Literature review on the use of information by capital providers

  • EFRAG (European Financial Reporting Advisory Group) (dk green) Image
  • Scotland Image

27 Dec, 2013

The European Financial Reporting Advisory Group (EFRAG) and the Institute of Chartered Accountants of Scotland (ICAS) have both launched projects aimed at understanding how capital providers use financial statements. In the context of these projects, EFRAG and ICAS have identified the need to take stock of the existing knowledge accumulated through academic research and have joined forces to commission an international team of academics to undertake a comprehensive literature review. The results of this review have now been made available.

EFRAG and ICAS believe that the IASB standard-setting process must be supported by a sound analysis and understanding of how the information that results from IFRS application is used. They also believe that the current revision of the IFRS conceptual framework will provide a good opportunity to integrate some of the lessons learned from the review and from further research into the IASB's standard-setting process.

The review was undertaken by a team of European academics and was aimed at answering the following questions:

  • Who are the key capital providers to companies in the European Union?
  • What decisions are capital providers making and what are the information needs for these decisions?
  • What information do these capital providers currently use to make financial decisions and assess stewardship?
  • How and for what purposes is this information accessed and used? In particular, what is the 'logic' of the models applied?
  • How important are financial statements for capital providers' decision making and assessing stewardship? How are financial statements used?
  • What additional information would capital providers consider to be useful?

Not surprisingly, the review revealed that financial statements are used in different ways by different capital providers who have different needs and different objectives. The authors of the review maintain, however, that more research into the topic is needed, especially empirical research into what information capital providers use, where and how they obtain the information and what additional information they would like to have. However, the authors feel that the initial results of the review already allow for drawing the following conclusions (reproduced from the report):


  • Standard-setters should focus on the competitive advantages of the financial accounting process when developing standards and financial reporting information should be designed to co-exist with competing information sources with other inherent weaknesses by providing reliable, verifiable data;
  • standard-setters need to decide whether they prefer to balance different user groups' interests on a standard-by-standard basis or to focus systematically on a specific subset of users when developing new standards;
  • standard-setters should consider the role of information intermediaries when developing new standards; and
  • standard-setters should consider the use of financial accounting information in contracting when making standard-setting decisions.

Please click for access to the full report on the EFRAG website.

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