Determining reporting entity boundaries in the light of neoinstitutional theories beyond the conceptual framework of IFRS

Abstract

As the financial crisis of 2008 demonstrates, wide discretion is provided by accounting rules for determining the reporting entity, especially with respect to special purpose entities (SPEs). In this paper, it is shown that the newly issued regulations of International Financial Reporting Standards (IFRS) 10 may not entirely solve the off-balance-sheet problem. As a result, consolidated financial statements may not provide useful information on the financial situation of the reporting entity with respect to the conceptual framework of IFRS. This paper presents an alternative concept in the light of neoinstitutional theories for determining the reporting entity with respect to proactive subsidiaries as well as to SPEs with and without autopilots. Specifically, the economic activities of the reporting entity are characterized based on property rights theory in a first step. Second, for SPEs, this paper tests whether these economic activities should be integrated into the efficient boundaries of the reporting entity based on transaction cost theory. The concept developed is evaluated by (1) analyzing it against the background of the conceptual framework of IFRS and the Exposure Draft ED/2010/2 “Conceptual Framework for Financial Reporting—The Reporting Entity”, (2) applying it to typical structures within the reporting entity, and (3) comparing its effectiveness to the effectiveness of the rules of IFRS 10.