The Pure Logic of Accounting: A Critique of the Fair Value Revolution

Abstract

When international accounting standards were renamed to become international financial reporting standards, this seemed to imply that accounting no longer needed to exist, but rather had to be reconsidered as a part of financial communication and advertising. Does traditional accountability no longer matter? Betrayed investors and globalized stakeholders would dissent. A difference of nature continues to exist between fair values disclosed by managers and certified by auditors, and the actual performance generated by the enterprise entity through time, space, and interaction. In a world shaped by complex organizations facing unfolding changes, hazard and limited knowledge, the quest for fundamental principles of accounting is not academic. Accounting principles constitute a primary way that the creation and allocation of business incomes is governed; that is, fairly managed and regulated in the public interest, having respect to "other people interests." This article adopts a dualistic posture that opposes the accounting conceptual frameworks based on fair value (market basis) and historical cost and revenue (process basis). The fundamental premises about the underlying economics of the enterprise entity are discussed, including the representation of the business and the concepts of asset and liability. References are made to the case of accounting for intangibles, and to the distinction between equities and liabilities. The cost and revenue accounting perspective is then defended in terms of accountability, but also from the informational viewpoint: historical accounting information plays a special role as a lighthouse in the dynamic and strategic setting of the Share Exchange. In particular, two refinements of the historical cost (and revenue) accounting model are suggested. The first one regards the treatment of earned revenues from continuing operations, and the second, the recognition of shareholders' equity interest computed on the actual funds provided in the past, coupled with the distinction between shareholders' equity and entity equity.

The International Politics of IFRS Harmonization

“…(This debate transcends international accounting and applies to accounting more generally. In fact, addressing this debate is one of the fundamental objectives of the Convivium: See Biondi, 2011, and Sunder, 2011. Baker et al, 2010, begin to develop a framework to address these questions.…”

On the Accounting Regulation for the European Private Sector

“…This work too, anyway, albeit often quoted did not seem to be a resolving solution to the problem, as within coulisses Englishmen first were used to comment "Two only persons in Great Britain know what true and fair is: professor Flint … and God!". The result was on one side the substantial absence of jurisdiction on t&f, on the other the paving the way to the so-called < diffused jurisdiction > , this obeying from case to case to different situations, values, and opinions as well (Biondi, 2011;Richard, 2005).…”

Hyman Minsky’s Financial Instability Hypothesis and the Accounting Structure of Economy

“…The recent drift into financialization has involved a change in the accounting model of reference, leading economic units to recognize and distribute accrued earnings (profits) earlier and earlier (Biondi, 2011, providing further references and analysis). This change has reshaped the accruals basis of accounting that is relevant for Minsky's financial analysis.…”