Journal of Business Economics

, Volume 84, Issue 6, pp 827–864 | Cite as

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

Original Paper
First Online:
  • 608 Downloads

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.

Keywords

Special purpose entity Reporting entity Off-balance sheet accounting Boundaries of firms Transaction cost theory Property rights theory Contract theory 

JEL Classification

L22 M41 
This is a preview of subscription content, log in to check access.

Notes

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.

References

  1. 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
  2. Alchian AA (1965) Some economics of property rights. Il Politico 30:816–829Google Scholar
  3. Alchian AA, Demsetz H (1972) Production, information costs, and economic organization. Am Econ Rev 62:777–795Google Scholar
  4. Alchian AA, Demsetz H (1973) The property rights paradigm. J Econ Hist 33:16–27Google Scholar
  5. Arnold PJ (2009) Global financial crises: the challenge to accounting research. Account Organ Soc 34:803–809Google Scholar
  6. 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, 59–73Google Scholar
  7. Arrow KJ (1970) Essays in the theory of risk-bearing. Markham Publishing Company, ChicagoGoogle Scholar
  8. Ball I (1988) Definition of the reporting entity. Caulfield, AustraliaGoogle Scholar
  9. Barney JB (1986) Organizational culture: can it be a source of sustained competitive advantage? Acad Manag Rev 11:656–665Google Scholar
  10. Barney JB (1991) Firm resources and sustained competitive advantage. J Manag 17:99–120Google Scholar
  11. Barney JB (1996) The resource-based theory of the firm. Organ Sci 7:469–501Google Scholar
  12. Barth M, Landsman WE (2010) How did financial reporting contribute to the financial crisis? Eur Account Rev 19:399–423Google Scholar
  13. Barth M, Ormazabal G, Taylor D (2011) Asset securitizations and credit risk. Account Rev 87:423–448Google Scholar
  14. Barth M, William HB, Wayne RL (1996) Value-relevance of banks' fair value disclosures under SFAS no. 107. Account Rev 71(4):513–537Google Scholar
  15. Beatty A, Berger PG, Magliolo J (1995) Motives for forming research and development financing organizations. J Account Econ 19:411–442Google Scholar
  16. Bird FA, Davidson LF, Smith CH (1974) Perceptions of external accounting transfers under entity and proprietary theory. Account Rev 49:233–244Google Scholar
  17. Brezing K (1978) Mehrstufige Unternehmensverbindungen im Steuerrecht. Zeitschrift für Unternehmens- und Gesellschaftsrecht 3:78–97Google Scholar
  18. Calomiris CW, Mason JR (2004) Credit card securitization and regulatory arbitrage. J Financ Serv Res 26:5–27Google Scholar
  19. 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 27:455–461Google Scholar
  20. Challen D, Jeffrey C (2005) Definition of the reporting entity. Aust Account Rev 15:71–78Google Scholar
  21. Chemmanur T, John K (1996) Optimal incorporation, structure of debt contracts, and limited-recourse project financing. J Financ Intermed 5:372–408Google Scholar
  22. Chen RS (1975) Social and financial stewardship. Account Rev 50(3):533–543Google Scholar
  23. Coase RH (1937) The nature of the firm. Economica 4:386–405Google Scholar
  24. Coase RH (1960) The problem of social cost. J Law Econ 3:1–44Google Scholar
  25. Coase RH (1990) Accounting and the theory of the firm. J Account Econ 12:3–13Google Scholar
  26. De Lange P, Howieson BA (2006) International accounting standards setting and U.S. exceptionalism. Crit Perspect Account 17:1007–1032Google Scholar
  27. 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 49:2–25Google Scholar
  28. Decker L (2010) Aufklärungspflichten über Innenprovisionen, Kick-backs und Retrozessionen bei der Kapitalanlage. Stuttgart, GermanyGoogle Scholar
  29. Demsetz H (1964) The exchange and enforcement of property rights. J Law Econ 7:11–26Google Scholar
  30. Demsetz H (1967) Toward a theory of property rights. Am Econ Assoc 57:347–359Google Scholar
  31. Demsetz H (1983) The Structure of ownership and the theory of the firm. J Law Econ 26:275–290Google Scholar
  32. Demsetz H (1988) The theory of the firm revisited. J Law Econ Organ 4:141–161Google Scholar
  33. Dierickx I, Cool K (1989) Asset stock accumulation and sustainability of competitive advantage. Manag Sci 35:1504–1511Google Scholar
  34. Dietrich A, Krakuhn J, Sierleja L (2012) Analyse der Konsolidierungspflicht ausgewählter Investmentstrukturen nach IFRS 10. IRZ—Zeitschrift für internationale Rechnungslegung 7:23–27Google Scholar
  35. Donaldson T, Preston LE (1995) The stakeholder theory of the corporation: concepts, evidence, and implications. Acad Manag Rev 20(1):65–91Google Scholar
  36. 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
  37. 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
  38. Ewelt-Knauer C (2010) Der Konzernabschluss als Berichtsinstrument der wirtschaftlichen Einheit. Lohmar/Köln, GermanyGoogle Scholar
  39. 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, GermanyGoogle Scholar
  40. Fama EF (1980) Agency problems and the theory of the firm. J Polit Econ 88(2):288–307Google Scholar
  41. Feng M, Gramlich JD, Gupta S (2009) Special purpose vehicles: empirical evidence on determinants and earnings management. Account Rev 84:1833–1876Google Scholar
  42. Fock T (2006) Das neue Recht der Investmentaktiengesellschaft. Betriebs-Berater 61:2371–2376Google Scholar
  43. Fowkes D, Kahn N, Armstrong D (2000) Leasing in project financing. J Project Financ 6:21–31Google Scholar
  44. Freeman RE (1984) Strategic management: a stakeholder approach. Pitman, BostonGoogle Scholar
  45. Früh A (1995) Asset Backed Securities/Securitization am Finanzplatz Deutschland. Betriebs-Berater 50:105–109Google Scholar
  46. Fülbier RU (2005) Wisschenschaftstheorie und Betriebswirtschaftslehre. Institutionenökonomie und Betriebswirtschaftslehre. In: Horsch A, Meinhövel H, Paul S, Munich GermanyGoogle Scholar
  47. Fülbier RU (2006) Konzernbesteuerung nach IFRS—IFRS-Konsolidierungsregeln als Ausgangspunkt einer konsolidierten steuerlichen Gewinnermittlung in der EU?. Frankfurt am Main, GermanyGoogle Scholar
  48. Fülbier RU, Weller M (2008) Normative Rechnungslegungsforschung im Abseits? Einige wissenschaftstheoretische Anmerkungen. J Gen Philos Sci 39:351–382Google Scholar
  49. Fülbier RU, Weller M (2011) A glance at German financial accounting research between 1950 and 2005: a publication and citation analysis. Schmalenbach Bus Rev 63:2–33Google Scholar
  50. Fülbier RU, Hitz J-M, Sellhorn T (2009) Relevance of academic research and researchers’ role in the IASB’s financial reporting standard setting. Abacus 45:455–492Google Scholar
  51. Furubotn EG, Pejovich S (1972) Property rights and economic theory: a survey of recent literature. J Econ Lit 10:1137–1162Google Scholar
  52. 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. 1/5Google Scholar
  53. Grant RM (1996) Toward a knowledge-based theory of the firm. Strateg Manag J 17:109–122Google Scholar
  54. Greenbaum SI, Thakor JV (1987) Bank funding modes: securitization versus deposits. J Bank Financ 11:379–392Google Scholar
  55. Grossman S, Hart O (1986) The costs and benefits of ownership. a theory of vertical and lateral integration. J Polit Econ 94:691–719Google Scholar
  56. Hart O (1988) Incomplete contracts and the theory of the firm. J Law Econ Organ 4:119–139Google Scholar
  57. Hart O (1989) An economist’s perspective on the theory of the firm. Columbia Law Rev 89:1757–1774Google Scholar
  58. Hart O, Moore J (1990) Property rights and the nature of the firm. J Polit Econ 98:1119–1158Google Scholar
  59. Hart O, Moore J (1999) Foundations of incomplete contracts. Rev Econ Stud 66:115–138Google Scholar
  60. Hartgraves AL, Benston GL (2002) Commentary: the evolving accounting standards for special purpose entities and consolidation. Account Horiz 16:245–258Google Scholar
  61. Henry B (1999) What constitutes control? J Account 187:39–43Google Scholar
  62. Hermanns M (2004) Die Investmentaktiengesellschaft nach dem Investmentmodernisierungsgesetz. Zeitschrift für Wirtschaftsrecht 25:1297–1303Google Scholar
  63. Hess A, Smith C (1988) Elements of mortgage securitization. J Real Estate Financ Econ 11:379–392Google Scholar
  64. 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
  65. IASB (2010) Conceptual framework for financial reporting 2010. LondonGoogle Scholar
  66. IASB (2011a) IAS 27—separate financial statements. LondonGoogle Scholar
  67. IASB (2011b) IFRS 10—consolidated financial statements. LondonGoogle Scholar
  68. Jensen MC, Meckling WH (1976) Theory of the firm: managerial behavior, agency costs and ownership structure. J Financ Econ 3:305–360Google Scholar
  69. John T, John K (1991) Optimality of project financing: theory and empirical implications in finance and accounting. Rev Quant Financ Account 1:51–74Google Scholar
  70. Karaoglu N (2005) Regulatory capital and earnings management in banks: the case of loan sales and securitizations. working paper, University of Southern CaliforniaGoogle Scholar
  71. Klein B, Crawford RG, Alchian AA (1978) Vertical integration, appropriable rents, and the competitive contracting process. J Law Econ 21:297–326Google Scholar
  72. 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, GermanyGoogle Scholar
  73. Koopmans TC (1957) Three essays on the state of economic science. McGraw-Hill, New YorkGoogle Scholar
  74. Küppers W, Brause C (1998) Asset-Backed Securities Transaktionen: rechtliche, bilanzielle und steuerliche Aspekte. Die Aktiengesellschaft 43:413–420Google Scholar
  75. Küting K, Brakensiek S (2001) Die Einbeziehung von Leasingobjektgesellschaften in den Konsolidierungskreis nach HGB und US-GAAP. Deutsches Steuerrecht 32:1359–1364Google Scholar
  76. Kwok WCC, Sharp D (2005) Power and international accounting standard setting—evidence from segment reporting and intangible assets projects. Account Audit Account J 18:74–99Google Scholar
  77. Lamp M (1995) When is a group a group? Convergence of concepts of “Group” in European Union Corporate Tax. Eur Account Rev 4:33–78Google Scholar
  78. Landsman WR, Peasnell KV, Shakespeare C (2008) Are asset securitizations sales or loans? Account Rev 83:1251–1272Google Scholar
  79. 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 23:133–147Google Scholar
  80. Lockwood LJ, Rutherford RC, Herrera MJ (1996) Wealth effects of asset securitization. J Bank Financ 20:151–164Google Scholar
  81. Matena S (2004) Bilanzielle Vermögenszurechnung nach IFRS: Konzept und Analyse der Zurechnung von Vermögenswerten zum bilanziellen Vermögen von Unternehmen. Düsseldorf, GermanyGoogle Scholar
  82. Mattessich R (1995a) Critique of accounting: examination of the foundations and normative structure of an applied discipline. Quorum books, WestportGoogle Scholar
  83. Mattessich R (1995b) Conditional-normative accounting methodology: incorporating value judgements and means end relations of an applied science. Account Organ Soc 20:259–284Google Scholar
  84. McDonald D, Puxty AG (1979) An inducement-contribution approach to corporate financial reporting. Account Organ Soc 4(1–2):53–65Google Scholar
  85. 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 8:162–207Google Scholar
  86. Mellwig W (2000) Die Konsolidierung von Leasingobjektgesellschaften im Konzernabschluß. Leasing Berater, Beilage 1(55):25–28Google Scholar
  87. Mills LF, Newberry KJ (2005) Firms’ off-balance sheet and hybrid debt financing: evidence from their book-tax reporting differences. J Account Res 43:251–282Google Scholar
  88. Mohr RM (1988) Unconsolidated finance subsidiaries: characteristics and debt/equity effects. Account Horiz 2:27–34Google Scholar
  89. Moonitz M (1942) The entity approach to consolidated statements. Account Rev 17:236–242Google Scholar
  90. Niu FF, Richardson GD (2006) Are securitizations in substance sales or secured borrowings? Capital market evidence. Contemp Account Res 23:1105–1133Google Scholar
  91. Nobes C, Parker RH (1991) Comparative international accounting, 3rd edn. Prentice Hall, New YorkGoogle Scholar
  92. Nölke A, Perry J (2007) The power of transnational private governance: financialization and the IASB. Bus Politics 9(Article 4):1–25Google Scholar
  93. North DC (1994) Economic performance through time. Am Econ Rev 84:359–368Google Scholar
  94. Ohl K (1989) Die Rechtsbeziehungen innerhalb des Investment-Dreiecks. Duncker & Humbold, BerlinGoogle Scholar
  95. Ordelheide D (1986) Konzern und Konzernerfolg. Wirtschaftswissenschaftliches Studium 15:495–502Google Scholar
  96. Ordelheide D, Pfaff D (1994) European financial reporting—Germany. LondonGoogle Scholar
  97. Pavel C, Phillis D (1987) Why commercial banks sell loans: an empirical analysis. Fed Reserv Bank Chicago: Econ Perspect 11:3–14Google Scholar
  98. Pejovich S (1976) The capitalist corporation and the socialist firm: a study of comparative efficiency. Schweizerische Zeitschrift für Volkswirtschaft und Statistik 112:1–12Google Scholar
  99. 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 19:908–916Google Scholar
  100. Picker R (1992) Practical problems in the reporting entity concept. Aust Account Rev 4:2–10Google Scholar
  101. Reichelt D, Schmidt M (2005) Notwendigkeit zur konzeptionsgerechten Fortentwicklung der Konzernrechnungslegung—das Beispiel sog. „umgekehrter“Unternehmenserwerbe. Zeitschrift für Betriebswirtschaft 75:43–70Google Scholar
  102. Reis M (1996) Die Körperbesteuerung des Konzerns als wirtschaftliche Einheit—Mögliche Alternativen zur Einzelbesteuerung. Frankfurt am Main, GermanyGoogle Scholar
  103. Rinze JP, Klüwer AC (1998) Securitisation—praktische Bedeutung eines Finanzierungsmodells. Betriebs-Berater 53:1695–1704Google Scholar
  104. Rosenthal JA, Ocampo JM (1988) Analyzing the economic benefits of securitized credit. J Appl Corp Financ 1:32–42Google Scholar
  105. Rumelt R (1984) Towards a strategic theory of the firm. In: Lamb R (ed) Competitive strategic management. Prentice-Hall, Englewood Cliffs, pp 556–570Google Scholar
  106. Ryan SG (2008) Accounting in and for the Subprime Crises. Account Rev 83:1605–1638Google Scholar
  107. Schipper K (2003) Principles-based accounting standards. Account Horiz 17:31–72Google Scholar
  108. Schmidt M (2002) On the legitimacy of accounting standard setting by privately organized institutions in Germany and Europe. Schmalenbach Bus Rev 54:171–193Google Scholar
  109. Schmidt M (2003) Ökonomische Überlegungen zur Rechnungslegungsregulierung bei Vorliegen hybrider Kooperationsformen. Die Betriebswirtschaft 63:138–155Google Scholar
  110. Schmidt M (2008) Die drei Ansätze des FASB zur Abgrenzung zwischen Eigen- und Fremdkapitalinstrumenten. IRZ—Zeitschrift für internationale Rechnungslegung 3:235–243Google Scholar
  111. Schwarcz SL (1992) The alchemy of asset securitization. Stanf J Law Bus Financ 133:133–154Google Scholar
  112. Shah S, Thakor A (1987) Optimal capital structure and project financing. J Econ Theory 42:209–243Google Scholar
  113. Shevlin T (1987) Taxes and off-balance-sheet financing: research and development limited partnerships. Account Rev 62:480–509Google Scholar
  114. Stibi B, Böckem H, Klaholz E (2012) Mehr Anwendungssicherheit bei IFRS 10–12 durch zusätzliche Materialien von IASB und EFRAG? Betriebs-Berater 67:1527–1532Google Scholar
  115. Streckenbach J (2006) Bilanzierung von Zweckgesellschaften im Konzern—Abgrenzung der wirtschaftlichen Einheit nach US-GAAP und IFRS, Bochum, GermanyGoogle Scholar
  116. Suojanen WW (1954) Accounting theory and the large corporation. Account Rev 29:391–398Google Scholar
  117. Sürken S (1999) Abgrenzung der wirtschaftlichen Einheit nach US-GAAP. Frankfurt am Main, GermanyGoogle Scholar
  118. Tweedie D (2007) Can global standards be principle based? J Appl Res Account Financ 2:3–8Google Scholar
  119. Walker RG (1987) Australia’s ASRB: a case study of political activity and regulatory “Capture”. Account Bus Res 17:269–286Google Scholar
  120. Watts R, Zimmerman J (1978) Towards a positive theory of the determination of accounting standards. Account Rev 53:112–134Google Scholar
  121. Wernerfelt B (1984) A resource-based view of the firm. Strateg Manag J 5:171–180Google Scholar
  122. Williamson O (1971) The vertical integration of production: market failure considerations. Amer Econ Rev 61:112–123Google Scholar
  123. Williamson OE (1975) Markets and hierarchies: analysis and antitrust implications. Free Press, New YorkGoogle Scholar
  124. Williamson OE (1979) Transaction cost economics: the governance of contractual relations. J Law Econ 22:233–261Google Scholar
  125. Williamson OE (1981) The economics of organization: the transaction cost approach. Am J Sociol 87:548–577Google Scholar
  126. Williamson O (1983) Credible commitments: using hostages to support exchange. Amer Econ Rev 73:519–540Google Scholar
  127. Williamson OE (1985) The economic institutions of capitalism. Free Press, New YorkGoogle Scholar
  128. Williamson OE (2000) The new institutional economics: taking stock, looking ahead. J Econ Lit 38:595–613Google Scholar
  129. Williamson OE, Wachter ML, Harris JE (1975) Understanding the employment relation: the analysis of idiosyncratic exchange. Bell J Econ 6:250–278Google Scholar
  130. Wüstemann J, Wüstemann S (2010) Why consistency of accounting standards matters: a contribution to the rules-versus-principles debate in financial reporting. Abacus 46:1–27Google Scholar

Copyright information

© Springer-Verlag Berlin Heidelberg 2014

Authors and Affiliations

  1. 1.Institute of Accounting and Auditing, University of MünsterMünsterGermany

Personalised recommendations