Lobbying on Accounting Standards: Evidence from IFRS 2 on Share-Based Payments

Abstract

Lobbying is an essential part of the International Accounting Standards Board (IASB) standard-setting process. There is still much to learn, however, about key aspects of the roles played and arguments employed by various constituents when lobbying practices do occur. This paper focuses on the regulation of share-based payments. As these transactions were under-regulated before International Financial Reporting Standard (IFRS) 2, we expect that the strong debate that occurred during the 1990s resulted in conflicting opinions when this standard was under discussion. To analyse lobbying behaviour and assess its influence on the IASB's decision-making, we conducted a content analysis of 539 letters addressing the documents issued by the G4+1 and the IASB preceding IFRS 2. Consistent with the rational-choice model, our analysis of lobbying activity shows that preparers constituted the most active group, particularly when the IASB started the project, whereas participation of standard-setters increased at the end, which is more consistent with institutional theory. A common strategy was to provide arguments merely on points of disagreement. Preparers and consultants constituted the only groups using economic-consequences arguments to disagree, but later enlisted conceptual arguments as well. The IASB considered only conceptual arguments, and no interested party had a dominant influence.

Acknowledgements

We would like to thank Juan Manuel García-Lara, Araceli Mora, the two anonymous reviewers, as well as the Associated Editor Steve Young and the Editor Salvador Carmona for their support and very useful comments during the development of this paper. Earlier versions of the paper benefited from presentations at the 3rd Workshop on Accounting and Regulation held in Siena and 30th European Accounting Association Congress held in Lisbon. This work is part of the research project ECO2008-06238-C02-01 funded by the Spanish Ministry of Science and Innovation and the European Regional Development Fund.

Notes

Some papers focus on one lobbying group, such as academics (Tandy and Wilburn, 1996); auditors (Puro, 1984; Meier et al., 1993); or preparers (Watts and Zimmerman, 1978; MacArthur, 1988, 1996; Guenther and Hussein, 1995; Schalow, 1995; Larson, 1997; Ang et al., 2000; Georgiou, 2002, 2004), more precisely on preparers that lobbied against SFAS 123 (Dechow et al., 1996; Hill et al., 2002). Others focus on several groups (Tandy and Wilburn, 1992; Kenny and Larson, 1993, 1995; Tutticci et al., 1994; Jupe, 2000; Larson and Brown, 2001; Stenka and Taylor, 2010). MacArthur (1988), Kenny and Larson (1993), Tutticci et al. (1994), Ang et al. (2000), Jupe (2000), and Stenka and Taylor (2010) also look at the content of submissions.

In particular, Haring (1979), Hussein and Ketz (1980), Brown (1981), Hope and Gray (1982), Coombes and Stokes (1985), Puro (1985), Brown and Feroz (1992), Rahman et al. (1994), Saemann (1995, 1999), Van Lent (1997), Jupe (2000), McLeay et al. (2000), and Kwok and Sharp (2005).

Despite its relevance, and perhaps due to its relative youth, the IASB has been considered in few studies. Georgiou (2010) examines the users' attitudes, Jorissen et al. (2011) analyse the stakeholders' participation, Orens et al. (2011) focus on preparers, and Larson (2007) considers lobbying of the IASB's International Financial Reporting Interpretations Committee.

The G4+1 was an association of the accounting standards-setting bodies of Australia, Canada, New Zealand, UK and USA. The International Accounting Standards Committee (IASC) participated as an observer. The G4+1 was disbanded in 2001 when the IASC was transformed into the IASB.

Between 2002 and 2006, the IASB received 103 comment letters per document on average; IFRS 6 received the lowest number (24), and the DP on share-based payments received the most (281).

EU Regulation 1606 and the Australian Financial Reporting Council announcement were issued in 2002, but there were earlier signals, such as the announcement made after the EU ministers' meeting in 2000 (COM 2000359, 13 June 2000).

This mechanism allows governments to use their power to force changes in the IFRSs, which could seriously impair the advantages of IFRSs as a common language, and, in turn, question the level-playing-field argument. This had already happened in 2004 when the EC used its endorsement power to eliminate several paragraphs from IAS 39 temporarily, and more recently in 2008, when it forced the IASB to modify IAS 39 and IFRS 7.

As a consequence of the accounting changes, US firms reduced the use of stock options. The Towers Perrin (2004) report states that many US companies redesigned their executive incentive plans in 2004 by a reduction of 16% in the value of long-term incentives and an increase of cash compensation.

The cost–benefit notion appears in the IASB Conceptual Framework as a constraint in the production of information. Whether or not this constraint should be applied in developing the standards is a different issue, but, as Schipper (2010) states, there is a misunderstanding about the notions of cost and consequences. Cost refers here to the incremental costs that stakeholders will incur when preparing and using the new information – costs that cannot be avoided. Consequences refer to the impact of a standard on the covenants and other restrictions based on the accounting numbers. Due to the worldwide use of IFRS, it would be extraordinarily difficult or even impossible to foresee all the implications of the standards, as they are not only company-specific (e.g. remuneration packages, borrowing restrictions), but also country-specific (e.g. impact on dividends, on corporate taxes, on regulatory capital). The regulatory authorities and the contracting parties could introduce changes, however, in order to avoid the consequences of the accounting changes.

Dechow et al. (1996) report that the FASB received 953 identical letters in a lobby against stock options. There were 455 other letters from preparers and 243 from other groups. In relative terms, the participation of other groups in the IFRS 2 due process is much more relevant.

Conceptual arguments against recognition were related primarily to problems with the definition of expense in the IASB Conceptual Framework, and with the reliability requirement. Lack of reliability and the special characteristics of employees' options were also employed in order to criticise the use of option valuation models to measure these transactions, and many respondents proposed the use of the intrinsic value as in SFAS 123. The use of the vesting date was rejected for such conceptual reasons as (i) obligations beginning and the equity instruments being issued at the grant date, (ii) contracts being established in terms of the value at that date, and (iii) inconsistencies between the Framework and the use of this criteria, as it would require a re-measurement of equity until that date. As for the economically based arguments, they were usually employed to reject recognition based on the competitive disadvantages of companies treating stock options as expenses and the convenience of maintaining a level playing field. Other respondents argued about the impact on taxes in their discussion of the valuation criteria and argued about income volatility when discussing the reference date – the latter being a common complaint.

The experience surrounding the changes in IAS 39 and IFRS 7 that occurred in 2008 questions this assumption, however. See the Minutes of Evidence by Sir David Tweedie, Chairman of IASB, taken before the Treasury Committee of the House of Commons of the UK Parliament (Tuesday 11 November 2008).

When the project began, there were five big auditing firms (the Big Five). After Andersen collapsed in 2002, however, the Big Five became the Big Four. In this paper, we refer to the Big Five/Four; Andersen replied during the first two comment periods.

When EFRAG produces the comment letters, it follows a due process as well, and requires comments to its constituency before considering them final.

We did not consider associations (65 submissions) or individuals (131 submissions), and there were 25 firms without data. Only 17 firms responded to both documents, and they are included in both samples. Two firms that had not been audited by the Big Five/Four were excluded from the auditor's analysis.

This analysis was replicated using EU companies and continental EU companies. The results remain consistent with those obtained from IFRS firms, except for the responses to the ED 2. We thank an anonymous reviewer for suggesting that we examine this angle.