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Development of the International Financial Reporting Standard for Small and Medium-sized Entities Ronita Devi Ram A thesis submitted in fulfilment of the requirements for the degree of Doctor of Philosophy Discipline of Accounting, The University of Sydney Business School, March 2012. Acknowledgements: My PhD journey would not have been possible without the assistance and generosity of several people. Firstly my heartfelt gratitude to Associate Professor Sue Newberry (my primary supervisor) for her guidance, generosity and encouragement throughout the duration of this study. Her insightful and challenging comments through all phases of my research and writing were very much appreciated. I benefited enormously from her experience, knowledge and expertise in the area of accounting standards and her efforts to push me to think beyond the normal boundary enabled me to achieve new heights. She was the perfect mentor and without her support, this journey would not have been possible. Thank you very much Sue. It was my good fortune to have you as one of my supervisors. I would not have been able to embark on this journey if it was not for Professor Sid Gray who saw my potential and encouraged me to undertake the PhD as one of his students. I am grateful for his continuous encouragement, support and guidance throughout this journey. The expertise and wealth of knowledge in the area of international accounting standards that he shared with me were invaluable to my thesis. I have indeed been blessed to have Prof Sid as my other supervisor. I would like to extend my appreciation to the interviewees for taking part in my study. In particular I would like to thank Sir David Tweedie, the chairman of the IASB, Tom Jones, the vice-chairman of the IASB, and Dr Paul Pacter, the director of the SME project for their time and their willingness to share their experiences and knowledge about the development of the SME project. They provided an invaluable source of information from which this thesis has benefited greatly. I am also indebted to Professor Walton for his assistance and generosity in providing me with the IStaR Reports and allowing me to use them in this thesis. These reports were a very important source of information for my study and added enormous credibility to the findings of this thesis. I wish to also thank the visiting academics at the University of Sydney, in particular Professor Geoff Whittington, Professor Axel Haller and Professor Chris Nobes for providing insights into the development of the SME project and for their suggestion of important people involved in developing the SME project. I am also grateful to Professor John Roberts, Chair of the Discipline of Accounting for providing me with much needed PhD study leave so that I could concentrate on finishing the thesis. This leave was indeed very helpful as it expedited the completion of my thesis. I would also like to thank the Asia Pacific Interdisciplinary Research in Accounting’s Emerging Scholars Committee and the Discipline of Accounting for funding the field work of this study. This funding made it possible for me to attend some of the key meetings and conduct interviews in Europe and Nepal. I would also like also to acknowledge the University of Sydney’s Faculty of Economics and Business scholarship that I received during my candidature. I wish to pay tribute to my mum and dad for providing me with the strong educational background that enabled me to undertake PhD studies. I am grateful to them for always putting my education first before anything else in life. I have been able to undertake this study because of their inspiration and continuous support. To my husband Sushil, I thank him for his unfettered love and support and for being by my side throughout this journey. I thank him for his understanding and for enduring the long hours that I had to put into my study and for sharing the ups and downs of my PhD journey. His assurance that I can do this and was nearing the completion made me stronger and more determined. Finally, I would like to thank the Almighty God for guiding me though this process. I also thank God for giving me the strength and courage to successfully complete this PhD journey. Without his blessing, this may not had been possible. Abstract This thesis examines how and why the International Accounting Standards Board (IASB) added the project on Small and Medium-sized Entities (SMEs) onto its active agenda, and examines the complete SME project to understand the IASB’s standard setting activity. This study covers events from March 2000 to July 2009 and is important because it is the first to examine the IASB’s agenda setting activity and accounting standard setting in such depth. Conventional thinking since the 1950s has been that one set of reporting requirements should be applicable to all entities, regardless of size. From the time of its establishment in early 2001 the IASB’s constitutional mandate was to “develop in the public interest a single set of high quality ... accounting standards ... to help participants in the various capital markets of the world” (IASB, 2004: para 8, emphasis added). In 2009, however, the IASB promulgated an accounting standard International Financial Reporting Standards (IFRS) for Small and Medium Entities (SMEs), that seemed to overturn this thinking. This research applies historical research methods, observation at key meetings and interviews to carry out this study. This study employs a wide range of documents relating to the SME project and observations of key meetings. It also goes beyond the evidence in the public domain and includes 32 interviews with key people with an interest and involvement in the development of the standard. It also draws on International Standard-setting Report (IStaR) documents that provide detailed observer accounts of the IASB board meetings. Kingdon’s (1984) policy oriented agenda setting framework provides a means of interpreting the research material obtained. This framework identifies three streams—problem, policy and politics— to understand how issues gain entrance onto a policy maker’s agenda, and is also useful for interpreting the more detailed policy formulation. Key findings of this thesis show that the SME project was opposed within the IASB by both some board members and senior staff, who did not believe that the IASB had the mandate to produce another set of standards. There was a possibility that the project could have been blocked or sidetracked by those opposed to the project. Sir David Tweedie, the chairman of the IASB, removed these obstacles by seeking a change in the International Accounting Standard Committee Foundation (IASCF)’s constitution and creating a new senior position to direct the project. The director of the SME project reported directly to Tweedie. A legacy issue inherited from the IASB’s predecessor, the International Accounting Standards Committee (IASC), noted a “strong demand exists for more work on the application of accounting standards to reporting by small enterprises” (IASC, 2000: para 29). As the IASB discussed this issue with its stakeholders, this potential project on SMEs was extended to include developing countries. Before the SME project was added onto the IASB’s agenda in July 2003, the project focus was narrowed to SMEs. The IASB assumed that SMEs and developing countries had similar reporting needs and that by developing the SME standard it would address the needs of developing countries. The IASB added the SME project onto its agenda for several reasons. The IASB was under external pressure to develop a simplified set of reporting standards for SMEs. There were also other groups, including the United Nations Conference on Trade and Development (UNCTAD), the European Financial Reporting Advisory Group (EFRAG), and the International Federation of Accountants (IFAC), which had indicated they would step into the IASB’s standard setting domain if the IASB did not i commit to the SME project. This possibility seemed to be a threat to the IASB, which wanted to protect its standard setting domain. Even before adding the project on SMEs to its active agenda the IASB had identified its proposed policy proposal if it were to act which was to minimise divergence from full IFRS. When the IASB issued its discussion paper in June 2004, it identified multiple objectives for the project of which the two primary objectives were to focus on meeting the needs of users of SME financial reports, and to reduce the reporting burden on SMEs. One of the secondary objectives was to facilitate transition to full IFRS, and this secondary objective seemed to be consistent with the IASB’s earlier proposed policy to minimise divergence. During the course of the project the IASB increasingly concentrated on the secondary objective of facilitating transition to full IFRS. The IASB seemed to resist changes sought via the public due process that would have simplified the recognition and measurement criteria in the SME standard. However, private lobbying by other groups such as EFRAG seemed more influential in convincing the IASB to provide some recognition and measurement simplifications. The IASB claimed that it was developing a standard for SMEs that would also assist developing countries, but it used a narrowly defined concept of public accountability to determine which entities can use the eventual standard. SMEs were described as those entities that do not have public accountability and that publish general purpose financial statements for external users. An entity was deemed to be publicly accountable if it was trading in the public market to raise funds or if it was holdings assets in a primary fiduciary capacity. The criteria used to determine which entities can use the standard were inconsistent with the description of the standard’s target users.

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