Skip to main content
SpringerLink
Log in

Determining reporting entity boundaries in the light of neoinstitutional theories beyond the conceptual framework of IFRS

  • Original Paper
  • Published:
Journal of Business Economics Aims and scope Submit manuscript

Abstract

As the financial crisis of 2008 demonstrates, wide discretion is provided by accounting rules for determining the reporting entity, especially with respect to special purpose entities (SPEs). In this paper, it is shown that the newly issued regulations of International Financial Reporting Standards (IFRS) 10 may not entirely solve the off-balance-sheet problem. As a result, consolidated financial statements may not provide useful information on the financial situation of the reporting entity with respect to the conceptual framework of IFRS. This paper presents an alternative concept in the light of neoinstitutional theories for determining the reporting entity with respect to proactive subsidiaries as well as to SPEs with and without autopilots. Specifically, the economic activities of the reporting entity are characterized based on property rights theory in a first step. Second, for SPEs, this paper tests whether these economic activities should be integrated into the efficient boundaries of the reporting entity based on transaction cost theory. The concept developed is evaluated by (1) analyzing it against the background of the conceptual framework of IFRS and the Exposure Draft ED/2010/2 “Conceptual Framework for Financial Reporting—The Reporting Entity”, (2) applying it to typical structures within the reporting entity, and (3) comparing its effectiveness to the effectiveness of the rules of IFRS 10.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Fig. 1
Fig. 2
Fig. 3
Fig. 4
Fig. 5

Similar content being viewed by others

References

  • Accounting Standards Committee of Germany (2010) Comment letter to Exposure Draft ED/2010/2 conceptual framework financial reporting: the reporting entity, available under: http://www.fasb.org/cs/BlobServer?blobkey=id&blobwhere=1175821181397&blobheader=application%2Fpdf&blobcol=urldata&blobtable=MungoBlobs. Accessed 03 Jul 2013

  • Alchian AA (1965) Some economics of property rights. Il Politico 30:816–829

    Google Scholar 

  • Alchian AA, Demsetz H (1972) Production, information costs, and economic organization. Am Econ Rev 62:777–795

    Google Scholar 

  • Alchian AA, Demsetz H (1973) The property rights paradigm. J Econ Hist 33:16–27

    Google Scholar 

  • Arnold PJ (2009) Global financial crises: the challenge to accounting research. Account Organ Soc 34:803–809

    Google Scholar 

  • Arrow KJ (1969) The organization of economic activity: issues pertinent to the choice of market versus non-market allocations. Analysis and evaluation of public expenditures: The PPP System. U. S. Joint Economic Committee, 91st Congress, 1st Session. Washington D. C., U. S. Government Printing Office, 59–73

  • Arrow KJ (1970) Essays in the theory of risk-bearing. Markham Publishing Company, Chicago

    Google Scholar 

  • Ball I (1988) Definition of the reporting entity. Caulfield, Australia

    Google Scholar 

  • Barney JB (1986) Organizational culture: can it be a source of sustained competitive advantage? Acad Manag Rev 11:656–665

    Google Scholar 

  • Barney JB (1991) Firm resources and sustained competitive advantage. J Manag 17:99–120

    Google Scholar 

  • Barney JB (1996) The resource-based theory of the firm. Organ Sci 7:469–501

    Google Scholar 

  • Barth M, Landsman WE (2010) How did financial reporting contribute to the financial crisis? Eur Account Rev 19:399–423

    Google Scholar 

  • Barth M, Ormazabal G, Taylor D (2011) Asset securitizations and credit risk. Account Rev 87:423–448

    Google Scholar 

  • Barth M, William HB, Wayne RL (1996) Value-relevance of banks' fair value disclosures under SFAS no. 107. Account Rev 71(4):513–537

    Google Scholar 

  • Beatty A, Berger PG, Magliolo J (1995) Motives for forming research and development financing organizations. J Account Econ 19:411–442

    Google Scholar 

  • Bird FA, Davidson LF, Smith CH (1974) Perceptions of external accounting transfers under entity and proprietary theory. Account Rev 49:233–244

    Google Scholar 

  • Brezing K (1978) Mehrstufige Unternehmensverbindungen im Steuerrecht. Zeitschrift für Unternehmens- und Gesellschaftsrecht 3:78–97

    Google Scholar 

  • Calomiris CW, Mason JR (2004) Credit card securitization and regulatory arbitrage. J Financ Serv Res 26:5–27

    Google Scholar 

  • Carmona S, Trombetta M (2005) On the global acceptance of IAS/IFRS accounting standards: the logic and implications of the principles-based system. J Account Public Policy 27:455–461

    Google Scholar 

  • Challen D, Jeffrey C (2005) Definition of the reporting entity. Aust Account Rev 15:71–78

    Google Scholar 

  • Chemmanur T, John K (1996) Optimal incorporation, structure of debt contracts, and limited-recourse project financing. J Financ Intermed 5:372–408

    Google Scholar 

  • Chen RS (1975) Social and financial stewardship. Account Rev 50(3):533–543

    Google Scholar 

  • Coase RH (1937) The nature of the firm. Economica 4:386–405

    Google Scholar 

  • Coase RH (1960) The problem of social cost. J Law Econ 3:1–44

    Google Scholar 

  • Coase RH (1990) Accounting and the theory of the firm. J Account Econ 12:3–13

    Google Scholar 

  • De Lange P, Howieson BA (2006) International accounting standards setting and U.S. exceptionalism. Crit Perspect Account 17:1007–1032

    Google Scholar 

  • Dechow PM, Myers LA, Shakespeare C (2010) Fair value accounting and gains from asset securitizations: a convenient earnings management tool with compensation side-benefits. J Account Econ 49:2–25

    Google Scholar 

  • Decker L (2010) Aufklärungspflichten über Innenprovisionen, Kick-backs und Retrozessionen bei der Kapitalanlage. Stuttgart, Germany

  • Demsetz H (1964) The exchange and enforcement of property rights. J Law Econ 7:11–26

    Google Scholar 

  • Demsetz H (1967) Toward a theory of property rights. Am Econ Assoc 57:347–359

    Google Scholar 

  • Demsetz H (1983) The Structure of ownership and the theory of the firm. J Law Econ 26:275–290

    Google Scholar 

  • Demsetz H (1988) The theory of the firm revisited. J Law Econ Organ 4:141–161

    Google Scholar 

  • Dierickx I, Cool K (1989) Asset stock accumulation and sustainability of competitive advantage. Manag Sci 35:1504–1511

    Google Scholar 

  • Dietrich A, Krakuhn J, Sierleja L (2012) Analyse der Konsolidierungspflicht ausgewählter Investmentstrukturen nach IFRS 10. IRZ—Zeitschrift für internationale Rechnungslegung 7:23–27

  • Donaldson T, Preston LE (1995) The stakeholder theory of the corporation: concepts, evidence, and implications. Acad Manag Rev 20(1):65–91

    Google Scholar 

  • EFRAG—European Financial Reporting Advisory Group (2012a). Feedback Report on Field-Tests on IFRS 10, IFRS 11 and IFRS 12. http://www.efrag.org/files/EFRAG%20public%20letters/Consolidation/Feedback_report_on_field_tests_on_IFRS_10_IFRS_11_and_IFRS_12.pdf. Accessed 26 Mar 2013

  • EFRAG—European Financial Reporting Advisory Group (2012b) Letter to the European Commission on “Adoption of IFRS 10 Consolidated Financial Statements (IFRS 10), IFRS 11 Joint Arrangements (IFRS 11), IFRS 12 Disclosure of Interests in Other Entities (IFRS 12), IAS 27 Separate Financial Statements (IAS 27 (2011)) and IAS 28 Investments in Associates and Joint Ventures (IAS 28 (2011))”. http://www.efrag.org/files/EFRAG%20public%20letters/Consolidation/Final_Endorsement_Advice/Final_Endorsement_Advice_-_IFRS_10_IFRS_11_IFRS_12_IAS_27_and_IAS_28.pdf. Accessed 26 Mar 2012

  • Ewelt-Knauer C (2010) Der Konzernabschluss als Berichtsinstrument der wirtschaftlichen Einheit. Lohmar/Köln, Germany

  • Fahrholz B (1998) Neue Formen der Unternehmensfinanzierung. Unternehmensübernahmen, Big ticket-Leasing, Asset Backed- und Projektfinanzierung: die steuer- und haftungsrechtliche Optimierung durch Einzweckgesellschaften (Single Purpose Companies) dargestellt anhand von Beispielsachverhalten. München, Germany

  • Fama EF (1980) Agency problems and the theory of the firm. J Polit Econ 88(2):288–307

    Google Scholar 

  • Feng M, Gramlich JD, Gupta S (2009) Special purpose vehicles: empirical evidence on determinants and earnings management. Account Rev 84:1833–1876

    Google Scholar 

  • Fock T (2006) Das neue Recht der Investmentaktiengesellschaft. Betriebs-Berater 61:2371–2376

    Google Scholar 

  • Fowkes D, Kahn N, Armstrong D (2000) Leasing in project financing. J Project Financ 6:21–31

    Google Scholar 

  • Freeman RE (1984) Strategic management: a stakeholder approach. Pitman, Boston

    Google Scholar 

  • Früh A (1995) Asset Backed Securities/Securitization am Finanzplatz Deutschland. Betriebs-Berater 50:105–109

    Google Scholar 

  • Fülbier RU (2005) Wisschenschaftstheorie und Betriebswirtschaftslehre. Institutionenökonomie und Betriebswirtschaftslehre. In: Horsch A, Meinhövel H, Paul S, Munich Germany

  • Fülbier RU (2006) Konzernbesteuerung nach IFRS—IFRS-Konsolidierungsregeln als Ausgangspunkt einer konsolidierten steuerlichen Gewinnermittlung in der EU?. Frankfurt am Main, Germany

  • Fülbier RU, Weller M (2008) Normative Rechnungslegungsforschung im Abseits? Einige wissenschaftstheoretische Anmerkungen. J Gen Philos Sci 39:351–382

    Google Scholar 

  • Fülbier RU, Weller M (2011) A glance at German financial accounting research between 1950 and 2005: a publication and citation analysis. Schmalenbach Bus Rev 63:2–33

    Google Scholar 

  • Fülbier RU, Hitz J-M, Sellhorn T (2009) Relevance of academic research and researchers’ role in the IASB’s financial reporting standard setting. Abacus 45:455–492

    Google Scholar 

  • Furubotn EG, Pejovich S (1972) Property rights and economic theory: a survey of recent literature. J Econ Lit 10:1137–1162

    Google Scholar 

  • Gelhausen W, Gelhausen H-F (1995) Behandlung von Leasingverträgen in Konzernabschlüssen, Handbuch des Jahresabschlusses in Einzeldarstellungen. In: Wysocki K, Schulze-Osterloh J, Köln, Germany, Abt. 1/5

  • Grant RM (1996) Toward a knowledge-based theory of the firm. Strateg Manag J 17:109–122

    Google Scholar 

  • Greenbaum SI, Thakor JV (1987) Bank funding modes: securitization versus deposits. J Bank Financ 11:379–392

    Google Scholar 

  • Grossman S, Hart O (1986) The costs and benefits of ownership. a theory of vertical and lateral integration. J Polit Econ 94:691–719

    Google Scholar 

  • Hart O (1988) Incomplete contracts and the theory of the firm. J Law Econ Organ 4:119–139

    Google Scholar 

  • Hart O (1989) An economist’s perspective on the theory of the firm. Columbia Law Rev 89:1757–1774

    Google Scholar 

  • Hart O, Moore J (1990) Property rights and the nature of the firm. J Polit Econ 98:1119–1158

    Google Scholar 

  • Hart O, Moore J (1999) Foundations of incomplete contracts. Rev Econ Stud 66:115–138

    Google Scholar 

  • Hartgraves AL, Benston GL (2002) Commentary: the evolving accounting standards for special purpose entities and consolidation. Account Horiz 16:245–258

    Google Scholar 

  • Henry B (1999) What constitutes control? J Account 187:39–43

    Google Scholar 

  • Hermanns M (2004) Die Investmentaktiengesellschaft nach dem Investmentmodernisierungsgesetz. Zeitschrift für Wirtschaftsrecht 25:1297–1303

    Google Scholar 

  • Hess A, Smith C (1988) Elements of mortgage securitization. J Real Estate Financ Econ 11:379–392

    Google Scholar 

  • IASB (2008) Financial Instruments with Characteristics of Equity. Discussion Paper. http://www.ifrs.org/NR/rdonlyres/AE2FC463-BB40-4835-8805-13E44BBFE96F/0/dp_financial_instrumentsfeb2008_186.pdf

  • IASB (2010) Conceptual framework for financial reporting 2010. London

  • IASB (2011a) IAS 27—separate financial statements. London

  • IASB (2011b) IFRS 10—consolidated financial statements. London

  • Jensen MC, Meckling WH (1976) Theory of the firm: managerial behavior, agency costs and ownership structure. J Financ Econ 3:305–360

    Google Scholar 

  • John T, John K (1991) Optimality of project financing: theory and empirical implications in finance and accounting. Rev Quant Financ Account 1:51–74

    Google Scholar 

  • Karaoglu N (2005) Regulatory capital and earnings management in banks: the case of loan sales and securitizations. working paper, University of Southern California

  • Klein B, Crawford RG, Alchian AA (1978) Vertical integration, appropriable rents, and the competitive contracting process. J Law Econ 21:297–326

    Google Scholar 

  • Köndgen J (1993) Die Relevant der ökonomischen Theorie der Unternehmung für rechtswissenschaftliche Fragestellungen—ein Problemkatalog. Ökonomische Analyse des Unternehmensrechts. In: Ott C, Schäfer H-B, Heidelberg, Germany

  • Koopmans TC (1957) Three essays on the state of economic science. McGraw-Hill, New York

    Google Scholar 

  • Küppers W, Brause C (1998) Asset-Backed Securities Transaktionen: rechtliche, bilanzielle und steuerliche Aspekte. Die Aktiengesellschaft 43:413–420

    Google Scholar 

  • Küting K, Brakensiek S (2001) Die Einbeziehung von Leasingobjektgesellschaften in den Konsolidierungskreis nach HGB und US-GAAP. Deutsches Steuerrecht 32:1359–1364

    Google Scholar 

  • Kwok WCC, Sharp D (2005) Power and international accounting standard setting—evidence from segment reporting and intangible assets projects. Account Audit Account J 18:74–99

    Google Scholar 

  • Lamp M (1995) When is a group a group? Convergence of concepts of “Group” in European Union Corporate Tax. Eur Account Rev 4:33–78

    Google Scholar 

  • Landsman WR, Peasnell KV, Shakespeare C (2008) Are asset securitizations sales or loans? Account Rev 83:1251–1272

    Google Scholar 

  • Lefebvre C, Lin L-Q (1991) On the scope of consolidation: a comparative study of the EEC 7th Directive, IAS 27 and the Belgian Royal Decree on Consolidation. Br Account Rev 23:133–147

    Google Scholar 

  • Lockwood LJ, Rutherford RC, Herrera MJ (1996) Wealth effects of asset securitization. J Bank Financ 20:151–164

    Google Scholar 

  • Matena S (2004) Bilanzielle Vermögenszurechnung nach IFRS: Konzept und Analyse der Zurechnung von Vermögenswerten zum bilanziellen Vermögen von Unternehmen. Düsseldorf, Germany

  • Mattessich R (1995a) Critique of accounting: examination of the foundations and normative structure of an applied discipline. Quorum books, Westport

    Google Scholar 

  • Mattessich R (1995b) Conditional-normative accounting methodology: incorporating value judgements and means end relations of an applied science. Account Organ Soc 20:259–284

    Google Scholar 

  • McDonald D, Puxty AG (1979) An inducement-contribution approach to corporate financial reporting. Account Organ Soc 4(1–2):53–65

    Google Scholar 

  • McKee TE, Rouse RW, Bradley LJ (2006) Accounting for special purpose entities: the control view versus the primary beneficiary view for consolidation. J Appl Account Res 8:162–207

    Google Scholar 

  • Mellwig W (2000) Die Konsolidierung von Leasingobjektgesellschaften im Konzernabschluß. Leasing Berater, Beilage 1(55):25–28

  • Mills LF, Newberry KJ (2005) Firms’ off-balance sheet and hybrid debt financing: evidence from their book-tax reporting differences. J Account Res 43:251–282

    Google Scholar 

  • Mohr RM (1988) Unconsolidated finance subsidiaries: characteristics and debt/equity effects. Account Horiz 2:27–34

    Google Scholar 

  • Moonitz M (1942) The entity approach to consolidated statements. Account Rev 17:236–242

    Google Scholar 

  • Niu FF, Richardson GD (2006) Are securitizations in substance sales or secured borrowings? Capital market evidence. Contemp Account Res 23:1105–1133

    Google Scholar 

  • Nobes C, Parker RH (1991) Comparative international accounting, 3rd edn. Prentice Hall, New York

    Google Scholar 

  • Nölke A, Perry J (2007) The power of transnational private governance: financialization and the IASB. Bus Politics 9(Article 4):1–25

    Google Scholar 

  • North DC (1994) Economic performance through time. Am Econ Rev 84:359–368

    Google Scholar 

  • Ohl K (1989) Die Rechtsbeziehungen innerhalb des Investment-Dreiecks. Duncker & Humbold, Berlin

  • Ordelheide D (1986) Konzern und Konzernerfolg. Wirtschaftswissenschaftliches Studium 15:495–502

    Google Scholar 

  • Ordelheide D, Pfaff D (1994) European financial reporting—Germany. London

  • Pavel C, Phillis D (1987) Why commercial banks sell loans: an empirical analysis. Fed Reserv Bank Chicago: Econ Perspect 11:3–14

    Google Scholar 

  • Pejovich S (1976) The capitalist corporation and the socialist firm: a study of comparative efficiency. Schweizerische Zeitschrift für Volkswirtschaft und Statistik 112:1–12

    Google Scholar 

  • Pelger C (2011) Rechnungslegungszweck und qualitative Anforderungen im Conceptual Framework for Financial Reporting (2010)—Der erste Stein im neuen Fundament der internationalen Rechnungslegung. Die Wirtschaftsprüfung 19:908–916

    Google Scholar 

  • Picker R (1992) Practical problems in the reporting entity concept. Aust Account Rev 4:2–10

    Google Scholar 

  • Reichelt D, Schmidt M (2005) Notwendigkeit zur konzeptionsgerechten Fortentwicklung der Konzernrechnungslegung—das Beispiel sog. „umgekehrter“Unternehmenserwerbe. Zeitschrift für Betriebswirtschaft 75:43–70

    Google Scholar 

  • Reis M (1996) Die Körperbesteuerung des Konzerns als wirtschaftliche Einheit—Mögliche Alternativen zur Einzelbesteuerung. Frankfurt am Main, Germany

  • Rinze JP, Klüwer AC (1998) Securitisation—praktische Bedeutung eines Finanzierungsmodells. Betriebs-Berater 53:1695–1704

    Google Scholar 

  • Rosenthal JA, Ocampo JM (1988) Analyzing the economic benefits of securitized credit. J Appl Corp Financ 1:32–42

    Google Scholar 

  • Rumelt R (1984) Towards a strategic theory of the firm. In: Lamb R (ed) Competitive strategic management. Prentice-Hall, Englewood Cliffs, pp 556–570

    Google Scholar 

  • Ryan SG (2008) Accounting in and for the Subprime Crises. Account Rev 83:1605–1638

    Google Scholar 

  • Schipper K (2003) Principles-based accounting standards. Account Horiz 17:31–72

    Google Scholar 

  • Schmidt M (2002) On the legitimacy of accounting standard setting by privately organized institutions in Germany and Europe. Schmalenbach Bus Rev 54:171–193

    Google Scholar 

  • Schmidt M (2003) Ökonomische Überlegungen zur Rechnungslegungsregulierung bei Vorliegen hybrider Kooperationsformen. Die Betriebswirtschaft 63:138–155

    Google Scholar 

  • Schmidt M (2008) Die drei Ansätze des FASB zur Abgrenzung zwischen Eigen- und Fremdkapitalinstrumenten. IRZ—Zeitschrift für internationale Rechnungslegung 3:235–243

    Google Scholar 

  • Schwarcz SL (1992) The alchemy of asset securitization. Stanf J Law Bus Financ 133:133–154

    Google Scholar 

  • Shah S, Thakor A (1987) Optimal capital structure and project financing. J Econ Theory 42:209–243

    Google Scholar 

  • Shevlin T (1987) Taxes and off-balance-sheet financing: research and development limited partnerships. Account Rev 62:480–509

    Google Scholar 

  • Stibi B, Böckem H, Klaholz E (2012) Mehr Anwendungssicherheit bei IFRS 10–12 durch zusätzliche Materialien von IASB und EFRAG? Betriebs-Berater 67:1527–1532

    Google Scholar 

  • Streckenbach J (2006) Bilanzierung von Zweckgesellschaften im Konzern—Abgrenzung der wirtschaftlichen Einheit nach US-GAAP und IFRS, Bochum, Germany

  • Suojanen WW (1954) Accounting theory and the large corporation. Account Rev 29:391–398

    Google Scholar 

  • Sürken S (1999) Abgrenzung der wirtschaftlichen Einheit nach US-GAAP. Frankfurt am Main, Germany

  • Tweedie D (2007) Can global standards be principle based? J Appl Res Account Financ 2:3–8

    Google Scholar 

  • Walker RG (1987) Australia’s ASRB: a case study of political activity and regulatory “Capture”. Account Bus Res 17:269–286

    Google Scholar 

  • Watts R, Zimmerman J (1978) Towards a positive theory of the determination of accounting standards. Account Rev 53:112–134

    Google Scholar 

  • Wernerfelt B (1984) A resource-based view of the firm. Strateg Manag J 5:171–180

    Google Scholar 

  • Williamson O (1971) The vertical integration of production: market failure considerations. Amer Econ Rev 61:112–123

    Google Scholar 

  • Williamson OE (1975) Markets and hierarchies: analysis and antitrust implications. Free Press, New York

    Google Scholar 

  • Williamson OE (1979) Transaction cost economics: the governance of contractual relations. J Law Econ 22:233–261

    Google Scholar 

  • Williamson OE (1981) The economics of organization: the transaction cost approach. Am J Sociol 87:548–577

    Google Scholar 

  • Williamson O (1983) Credible commitments: using hostages to support exchange. Amer Econ Rev 73:519–540

    Google Scholar 

  • Williamson OE (1985) The economic institutions of capitalism. Free Press, New York

    Google Scholar 

  • Williamson OE (2000) The new institutional economics: taking stock, looking ahead. J Econ Lit 38:595–613

    Google Scholar 

  • Williamson OE, Wachter ML, Harris JE (1975) Understanding the employment relation: the analysis of idiosyncratic exchange. Bell J Econ 6:250–278

    Google Scholar 

  • Wüstemann J, Wüstemann S (2010) Why consistency of accounting standards matters: a contribution to the rules-versus-principles debate in financial reporting. Abacus 46:1–27

    Google Scholar 

Download references

Acknowledgments

I thank the anonymous reviewers for their careful reading of the manuscript and their many insightful comments and suggestions. I also thank participants and discussants of the following conferences: Conference of the German Academic Association for Business Research 2011, Conference of the European Accounting Association 2012, Conference of the Canadian Accounting Association 2012, Conference of the British Accounting and Finance Association 2012, Conference of the International Association of Accounting Education and Research 2012. This paper significantly advances my dissertation published in 2010.

Author information

Authors and Affiliations

  1. Institute of Accounting and Auditing, University of Münster, Universitätsstr. 14-16, 48143, Münster, Germany

    Corinna Ewelt-Knauer

Authors
  1. Corinna Ewelt-Knauer
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Corinna Ewelt-Knauer.

Rights and permissions

Reprints and permissions

About this article

Cite this article

Ewelt-Knauer, C. Determining reporting entity boundaries in the light of neoinstitutional theories beyond the conceptual framework of IFRS. J Bus Econ 84, 827–864 (2014). https://doi.org/10.1007/s11573-014-0706-8

Download citation

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s11573-014-0706-8

Keywords

JEL Classification

Search

Navigation