Analysing the impact of the transition from an historical cost to a fair value model of accounting for preparers, auditors and users of the financial statements of listed companies in Malta – An island state economy

Abstract

International Financial Reporting Standards (IFRSs) are moving away from being based on an historical cost model of accounting towards one based on fair values. Such changes have implications for the preparers, auditors and users of financial reports. While much attention has been focused on the technical aspects of the transition to fair value accounting, there has been almost no consideration of the impact of these changes on those who prepare, audit and use financial reports.
International Accounting Standards and, subsequently, IFRSs have been incorporated into Maltese company law since 1995. More recently, as a Member State of the European Union, Malta has been required to incorporate IFRSs (as modified by the EU) into its national law. This thesis explores the impact of the transition towards fair value accounting on the preparers and auditors of the financial reports of Maltese listed companies.
An exploratory, inductive approach is adopted which uses the grounded theory method (Glaser & Strauss 1967) to understand the effects on the patterns of behaviour of the preparers, auditors and users of financial reports arising from the transition to fair value accounting. Interviews were conducted with those responsible for the preparation of the financial reports of those companies listed on the Malta Stock Exchange that experienced such a transition as well as with the companies’ auditors.
The main themes that emerge from the first analysis of the interview material relate to the perceived near absence of markets for assets in Malta, concerns about the understandability of fair value accounting for users of financial reports, and the perceived primacy of the income statement. These themes were identified after transcribing and analysing the interview data collected. However, themes as an output of analysis are insufficient, as grounded theory necessitates the conceptualisation of the data. Moreover, the research was driven by analysis that required further theoretical sampling and thus interviews were carried out with users; namely, stock-brokers and investors. Additionally the analysis required theoretical sampling from a country that has a similar set-up to Malta; thus, Trinidad & Tobago was selected for data comparison in this regard.
This theory is developed through the iterative process of constant comparison and analysis of the interview material as well as online data and listed entities’ financial reports. The theory contended that there is a tension between the regulatory framework and the determination of the dividends being proposed by companies. Such a tension evolves from users’ lack of understandability of what fair value adjustments represent; for example, unrealised positive amounts being treated as available for distribution. The resolution of this tension is seen to be through a “meaning-making process”.
This “meaning-making process” refers to the latent patterns of behaviour engaged into by preparers, auditors and stock-brokers throughout all six stages of the financial reporting process i.e. from the preparation and review of the financial statements right through to their approval by the shareholders gathered at the AGM. Thus, a process of funnelling, jargonising, pre-empting, briefing, elaborating, explaining and clarifying is engaged in.
The research contributes to interpretive accounting research by developing explanations of the effect of fair value accounting on significant actors in an island economy.

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