Shaping Global Accounting Standards | LSE Activity Review

Financial reports can be used both to estimate future cash flows associated with debt and equity and to provide information about the management and oversight of the business. Search by Stefano Cascino and his colleagues indicate that goals make a significant difference in the type of information investors gather and how they use and value that information. This has contributed to a greater emphasis on the principle of stewardship as a cornerstone of financial reporting globally.

Impact Case Series — Research Excellence Framework (REF)

What was the problem?

Financial statements provide essential information about a company’s performance. Stakeholders who provide resources to companies, whether shareholders, banks or suppliers, rely on accounting information to support their decisions.

International Financial Reporting Standards (IFRS) are based on the International Accounting Standards Board (IASB) Financial Reporting Conceptual Framework. These common financial reporting standards improve overall corporate transparency, strengthen accountability and improve capital allocation. More than 50,000 listed companies in 166 countries are required or permitted to use IFRS to prepare their financial statements.

the Conceptual frame establishes a comprehensive set of concepts to assist the IASB in producing and revising accounting standards. The framework ensures consistency of accounting policies and helps firms, auditors and users (equity investors, creditors, lenders) to prepare, understand and interpret financial statements.

Financial reports can be used both to estimate future cash flows associated with debt and equity (the “valuation roll”); and to provide information about the management and oversight of the business (the “stewardship role”).

When the Conceptual frame was revised in 2010, the IASB removed the principle of stewardship as a separate objective. Instead, it focused on a single objective of “decision usefulness” for financial reporting, intended to cover both evaluation and stewardship objectives of financial statements.

However, some national standard-setters and accounting regulators have expressed concern that this undermines the usefulness of financial information in holding the management of public companies to account. High-profile corporate bankruptcies highlight the importance of managerial accountability and effective management as core concerns for investors, accountants, and regulators and standard setters.

What have we done?

Our research examined whether the objective of stewardship of financial information could be subsumed under a single overarching objective of “decision usefulness” encompassing both a valuation objective and a stewardship goal.

Of Systematic review of the academic literature on the use of financial information, we found that research exploring the effects of stakeholders’ objectives on the usefulness they attribute to accounting information was limited. The review concluded that there are significant variations in the use of information by capital providers and that they sometimes have competing objectives when using different sources of information together with the financial statements.

To address the lack of direct evidence on this issue, we designed a series of innovative survey experiments. We conducted 81 face-to-face interviews with investment professionals in 16 countries. This examined their assessments of the usefulness of the same financial reporting information for different purposes. the results indicated that the goals make a significant difference in the type of information investors collect and how they use and value that information. In particular, research has shown that the relevance of financial information depends on whether it is used for stewardship or evaluation purposes. When assigned a stewardship objective, investors prefer information that excludes factors beyond the managers’ control; for valuation, they prefer information that helps them predict future cash flows and understand the business.

The results of this research raise questions about the feasibility of a truly “general purpose” financial accounting regime prepared under a single objective of “decisional utility”. Specifically, these findings strongly challenged the focus of the 2010 study Conceptual frame on the valuation roll alone by pointing out the potential shortcomings of the assumption that a single set of financial information can serve multiple purposes. One size does not seem to fit all in financial reporting. The person evaluating the information determines the usefulness of the information to them.

What happened?

This body of research has helped re-establish standard setters’ attention to both aspects of financial reporting. The evidence he provided has catalyzed and informed discussions in the international financial sector ahead of the IASB’s publication of its revised version. Conceptual frame in 2018, and provided independent evidence reviewed by the IASB as part of the review process. In line with the research recommendations, the 2018 revised version of the Conceptual frame emphasizes the importance of financial reporting in assessing “stewardship” – the responsibility of managers to protect the interests of shareholders.

The Institute of Chartered Accountants of Scotland (ICAS) and the European Financial Reporting Advisory Group (EFRAG) have used the research to push for the reintroduction of the goal of responsible management as a central principle of Conceptual frame. Responses submitted by other major professional bodies – including the Financial Reporting Council – also cited the research and distinguished themselves by strengthening the case for these changes.

The research results were presented at the IASB board meeting in early 2014, and its Exposure draft subsequently suggested putting more emphasis on providing information to assess managerial performance. The stewardship objective was given much more prominence when the revised final version was released in 2018.

The 2018 Conceptual frame specifically clarifies why the information used in the stewardship assessment is necessary to achieve the overall objective of financial reporting. In particular, it clarifies that users need information about an entity’s resources, not only to assess the entity’s prospects for future net cash inflows, but also to understand how effectively and efficiently the management fulfilled its responsibilities.

Following these changes to the Conceptual frame, the research has contributed to a greater emphasis on the principle of stewardship as a cornerstone of financial reporting globally. Since Conceptual frame provides the fundamental principles guiding the IASB’s standard-setting process, the impact of its revision extends to individual financial reporting standards and their post-implementation assessments. Our work has therefore contributed to improving regulatory practices, in particular by improving regulators’ understanding of how capital providers use financial information. It also has far-reaching indirect implications for corporate financial reporting practices globally, as well as for auditors, investors, lenders and many other stakeholders.



  • This blog post first appeared as an impact of the LSE Research Excellence Framework case study.
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