The Equity Theories and the IASB Conceptual Framework

Abstract

The International Accounting Standards Board (IASB) staff members ‘recommend that the IASB confirm its view that financial statements should be presented from the perspective of the entity as a whole’ [IASB (2014) Agenda Paper 10E Project – The Conceptual Framework. Reporting Entity – Perspective. London: The International Accounting Standards Board. May 2014. Available at: http://www.ifrs.org/Meetings/MeetingDocs/IASB/2014/May/AP10E-Conceptual%20Framework.pdf (accessed 9 July 2014), para. 28], which implies adoption of the Entity Theory. This paper explains the value judgements and arguments supporting the main equity theories and their perspectives on financial performance and financial position. It identifies Residual Equity Theory, instead of Entity Theory, as the dominant equity theory in the 2010 IASB Framework and the 2013 IASB Exposure Draft. Hence, there is a discrepancy between the perspective from which the IASB thinks financial statements should be presented and the perspective actually underlying the definition, recognition and measurement of the elements of financial statements in the IASB's Framework and Exposure Draft. Finally, this paper argues for a careful reconsideration and justification of the equity theory the IASB chooses as the basis for its Conceptual Framework.

Acknowledgements

I thank Sardar Ahmad, Jo Locke, the participants of the Financial Reporting Council academic panel in March 2014, two anonymous reviewers, and the editor for their helpful and supportive comments.