Reporting Entity Size and the Need for Accounting Information

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Reporting Entity Size And The Need For Accounting Information(*)

Differentiation in financial reporting on the basis of size and ownership characteristics has been an accounting policy issue for several years. Supporters of differentiation argue that there should be differences in accounting standards based on size and/or ownership characteristics in order to minimize the impact of "standards overload." The "standards overload" problem is typified by numerous accounting standards that are complex, costly to implement, and provide relatively insignificant benefits to small and/or private companies. Although the debate on "standards overload" emerged in the early 1970's, it continues to be an area of concern in the profession[4, 16, 22, 23]. Several professional committees have examined the problem and have made numerous recommendations that, to a large extent, support differentiation in financial reporting as a method of dealing with the issue.

While the incidence of a "standards overload" is widely acknowledged, there is considerable resistance to differentiation as a solution to the problem. One reason for such resistance is that key parties[e.g., 8, 9, 17] in the debate contend that user needs for accounting information are robust to variations in size and ownership characteristics of reporting entities. If this is, in fact, the case, there can be little justification for differentiation. On the other hand, the FASB's Statements of Financial Accounting Concepts (SFAC) 1 and 2 would justify differentiation to the extent that user needs are affected by variations in the size and ownership characteristics of reporting entities[8, 9, 13]. Thus, differentiation in financial reporting involves, among other things, a relevance issue that requires an understanding of the impact of size and ownership characteristics on the need for accounting information[11].

This article reports the results of a quasi-experiment that examines the association between the need for selected financial statement items and the size and ownership characteristics of a reporting entity. The research focuses

on the information needs of commercial loan officers in a lending decision. However, bank size and the behavior response repertoire of the user are incorporated into the research model in order to account for these sources of variability in user perceptions of financial statement information.

The need for thirteen financial statement items is examined. These items are divided into two categories, "control" and "key" items, in order to incorporate the extant philosophy in financial reporting that postulates that certain disclosures are important for all companies irrespective of their characteristics. Accordingly, the "control" items include disclosures that (a) have generated little controversy in the "standards overload" debate and (b) are perceived (by loan officers) to be just as important in evaluating a loan application for a small company as they are in evaluating a loan for a large company. These items, which are used for validation purposes, were identified via a pilot study and a series of interviews with commercial loan officers.

The "key" items, on the other hand, are those that proponents of differentiation have identified as being more complex and less relevant for small and closely-held companies. Presumably, proponents of differentiation view the need for these items as being affected by variations in size and ownership characteristics. Indeed, efforts toward differentiation in regard to some of these items already exist in financial reporting. In order to incorporate existing differentiation practices, the key items are further sub-divided into (1) a differentiated set made up of items for which differentiation has been formally implemented in accounting standards and are, therefore, not required in the financial statements of private companies (e.g., SFAS 21 and SFAS 33 [superseded]) and (2) a non-differentiated set made up of items for which differentiation has not been implemented (hereafter referred to as non-differentiated items). …