are not applied in the (very different) field of IFRS and European Directive requirements either. Our research question is to investigate the proposition that they significantly should be so applied. Our key area of study, therefore, is the complex and multi-faceted problem of income measurement and asset valuation, valuation issues in short. In order to properly investigate these considerations, we present a thorough survey of the theoretical development and arguments of the EA tradition, showing its logicality and usefulness, and contrasting these effects with the present-day regulatory systems. This forms the major theoretical element of the paper. In summary, therefore, the paper could be characterised as an analytical presentation of major theoretical arguments, with significant application to the real world of today and tomorrow. The EA tradition is not new. But we demonstrate its current relevance, and expose it to an international audience.
Keywords: Economia Aziendale, long-run operating capital maintenance, asset valuation, income measurement, Gino Zappa.
In this study, we examine the effects of voluntary disclosure on the market value of Italian-listed companies adopting GRI guidelines, interpreting our results in the light of both stakeholder theory and legitimacy theory. From a methodological viewpoint, an index is used to measure the level of disclosure of human resources and environmental information. We consider a sample of firms listed on the Milan Stock Exchange for an eleven-year period (2004-2014). The period chosen gave us the opportunity to assess the value-relevance of environmental and social information before and during the Global Financial Crisis. We supplement the previous literature on the topic of the relationship between social and environmental disclosure and value-relevance by arguing that sustainability tools have to be evaluated, remembering that they express a notion of value in the long term and provide information to a large number of stakeholders. Our findings show that environmental information is only value-relevant during the crisis period, when the shareholder perspective comes more into line with other stakeholder perspectives because they are seeking a middle-to-long run notion of value. Finally, we find that a high level of GRI information disclosure is positively evaluated by investors; this result is important also because it was obtained in the Italian market which is largely considered inefficient, and thus it supports the urgent need to provide high-quality information in each type of market.
Keywords: Social and environmental reports, global financial crisis, global reporting initiative guidelines, stakeholder theory, value relevance.
Nowadays companies are engaged in an increasingly competitive and global arena, where informational imbalances between companies and investors might be seen as a constraint to the correct functioning of markets. Breakdown of infor-mation by segments might be seen as an attempt to intercept different information needs about each circumscribed area of economic activities individually identified within entity-group. This paper is first intended to figure out, by resorting to practical examples, the effects of full management approach on IFRS 8 segment reporting structure. Then, in the light of the state of art arising from IFRS 8 Post-Implementation Review and the latest criticisms, in order to guarantee its useful-ness, it calls for a more awareness of the multi-faceted nature of segment reporting as a planning and control tool. Besides, merit of segment reporting is to recovery subsidiaries data elided within the consolidated financial statements. Following this perspective, separate financial statements, depicting subsidiaries in terms of in-vestments and profits and losses flowing respectively into balance sheet and in-come statements, is bound to provide a synthetic overview of all the business areas occupied by entity-group.
Keywords: Customization, breakdown, subsidiaries, operating segments.
In 1998 Miller, in his paper titled “The margins of accounting” observed that “By looking at the margins of accounting, we can understand how this influential body of expertise is formed and transformed” (Miller, 1998: 618). Drawing on this analogy, the boundaries of reporting and the ways these are defined and re-defined, as a consequence of the relationships organisations form with other entities from time to time, and their substantive nature provide insights about the business and its business model. Accordingly, an examination of reporting boundaries helps to better understand and appreciate the objective of an organisation, the logic that underlies its business model and how that is ‘reflected’ and communicated through the reporting entity’s financial statements – which may or may not align with the boundaries of the ‘organisation’. Despite the relevance of reporting boundaries as a critical aspect of the accounting discipline, it remains a relatively unexplored area in the literature. Accordingly, the aim of this work is to offer an initial overview on how the boundaries of reporting have (not) changed in response to the broadening scope of reporting to address both financial and ‘non-financial’ information (e.g. sustainability, governance and intangibles) and attempts to promote greater integration between both sets of information (IIRC, 2013). In particular, the analysis draws on the interpretative schemes of Zambon (1996) and Zambon and Zan (2000) and is combined with the concept of ‘transplantation’. The manner in which reporting boundaries are defined for both financial and non-financial reporting is investigated and compared. This comparison enables similarities and differences between the definition of the ‘reporting boundary’ to be problematised and explored for both financial and non-financial reporting.
Keywords: Reporting boundaries, financial reporting, non-financial reporting, transplantation.
[Dialogue with standard setters]
There had been several international accounting principles about the accounting treatment for business combinations, over the past years. Last June 2016, the International Accounting Standards Board proposed to amend IFRS 3 Business Combinations with the aim of clarifying the definition of a business. The motivation that pushed the Board to propose the Exposure Draft was to inform that there is a diversity in practice in accounting for previously held interests in the assets and liabilities of a joint operation in two kinds of transaction, those in which an entity obtains control of a business that is a joint operation and those in which it obtains joint control of a business that is a join operation. The purpose of the following review is to identify whether the board has reached the desired objective, and leads through the historical analysis of the accounting standards concerning business combinations, the analysis of the Exposure Draft and especially the analysis of the comments letters.
Keywords: Business combinations, IFRS3, Exposure Draft, Purchase Method, Screening test
|Italian academia facing an international scenario: Issues and trends
|Toward a learned profession: The future of accounting research
|Increasing the value of accounting research: An Italian perspective
Aldo Pavan, Isabella Fadda,
|Some notes about financial accounting research: Research methodology, epistemological approaches and practical implications
Marco Allegrini, Giulio Greco
|Past evolution and recent trends in accounting research
|The points of contacts between academics and professionals
|The usefulness of accounting research: A practitioner’s point of view
Giovanni Andrea Toselli
|Accounting research production and evaluation: The view of the professionals
The opening up to international debate of Italian accounting studies has required local researchers to deal with scientific paradigms based on assumptions, theories and methods markedly different from those that have been leading for decades the local knowledge production system. In an international scenario, a leading part has been played by the Anglo-Saxon mainstream paradigm. Not surprisingly, the interest of many Italian scholars has been catalyzed by such studies. However, the paradigm behind these studies is not free of criticism, as emerges from a qualified debate arising at international level around the pros and cons of this scientific approach. This paper – and the others collected in this Special Issue – hopes to contribute to the debate, with the aim, on the one hand, of overcoming some unbending defensive positions and, on the other hand, of favoring a conscious internationalization process.
Keywords: Accounting research, academia, positive accounting theory, scientific paradigm
The Pathways Commission (2012) recommended that we devote significant efforts to building a learned profession by purposeful integration of accounting research, education, and practice for students, accounting practitioners and educators. The reason this goal is so important for our broadly defined accounting profession is that we are in market for talent with other traditional learned professions such as medicine, law and engineering (and other future learned professions). Potential students want rewarding successful careers so they will migrate to learned professions that help make a difference in the world. The key aspect to a learned profession is intellectual technique (research) that informs practice and teaching. If our accounting profession can enhance the link between research, practice and teaching, we can move towards a learned profession.
Keywords: Learned profession, pathways commission, intellectual technique, sustainable development.
Accounting research has a speculative and normative tradition. Starting at the beginning of the 1970s, empirical methodologies gained prominence and the boundaries of accounting disciplines have become uncertain. Quantitative and qualitative methods tend to overwhelm the accounting and business objects; often they are only suitable to deal with past and narrow phenomena. Empirical methodologies need reference theories, coming from other disciplines and particularly economics and sociology. In this context, it is questioned if accounting research does exist anymore and if it is relevant to the business world. Some scholars have begun to wonder whether it would be appropriate to revalue normative approaches in order to conduct a type of research which is useful to the society and allows the preservation of specific accounting knowledge. A necessity emerges to come back to the prominence of business and accounting issues over methodologies and sociological theories. Research should be directed to tackle wide and current phenomena, not just the narrow and past ones. Speculative thinking has to be reassessed and empirical findings should be used to strengthen it as starting premises. Explaining phenomena is not enough; empirical research has to go beyond its findings; the emphasis should be shifted to the drawing of policy recommendations.
Keywords: Accounting research, empirical methods, a priori research, research relevance.
Research in accounting is relatively young compared to other disciplines. Originally, normative research based on a priori reasoning and aimed at improving accounting practice was predominant among accounting scholars. After the 60’s, accounting academics started using an empirical positive approach, aimed to better understand accounting phenomena through empirical tests of hypotheses. As from then, research in accounting has gone through several changes in terms of approaches, research methods and topics. This paper aims at highlighting the main stages of the past evolution and recent trends in accounting research. After describing the main drivers of the shift from normative to positive approach, the dominant traits that have characterized accounting research for the last two decades are briefly analyzed. Particular emphasis is put on methods and topics. In the last section, the main limitations of current accounting research are highlighted, and some directions for future research are outlined.
Keywords: Accounting research, past evolution, future directions, research methods, research topics.
Some argue that the ultimate purpose of accounting research should be to improve accounting practice, rather than simply to describe or understand or critique it. Hence a gap appears to have emerged between practitioners and academics with regards to accounting research. In order to exploit as better as possible the output of the accounting research performed by academic researchers, the accounting profession should create a point of contact; auditing networks might facilitate this link. On the other hand, research performed by academics should become “understandable” by practitioners using a different jargon and simple mathematical formulas.
Keywords: Accounting profession; accounting research; research impact; impact factor.
This paper represents a contribution from the point of view of a practitioner who strongly believes that it is essential to continue to invest in accounting research. The cooperation between chief financial officers, auditors and academic institutions is central not only for improving the process of accounting regulations but also for relaunching, at the same time, the industrial system (and not only it), by creating a strong feeling of trust in general economic and financial communication, thus fostering higher level of accountability.
Keywords: Accounting profession, accounting research, research impact, impact factor, accountability.
The existence of a gap between accounting research and accounting practice has been extensively described in literature. In order to be able to publish a research in a high-ranked accounting journal, it seems that methodological issues are more important than those related to the relevance of the topics covered. To improve research and accounting practice and to avoid the risk of accounting research becoming selfreferential, every effort should be made to bridge the current gap between research and accounting practice. To this end, the development of mutual knowledge of the agenda of researchers and practitioners on the one hand, and participation in joint projects on the other, could represent possible future solutions to be pursued.
|The Reporting Entity in Private-Public Accounting Harmonisation. Is Control Enough for the Local Government Consolidated Financial Statements?
Cristian Carini, Laura Rocca, Claudio Teodori, Monica Veneziani
|Concerned about Going Concern: When do Entities in Liquidation have to be Considered a Non-Going Concern According to IFRS?
Marius Hasslinger, Michael Olbrich, David Rapp
|The Association between Big4 and Cost of Debt in Private Firms
Stefano Azzali, Tatiana Mazza
|Discretionary Accruals in Italian Private Firms and Non-Linear Bank Loan Granting
Elisabetta Mafrolla, Viola Nobili
The European Commission initiated a discussion on the expediency of using the International Public Sector Accounting Standards (IPSAS), based on the IAS/IFRS,as a common base for harmonizing the public sector accounting systems of the member states. However, literature suggests that accounting is not neutral with respect to the economic, social and political dimensions. In the perspective of evolution of the accounting regulation outlined, balanced between accountability, with the need to represent phenomena for reporting purposes, and decision-making issues, which concentrates on the quantitative importance of the values, the paper aims to analyse the effects of the application of different criteria for the definition of the reporting entity of the local government consolidated financial statements (CFS). The Italian PCA 4/4, the test of control and the financial accountability approaches are examined. The evidence that emerged from the case studies examined identifies several criticalities in the Italian PCA 4/4 and support the thesis that the financial accountability approach is more effective in providing a complete representation of the public resources entrusted to and managed by the group, whereas the control approach better approximates quantification of the group results in terms of central government surveillance. The analysis highlights the importance of the post implementation review period and the opportunity to contextualize the adoption of the consolidated financial statement in the broader spectrum of the accounting harmonization process, participating in the process of definition of the European Public Sector Accounting Standards (EPSAS).
Keywords: accounting regulation, accounting harmonisation, consolidated financial statement, IPSAS, public sector accounting.
The rejection of the going concern premise as the underlying assumption of financial statements has far-reaching consequences for accounting. For that reason, it is vitally important to identify the appropriate point in time at which the entity can no longer be regarded as a going concern. Focussing on entities that voluntarily decided to liquidate their operations, the analysis shows that both the IFRS taxonomy and the accounting literature are rather vague on the question of the point in time at which the going concern premise is no longer appropriate. Therefore, we identify the reporting stages that are necessary in the liquidation phase. Contrary to expectations, the paper argues that the going concern assumption should not be immediately abandoned, as retaining it can provide users of financial statements with decisionuseful information. In fact, the paper recommends a value chain based approach. Accordingly, the going concern assumption should not be rejected before the entity has terminated its activities at all stages of its value chain.
Keywords: going concern, liquidation, IFRS, winding-up.
This study investigates the association between choice of a Big4 audit firm and Cost of Debt compared with non-Big4 in Italian firms. Based on a sample of Italian companies audited by an audit firm in the period 2007-2012, we perform OLS regressions to test the Big4 association with Cost of Debt. Results confirm our expectation that audit firm size is a significant criterion of audit firm choice and we find that Big4 is associated with lower Cost of Debt than non-Big4 in private firms. The choice of Big4 audit firm reduce the specific agency conflict between banks and owner/management in private firms. We also find that private firms benefit from lower Cost of Debt than public companies. This research makes a contribution to the literature by extending previous results (Gul et al., 2013, Cano Rodriguez and Alegria, 2012, Karjalainen, 2011) to private firms and to the setting of Italy. Results may also be useful for companies choosing auditors in private firms and in the mitigation of agency conflict.
Keywords: Big4, cost of debt, private firms.
This paper investigates whether and at what extent private firms reduce the quality of their accruals in order to signal a better portrait to the bank and obtain new or larger bank loans. We measure earnings discretionary accruals of a sample of Italian private firms, testing whether new and larger bank loans are associated with a higher (lower) quality of earnings in borrowers’ financial reporting. We study bank loan levels and changes and how they impact discretionary accruals and found that, surprisingly, private firms’ discretionary accruals are systematically positively affected by an increase in bank loans, although they are negatively affected by the credit worthiness rating assigned to the borrowers. We find that the monitoring role of the banking system with regard to the adoption of discretionary accruals is effective only when the loan is very large. This paper may have implications for policy-makers as it contributes to the understanding of the shortcomings of the banking regulatory system. This is an extremely relevant issue since the excessive amount of non-performing loans held by Italian banks recently threatened the stability of the European Banking Union as a whole.
Keywords: Discretionary accruals, private firms, bank loans, non-performing loans, private loans.
|Put Your Money where Your Mouth is: The Difference between Real Commitment to Sustainability and Mere Rhetoric
Laura Bini, Marco Bellucci, Francesco Giunta
|Income Smoothing via Loan Loss Provision in Credit Cooperative Banks
Stefano Azzali, Luca Fornaciari, Tatiana Mazza
|The Connectivity of Information in Integrated Reporting. Empirical Evidence from International Context
Alberto Incollingo, Michela Bianchi
|Web-Based Financial Reporting: An Interpretative Model for Corporate Communications on Social Media
Paola Ramassa, Costanza Di Fabio
Roberto Di Pietra, Stefano Zambon
Companies exhibit growing interest in sustainability rhetoric. Such an interest is alternatively justified by a company’s need to address legitimacy instances, rather than to satisfy stakeholders’ requests about its sustainability performance. Whatever the case, a main debated issue concerning sustainability rhetoric deals with the difficulties in understanding whether companies’ commitment towards sustainability is “real”, or it only consists of “empty words” that hide opportunistic strategies. Our paper contributes to this debate, proposing a methodological approach, which is based on a company’s business model (BM) representation. We argue that the inclusion of adequate sustainability information in a company’s BM representation can testify to a real company’s engagement, as it illustrates how sustainability affects its value creation process. Compared to extant methodological proposals, mainly based on linguistic analyses, our approach does not require specific competences to be applied. Moreover, it saves user’s time, as it allows the assessment of entire company’s sustainability rhetoric through the analysis of the information reported in its BM. Our approach is consistent with previous contributions that propose a company’s BM as a representation device able to illustrate strategic information that cannot be represented in the traditional corporate reporting. Our approach proposes a possible answer to address the challenges faced by regulators and standard setters involved in the regulation of sustainability disclosure. Such approach has found a first step of implementation in the UK, where since 2013, listed companies are requested to describe their BM in Strategic Reports.
Keywords: Sustainability rhetoric, business model, corporate social responsibility, non-financial disclosure, mining industry
This research investigates whether income smoothing via loan loss provision is lower for Credit Cooperative Banks than for non-Credit Cooperative Banks. Using data collected from the financial reporting of a sample of private banks, and Ordinary Least Square models based on net income or its variation, as used by previous literature, we find that income smoothing through loan loss provision is lower in Credit Cooperative Banks than in banks with different ownership structures. Results remain the same using several robustness tests (decomposition of loans, quality of loans, change in economic growth, cluster and fixed effect, effect of financial crisis). Mutual ownership, smaller size, and the local boundaries that characterize Credit Cooperative Banks may reduce the need for managers to manipulate earnings. Our findings give a positive evaluation of the recent Italian Law No. 18/2016 which reforms Credit Cooperative Banks, and imply that benefits of Credit Cooperative Banks ownership structure may derive from the group structure which gives a higher level of stability and solidity.
Keywords: Income smoothing, loan loss provision, credit cooperative banks