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Abstract
The 2015 International Accounting Standards Board (IASB) Conceptual Framework Exposure Draft (2015 IASB CF ED) proposes a mixed valuation and transactions approach to income determination. Nevertheless, it does not clearly choose between single or dual concepts of profit, which renders the 2015 IASB CF ED’s financial accounting model somewhat incoherent. The 2015 IASB CF ED proposes a rebuttable presumption that profit or loss should be all-inclusive. Only the IASB can rebut this presumption, but the 2015 IASB CF ED provides no clear conceptual basis on which to rebut this presumption. In spite of considering dual measurement, the IASB believes that it is neither possible, nor necessary, to distinguish between profit or loss and other comprehensive income (OCI) on a conceptual basis. This paper suggests that the 2015 IASB CF ED’s approach to measurement can be improved by introducing a deprival value measurement rule in cases where fair value and historical cost are not appropriate. Furthermore, it argues that under dual measurement it is both necessary and possible to make a conceptual distinction between the realised items of income and expense in profit or loss and those recognised by accretion in OCI.
Acknowledgements
Yuko acknowledges the hospitality of the Open University during the period from August 2016 to August 2017.
Disclosure Statement
No potential conflict of interest was reported by the authors.
Notes
1 Barker actually referred to the 1989 International Accounting Standards Committee (IASC) Conceptual Framework which had been adopted without any amendment by the IASC’s successor in 2001.
2 Linsmeier (Citation2014, Citation2016) provides some insight in the criteria considered by the FASB and the IASB in December 2011. See for further discussion of those criteria Rees and Shane (Citation2012).
3 ‘Financial information has predictive value if it can be used as an input to processes employed by users to predict future outcomes’ (IASB, Citation2015a, p. 2.8).
4 ‘Financial information has confirmatory value if it provides feedback about (confirms or changes) previous evaluations’ (IASB, Citation2015a, p. 2.9).
5 These come down to developed capital markets, active individual and other investors, an active take-over market, competitive product, financial and human resource markets.
6 The Allocation problem in Financial Accounting, Studies in Accounting Research No. 3 (Thomas, Citation1969) ‘was an attempt to demonstrate that financial accounting theory had no defensible theory of allocations (…) (and) to persuade theorists to abandon research into allocation in favour of more productive lines of inquiry’ (Thomas, Citation1974, p. xiii). Thomas (Citation1969) regarded the allocation problem as a problem solely associated with period and/or product matching. Subsequently, Thomas (Citation1974) attempted to eliminate any reasons for accounting theorists to continue to propose arbitrary allocations, claiming that allocation-free alternatives to accrual accounting did exist (Thomas, Citation1974, p. xiv). However, ultimately, he had to concede that financial reporting based on valuation at current entry values (e.g., Edwards & Bell, Citation1961) requires allocations (Thomas, Citation1974, p. 111) and that valuation at current exit values (e.g., Chambers, Citation1966, Citation1972 and Sterling, Citation1970) leads ‘to aggregation difficulties that mirror the allocation problem’ (Thomas, Citation1974, p. 112). By the way, these aggregation difficulties are not limited to an uncertain world with incomplete markets. The aggregation problems in respect of financial instruments are very clearly explained in Horton and Macve (Citation2000).
7 Although not specifically mentioned under the references, their quotations appear to come from the ‘Study Pursuant to Section 108(d) of the Sarbanes-Oxley Act of 2002 on the Adoption by the United States Financial Reporting System of a Principles-Based Accounting System’ prepared by the staff of the SEC (Available from https://www.sec.gov/news/studies/principlesbasedstand.htm#3b, accessed on 30 September, 2017).
8 Compare with Barker (Citation2015) who uses a comparison with economic income to make the point that the accounting model in the IASB’s Framework and IFRS is inherently conservative in that a neutral application of the IASB's definition of (net) assets leads to book value being less than economic value.
9 Horngren (Citation1965) did not literally use the term ‘accretion concept’ but that is the concept he was describing.
10 Penman (Citation2007, p. 39) lists cases where the one-to-one condition for fair value applies, including investments in securities in a trading portfolio, among others.
11 Surplus = Net assets − shareholders’ capital.
Clean surplus: Net assets = Shareholders’ capital + retained earnings.
Dirty surplus: Net assets = Shareholders’ capital + retained earnings + revaluation reserve.
12 Edwards and Bell (Citation1966) proposed a measure of replacement cost income. Into the 1980s, replacement cost accounting theorists were also very concerned with inflation.
13 Goodwill = Actual income−Expected income.
14 We thank David Cairns for pointing out that, in financial accounting, practical confusion between income and capital also depends on the strength of the links with the determination of distributable income and taxable income under the law in a jurisdiction. Taxing and/or distributing unrealised gains and losses is not unheard of, but it is usually not considered prudent.
15 The same point is made in Saito (Citation2011, p. 10).
16 In an attempt to reconcile deprival value with fair value Zijl and Whittington (Citation2006) assumed that any instance where net realisable value was greater than replacement cost implied a redevelopment or redeployment opportunity. They argued that this should make net realisable value a more appropriate value of the asset than replacement cost (Zijl & Whittington, Citation2006). At the time, fair value had not yet been decisively defined as exit value. In addition, the assumption in this paper is that fair value as exit value is only appropriate when Penman’s (Citation2007) one-to-one condition and the speculative business model apply. Therefore, although the attempt at reconciliation between deprival value and fair value is understandable against the background in 2006, it is no longer necessary.