1

Focus on
Research
The research newsletter of The Institute of Chartered Accountants of Scotland
S
p
r
i
n
g

2
0
1
4

I
s
s
u
e

3
0
INSIDE THIS ISSUE
NEW ICAS APPROACH TO
RESEARCH FUNDING
FOOTBALL, FINANCIAL SERVICES
& MORE - FIND OUT ABOUT OUR
FORTHCOMING PUBLICATIONS
ICAS INFORMS CONCEPTUAL
FRAMEWORK DEBATE
NEW PUBLICATIONS ON
SCOTTISH INDEPENDENCE,
BUSINESS START
UPS & ASSURANCE
WIN A NEXUS TABLET
AT BAFA & EAA
EDITORIAL
CONTENTS
EDITORIAL THE TEAM
New ICAS research funding 1
New grants awarded 3
New ICAS research 4
Coming soon 8
ICAS news 10
New ICAS insight publications 15
Research results - Small projects 21
Research results - Seedcorn projects 24
Save the date 25
Welcome to our latest research newsletter. We hope you enjoy
reading this jam packed edition!
ICAS is committed to promoting evidence-based policy making
and therefore commissions research in key areas to support the
development of policy. We have just published our new research
funding brochure. This gives details of our new research funding
approach and how we aim to maximise research impact from our
projects. For more information please see pages 1 and 2 of this
newsletter. To ensure that you are made aware of new calls for
research as they arise, we would encourage you to subscribe to
our e-news service. To subscribe either email research@icas.org.
uk or if you are attending either the BAFA or EAA conference visit
our exhibition stand to subscribe and enter our prize draw to win a
Nexus Tablet.
As usual time seems to be flying by at ICAS and we have some
great new research and technical publications for you to look at.
All of our publications can be downloaded free of charge from our
website but if you would like a hard copy please do get in touch.
We know that the ongoing revision to the IASB Conceptual
Framework has generated a lot of interest in the academic
community and in some cases a lot of work! Here at ICAS, we
have published a literature review with the European Financial
Advisory Group (EFRAG) on the use of information by capital
providers and a technical paper with the International Federation
of Accountants (IFAC) to contribute to this crucial debate. These
reports are profiled on pages 6 and 15, respectively.
In the UK, and particularly Scotland, the debate on whether
Scotland should be an independent nation continues, with the
vote on independence due to take place on 18 September 2014.
ICAS continues to contribute to the debate, asking the important
questions from our field of expertise and raising the issues, whilst
maintaining an apolitical stance. New research and technical
papers published in this area are outlined on pages 4, 17 and 20.
We have a number of research publications in the pipeline, covering
topics as diverse as football club financial reporting, assurance
and supervision in financial services, information needs of charity
trustees and SME funding issues. Find out more on pages 8 and 9.
As usual ICAS will be exhibiting at the BAFA and EAA conferences
this spring and look forward to seeing as many of you as possible
at these conferences. Please drop by our stand for a chat and to
pick up a copy of our new research funding brochure and take a
look at our new research and technical publications. You can also
enter our free prize draw to win a Nexus Tablet by dropping your
business card or e-news subscription form into our prize draw box
good luck!
We would like to end this editorial with a special thank you to
Professor Angus Duff, our Academic Research Adviser, who will
step down from this role and the Research Committee at the end
of April 2014. We wish Angus all the best for the future and are
grateful for his contribution over the years.
The ICAS Research Team
Michelle Crickett
Director of Research
Ange Wilkie
Research Coordinator
NEW RESEARCH FUNDING
1 www.icas.org.uk/research
ICAS is committed to promoting evidence-
based policy making and therefore
commissions research in key areas to
support the development of policy. We
believe that focusing on a number of
specific topics of interest will maximise
the impact of the resultant research and
be beneficial to our researchers, ICAS and
policy makers.
THE NEW APPROACH
Our new research funding brochure has
just been published; this outlines our new
approach. Whilst we continue to focus on
policy relevant research, we have adopted
two new streams for research, these are
outlined below.
Calls for research
The Technical Policy Board (TPB) of
ICAS will work in conjunction with the
ICAS Research Committee, to identify
topics where research is considered
crucial to take forward an important issue
affecting the profession or business in
an international or UK context. In such
circumstances a call for research will be
issued and advertised on our website.
The calls for research may be specific or
identify a broader theme or programme of
work. Each call for research will specify
the application requirements, including
the deadline by which applications
must be received. Generic guidance is
also available in the Guidance notes for
applicants, which are available from the
ICAS website or by contacting the ICAS
Research Centre.
We do expect to issue some new calls
for research over the next few months,
so please keep an eye on our website
or if you are a subscriber to our e-news
service, watch out for news of these
opportunities arriving in your inbox. You
can subscribe to our e-news service by
emailing: research@icas.org.uk
Pro-active applications
Pro-active applications for research
funding are also invited to be submitted
where they are in the public interest
and are consistent with the TPBs policy
themes and the policy positions of one
of the ICAS technical committees. These
themes and policy positions are available
from the ICAS website. Applications are
welcome at any point in time.
Please do get in touch with us if you have
any ideas for undertaking policy relevant
research which meet the above criteria.
We have detailed guidance notes and have
an informal proposal form to make the
process quick and easy.
Interested applicants should, in the first
instance, complete our short informal
proposal form, specifying how the
proposed project will contribute to the
ICAS policy themes and policy positions
and its relevance to one of our technical
committees. There are no deadlines for
submissions and the Research Centre will
provide informal and constructive feedback
on the project, prior to asking selected
applicants to proceed to the formal
application stage. The formal application
will then be considered by the Research
Committee and the TPB.
MAKE AN IMPACT
WITH ICAS
OUR NEW APPROACH TO RESEARCH
FUNDING
ICAS remains firmly committed to
funding world class academic research
that has the potential of having a real
impact on important issues that affect the
profession or business, either in the UK
or internationally.
Allister Wilson
Convener, ICAS Research Committee
NEW RESEARCH FUNDING
2 www.icas.org.uk/research
WHY WORK WITH ICAS?
We provide a helpful, friendly and
approachable service to our researchers.
The Research Centre can offer assistance
with projects whilst allowing researchers
to maintain their independence.
We provide financial as well as in-kind
support to our researchers to maximise
the impact and influence of the research,
by providing:
collaboration with an influential
professional body with close links to
policy makers;
establishment of an expert steering
group for major research projects;
access to our technical staff and
members with expertise in the specific
area;
access to our worldwide membership
for questionnaires and interviews; and
assistance with maximising the impact
and influence of your research.
The resultant research will normally be
used by ICAS in order to pursue policy
change and in some circumstances the
research will also feed into larger ICAS
thought leadership projects. The research
will be disseminated widely to ensure
greater engagement with the profession
and business.
Researchers are also encouraged to
publish their results in academic journals
and professional magazines.
In order to maximise impact, ICAS will
on occasion partner with other high
profile bodies to ensure the maximum
reach of research and the involvement of
experts in that topic. Examples of recent
collaborations with other bodies include
the UK Financial Reporting Council and
the European Financial Reporting Advisory
Group.
Each call for research will detail the
maximum grant available for a particular
project. There is no upper or lower limit
for grant applications under the pro-active
route, however each application will be
assessed individually to consider if it
represents value for money.
Applications for funding are welcome from
researchers and institutions anywhere
in the world and are not restricted to the
academic community.
For further details on the application
and review process please see the
Funding Brochure, Guidance notes
for applicants and Grant application
forms which are available from the
ICAS website at: www.icas.org.uk/
researchfunding
If you have any queries please
contact the ICAS Research Centre
(email research@icas.org.uk or
phone +44(0)131 347 0237) or if
you are attending the BAFA or EAA
conferences come along to our
exhibition stand for a chat and pick up
a copy of the new brochure.
ICAS has a reputation for applied research and
policy-based studies that contribute to national
and international debates. The friendly and
professional support we received from ICAS
was exemplary throughout the project.
Dr Jill Collis, Brunel University, London
Previous ICAS grant holder
The ICAS research experience was excellent.
We benefited a lot from the feedback and
the "drive" from ICAS. Their insights and
suggestions helped us to bridge the gap
between academic research and practitioners
interests, in other words to generate highly
relevant research.
Professor Thomas Jeanjean, ESSEC
Business School, Paris
Previous ICAS grant holder
3
GRANTS AWARDED
www.icas.org.uk/research
NEW GRANTS
AWARDED
Balancing the board: Directors' skills and diversity
Chris Mallin, University of East Anglia and Hisham Farag,
University of Birmingham
One of the key requirements for best practice corporate
governance is a balanced board. It has long been recognised
that companies should be headed by an effective board which
can both lead and control the business, para 4.1, Cadbury
(1992). Over the years there has been an increasing focus on the
diversity of corporate boards. In this project, diversity is seen as
encompassing both the directors skills and the board composition
in terms of gender, age, nationality, etc. Thus building effective
corporate boards is about the set of skills and qualifications
of directors and is not solely reliant on gender diversity. The
current UK Corporate Governance Code (2012) recognises
the importance of diversity and states that, when making
appointments to the board, 'the search for board candidates
should be conducted, and appointments made, on merit, against
objective criteria and with due regard for the benefits of diversity
on the board, including gender' (para B.2).
This project will investigate the individual directors skills across
the UK FTSE All Share companies and industries by constructing
a measure of a broader concept of diversity. Directors skill
is defined as a function of education/qualifications, board
experience, professional experience, and age. The project
will also measure gender, age and national diversity for each
individual board, and also analyse by company size and industry.
The skill set for each board will be calculated and then compared
with the skill set of the entire sample. The research will quantify
the UK board heterogeneity, and hence describe the bigger
picture for the main skills of the directors and board diversity for
UK FTSE All Share companies.
The final phase of the project will be to investigate the impact on
company financial performance.
Are valuation and stewardship complementary or
competing objectives of financial accounting?
Stefano Cascino, London School of Economics, Mark
Clatworthy, University of Bristol, Beatriz Garca Osma,
Universidad Autnoma de Madrid, Joachim Gassen, Humbolt-
Universitt zu Berlin, Shahed Imam, Warwick Business School
and Thomas Jeanjean, ESSEC Business School, Paris
The current development of the Conceptual Framework by the
International Accounting Standards Board (IASB) is generating
renewed interest in the objectives of financial accounting and
their impact on recognition and measurement rules. Conceptually,
valuation-based objectives can be separated from objectives that
directly interact with managerial decision-making by designing
and/or governing contracts. The latter class of objectives is
also referred to as the stewardship role of accounting. While
many constituents stress the importance of stewardship for the
development of financial accounting standards, the IASB seems to
hold the view that different objectives can, at least to a reasonable
extent, be addressed by a common set of financial reporting rules.
The question of the objectives of accounting information is
of fundamental policy relevance. The relative priorities of the
valuation and stewardship objectives can affect financial reporting
in profound ways, including establishing priorities for particular
measurement and valuation bases and promoting or relegating
key properties of accounting information, such as conservatism.
The academic literature on the importance and consequences of
the objectives of financial reporting is inconclusive. This project
aims to address this important gap by producing evidence for
the demand from capital providers for accounting information,
depending on their information objectives. The project will involve
a major survey of around 120 institutional investors across
Europe. The results of the research will inform one of the most
controversial debates ever faced by accounting standard setters.
This project is a follow on project to the joint ICAS/EFRAG
published research which is profiled on page 6 of this newsletter.
ICAS research grants have been
funded by The Scottish Accountancy
Trust for Education and Research
(SATER)
4
NEW RESEARCH
www.icas.org.uk/research
NEW ICAS
RESEARCH
Jane Frecknall-Hughes and Rosemarie
McIlwhan, The Open University and
Simon James, the University of Exeter
On 18 September 2014, voters in Scotland
will decide whether Scotland should
become an independent nation. This
report addresses a series of questions
regarding the tax implications of Scottish
independence or further devolution on
the basis of an extensive interdisciplinary
literature review covering both academic
and professional publications and
interviews with 19 experts. The tax
implications relating to the wide range
of possibilities associated with Scottish
independence or further devolution are
far reaching. This report takes no view
on the desirability of the various options,
but rather sets out to help establish the
factors that should be taken into account
if change is to be successfully achieved.
This investigation suggests that the tax
implications of independence or further
devolution may be more complex than
might be widely thought.
The concept of full independence, with
Scotland becoming a sovereign state,
is relatively straightforward. However,
further devolution presents a substantial
number of options which might
involve different taxes and possibly the
introduction of one or more new taxes in
Scotland.
In the event of independence, the Scottish
Government (2013) has stated that it
intends to develop a new tax system
for Scotland. However, even with an
independent Scotland, such an outcome
is uncertain because a new Scottish
Parliament would be elected and a new
Scottish Government formed. In practice
the outcome might be something between
an entirely new system and the current
tax system. There is a considerable
overlap of the tax implications of the
different possibilities involving either
independence or further devolution,
although some issues, for example, the
design of a new tax system and the
status of double taxation agreements,
would only be relevant in the case of
Scottish independence. Other matters,
such as those relating to education, risks
and practical implications are broadly
similar for either independence or further
devolution.
The particular questions addressed in the
study and a summary of the findings are
set out below.
(i) Is the current UK tax system fit for
purpose for modern Scotland?
In general the evidence suggests the UK
tax system works reasonably well in a
complex and changing environment, but
there is scope for improvement. The
Scottish Government (2013) suggests
that the UK tax system is complex and
inefficient (p. 118) and that it intends to
develop a new tax system for Scotland
based on the design principles of a
modern and efficient system (p. 122).
This is a laudable aim but there are many
reasons why modern tax systems are
not closely aligned with such principles
in practice and tend to become complex.
Devising a new tax system that is
workable and acceptable to Scottish
taxpayers would involve many serious
challenges.
(ii) What practical issues arise in
developing and administering a new
or supplementary tax system, what
capacities are key, and how might
capacity requirements be met?
There would be numerous practical
issues involved in developing and
administering a new or supplementary
tax system. These include establishing
a skilled tax administration in Scotland
INFORMING THE DECISION - THE TAX IMPLICATIONS OF
SCOTTISH INDEPENDENCE OR FURTHER DEVOLUTION
THE TAX IMPLICATIONS OF
SCOTTISH INDEPENDENCE
OR FURTHER DEVOLUTION
Jane Frecknall-Hughes
Rosemarie McIlwhan
Simon James
5
NEW RESEARCH
www.icas.org.uk/research
to replace HM Revenue and Customs,
ensuring that double taxation and effective
information exchange agreements were in
place, clarifying the standing of UK case
law, agreeing the definition of Scottish
resident or taxpayer as well as ensuring
an effective IT system including online
filing.
(iii) What are the determining factors for
a new country designing a tax system?
For example, should there be a legacy
approach, a new start, with a simpler
approach or an approach to fulfil other
political or economic objectives?
In deciding whether to base change on the
existing system (a legacy approach) or
to design a new one, the former has the
advantage of starting with a functioning
tax system which can then be developed
over the course of time. However, this
approach risks the creation of an overly
complex system which lacks coherence
and may miss the big picture. On the
other hand, whilst developing a new tax
system offers the opportunity to create a
coherent system, it also risks generating
unintended consequences and would
raise issues about the acceptance of, and
compliance with, the new system. The
risks involved in tax reform are likely to be
much lower where change is incremental
rather than associated with a new start.
(iv) What trade-offs or compromises arise
and on what basis?
There are many trade-offs and
compromises involved in modern tax
design. One example is simplicity versus
fairness. A simple tax system has many
attractions but may not take sufficient
account of different circumstances to be
acceptable to taxpayers. Another example
is the trade-offs and compromises
required in terms of the policy objectives
of taxation versus the levels of taxes set.
There may be a fine balance between
ensuring sufficient revenue to fund the
desired levels of public expenditure
and creating a system that does not
excessively distort economic behaviour
or arouse serious taxpayer resistance.
Achieving such a balance can take time
and experience.
(v) How long would it take to implement a
new tax system and what would happen in
any transitional period?
The length of time required to develop and
implement new taxes or a new system
depends, of course, on the features of
the tax or system, the extent to which
it is acceptable to taxpayers and the
capacity of the revenue authorities to
support such changes. A process of
developing a new tax system, including
taxpayer consultation, producing a new tax
code, recruiting and training tax officials,
developing IT systems and preparing
taxpayers could take a period of years.
Further devolution of existing taxes to
Scotland would not require the same level
of change and support.
(vi) What are the most significant
implementation issues? and
(vii) What are the key risks and what can
be done to mitigate those risks?
The responses to these two questions
are closely linked. The biggest risk
associated with a new tax system is
whether it will deliver the desired revenue.
Tax compliance is an important issue
and the report describes a system of
compliance risk management. Another is
the international dimension which raises
considerations of tax competition and tax
harmonisation. A national tax system that
deviates significantly from those in other
countries may generate economic effects
that include undesirable movements of
capital and labour. In recognition of the
risks involved the report offers a strategic
approach to the development of tax policy.
There would also be risks involved in the
further devolution of taxes but they would
not be on the same scale. However, the
further devolution of taxation might also
benefit from a strategic rather than an ad
hoc approach to tax reform.
(viii) What are the insights, processes and
learning points from other new countries
or regions which have gone through
similar developments?
In examining the tax experiences of
other new countries or regions there
are few specific lessons that would
be immediately applicable to the tax
implications of Scottish independence or
further devolution without qualification.
For example, former UK colonies of
substantial size gained independence
well before tax administrations took on
many of their modern characteristics.
The transition economies in Central and
Eastern Europe and the former USSR
had experienced very different economic
and political circumstances which meant
some had no choice but to adopt the big
bang approach (introducing a new system
all at once). A lack of administrative
infrastructure, distrust of government and
public institutions, corruption and a need
for swift, practical solutions drove tax
developments in ways which would not
necessarily be applicable to the Scottish
situation. There is no one model for
adopting or developing a new tax system:
each country is unique.
(ix) What are the insights, processes and
learning points from federal systems, for
example, the US or Switzerland?
The experiences from federal systems,
such as those in the USA and Switzerland,
are not readily applicable to the situation
of an independent Scotland and the
remainder of the UK (rUK). In theory,
however, a federal system would be
possible in this context and would address
other concerns, such as currency union.
However the creation of a federation
raises wider issues for Scotland and rUK
than just tax.
(x) What are the educational (professional
and public) needs to support a new
system?
Clearly the extent of such needs depends
on the nature and the scope of the
changes proposed, but the view expressed
in the interviews especially is that they
would be considerable. Taxpayers
commitment to and acceptance of changes
will be significant to their successful
implementation. A new tax system for an
independent Scotland or the introduction
of new taxes under further devolution
would require considerable professional
and public education.
(xi) What would a new system of incentives
or penalties to support compliance look
like?
A new tax system and further devolution
could raise a range of issues relating to
tax avoidance, and while Scotland would
be subject to the same pressures in this
context as any other developed country,
there might be particular issues raised
by any transfer of information between
systems, especially under independence.
For more detailed analysis, please see
the full report, available to download
from May at: www.icas.org.uk/
frecknall-hughes
Scottish Government (2013), Scotlands
Future: Your Guide to an Independent Scotland,
Edinburgh: Scottish Government.
6
NEW RESEARCH
www.icas.org.uk/research
Stefano Cascino, London School of
Economics, Mark Clatworthy, University
of Bristol, Beatriz Garca Osma,
Autonoma University of Madrid, Joachim
Gassen, Humboldt-Universitt zu Berlin,
Shahed Imam, University of Warwick
and Thomas Jeanjean, ESSEC Business
School, Paris
The changes to the IASBs Conceptual
Framework have generated substantial
debate about important issues, including
whether prudence should be maintained
and whether the stewardship objective
of accounting truly deserved its effective
relegation. It is generally agreed that
financial reporting aims to inform capital
providers investment decisions. But
beyond this, and in order to fully inform the
debates surrounding the Framework, more
specific questions may be asked:
Who are the main capital providers and
what decisions are they making?
What information do they use in their
decision making and how do they use it?
How important is accounting information
to capital providers?
The answers to these questions have
important implications for standard setters
and for the accounting community as a
whole. In short, capital providers are highly
varied in their information usage and
while accounting information is important
to equity and debt investors, it is used in
different ways and for different purposes.
Even the same capital providers use
financial statement information differently,
depending on the nature of the decisions
they are making.
To address the above questions in
detail ICAS and the European Financial
Reporting Advisory Group (EFRAG)
commissioned this comprehensive review
of the international academic literature.
The aim of the review was to inform future
standard setting and highlight any gaps in
the existing research. The review focuses
where possible on evidence obtained
directly from users themselves.
The main capital providers for large public
companies can be broadly categorised
as equity investors, debt providers and
trade creditors. They can be further
sub-classified into professional equity
investors, private retail investors, inside
(usually family) equity investors, public
and private debt investors and trade
creditors. Importantly, there is significant
international variation in the importance
of capital providers. For example, equity
represents less than 30% of total capital
employed for the average public company
in Portugal, but almost 60% of total assets
are financed by equity in the average UK
listed firm. Furthermore, inside family
equity investors are major providers of
capital to large European companies.
In general, capital providers aim to receive
an appropriate level of return on their
investment, for a given level of risk. In
accordance with the "valuation" view,
information is therefore deemed useful if it
assists with estimating the amount, timing
and riskiness of future cash flows. But
there are important differences between
capital providers and these can strongly
influence information preferences. To
see this, take the fundamental distinction
between debt and equity securities. While
both have limited liability, debt securities
returns are limited on both the downside
and upside, whereas equity returns are
only limited on the downside. Lenders and
bondholders are therefore more sensitive
to downside risk and as a result, debt
contracts regularly contain covenants that
pass control to lenders when the value of
the firm falls, but not when it increases.
Hence, there is a stronger preference for
conservative accounting in debt contracting
because slow recognition of bad news
can result in deferred creditor control and
potentially to higher losses.
In some cases, the interests of
shareholders and debt providers may
diverge. For instance, shareholders
may use the proceeds of a loan to fund
excessive dividend payments, or may
issue more senior debt, thus diluting the
claim of the original lender. In addition,
it is well known that the interests of
managers and shareholders often
conflict because of "agency problems",
where managers act in ways that suit
their own interests, rather than those of
shareholders. Information will therefore
also be judged on its ability to mitigate
the problems associated with these
conflicts. Moreover, the characteristics
that lead to useful information for equity
valuation decisions do not necessarily
correspond with those for reducing
conflicts between shareholders, debt
providers and managers. In particular, for
the latter purpose, which corresponds
to a "stewardship" role, information is
often used in contracting (such as lending
agreements and executive compensation
contracts), so conservatism and verifiability
are more desirable than for valuation
purposes. It is clear from the literature
therefore that in some areas, the valuation
and stewardship roles do not coincide.
Because of the different roles for
information, it should be no surprise
that when making decisions, capital
providers make use of various information
sources and do so in different ways. For
professional equity investors (including
fund managers, buy-side and sell-side
analysts), direct contact with company
management and financial statements are
most important. These investors rely on
such information for both financial and
for stewardship decisions, in the former
case for estimating future cash flows
and profits, and in the latter case for
accountability and executive compensation
purposes.
Valuation models, such as the price/
earnings ratio or discounted cash flow
require information on future cash flows
and/or earnings have financial statement
data as inputs. However, equity investors
prefer "persistent" or recurring earnings,
so transitory or non-recurring items
THE USE OF INFORMATION BY CAPITAL PROVIDERS
The use of information by capital providers
Academic literature review
2013
DECEMBER
AUTHORS:
Stefano Cascino
Mark Clatworthy
Beatriz Garca Osma
JoachimGassen
Shahed Imam
Thomas Jeanjean
7
NEW RESEARCH
www.icas.org.uk/research
are often removed from "bottom line"
GAAP numbers. Also, because of the
stewardship role of financial statements,
information in the financial statements
on past and present performance is also
important to professional investors. When
it comes to valuation bases, fair value is
sometimes preferred to historic cost for
certain asset classes, but this is not the
case where fair value is arrived at using
unobservable inputs as part of "mark
to model" valuations. Moreover, while
notes to the accounts are important to
professional equity investors, information
disclosed in the notes receives less
attention than the main financial
statements.
Importantly, financial statements are not
used mechanistically by professional equity
investors, nor are they used in isolation.
For example, meetings with management
often rely on accounting information to
form the agenda, and while managers or
equity analysts forecasts of future profits
may be highly relevant, their usefulness
also depends on the availability of an
eventual outcome against which the
forecast can be judged. Audited financial
statements therefore occupy a unique
position in the information environment.
Accounting information is also highly
important to debt investors, as evidenced
by the fact that contracts between lenders
and corporate borrowers usually contain
numerous covenants based on financial
ratios taken from the audited financial
statements. Such covenants may restrict
dividend payments, limit companies ability
to issue more debt or even constrain
capital expenditure, though these are
often based on "non-GAAP" figures. Debt
providers are thus relatively sophisticated
users of accounting information and
because of the nature of their claims, they
typically prefer conservative accounting
to unbiased accounting. This is reflected
in the adjustments they make to financial
statement data. For instance, intangible
assets are often excluded from financial
statement data used in loan contracts.
Moreover, companies recognising losses
in a timely way can benefit from more
favourable lending terms.
When it comes to private retail investors
and trade creditors, information is
not usually accessed directly. Rather,
intermediaries process the information
used in investment decisions and it is
these intermediaries who may also rely
on accounting information. For example,
even though trade creditors may rely on
credit bureaus for a decision on whether
to provide credit to a new customer,
these credit bureaus themselves rely on
financial statement data (along with other
non-financial information) for estimating
payment default risk.
The principal conclusion arising from
the academic literature is therefore that
financial statements are used in different
ways by various capital providers with
different needs and different objectives. A
major challenge for accounting standard
setters is the need to balance these
differences either by focusing on a
subset of users, or by balancing different
needs on a standard-by-standard basis.
In so doing, focusing on the comparative
advantages of the accounting process
when developing standards will help.
Although it may not be the most timely
source, financial reporting provides
recurring, standardised, regulated, audited
data and these features set it apart from
other information sources. Under this
approach, financial reporting information
should be designed to coexist with
other information sources with different
weaknesses by providing reliable, verifiable
data.
Standard setters also need to consider the
role of information intermediaries when
developing new standards. Even though
private investors and trade creditors do
not use accounting information directly,
they rely on others, such as analysts, the
media and credit bureaus, who do. This
may affect who the standard setters
target user is. Finally, certain capital
providers regularly require financial
accounting data for contracting purposes.
Although these users can amend contracts
when standards change, significant
renegotiation costs may be incurred.
Standard setters should therefore consider
the use of financial accounting information
in contracting when making standard
setting decisions.
In some important areas, the academic
literature yields few insights. Examples
include the factors that influence the use
of various information sources and the
impact of different institutional and national
environments. In other areas, such as
what information capital providers would
like, we know barely anything at all. As
ever, therefore, there remains considerable
scope for further research.
ICAS has awarded a new research
grant to this team to undertake further
work in this important area. For
more information see page 3 of this
newsletter.
Download the report at:
www.icas.org.uk/clatworthy
RESEARCH IMPACT: IASB
PRESENTATION
The publication of the report
comes at a crucial time as the
IASB considers revisions to its
Conceptual Framework. As a result
the research team was invited to
present their research to the IASB
Board Members at the meeting
on the 21 January 2014. A full
two hour session was allocated
to the research - illustrating
the importance attached to this
report and the topic in general.
Hans Hoogervorst, Chairman of
the IASB, commenting on the
research, stated that it was a very
interesting study adding that it
gave the IASB a lot to think about
and information that we can use
in our work on the Conceptual
Framework.
The research has also been
presented to the UK Financial
Reporting Council (FRC) and has
been referenced in a number of
responses to the IASB Conceptual
Framework discussion paper,
including those of ICAS, EFRAG
and the FRC.
The IASB presentation is available
at: www.ifrs.org/Meetings/Pages/
IASB-Edu-Jan-2014.aspx
8
COMING SOON
www.icas.org.uk/research
COMING SOON
Audit, supervisors and risk in financial services
Ian Dewing and Peter Russell, University of East Anglia
The recent financial crisis has called into question the role of
auditors, supervisors and the nature of financial risk. Auditors
have been criticised for giving no warning of the financial crisis
and for failing to communicate with supervisors. Auditors have
been further accused of failing to exercise a sufficient degree
of professional scepticism. Similarly, supervisors have been
criticised for a failure to communicate with auditors and, more
fundamentally, for a failure of supervision. The role of fair
value accounting and, in particular, the apparent downgrading
of the accounting concept of prudence, has also been blamed
for contributing to the crisis. Concerns have also been raised
about auditors' and supervisors' assessments of risk, especially
of systemic risk, and about the risk governance of financial
institutions.
This report investigates the role of auditors and supervisors in the
system of UK and EU financial services supervision post-financial
crisis. In particular, it focuses on four areas: liaison between
auditors and supervisors; accounting and auditing judgements
in financial services audit; monitoring and reporting of risk; and
implications of European and international regulations for auditors
of financial services firms.
The objective of the report is to understand the evolution of these
complex roles following the financial crisis and to provide policy
recommendations.
Funding issues confronting high growth SMEs in the UK
Ross Brown, University of St Andrews and Neil Lee, University
of Lancaster
In the wake of the financial crisis, there has been increased
concern about the availability of external finance for small and
medium sized enterprises (SMEs). A lack of external finance
has been seen as a significant factor in the UK economys slow
recovery. At the same time, there is a growing awareness that
relatively few firms have a significant impact on economic
growth. A small group of "high growth firms" appear to be
responsible for the majority of new job creation. This research
report helps address a gap in the literature by investigating the
use of external finance amongst rapidly growing SMEs in the UK.
This reports overriding aim is to investigate the funding
constraints faced by high growth SMEs in the UK, it investigates:
the extent to which high growth SMEs in the UK apply for
external finance;
the sources and types of finance sought by high growth SMEs;
the reasons for applying for external finance;
whether high growth SMEs were more likely than other firms
to face funding constraints; and
the implications of these findings for policy in this area.
The research findings have significant implications for policy and
practice.
Keep an eye out for our forthcoming publications
ICAS research publications can be downloaded free of charge
from the ICAS website:
www.icas.org.uk/researchpublications
To keep up to date with new funding opportunities and new
publications subscribe to our e-news service
email: research@icas.org.uk
9
COMING SOON
www.icas.org.uk/research
Financial fair play: Implications for football club
financial reporting
Stephen Morrow, University of Stirling
While economies, industries and companies throughout Europe
have struggled in recent years, major European football
leagues and clubs have continued to see remarkable revenue
growth; fuelled by domestic and overseas media rights. Too
often, however, that revenue growth has not led to profit, with
many clubs reporting substantial losses and escalating debts
and several high profile clubs suffering insolvency events. The
seemingly paradoxical situation in European football finance -
increasing revenues but declining financial performance and
position - has now directly influenced football policy; most visibly
in the introduction by Union of European Football Associations
(UEFA) of Financial Fair Play (FFP) regulations designed to
encourage clubs to adopt a more economically rational and
sustainable approach to their activities.
This study involved interviews with football clubs, football club
auditors, football finance experts working in the profession and
representatives of governing bodies and leagues. The report
considers views on the following issues:
the requirements set out in UEFAs FFP regulations;
the usefulness of conventional financial reporting for
professional football clubs; and
the implications of FFP for football club financial reporting
and as to whether alternative forms of reporting may better
communicate the value and role of contemporary football clubs.
Although focused on the football sector, the report also
contributes to the wider debate about the nature of financial
reporting.
Charity trustee information needs: Can enterprise
performance management systems help?
Diana Limburg, Cathy Knowles, Maureen McCulloch and Laura
Spira, Oxford Brookes University
There are approximately 187,000 charities in the UK covering
most areas of societys activities. Charities are governed by a
board of trustees who volunteer for the role and are responsible
for the strategic direction and the legal, financial and operational
health of their charity.
Charities are confronted with increasing demands and
complexities, partly due to more short-term competitive
contracting of services, increasing demand and falling income.
Against this background charities need to address the challenge
of providing trustees with accurate, relevant and timely
information in a user-friendly format, so that trustees can
perform their roles. This study explores how charities might
benefit from Information Technology (IT), in particular enterprise
performance management (EPM) systems, to address this
challenge. It is particularly concerned with trustees ability to
interpret and use financial and non-financial information. The
research has the following objectives:
to identify the core information needs for charity trustees, with
a focus on issues surrounding the interpretation and use of
both financial and non-financial information;
to gain insight into the IT capabilities of charities and their
current use of IT for providing such information to trustees; and
to consider how charities can employ EPM systems so that
they meet the identified information needs and match their
typical IT capabilities (including trustees skills).
10
ICAS NEWS
www.icas.org.uk/research
The 2014 ICAS Aileen Beattie Memorial
Lecture will be given by Lord Green of
Hurstpierpoint, former Minister of State for
Trade and Investment. Lord Greens talk is
entitled Values versus Value: does ethics
drive business success?.
The event is being held at Stationers
Hall, Ave Maria Lane, London EC4M 7DD
and will commence at 4:30 pm and finish
at 7.30pm. For further details contact:
accountingandauditing@icas.org.uk
UPCOMING ICAS EVENT
Aileen Beattie was Technical
Director and the Executive
Director, Technical Policy at
ICAS over a period of almost
twenty years. After a long
battle with cancer, borne with
characteristic bravery and
good humour, Aileen died
on Thursday 6th October
2005. Over her time at
ICAS, she co-ordinated and
contributed to a number of
major landmark projects and
publications including Making
Corporate Reports Valuable,
Auditing into the Twenty-First
Century, Taking Ethics to
Heart and the Principles not
Rules project.
The Consultative Committee of
Accountancy Bodies (CCAB) has published
a research study into international financial
reporting standards for not for profit
organisations (NPOs).
The study, conducted for CCAB by
academics from four prominent
universities, was led by Professor Gareth
Morgan of Sheffield Hallam University and
Dr Louise Crawford CA of the University of
Dundee.
The aim of the study, launched on 25
February 2014 at the House of Commons,
was to assess the need and demand for
tailored international financial reporting
standards for NPOs.
The research was based on a literature
review and survey which received over
600 responses from 179 countries across
the world.
While 72% of respondents agreed that an
international financial reporting standard
for NPOs would be useful, there were
mixed responses to this idea with variation
by country and some strong opposition in
the narrative responses.
The research calls for more study of the
area to assess the extent to which NPOs
would welcome a formal international
standard and be willing to use it.
Therefore, more study of the area would
be required to determine need, as well as
to consider what an international financial
reporting standard for NPOs could look
like.
ICAS along with ACCA, CIPFA, Chartered
Accountants Ireland and ICAEW form the
membership of the CCAB.
The Executive Summary and the Full
Report are available on the ICAS
website at: www.icas.org.uk/CCAB-
NPO-research
NEW CCAB RESEARCH PUBLISHED ON NOT FOR
PROFIT ORGANISATIONS
11
ICAS NEWS
www.icas.org.uk/research
The research team at ICAS would like
to congratulate The British Accounting
& Finance Association (BAFA) on the
occasion of its 50th Annual Conference
- a real achievement!
ICAS looks forward to celebrating with
you at the April 2014 Conference at the
London School of Economics. ICAS is
proud to be associated with BAFA and
we look forward to continuing to support
the conference and maintaining a close
relationship with academia in future years.
BAFA is the working name of the British
Accounting Association which was
established in 1947, and brings together
those interested in teaching and research
in accounting and finance.
CONGRATULATIONS TO BAFA ON ITS
50th ANNUAL CONFERENCE
NEXUS PRIZE DRAW
Make sure you drop by our exhibition stand at the BAFA and EAA conferences and enter
our 2014 prize draws to win a Nexus Tablet!
The lucky 2013 winners were:
BAFA 2013 - Hannu Ojala, Aalto University, Finland
EAA 2013 - Alan Kilgore, Macquarie University, Australia
Terms and conditions available on request from research@icas.org.uk
The Association of Business Recovery
Professionals (R3) will shortly publish a
research report by Professor Peter Walton
entitled The Likely Effect of the Jackson
Reforms on Insolvency Litigation an
Empirical Investigation. The report was
commissioned by R3 (with the support of
ACCA, ICAEW, ICAS, IPA, JLT Speciality
Ltd, Moon Beaver and Moore Stephens
LLP).
In 2010 Lord Justice Jackson completed
his review into civil litigation costs and
funding. One of the key recommendations
was that changes should be made to
Conditional Fee Arrangements (CFAs) and
After the Event (ATE) insurance so that
CFA uplifts (or success fees) and ATE
insurance premiums should no longer
be recoverable from a losing defendant.
A temporary carve out was provided for
insolvency litigation until April 2015.
The purpose of this report has been
to attempt to consider the nature of
insolvency litigation and to discover
how CFAs (and ATE insurance) operate
in practice in this context. It attempts
to quantify the value to creditors of
CFA-backed insolvency litigation and to
assess the likely effect that the Jackson
recommendations will have on insolvency
litigation if the temporary carve-out is not
made permanent.
The report will be available to download
from the ICAS website at: www.icas.
org.uk/Current_Insolvency_Issues.aspx
NEW INSOLVENCY RESEARCH PUBLISHED BY R3
Te Likely Efect
of the Jackson Reforms
on Insolvency Litigation
an Empirical Investigation
A report commissioned by R3 (with the support of ACCA, ICAEW, ICAS,
IPA, JLT Specialty Ltd, Moon Beever and Moore Stephens LLP)
By Professor Peter Walton
University of Wolverhampton
April 2014
12
ICAS NEWS
www.icas.org.uk/research
ICAS RESEARCH COMMITTEE
Professor Angus Duff will step down from his role as ICAS Research Adviser on 30 April 2014.
Angus joined the ICAS Research Committee in 2007 and was appointed to the role of part time
Research Adviser in 2009. The ICAS research team and the rest of the Committee would like to
thank Angus for the important role he has played in the development of ICAS research and wish
him all the best for the future.
Angus is Professor of Accounting and Finance at the University of the West of Scotland. He
has published numerous articles in academic and professional journals. He is a member of the
Chartered Institute of Management Accountants and the Association of Corporate Treasurers.
We are pleased to announce that Professor Mark Clatworthy, the University of Bristol, joined the
ICAS Research Committee in March 2014.
Mark Clatworthy is Professor of Accounting at the School of Economics, Finance and
Management at the University of Bristol. He obtained his PhD from Cardiff University, where he
worked for 17 years. He has research interests in the links between financial reporting and capital
markets and in corporate audit markets. Mark is involved in undergraduate and postgraduate
teaching in financial reporting and is also Associate Editor of Accounting and Business Research.
We are pleased to announce that Liz Murrall, the Investment Management Association (IMA), joined the
ICAS Research Committee in March 2014.
A chartered accountant, Liz is Director Corporate Governance and Reporting at IMA. She is
responsible for representing IMA members interests as institutional investors on corporate governance
and company reporting and assurance issues. She sits on a number of committees, including the FRC's
Accounting Council, the FTSE Policy Committee, the International Corporate Governance Network's
Accounting & Auditing Practices Committee, the European Fund and Asset Managers Association's
Corporate Governance Committee and the CBIs Companies Committee.
Mark and Liz join our existing Research Committee members, who are:
Allister Wilson (Convener) - Partner, Ernst & Young LLP
Michelle Crickett (Secretary) - Director of Research, ICAS
Riona Bell - Director of Finance and Corporate Resources, Scottish Further and Higher Education Funding Council
Andrew Cotton - Company Secretary and Director of Corporate Development, Macfarlane Group plc
Louise Crawford - Associate Dean for Research, School of Business, University of Dundee
Lisa Evans - Professor of Accounting in the Division of Accounting and Finance, University of Stirling
13
ICAS NEWS
www.icas.org.uk/research
The leading UK professional bodies
1

involved in taxation, including ICAS, have
issued updated guidance on how tax
advisers should act. These guidelines
should be read in the context of the ICAS
Code of Ethics and the principles that
should apply to all dealings by members
with HMRC they address specific areas
of legal and practical difficulty, whether
dealing with client situations or HMRC.
The guidance appears in the publication
Professional Conduct in Relation to
Taxation (PCRT). PCRT sets out the high
expected standards which should govern
the tripartite relationship between tax
adviser, client and HMRC. It supports the
key role accountants play in helping clients
comply with their tax obligations. This
guidance is followed by members of the
listed professional bodies, but many other
bodies and professional firms also adopt it
as best practice.
It is based on five fundamental principles:
integrity
objectivity
professional competence and due care
confidentiality
professional behaviour
and provides guidance on applying
these principles to practical situations,
for example, if there is an irregularity
in a clients tax affairs and the client is
reluctant to correct it.
The document makes clear the obligation
of tax advisers to advise their clients
accurately and thoroughly of the risks
and implications of their actions including
reputational and practical aspects.
PCRT has been reviewed by Counsel
and HMRC has been consulted and
acknowledges that this guidance is an
acceptable basis for dealings between
members and HMRC. It added HMRC
welcomes the publication of the new
edition of this guidance for tax agents as
a positive step. We recognise the role they
play and the responsibilities they bear in
ensuring taxpayers understand and comply
with their tax obligations.'
The key changes in this update include:
an enhanced chapter on Tax planning,
tax avoidance and tax evasion which
includes guidance on the new General
Anti-Abuse Rule;
points to consider when HMRC wants
to visit the member to discuss practice
matters eg as part of Agent and Client
Statistics;
professional standards relating to
participating in consultations or
secondments with HMRC;
advising clients who wish to rectify past
irregularities; and
a brief section on electronic filing.
The guidance is available at:
www.icas.org.uk/PCRT.pdf
1 The professional bodies who were members
of the working party and who have endorsed
the guidance are: ICAS; ICAEW; ACCA; CIOT;
ATT; and STEP.
PROFESSIONAL BODIES UPDATE
GUIDANCE FOR TAX ADVISERS
A GUIDE FOR PHD STUDENTS 2014
ACCOUNTANCY AND FINANCE RESEARCH
STUDY IN SCOTTISH UNIVERSITIES
The 2014 edition of this guide can now be downloaded from the
website - icas.org.uk/researchguidance. The guide is produced by
ICAS to assist potential PhD students to identify a supervisor in a
Scottish university whose research interests are closest to the
students intended field of study.
14
ICAS NEWS
www.icas.org.uk/research
JOIN US ON FACEBOOK
FACEBOOK.COM/
ICASACCOUNTING
CONNECT WITH US ON LINKEDIN
SEARCH FOR ICAS THE PROFESSIONAL
BODY OF CAS
FOLLOW US ON TWITTER
@ICASACCOUNTING
ICAS is on various social networks if
you would like to communicate with us
or just keep up to date with ICAS news.
Connect with
the professional
community online
To ensure that ICAS continues to attract
the highest calibre of candidates to study
towards the CA qualification, ICAS is
introducing new avenues to training,
widening access to the profession
to ambitious accounting and finance
professionals.
The new professional entry route enables
graduates working in an accountancy or
finance role, or individuals with five years
experience in a financial environment, to
study towards becoming a CA without
having to leave their current role and
secure a training contract with an ICAS
authorised employer.
Students receive the same world class
training programme, the same industry-
leading syllabus, the same
comprehensive support and must
meet exactly the same examination
standards and practical experience
as other CA students to obtain the
world renowned CA qualification.
However, they have the flexibility
to undertake education and
examinations at different times and
have up to eight years to complete
their studies.
For more information, and to
register for an information pack,
visit: www.icas.org.uk/professional-
entry
THE NEW WAY TO
BECOME A CA
The great thing about the Chartered
Accountancy qualification is that it
transcends industries.
Martin Murray CA
Finance Director
Cathay Pacific Airways
CONGRATULATIONS
The ICAS research team would like to pass their congratulations on to the recipients of the following awards by the
British Accounting & Finance Association:
Distinguished Academic Award - Jan Bebbington
Lifetime Achievement Awards - Mahmoud Ezzamel, Stella Fearnley, David Gwilliam, Prem Sikka
The awards are made to individuals who have made a substantial and direct contribution to the academic
accounting and finance community. The awards will be presented at this years Annual British Accounting &
Finance Association Conference in London in April 2014.
15 www.icas.org.uk/research
INSIGHT PUBLICATIONS
NEW ICAS INSIGHT
PUBLICATIONS
How many accountants can say that they
have read the IASBs existing Conceptual
Framework or have referred to it in their
jobs? Probably not too many - it can
seem quite remote to many accountants
- whether they are working in practice, in
business or possibly as a user of financial
statements. Yet the importance of the
Conceptual Framework should not be
underestimated as it has the potential to
shape the future of financial reporting
across the globe.
The IASB is currently undertaking a
project to revise and update the existing
Conceptual Framework and it is important
that all those with a stake in financial
reporting engage with this process. To
assist the IASB with their project, and
to encourage debate, ICAS and the
International Federation of Accountants
(IFAC) set up a working group and
collaborated to produce a paper, Do we
need a roadmap for financial reporting?
Developing the IASBs Conceptual
Framework. This paper highlights the
challenges facing the IASB and, whilst
not pretending to contain answers to all
the difficult questions, the paper aims to
stimulate the debate.
The IASB issued a Discussion Paper
exploring possible changes to the IASBs
Conceptual Framework for Financial
Reporting in July 2013. The comment
period ended in January 2014 and an
Exposure Draft is expected to be published
later this year. The IFAC/ICAS paper
has been prepared to complement the
individual comment letters that both IFAC
and ICAS submitted to the IASB.
The IASB has received over 200
responses to its Discussion Paper and
taking forward revisions to the Framework
will be a very challenging task. Many of us
will have heard some of the public calls
for the IASB to bring back "stewardship",
"prudence", "reliability" and "substance
over form" but what else needs to be
considered? In this paper with IFAC, we
raise some fundamental questions and
issues for consideration by the IASB,
including:
Who are financial statements for?
What is the purpose of financial
statements?
What role should the Conceptual
Framework serve?
What items should be included as
assets and liabilities and how we should
measure them?
What does "financial performance"
mean?
Referring to the report, Fayez Choudhury,
CEO of IFAC, commented, 'These
questions get right to the heart of how
companies communicate with the financial
markets. The basic building blocks of
financial statements have existed for
decades and it is important to undertake
a serious assessment of whether they
remain fit for purpose.'
Anton Colella, CEO of ICAS, added, 'The
Conceptual Framework sets the direction
of travel for financial reporting globally.
The IASB has stated that it will focus on
"updating, improving and filling in gaps" of
the current Framework. Our overarching
question is: is this sufficient or do we need
a more fundamental re-think?'
So what is the Conceptual Framework
and why is it important? The Framework
is intended to set out the concepts and
principles that the IASB uses in developing
standards but what is its wider role? In
updating the Framework a decision needs
to be taken on its role in practice - is
it there to assist people in interpreting
accounting standards and to help in
situations where the accounting standards
do not cover a particular situation or
transaction. If the answer is yes, then
the Framework needs to be written in a
way which is understandable to the wider
financial reporting community and can be
translated for different jurisdictions.
Whilst the Conceptual Framework sits at
the top of the hierarchy of international
accounting standard-setting the IASB
Discussion Paper, somewhat surprisingly,
states that the IASB will not necessarily
change existing Standards for any of
the areas discussed in this Conceptual
Framework. Yet this may mean that a
DO WE NEED A ROADMAP
FOR FINANCIAL REPORTING?
Developing the IASBs Conceptual Framework
DO WE NEED A ROADMAP FOR FINANCIAL REPORTING?
DEVELOPING THE IASB'S CONCEPTUAL FRAMEWORK
16
INSIGHT PUBLICATIONS
www.icas.org.uk/research
number of accounting standards will be
at odds with the fundamental principles
from which they are intended to be
derived. How will these conflicts and
inconsistencies be reconciled?
The world around us, how we
communicate with the markets, and
business itself, have changed but the
current Framework is derived from the
US Financial Accounting Standards
Board (FASB) Framework of the 1970s.
The scope of the Framework and its role
therefore needs careful consideration
and, as a profession, we need to consider
if developing the existing Framework is
enough or if a more fundamental re-think
is required.
The paper considers what should be
included in the Conceptual Framework and
identifies some core building blocks, which
both IFAC and ICAS believe are currently
absent from the Framework. The core
building blocks which we argue should be
considered by the IASB in the Conceptual
Framework are:
The scope of financial reporting
Stewardship
The business model
Entity versus proprietary perspectives
Prudence
Unit of account
Concept of capital
The paper also discusses the qualitative
characteristics of financial statements and
the need for the IASB to reconsider the
concepts of "substance over form" and
"reliability".
At the heart of the Conceptual Framework
are the definitions of, and recognition
criteria for, assets and liabilities. The IASB
Discussion Paper signals a significant
change in the definition of assets and
liabilities, with proposals to recognise the
capacity to generate inflows (outflows),
not the probability of generating inflows
(outflows). This appears to shift the
debate from the existence of assets and
liabilities to their measurement and may
have significant implications for financial
reporting.
On measurement the ICAS/IFAC paper
recommends that the IASB reconsider
the objective of measurement and what
factors should be taken into account in
determining the most appropriate base
and what role reliability should play in
determining measurement bases.
Ultimately financial statements are there
to communicate with the end user and the
IASB is importantly seeking to address
both presentation and disclosure in its
Conceptual Framework project. The
fundamental issues of who financial
reporting is for, and what the purpose of
financial reporting is, need to be addressed
before the issues around presentation
and disclosure can be resolved. Users
typically want to know what the "profit"
is, and it would, therefore, be useful if the
IASB could develop a concept of financial
performance and profit, from which
presentation would then logically flow.
Disclosure appears to have become the
residual consideration in the standard-
setting process and as a consequence
financial statements are getting longer and
longer. It would be helpful if disclosure
in future was based on clear principles,
which could be outlined in the new
Conceptual Framework.
The development of the Conceptual
Framework for financial reporting has a
long and troubled history, but if the new
Framework is to guide future standard-
setting and ultimately impact on what and
how we report to the financial markets
then a number of difficult issues identified
in both the IASB Discussion Paper and
the ICAS/IFAC paper need to be resolved.
The future viability of financial reporting
depends upon it.
The paper will be presented at the
following academic conferences:
EAA, Tallinn - Accounting in Europe
& FARS/EAA symposium - 23 May,
9-10.30 am
Financial Reporting & Business
Communication Conference, Bristol -
3-4 July
Download the ICAS/IFAC paper at:
www.icas.org.uk/icas-ifac-roadmap
Find out more about the IASB project at:
www.ifrs.org/Current-Projects/IASB-
Projects/Conceptual-Framework
KEY DATES FOR THE IASB PROJECT
14 January 2014 - Comment period on
Discussion Paper closed
Quarters 1 & 2, 2014 - IASB
redeliberations
Before the end of 2014 - Exposure Draft
to be issued for comment
Before the end of 2015 - Revised
Conceptual Framework to be published
WORKING GROUP MEMBERS
Mario Abela -Senior Policy Advisor, Public Policy and Regulation, IFAC
Andrew Buchanan - Global Head of IFRS, BDO and Member of ICAS Accounting Standards Committee
Michelle Crickett - Director of Research, ICAS
Amy Hutchinson - Assistant Director, Technical Policy, ICAS
Allister Wilson - Partner, Ernst & Young LLP and Convener of ICAS Research Committee
17 www.icas.org.uk/research
INSIGHT PUBLICATIONS
SCOTLANDS PENSIONS FUTURE
Have our questions been answered?
Towards the end of last year the Scottish
Government set out its plans for pensions
in an independent Scotland in a detailed
paper on the topic and in its blueprint for
an independent Scotland, Scotlands Future
Your Guide to an Independent Scotland.
ICAS has been a leader in the debate on
the potential impact on pensions following
a Yes vote on 18 September 2014. We
have prepared two papers on this topic
under the banner Scotlands pensions
future. Our second report, subtitled Have
our questions been answered? (February
2014), considered the extent to which the
Scottish Government has addressed the
key questions raised in our first report,
subtitled What pensions arrangements
would Scotland need? (April 2013). Many
of our questions have been answered,
although we expect pensions to remain a
key issue in the lead up to the referendum.
A recent BBC poll identified pensions as
the second most important issue to voters
taking part in the referendum, with only
the economy being more important.
The Scottish Government proposes to
adopt the pensions system in place in the
UK at the date of independence with some
proposed differentiation at the margins.
An independent commission would be
established to examine whether or not
an independent Scotland should adopt
the UKs plans to raise the state pension
age to 67 between 2024 and 2026. The
commission would also consider any
increases in the normal retirement age for
members of public service schemes at the
same time. The Scottish Government has
also pledged to introduce the single-tier
pension at the level of the UK single-tier
pension or 160 per week, whichever is
higher. The rationale for reviewing the
timing of the rise in the state pension age
to 67 relates to the lower average life
expectancy of Scots compared to the UK
average.
Replicating existing arrangements in
an independent Scotland will not be
without its challenges from a policy as
well as practical perspective. The UK
Government is driving through a pension
reform agenda aimed at improving
individual retirement incomes during
the accumulation phase including the
establishment of the single-tier pension
as a simple foundation for saving and
encouraging more individual retirement
saving, for example, through the
implementation of auto-enrolment into a
workplace pension arrangement. Further
reforms, announced in the 2014 Budget,
focus on the decumulation phase and will
remove the requirement to use a pension
pot to purchase an annuity. The Scottish
Government needs to keep a watching
brief on this on-going reform agenda
so it could replicate any changes for an
independent Scotland. New systems for
the state pension and some public sector
pensions would need to be implemented
and pensioner data would need to be
migrated across, not to mention the
establishment of a regulatory system for
private pensions, such as the creation of
a new pensions regulator. The Scottish
Governments intention to share the UK
Pension Protection Fund was ruled out
by Danny Alexander, Chief Secretary to
the Treasury, in his speech to the National
Association of Pension Funds investment
conference in Edinburgh on 7 March this
year. Therefore, the Scottish Government
should now consider how this statement
impacts on its stated policy on pension
protection.
One of the most significant issues to
arise is the funding of defined benefit
pension schemes which would become
cross-border schemes in the event of
independence. As UK-wide pensions
law stands at the moment, cross-border
schemes need to be fully funded at all
times and would not be able to operate a
recovery plan. A recent survey by PWC
indicates that the average recovery plan
period is currently 11 years. Therefore,
paying down deficits immediately
will impact heavily on the finances of
employers. The law in this regard is
driven by the solvency rules set out in
EU Pensions (IORP) Directive 2003 and
therefore it is not within the gift of the UK
Government to amend.
Quantifying the likely extent of cross-
border deficits between an independent
Scotland and the rest of the UK is a
challenge, as information on which
schemes would become cross-border
in the event of independence is neither
required nor held for the operation of
existing regulatory arrangements. Even
the current level of UK-wide pensions
deficits calculated on a technical
provisions basis, which is a prudent basis
used for this purpose, are difficult to pin
down. However, these are likely to be in
the region of 300 billion or more.
While many of our questions have been
answered, the Scottish Governments
scope to implement its policy agenda
post-independence would depend on
the outcome of any post-referendum
negotiations with the UK Government
and the European Union. With that in
mind, there are limitations on the degree
of assurance the Scottish Government
can provide on what could eventually
be delivered. However, the Scottish
Governments papers move the debate on
pensions and independence forward and
provide an opportunity to tease out some
more detailed but nevertheless important
aspects of delivering a separate pensions
system.
Download the papers at: www.icas.
org.uk/Scottishindependence
18
INSIGHT PUBLICATIONS
www.icas.org.uk/research
The consultation period for the ICAS
discussion paper proposing a "Balanced
and reasonable" opinion over the front-half
of the annual report, closed on 31 October
2013 and the responses have now been
summarised.
SUMMARY OF RESPONSES
Some of the feedback to our key questions
is summarised below:
There was support for our proposal
and many see this type of additional
assurance as inevitable over time.
There may be some confusion amongst
users over the extent of assurance they
believe they are currently receiving.
We need to demonstrate user demand
for this type of assurance.
The concept of a third, or medium level
of assurance is confusing.
Concern was expressed over how a
clean opinion could be expressed which
relied on professional judgement in the
absence of any appropriate evidence.
There was interest in the development
of an assurance spectrum describing
different percentages of assurance
levels.
There is uncertainty as to how much
and what type of assurance is currently
provided by auditors under the FRCs
"fair, balanced and understandable",
requirement.
Many respondents would prefer to
monitor how the FRCs fair, balanced and
understandable requirement in the UK
develops before proposing any further
changes.
Many disagreed with the substitution
of the term "material" with the term
"significant", but some acknowledged
that the use of the word "material" might
not be appropriate for the front-half of
the annual report.
The importance of being able to
demonstrate, and perhaps quantify,
the costs versus the benefits of such
assurance was raised.
A number expressed concern over
the use of the terms "balanced" and
"reasonable" as potentially confusing
with:
(i) "reasonable assurance" as defined in
the IAASB assurance framework; and
(ii) reference to the term "balanced"
in the Financial Reporting
Councils (FRC) "fair, balanced and
understandable" requirement in the
UK.
Some respondents questioned whether
auditors had the necessary skills and
ability to undertake this type of work.
Many saw the auditor liability regime as
an obstacle to be negotiated in order for
auditors to be able to conduct this type
of work.
A possible compromise was the
identification of discrete elements of the
content over which positive assurance
might be provided.
OUR PROPOSED NEXT STEPS
The feedback we obtained has enabled
us to prioritise our next steps as detailed
in our paper Assurance on management
commentary: Where next? We are keen
to promote a framework for corporate
reporting and assurance which meets the
needs of users, primarily the investment
community, at an acceptable cost.
Therefore, our proposed first step is a
research project into the impact that
the "fair, balanced and understandable"
requirement has had on reporting in
the UK. The project will consider the
anticipated additional costs and work
involved if a positive audit opinion was
to be provided on the management
commentary and will highlight those areas
and content over which the auditors do
not believe that the provision of a positive
opinion would be possible.
The results of the above research will
inform discussions with users to assess
the extent to which they have received,
or are currently receiving, the level of
assurance they desire on the front-half of
the Annual Report, and whether they would
prefer to receive a positive expression of
opinion on the front-half.
Other proposed projects that may be
considered include:
The development of a straw man
of a new assurance framework
which permits a variety of assurance
engagements to be provided by the
auditing/assurance profession;
The continued monitoring of
developments in Integrated Reporting;
The feasibility of the provision of
assurance over discrete areas in the
front-half of the annual report;
Engagement with representatives from
other jurisdictions and professional
bodies;
Use of the findings from the joint ICAS/
FRC research project into the skill and
competency requirements of auditors in
todays complex business environment.
It is our intention to reconsider the original
proposals in the original "Balanced and
Reasonable" discussion paper at a later
date to determine which, if any, will be
taken forward.
Download the paper at:
www.icas.org.uk/auditing/publications
ASSURANCE ON MANAGEMENT
COMMENTARY Where next?
I
ASSURANCE
ON MANAGEMENT
COMMENTARY
WHERE NEXT?
19 www.icas.org.uk/research
INSIGHT PUBLICATIONS
This short and simple guide to starting a
business has been developed by ICAS. It
is a visual and user-friendly publication
designed to help aspiring business people
on the way to setting up and running a
successful company.
The guide has been prepared by
ICAS members with a breadth of
entrepreneurial and business experience,
including business angels who provide
funding support to start-ups.
It aims to help those committed to starting
their own enterprise with tips on:
sourcing advice, support and mentoring
preparing a business plan
identifying appropriate funding and
increasing your chances of getting it
accessing further business start-up
resources and guidance
The guide spans the range of resources
and help available from both the private
and public sector.
It flags key things to consider when
preparing a robust business plan - like
knowing your market, working out how
much cash you are likely to need, reducing
your risk - and how to avoid the perils and
pitfalls, such as hidden costs.
The guide includes a series of "pre-flight"
checks for small enterprises seeking to
get off the ground, in areas such as
tax relief entitlement, cashflow, raising
investment, contingency planning and
business structures.
It also focuses on new funding models
by explaining recent developments
in investment opportunities, such as
crowdfunding and the use of social
media.
The guide has been prepared by the
Business Policy Committee of ICAS a
group of CAs with a wealth of business
experience who contribute their time on
a voluntary basis to support ICAS.
The guide is available at:
www.icas.org.uk/guide-
to-starting-a-business
STARTING A BUSINESS:
A step by step guide to starting
and financing a new business
Anyone wanting to start a business
for the first time will find the ICAS
guide full of useful, practical tips.
Becky Woodhouse CA, founder
and MD of Pure Spa
The ICAS guide to starting up a
business provides a sound platform
to help identify sources of finance
for different business situations.
Robert Pattullo CA, business
angel investor
20
INSIGHT PUBLICATIONS
www.icas.org.uk/research
ICAS has much to contribute to a debate
on tax devolution. Tax devolution means
any form of control of taxes passing
from Westminster to Holyrood, whether
under the Scotland Act 2012, the current
campaign for full independence, or
anywhere in between.
The ICAS contribution to the Scottish
independence referendum debate has
included publication of a number of tax
papers. Six questions were asked in
the first tax paper Scotlands Tax Future;
What tax system would Scotland want?
on design principles and approaches.
The practicalities that both the Scottish
and UK Governments and people of
Scotland would have to embrace to see tax
devolution happen were the subject of the
second paper Scotlands Tax Future; The
practicalities of tax devolution.
At the start of 2014, it seemed appropriate
to reflect on the development of the debate
so far and consider what progress has
been made in addressing the topics in
the first two ICAS tax papers. But the
single biggest issue emerging over recent
months is that many individuals, CAs or
not, struggle to access the explanations
they need to understand the place of
our tax system in our economy the big
picture tax debate - even before the issues
of independence or further devolution are
factored in. The lack of simple numbers
in the independence referendum debate
so far has seemingly not been helpful. In
this third tax paper, Scotlands Tax Future;
Taxes explained, the aim is also therefore
to go back to some basics, address the
information gap, and suggest an approach
to understanding the role of tax in the
referendum debate.
It is nearly two years since ICAS issued
its first tax paper, asking questions
on what tax system would Scotland
want. Some answers are emerging,
and the importance of the economic and
political context in shaping the answers
is becoming clearer. In particular,
notable progress has been made by
way of some credible and informative
expert analysis, and the Scottish
Governments response is included
in Scotlands Future: Your Guide
to an Independent Scotland (the
Guide). From the questions still
being put to the ICAS technical team,
it seems that the volume of detail
sometimes overwhelms and the
presentation of the few numbers in
the Guide leaves a gap, particularly
about the impact of oil and gas tax
revenues on Scotlands spending
capacity. The need for independent
and unbiased analysis remains; and
the desire for numbers is growing.
Further insights are offered in this
new paper, consistent with the ICAS
aim of informing the debate without taking
sides.
Firstly on tax system design, the Guide
indicates the way forward after a Yes
vote in the referendum is, in practice,
to replicate the UK tax system for a
transitional period (the number of years
are not specified) with the potential for
change in future. Minor amendments,
exactly the same as Westminster might
propose in the annual Budget adjustments
were included, principles were proposed,
but the Guide is virtually silent on further
detail. What would happen next? The
competitive strategy on corporate tax
rates is aspirational, perhaps because of
concerns that the cost of tax competition
with the rest of the UK might outweigh
the benefits; that is not a criticism if the
eventual outcome of this debate is simply
that better informed decisions can be
made.
Many have suggested that the Guide
focussed more on the emotional drivers
to a decision on independence than the
financial analysis. A lot of the economic
commentary provided about the financial
position in the Guide is based on the past,
yet the vote is not to change the past the
numbers for the future are the ones that
logic should say matters and these may
be very different.
And as for the practicalities, it appears
that the transition costs the one-off
costs to set up a new tax system in
Scotland to take over all of the operations
currently carried out by HMRC, as well
as taking over administration in all other
non-devolved areas have yet to be fully
explored or explained. They apparently
have been accepted as being in many
hundreds of millions of pounds; what if
transition costs were at a lot higher? With
the dependency on HMRC to operate an
independent Scotlands tax system in
that transition phase, there is a likelihood
that the timescale for adoption of new
policy changes and benefits might be
some years away. At what cost and
timescale does it affect voters decisions,
if at all, and are voters satisfied with the
information they have been given? Whilst
that really may be a question of whether
an intellectual justification is being sought
for an emotional decision, perhaps it is
time for an honest cost-benefit analysis
on public finances at a UK level as well
as for Scotland - as well as consideration
of alternative constitutional options for
Scotland and the rest of the UK.
The paper will be available to
download at: www.icas.org.uk/
Scottishindependence/
Scotland's Tax Future -
Taxes explained
21
RESEARCH RESULTS
www.icas.org.uk/research
RESEARCH RESULTS
SMALL PROJECTS
Accounting for carbon and
reinforcing disclosure
Colin Haslam and John Malamatenios,
Queen Mary University of London and
Glen Lehman, University of South
Australia report
Reducing carbon emissions is a major
global challenge and one that must be
taken seriously if we are to alleviate the
risks associated with climate change. It
is a legal obligation of governments and
a major challenge to the corporate sector
and so the measurement and disclosure
of carbon emissions takes on added
urgency. Think-tanks including the World
Resources Institute (WRI), World Business
Council for Sustainable Development
(WBCSD) and International Organization
for Standardization (ISO), have
established rules and tools for measuring
and reporting carbon emissions. The
Greenhouse Gas Protocol (GHG-Protocol)
has become the de facto standard for
corporate carbon footprint reporting.
From October 2013, the Companies Act
2006 (Strategic and Directors Reports:
Regulations 2013) requires that UK
companies listed on the London Stock
Exchange make carbon disclosures in
their directors reports.These include the
annual quantity of greenhouse gas (GHG)
emissions stated in tonnes of carbon
dioxide equivalent (CO2e) from activities
for which the company is responsible, and
at least one carbon intensity ratio.
Mandatory carbon reporting is necessary
if we are to determine whether companies
are changing the intensity and trajectory
of carbon emissions. Measuring and
reporting corporate GHG emissions will
increase the visibility of targets and will
also force innovative carbon reducing
investment initiatives. The accounting
professional bodies and academic
researchers in field of accounting have a
significant role to play not only in terms of
initiating new forms of disclosure but how
these will translate into active dialogues
between stakeholders to promote a
reduction in carbon intensity.
There are significant challenges and these
relate to the gap between measurement
and change. On measurement, the GHG
Protocol classifies emissions into three
"scopes":
Scope 1: emissions that are direct
emissions from owned or controlled
sources;
Scope 2: indirect emissions incurred in
the supply of purchased electricity; and
Scope 3: comprising all other indirect
emissions occurring in the reporting
companys value chain, including both
upstream and downstream activities.
Whilst the science associated with
translating different types of GHG
emissions into carbon equivalents is
now relatively stable. The accounting
boundaries that are used to capture
carbon are not so stable because they are
affected by ongoing assumptions about
which carbon generating activities are
located inside or outside the responsibility
and control of the reporting entity. Firms
are often restructuring, outsourcing and
off-shoring business processes and
carving up asset ownership and this
modifies operational responsibilities and
reported carbon emissions.
There are considerable difficulties
associated with obtaining consistent and
stable disclosures of carbon emissions
within scopes 1 to 3. We argue that these
weaknesses are offset by other potential
benefits. These relate to how information
disclosed about carbon emissions can
be translated into metrics and incentives
that would help to modify behaviour. For
example, we have aggregated the key
financial metrics of FTSE 100 companies
and matched this information with their
scope 1 and 2 carbon emissions data. Our
analysis is based on sixty-two firms that
are listed continuously in the FTSE 100
during the period 2006-2012. For this
group, carbon emissions, although cyclical
in the recent recession, have now returned
to the relatively stable pre 2008 figures in
the range 450 to 460 million tonnes CO2e.
Carbon emissions per employee in the
FTSE 62 benchmark group also remain
relatively stable recently in the range 120-
130 tonnes CO2e.
This section reports the results from recently completed ICAS small projects

0
20
40
60
80
100
120
140
160
410
420
430
440
450
460
470
2
0
0
6
2
0
0
7
2
0
0
8
2
0
0
9
2
0
1
0
2
0
1
1
2
0
1
2
C
a
r
b
o
n

e
m
i
s
s
i
o
n
s


p
e
r

e
m
p
l
o
y
e
e

(
t
o
n
n
e
s
)

T
o
t
a
l

c
a
r
b
o
n

e
m
i
s
i
s
o
n
s

(
m
i
l
l

t
o
n
n
e
s
)


FTSE 62: Aggregate emissions and emissions per employee
Total Carbon Emissions mill tonnes Carbon per Employee (Tonnes)
22
RESEARCH RESULTS
www.icas.org.uk/research
In terms of carbon used to generate
financial outputs, this FTSE 62 group of
firms have consistently increased revenue
earned from 2.5k to just over 3.5k per
tonne of carbon used but collectively did
not structurally transform their bottom
line pre-tax profit per tonne of carbon
emissions over the seven year period.
The United Nationals Environment
Programme and Greenhouse Gas Protocol
(UNEP/GHG-Protocol) have combined with
other key stakeholders to establish a global
project that has set itself the objective of
widening carbon disclosure and the design
of practical toolkits. These toolkits will
help inform finance industry analysts. The
UNEP/GHG-Protocol technical working
group projects are motivated by a general
observation that:
...the worlds financial institutions
are there to finance a growing,
sustainable economy, but the
evidence suggests that, today,
the industry performs that task
poorly.
1

In our project we combined the financial
results and physical carbon emissions
data for the FTSE 62 into a carbon-
financial risk evaluation software tool. This
reveals the trade-off between a reporting
entitys financial performance/stockholder
returns and carbon risk. It is this type of
information that investors and pension
funds will require as they progressively
seek to reduce carbon risk exposure in
their investment portfolios.
Furthermore, we believe that embedding
relative carbon-intensity performance
metrics into executive remuneration
packages would help to strengthen the
alignment between investor interests
and corporate use of resources towards
a less carbon intensive business model.
Executive remuneration packages already
include bonuses linked to boosting
Earnings per Share (EPS), Return on
Capital Employed, and Economic Value
Added (EVA) relative to peers or a
benchmark index. Why not also include
carbon emissions per employee, carbon
generated from revenue, cash earnings
or profit relative to peers? These metrics
could also be wired into senior executive
remuneration packages and weighted
towards transforming medium to long-
term carbon emissions reduction.
How and in what ways can the accounting
profession experiment with new disclosure
practices? In our project we draw upon
the debates taking place within the
accounting professional bodies on the
application of business models.
The accounting bodies are focussed on
how a firms business model might inform
the setting of appropriate accounting
standards and filter out relevant financial
disclosure to stakeholders. Our argument
is that a reporting entitys business model
can best be understood as the outcome
of stakeholder interactions that have a
material impact upon reported financials.
We should be encouraging reporting
entities to disclose information about
these material stakeholder-relationships.
For example, how do these relationships
impact upon a reporting entitys financial
viability in terms of liquidity and solvency
for a going concern? We could substitute
material financial-stakeholder relations
with material carbon-stakeholder
relations and ask reporting entities to
disclose their top ten carbon-material
stakeholders and matched carbon
emissions.
This approach could provide additional
valuable information and it would also be
less susceptible to changes in judgements
about a reporting entitys boundary within
which to capture carbon. It would demand
a significant shift in the accounting
Conceptual Framework because the
purpose of disclosure moves way from
disclosure "to" towards disclosure "about"
stakeholder relations.
1 See www.unepfi.org

0
50
100
150
200
250
300
350
400
0
500
1000
1500
2000
2500
3000
3500
4000
2
0
0
6
2
0
0
7
2
0
0
8
2
0
0
9
2
0
1
0
2
0
1
1
2
0
1
2
P
r
e

t
a
x

p
r
o
f
i
t

p
e
r

t
o
n
n
e

o
f

c
a
r
b
o
n

e
m
i
s
s
i
o
n
s

R
e
v
e
n
u
e

p
e
r

t
o
n
n
e

o
f

c
a
r
b
o
n

e
m
i
s
s
i
o
n
s

FTSE62: Revenue and profit per tonne of CO2e emissions

pre tax profit per tonne of carbon revenue per tonne of carbon
23
RESEARCH RESULTS
www.icas.org.uk/research
How risky are defined benefit
pension plans?
Anne McGeachin, Julian Williams, Mark
Whittington and Zhujuaj Wu, University
of Aberdeen report
Pension plans are often in the news. Over
the past 10-15 years companies have
been switching from final salary pension
plans to career average plans or defined
contribution plans in an attempt to reduce
costs and, perhaps more importantly, to
reduce the risk of further unexpected
costs in the future. As a result final salary
plans that are open to new employees are
now rare. Nonetheless, many companies
still offer final salary plans to existing
employees, or have obligations for final
salary pensions earned in the past. Such
plans create risks for the company and
hence affect the companys overall risk
profile.
We want to see if we can measure the
effect on company risk of a companys
defined benefit plan. The Capital Asset
Pricing Model establishes a relationship
between the equity risk of a company
and the return required by investors. The
riskier the company in relation to the
market, the greater the return required.
In principle, the equity risk of a company
(its beta) will include the effect of its
defined benefit plan. We try to decompose
a companys beta into betas for operating
assets, debt, pension assets and pension
liabilities. We think that doing so will
provide useful information in two areas:
In relation to pension provision, it will
allow companies and policy makers to
assess the extent to which companies
can be expected or encouraged to offer
pension benefits of varying types. It
will also provide valuable input on the
level and nature of pension regulation
that would achieve the best result in the
public interest. Finally, it will provide
information on how pension liabilities
might be measured and disclosed in
financial statements to give users of
those statements the most relevant and
faithful representation of the entitys
liabilities and exposure to risk.
From a broader perspective, it will aid
an understanding and comparison of
companies operating activities, and
whether the market is efficient in
absorbing information about pension
risk.
There are a number of problems in
determining the effect that a defined
benefit pension plan has on a companys
equity risk. There is a theoretical model,
that treats pension plan assets and
pension plan liabilities as if they were
direct assets and liabilities of the company
(Jin et al. 2006). However, in this model,
Jin et al.:
Calculate the pension asset beta by
analysing the pension assets into broad
classes and assigning a beta to each
asset class.
Assume that the pension liability beta is
the same for all pension liabilities, and
equals either the beta of corporate debt
or the beta of a 30-year Treasury bond.
Assume that changes in a pension
surplus or deficit will flow through
entirely to the equity and debt holders
of the entity, not to members of the
plan, tax authorities or other potential
stakeholders.
Assume that the beta of the operating
assets is independent of the pension
plan.
Assume that the beta of the entity
derived from market prices fully reflects
the pension betas.
There are reasons for thinking that
these assumptions are questionable,
and the results of this model for specific
companies seem unrealistic (Cooper 2009
and 2010). We therefore want to see if we
can determine the effect of defined benefit
pension plans on equity risk from empirical
evidence.
Our approach uses a simultaneous
equation model in which we determine
the security market line for equity using
a conventional cross sectional asset
pricing model (the stochastic discount
factor version of the CAPM) and then
simultaneously explain variation in the
estimated betas by incorporating pension
asset and liability data in addition to the
standard leverage measures.
Our initial work has been using US data,
because the available quantity of such data
makes it possible to test the methodology
robustly. Once the methodology has been
well established, it may be possible to also
evaluate the effect of defined benefit plans
in other jurisdictions, such as the UK.
The initial results indicate an asymmetry
in the systemic risk adjustment that runs
counter to that found in Jin et al. 2006.
In other words, we found that changes
in plan liabilities are incorporated into
the systemic risk of the firm, whereas
the effect of changes in plan assets
is substantially smaller. These results
are very preliminary and are subject to
change. The data set is large and we
need to check the robustness of our
results by re-running the tests on various
subsets to ensure we are not picking
up any distorting effects. However, the
implications for our approach and its ability
to yield results are encouraging and we
plan to work further to analyse the data in
greater detail.
References
Cooper, I. (2009), The effect of defined
benefit pension plans on measurement
of the cost of capital for UK regulated
companies: A report for Ofcom, Ofcom.
Cooper, I. (2010), Comment on responses
to the report: The effect of defined benefit
pension plans on measurement of the cost
of capital for UK regulated companies: A
report for Ofcom, Ofcom.
Jin, L., Merton, R. C., & Bodie, Z. (2006),
'Do a firm's equity returns reflect the risk
of its pension plan?', Journal of Financial
Economics, 81(1), 1-26.
24
RESEARCH RESULTS
www.icas.org.uk/research
RESEARCH RESULTS
SEEDCORN
What can accounting standards
convey?
Yeng Wai Lau, Universiti Putra Malaysia
reports
Accounting standards provide a common
understanding on how economic
transactions should be recorded. However,
providing such a common understanding
is no easy task. Accounting principles
and rules have different characteristics,
which in turn determine what accounting
principles and rules can and cannot
convey. This study examines how
accounting principles and rules not
only convey the underlying intent of the
standards but also other unintended
meanings.
This seedcorn project involved a review
of extant literature and discussions with
17 accounting practitioners at a Big 4
accounting firm in Finland. The study
reveals that the underlying intent of
accounting standards is more explicit
with the use of accounting principles and
implicit with the use of rules.
Accounting principles convey generalisable
practices, which promotes a holistic
understanding of the standards intent.
Such holistic understanding is applicable
across a variety of situational contexts.
However, accounting principles contain
abstract terms and individuals are inclined
to comprehend abstract terms by relating
them to relevant concrete contexts drawn
from past experience. A lack of experience
is therefore an issue in applying accounting
principles. The inability to relate abstract
principles to concrete contexts can lead
individuals to focus on comprehending
each abstract term in isolation, which
does little to enable comprehension of the
standards intent. A holistic understanding
of the principles is required to ensure the
intent of the standards is applied.
On the other hand, concrete terms are
preserved in rules. Rules are readily
applicable to various situational contexts
and easier to relate to, which facilitates
completion of routine, predictable tasks
typically assigned to juniors who lack
the relevant experience. Despite being
more implicit, the intent of rules-based
standards only emerge when the collection
of rules are considered holistically; each
rule cannot be considered in isolation.
However, a number of reasons prevent
the emergence of the standards intent.
First, each rule being readily applicable
in isolation provides little incentive to
consider the collection of rules in a holistic
manner. Second, holistic processing of
collections of rules is more cognitively
demanding.
The results of this initial research
suggests that accounting principles and
rules are both capable of conveying the
intent of accounting standards but only if
accounting standards are interpreted in
a holistic manner. Unintended meanings
emerge when the focus is on individual
parts of the standards. The move towards
principles-based standards is a noble
effort as accounting standards require
constant revisions to keep practitioners
informed of developments in accounting
practices. Rules are believed to still be
required to complement accounting
principles. However, the inclusion of rules
in standards risks diverting attention to
the rules, at the expense of the principles,
as rules are more readily applicable and
easier to relate to.
This section reports the results from a recently completed ICAS seedcorn project
25
SAVE THE DATE
www.icas.org.uk/research
BAFA Doctoral Colloquium
2014
13-14 April - London School of Economics
w: www.bafa.ac.uk
e: bafa@shef.ac.uk
BAFA Annual Conference
2014
14-16 April - London School of Economics
w: www.bafa.ac.uk
e: bafa@shef.ac.uk
BAFA CDAF Conference 2014
8-9 May - Hilton, York
w: www.bafa.ac.uk
e: f.ghaffari@mdx.ac.uk
BAFA Accounting Education
SIG Conference 2014
1416 May - University of the West of
England
w: www1.uwe.ac.uk/bl/bbs/conferences/
bafaconference
e: nadine.fry@uwe.ac.uk
EAA Doctoral Colloquium
2014
17-20 May - Tartu, Estonia
w: www.eaa2014.org
e: eaa2014@lapub.ee
EAA Annual Conference 2014
21-23 May - Tallinn, Estonia
w: www.eaa2014.org
e: eaa2014@lapub.ee
BAFA Auditing & Assurance
SIG Conference 2014
29-30 May - Aston University Business
School
w: www.bafa.ac.uk
e: i.g.basioudis@aston.ac.uk
BAFA Scottish Doctoral
Colloquium in Accounting &
Finance 2014
2 June - University of Stirling
w: www.bafa.ac.uk
e: ioannis.tsalavoutas@stir.ac.uk
Accounting & Finance
Pathway - Scottish Graduate
School of Social Science 2014
16-17 June 2014 - University of Edinburgh
w: www.socsciscotland.ac.uk
e: events@socsciscotland.ac.uk
AMIS 2014
11-12 June - Bucharest University of
Economic Studies
w: www.amis.ase.ro
BAFA FARSIG Financial
Reporting & Business
Communication Conference
2014
3-4 July - Armada House Conference
Centre, Bristol
w: www.bafa.ac.uk
e: michaeljohn.jones@bristol.ac.uk
BAFA CPAF Conference 2014
1-2 September - University of Manchester
w: www.bafa.ac.uk
e: chris.humphrey@mbs.ac.uk
EIASM Public Sector
Conference 2014
2-4 September - University of Edinburgh
w: www.eiasm.org/frontoffice/event_
announcement.asp?event_id=1025
BAFA Scottish Area Group
Conference 2014
4 September - University of St Andrews
w: www.bafa.ac.uk
e: jf60@st-andrews.ac.uk
EUFIN Conference 2014
25-26 September - University of
Regensburg, Germany
w: www-wiwi.uni-regensburg.de/
EUFIN_2014/Home/index.html.en
Tax Research Network
Conference 2014
4-5 September - University of
Roehampton, London
w: www.trn.org.uk
e: Rebecca.Boden@roehampton.ac.uk
World Congress of
Accountants 2014
10-13 November 2014 - Rome, Italy
w: www.wcoa2014rome.com
e: info@wcoa2014rome.com
World Congress of Accounting
Educators & Researchers
2014
13-15 November 2014 - Florence, Italy
w: www.oic.it/iaaer2014/
e: infoiaaer2014@oic.it
SAVE
THE DATE
www.icas.org.uk/research 26
RESEARCH FUNDING
The Institute of Chartered Accountants of Scotland
CA House 21 Haymarket Yards Edinburgh EH12 5BH