EDITORIAL
Jens Wüstemann and Sonja Wüstemann address a continuing and controversial debate in the accounting literature on rules versus principles as a basis for accounting standard setting. The authors' analysis considers how the current IFRS regime fairs with respect to internal consistency of accounting standards as well as the relationship between principles and rules to achieve consistent application in practice. The authors discuss the quest for consistency in U.S. GAAP, German GAAP and IFRS. According to the authors, the present IFRS regime fails to effectively ensure consistent application of accounting standards, mainly because of fundamental inconsistencies between the objectives, qualitative characteristics, and recognition and measurement criteria in the IASB Conceptual Framework which afford managers a significant discretion to choose between different accounting policies in the absence of clear guidance. The authors conclude that accounting regimes should not be based exclusively on principles. They recommend that there should be a set of high-level principles from which more concrete accounting rules are consistently derived. However, the authors acknowledge that further research is needed to determine if internally consistent accounting rules limit managers' judgments in the application of accounting standards and how such a system could be implemented; and what the content of IFRS would have to be to satisfy the authors' requirements for consistency.
Koji Ota's study exploits an interesting disclosure difference between Japan and other countries relating to financial forecasts. Most listed companies in Japan provide forecasts of the next year's key accounting figures, including sales, ordinary income, net income, earnings per share and dividends per share data (this information is provided simultaneously with the most recently completed year's actual accounting data in annual press releases). According to Ota this practice was initiated in 1974 at the request of Japan's stock exchanges. Although the forecasts are technically voluntary, Ota observes that nearly all companies comply with the voluntary requirement. Based on a large sample of data, Ota examines the value relevance of Japanese management earnings forecasts and their impact on analysts' earnings forecasts. Utilizing a valuation framework provided by Ohlson, firm value is expressed as a function of book value, current earnings and next year's expected earnings. Ota finds that management forecasts have the highest correlation and incremental explanatory power with stock prices relative to the three accounting measures used. Ota's analysis also shows that more than 90% of changes in analysts' forecasts are explained by management forecasts alone. Other findings suggest that financial analysts tend to rely heavily on management forecasts in part because of the relatively high accuracy of management forecasts in Japan.
Jan Richard Heier examines the Richmond slave market and the type of accounting practices used by the participants in the so-called ‘business of suffering’ just prior to and during the American Civil War. The article fills an important gap in a literature genre that has concentrated on the methods used to account for slaves in the antebellum American south and their related work and expenses, but has largely ignored the slave trade itself. To give historical context to the study, the author examines the content of records as they relate to a series of lawsuits filed against leading American companies that may have tangentially been involved in the slave trade during the 1850s. According to Heier, these records revealed a primitive, yet sophisticated, process to account for the consignment, purchase and sales of human merchandise.
The final piece in issue 1 is the EAA symposium on the foundations of accounting measurement, held at Tampere on 13 May 2009. This symposium continues the long search for the elusive fundamentals of accounting measurement. The presenters included Graeme Dean, Mary Barth, Andrew Lennard, Geoffrey Whittington and Richard Macve. All presenters were asked to consider matters related to current measurement issues facing standards setters worldwide. Particularly in focus were fair value (FV) implementation issues in many IFRSs, and the contemporary debate pertaining to the influence of mark-to-market (M-t-M or FV) valuations for financial institutions holding toxic assets underpinning the institutions' (and some commentators') special pleading to have SFAS 157 effectively modified. Dean's paper canvassed three particular issues: (a) canons of measurement; (b) politicization and special pleading—déjà vu; resulting in (c) professional failure to adhere to any canons of measurement. The paper raises a number of fundamental questions whether: (a) accounting measurement depicts quantitatively objects, events and expectations; (b) accounting measures be accepted that do not satisfy the additivity test; (c) accounting measures be accepted that are incapable of verification by external parties, like an auditor; and (d) thoughts about accounting measurement be progressed properly without first clarifying what is the function of accounting. Dean concludes that if these questions are not adequately addressed by standards setters, the latest conceptual framework effort could be reduced to another manifestation of Sterling's ‘recycling of ideas’. Lennard mounts a case for the use of replacement cost accounting. He argues that the basic premise which supports the widespread use of replacement cost is that, in many circumstances, it measures the extent to which the entity is ‘better off’ as a result of its ownership of the asset. However, he argues that while financial reporting would be enhanced by the use of replacement cost as the preferred measurement basis, it does not imply replacement cost should be the only measurement basis. Lennard reflects that ‘deprival value reminds us that it is necessary to be sure that replacement cost is recoverable and where it is not, for example in the case of impaired assets, other bases need to be used’.
Whittington considers the pros and cons for a single measurement basis in accounting. One of his basic premises is that markets are imperfect and incomplete, so that ideal unique market prices are not necessarily available for all types of assets and liabilities. He argues that an important source of imperfection in markets is the existence of information asymmetry, that is, not all market participants are equally well informed. Whittington argues that alleviation of information asymmetry through the exercise of accountability is the principal reason why accounts are needed. He argues that it is important that measurement methods be selected with the market context in mind and concludes that a single preselected measurement method may not best reflect market conditions or meet users' needs. Whittington further argues that deprival value is a possible measurement objective, overcoming some of the possible objections to fair value and other ‘ideal’ measurement approaches. Whittington concludes however that ‘Deprival value is consistent with our preferred approach but is not necessarily the best solution, although it is certainly the best developed in the existing literature’.
Macve appears to share similar views about deprival value to Whittington. He argues the age-old maxim that it is impossible to prove that any individual measurement approach is ‘Pareto superior’ to others for external users. Macve concludes that deprival value is not a measurement basis per se but rather a ‘rule’ requiring consideration of the various bases to determine which is the relevant outcome in each situation, that is, if the ‘best’ decision between alternative actions is made. Macve suggests that if managements reported deprival value and were to explain their balance sheet values by reference to what current external (market) benchmark prices (for both buying and selling) were available, that could be useful to external users.
Barth outlines the standard setting debate about measurement and observes that this is taking place in two parts—one is in the measurement phase of the International Accounting Standards Board's (IASB) Conceptual Framework (CF) project and the other is in the Fair Value Measurement (FVM) project. Barth concludes that the measurement section will guide the boards in developing financial reporting standards for the foreseeable future. The IASB also has a Fair Value Measurement project, the objective of which is to define the term ‘fair value’ when it is used in financial reporting standards. As a former member of the IASB, Barth is hopeful that the Fair Value Measurement standard will clarify what a fair value measure includes and excludes, which should increase understanding and facilitate further academic debate.
