Question

Explain the objectives of Public Sector Accounting in relation to Stewardship and Accountability

Answer 1

Objectives of Public Sector Accounting in relation to Stewardship and Accountability

Introduction

This paper has been prepared as a comment on the first Preliminary Views Discussion Paper (DP) issued by the International Accounting Standards Board (IASB) in July 2006 as part of its joint project with the US Financial Accounting Standards Board (FASB) to develop a common conceptual framework that both Boards can use in developing new and revised accounting standards.

IASB and FASB proposed that the converged framework should specify only one objective of financial reporting, that is being the provision of information that is useful to users in making an investment, credit, and similar resource allocation decisions (‘the resource allocation decision-usefulness objective’). The DP argued that this objective “encompasses providing information useful in assessing management’s stewardship” (‘the stewardship objective’). Two IASB Board members disagreed with this and argued in the Alternative View in the DP that stewardship should be identified as a separate objective.

Common themes in the comment letters on stewardship

In preparing this paper we carried out a detailed review of the comment letters received by the IASB and FASB on the DP. The common themes in the comment letters on the stewardship objective are drawn out in this section. To summarise, most respondents that commented on stewardship consider that the stewardship objective is about assessing management’s competence and integrity including the success of their strategy in managing the business. They state that one objective of financial reporting should be to serve as a type of dialogue between management and shareholders, providing shareholders with the information they need to make decisions, as owners of the business, including whether to reappoint or replace management; assessing the adequacy of management compensation, and considering management’s proposals about potential strategy changes as well as the success of past strategies. They argued that an assessment of stewardship was originally the primary objective of financial reporting under agency theory and is just as relevant today.

stewardship/ accountability

Few respondents actually defined stewardship or accountability. However, all those who did linked stewardship, directly or indirectly, to agency theory. The current IASB Framework makes similar inferences when discussing stewardship or accountability.“Financial statements also show the results of the stewardship of management or the accountability of management for the resources entrusted to it. Those users who wish to assess the stewardship or accountability of management do so in order that they make economic decisions; these decisions may include, for example, whether to hold or sell their investment in the enterprise or whether to reappoint or replace the management.”

Does it matter if the label is stewardship or accountability

some commentators have suggested that there are a number of different interpretations of the term stewardship in the comment letters One reason for this view may be that respondents appear to use the terms ‘stewardship’ and ‘accountability’ interchangeably in the comment letter

Implications of a separate accountability objective on financial reporting

It has been suggested that it would be useful if examples could be given demonstrating the implications for financial reporting of omitting stewardship/accountability as a separate objective. This section provides such examples. It is clear from the examples discussed below that stewardship/accountability has implications for recognition, measurement, and presentation issues. Implications of stewardship/accountability, therefore, cannot be discussed without “peeking ahead” to later phases of the conceptual framework project and this should be considered by both the Boards when considering further revisions of the conceptual framework.

Conclusion

There is a broad consensus amongst the majority of IASB and FASB respondents who commented on the stewardship/ accountability objective that it should a separate objective of financial reporting;

Stewardship/accountability is inherently linked to agency theory and is a broader notion than resource allocation as it focuses on both past performance and how the entity is positioned for the future. It should, therefore, be retained as an objective of financial reporting to ensure that there is an appropriate emphasis on company performance as a whole and not just on potential future cash flow;