AASB Research Report 16 Financial Reporting by Non-Corporate or Small Entities

Research Report 16 presents an overview of the academic literature on financial reporting by non-corporate and small entities. The Report’s overall objective is to answer key questions about the coverage of non-corporate and small entities’ reports, their user and stakeholder needs, and their compliance and regulatory oversight. 

Key findings from the literature review includes:

With regard to which entities should report and in how much detail:

There is some consensus in the academic literature about the: 

• mismatch between the needs of users and the information that is reported (often for compliance purposes) by non-corporate and small entities
• difficulties applying a conceptual framework targeted at for-profit entities to the reporting of not-for-profit entities.

Authors highlight the importance of:

• both financial and non-financial information
• mandatory reporting requirements
• oversight by large donors, auditors and government authorities.

Some authors raise concerns regarding the compliance burden that detailed reporting requirements will place on small entities. 

There is little research on the question of whether general purpose financial reports are required by users and resource providers in these sectors. In the public sector, GAAP is preferred over cash or statistical reporting, as is IFRS preferred over cash reporting in a New Zealand study . There appears to be support for the inclusion of budgetary and infrastructure reporting. Some users seek information to monitor management.

It is recognised by several studies that large donors are able to obtain the information required, whereas other users are restricted to financial reports. Non-financial information is wanted, and narrative reporting is valued. Performance information is also sought, although defining performance is an open question. 

The academic literature highlights breaches in compliance and misrepresentation in the financial reporting in this sector. Examples include late filing of financial statements, poor coverage of environmental issues, and diversity in reporting of art and heritage assets. This sector is subject to financial and reputational incentives to misreport, just like the for-profit sector. 

Notwithstanding the wide search of the academic literature performed (a total of over 400 articles were surveyed to arrive at the list included in the annotated bibliography), the literature does not directly address the reporting requirements for these sectors, nor does it offer a lot of guidance regarding regulation.