The temporal nature of legitimation: the case of IFRS8

Abstract

Legitimation can operate on an episodic or continual basis [Suchman, M.C. (1995). Managing legitimacy: Strategic and institutional approaches. Academy of Management Review, 20(3), 571–610]. We examine the temporal legitimation of the International Accounting Standards Board (IASB)’s actions during the adoption and review of International Financial Reporting Standard (IFRS) 8 ‘Operating Segments’. We conceptualise the controversy surrounding IFRS8 as an episode when the IASB sought segmental reporting convergence with the US standard, Statement of Financial Accounting Standard 131. Interpreting evidence from 15 (20) semi-structured interviews undertaken in 2009 (2011), before (after) entities reported under IFRS8, reveals its adoption precipitated an episodic legitimacy threat from selected audiences to the actions of the IASB. We discuss the IASB's attempt to influence legitimation for this episode through commitment to a post-implementation review [IFRS Foundation. (2011). Post implementation reviews: Plan for developing the framework for conducting post-implementation reviews. IASB Board meeting February 2011. Retrieved July 27, 2011, from http://www.ifrs.org/NR/rdonlyres/3E1502E4-F1E8-4907-838B-FFB20C7268ED/0/PIR02111st2ndb04obs.pdf] of IFRS8. Interpreting legitimacy concerns across diverse audiences about specific actions of the IASB (the introduction of IFRS8) enables us to draw conclusions about the resilience of the IASB as a standard setting organisation, in itself.

Keywords:

• legitimation
• IFRS8
• segmental reporting
• episodic
• temporal

Disclosure Statement

No potential conflict of interest was reported by the authors.

ORCID

Christine Helliar http://orcid.org/0000-0002-5497-9053

Notes

1 In 2002, the IASB and the FASB entered into a formal international alliance, signing the Norwalk Agreement where both committed to work towards the convergence of financial reporting in pursuit of stabilising global financial markets. As part of this agreement, the two standard setters instigated a short-term convergence project, identifying a number of standards that could be converged without major re-writes; this included converging IAS14 (Revised), which was published in 1997 by the IASC (1997) to regulate the disclosure of disaggregated information, with SFAS131 (Norwalk Agreement, 2002).

2 The IMF and WB recognise international standards in 12 policy areas related to their work; IASB pronouncements, together with standards issued by the International Audit and Assurance Standards Board (IAASB), ostensibly contribute towards rigorous and credible capital market infrastructure (IMF, 2011).

3 At the time or writing, 116 countries require IFRS ‘for all or most domestic publicly accountable entities (listed companies and financial institutions)' (IFRS Foundation, 2015).

4 Except for: (i) minor differences, as noted in the Basis for Conclusions and (ii) terminology changes that were necessary to comply with other IFRSs (IASB, 2006a, para Basis for Conclusions 60).

5 Before issuing ED 8, the IASB considered the findings from academic research about the introduction SFAS131 (which had been adopted in the US in 1997) and undertook ‘several meetings with users of financial statements' (IASB, 2006a, para Basis for Conclusions 7).

6 This is important because at the time of IFRS8's development and adoption, the IASB was pursuing convergence with the US FASB and focused on gathering evidence from US academic research relating to SFAS131 (IASB, 2006a).

7 Pragmatic and moral legitimacy have been the subject of previous studies but these examine the legitimacy of standard setters internally from the standard setters view point, rather than from the perspective of external audiences. Some of these internal examinations concentrate on the due process associated with the adoption of new standards, reflecting procedural legitimacy (Danjou & Walton, 2012; Durocher & Fortin, 2010; Jeppesen, 2010). Others focus on the engagement of certain constituents with the standard setting process via the strategic appointment of certain audiences to non-decision-making roles to gain influential legitimacy on various sub committees or working parties (Durocher & Fortin, 2010) aligning them with the standard setting process. A third group of studies have examined personal legitimacy through the roles of specific individuals that have been involved in the standard setting process. Such studies have covered formal standard setting structures at the international (Durocher & Fortin, 2010; Jeppesen, 2010; Power, 2010) and professional levels (Deephouse & Suchman, 2008).

8 Legitimacy for standard setters such as the IASB may be granted over time, in a dynamic process, through the repetition of practices (Georgiou & Jack, 2011; Suchman, 1995), such as those associated with the routine implementation of due process and adoption of new accounting standards. Hence each new standard introduced by the IASB represents an episode in its own legitimation that may enhance or damage continual legitimacy for accounting practice.

9 The temporal dynamic as it relates to the IASB in essence frames dispositional (interest) and personal legitimacy as elements of episodic legitimacy, and dispositional (character) and structural as elements of continual legitimacy. The legitimacy of the IASB's essence is out with the focus of the current research.

10 The dynamics of legitimation are presented here as distinct reasons as to why external audiences might give support to a practice (IFRS8). In actuality, each type of legitimation is not separable; they often interact with one another (O'Dwyer et al., 2011) and may ‘sometimes work against each other but more often [than not] reinforce one another' (Georgiou & Jack, 2011, p. 313).

11 Although it should be noted that there is a long history of segmental reporting being problematic for standard setters (Edwards & Smith, 1996; Emmanuel, Garrod, McCallum, & Rennie, 1999; Rennie & Emmanuel, 1992) and adopting IFRS8 was no exception.

12 A carve out had been granted to IAS 39, but this had not involved the European Parliament's comitology process.

13 Indeed, after IFRS8 had been introduced, the UK's Financial Reporting Review Panel (FRRP) expressed ‘concern about how companies [were] reporting the performance of key parts of their business in the light of the introduction of IFRS8'. In addition, the European Securities and Markets Authority reported back to the European Parliament that, although original concerns about a possible reduction in geographical disclosures appeared to have been allayed, issues remained about: the identity of the CODM; the use of non-IFRS measures; and the criteria for aggregating operating segments (European Securities and Markets Authority, 2011b). Similar issues have also been documented in a UK context (Crawford et al., 2012).

14 Geographic entity-wide disclosures only covered: (i) reporting revenues from external customers; (ii) reporting non-current assets and (iii) distinguishing between the entity's country of domicile and foreign countries in total. Further, entity-wide disclosures Revenues and profits by geographic area were no longer mandated in the new standard, unless an individual foreign country was material.

15 Hooks and Staden (2011) note that there are different approaches to analysing the content of documents, in their content analysis of environmental disclosures they demonstrate that the results from different forms of content analysis are highly correlated with each other.

16 Indeed, the European Parliament expressed concern in its endorsement instrument that segmental disclosures ‘must' be comparable (European Parliament, 2007), and that endorsement of IFRS had to have regard to the decision-useful criteria of EC Regulation (European Parliament, 2002).

17 This reflects user ‘lack of’ participation in the standard setting process (Botzem & Dobusch, 2012; Chiapello & Medjad, 2009; Durocher & Fortin, 2011; EC, 2007; Jorissen, Lybaert, Orens, & Van der Tas, 2012; Loft, Humphrey, & Turley, 2006; Richardson & Eberlein, 2011; Sutton, 1984; Young, 2006).

18 The PWYP coalition is a group of non-governmental organisations and charities that campaign for greater transparency of payments paid by companies operating in the extractive industries to governments of developing countries.

19 The interviewees do not represent a random sample, and any generalisations from their viewpoints might be problematic. However, care was taken to get a spread of views from across the different groups. Interviewees’ views may have changed over time but we were capturing their opinions on four particular issues and not the standard as a whole.

20 This was part of a larger study; in the full study, questions were also asked to explore stakeholders’ perceptions of the EU endorsement process (Crawford et al., 2010). Responses to this issue are not reported in the current paper. We asked the interviewees if they had submitted a comment letter to the ED associated with IFRS8. Some had responded on behalf of their regulatory bodies or sent in a comment as a representative of their audit firm. Thus, the views expressed in these comment letters were not necessarily the interviewees' own opinions. A number of these noted that their responses were supportive while others were critical. However, in general the four areas examined in this paper did not correspond exactly to the comment letter questions, apart from a question on the management approach. Hence, we have not attempted to cross check our analysis in this paper with any comment letter responses.

21 IFRS8 no longer allows companies to opt out of segmental disclosures on the grounds of commercial sensitivity.

Additional information

Funding

This work was supported by Institute of Chartered Accountants in England and Wales and The Institute of Chartered accountants of Scotland.