Geoffrey Whittington

Fair Value and the IASB/FASB Conceptual Framework Project: An Alternative View

This paper analyses various controversial issues arising from the current project of the IASB and FASB to develop a joint conceptual framework for financial reporting standards. It discusses their possible implications for measurement and, in particular, for the use of fair value as the preferred measurement basis. Two competing world views are identified as underlying the debate: a Fair Value View, implicit in the IASBs public pronouncements, and an Alternative View implicit in publicly expressed criticisms of the IASBs pronouncements. The Fair Value View assumes that markets are relatively perfect and complete and that, in such a setting, financial reports should meet the needs of passive investors and creditors by reporting fair values derived from current market prices. The Alternative View assumes that markets are relatively imperfect and incomplete and that, in such a market setting, financial reports should also meet the monitoring requirements of current shareholders (stewardship) by reporting past transactions and events using entity-specific measurements that reflect the opportunities actually available to the reporting entity. The different implications of the two views are illustrated by reference to specific issues in recent accounting standards. Finally, the theoretical support for the two views is discussed. It is concluded that, in a realistic market setting, the search for a universal measurement method may be fruitless and a more appropriate approach to the measurement problem might be to define a clear measurement objective and to select the measurement method that best meets that objective in the particular circumstances that exist in relation to each item in the accounts. An example of such an approach is deprival value, which is not, at present, under consideration by the IASB.

The adoption of International Accounting Standards in the European Union

Abstract This paper discusses the IASBs process of developing accounting standards for adoption by listed companies within the European Union. Issues addressed include the structure of the IASB, its role as a global standard setter and its programme. Particular attention is given to two topics that are both controversial and important, accounting for financial instruments and reporting financial performance.

Corporate Governance and the Regulation of Financial Reporting

Abstract This paper examines the inter-dependent role of corporate governance and financial reporting within the institutional context of listed companies in the UK. Four related issues are addressed: the nature of the current problems of corporate governance, the role of financial reporting as a palliative for these problems, the need to regulate financial reporting if it is to fill this role, and the form which such regulation is likely to take. It is concluded that improvements in financial reporting may be a necessary condition for improved corporate governance, but they may not be sufficient. Improvements in financial reporting are likely to be facilitated by some form of regulation, because of the need to devise a standard form which will aid inter-firm comparisons. Self regulation by professional bodies has emerged as the initial method of regulation, but this is unlikely to be a permanent solution. If the professional body has monopoly power, there will be pressure for a wider form of private sect...

The harmonization of accounting within the EU

The central concern of this paper is the international harmonization of financial accounting standards, and, in particular, the respective roles in this process of the EU, the IASC and national standard setters. The institutional framework, historical background and current achievements of accounting regulation by both the EU and the IASC are surveyed and compared. Current and prospective developments are identified, and it is suggested that a critical phase has now been reached in the relationship between the two bodies. The role of national standard-setting bodies is also considered, and the two authors offer their individual views on the problems of international accounting harmonization from the perspectives of their own countries, Sweden and the UK respectively. The paper concludes with a discussion of policies which may enable the national and international standard setters to work in a mutually supportive rather than a competitive manner.

Deprival value and fair value: a reinterpretation and a reconciliation

Abstract Measurement is an important current issue for financial accounting standard-setters. Current values are increasingly replacing historical cost measures, but an important unresolved issue is the precise form that current value should take. In this paper two alternative measurement bases that have appeared in accounting standards. Deprivai Value (sometimes called Value to the Business) and Fair Value, are explained and compared. They are then reconciled by making the following three adjustments to their conventional definitions. (1) In the case of Deprival Value, situations in which net realisable value exceeds replacement cost imply that there is a profitable redevelopment or redeployment opportunity, so that net realisable value is regarded as the appropriate measure of Deprivai Value. (2) In the case of Fair Value, transactions costs (including installation and removal costs) are added to acquisition values and deducted from disposal values. (3) In the case of Fair Value, it is assumed that net realisable value represents the ‘highest and best use’, except when it is exceeded by both replacement cost and value in use. In the latter case, ‘highest and best use’ (and therefore Fair Value) is inferred by assuming profit-maximising behaviour by the owner. It is suggested that the resulting synthesis represents a method of current valuation which is consistent with the objective of measuring the asset in terms of the economic opportunities that are available to its current owner in the condition and location in which it is currently to be found.

The Components of Accounting Ratios as Co-integrated Variables

Time series of accounting variables may often be non-stationary, i.e. they have a unit root, as in the common example of a random walk. This can lead to spurious results in time series regression analysis which uses such variables. The problem is overcome if the variables are co-integrated. This paper examines and tests the proposition that, where the variables are expressed in logarithmic form, calculating a ratio may capture the effects of co-integration. Thus, accounting ratios (calculated in logarithmic form) might be stationary, and therefore exempt from the econometric pathology associated with their component variables. Copyright Blackwell Publishers Ltd 1999.

The Working of the Auditing Practices Committee—Three Case Studies

Abstract This is a study of the development of three different auditing guidelines by the Auditing Practices Committee (APC) of the UK and the Irish Republic. The guidelines are those on analytical review, fraud, and general insurance business. The evidence is derived from the APCs archives and includes agendas, minutes, working papers and correspondence of working parties and of the main Committee, in addition to published sources. The evidence is used to assess the validity of the public criticisms that have been made of the APC and the possible effectiveness of the recent reforms of the system.

Mathews, Gynther and Chambers: three pioneering Australian theorists

Abstract This paper reviews the professional careers and contributions of three distinguished Australian academics, Russell Mathews, Reg Gynther and Ray Chambers, each of whom died recently. Particular attention is paid to their contributions to the debate on price change accounting, including the exchanges that took place between them on this subject. Price change accounting was a central issue in academic and professional debates of the 1960s and 1970s, when the trio were at the peak of their activity as academics. The paper also records the wide range of their contributions to accounting research, education, standard setting and public policy.

General Price-level Adjustment: Some Properties of the Edwards and Bell Method

Abstract The method of general price level adjustment proposed by Edwards and Bell differs from the traditional CPP method, insofar as it enables historical cost profit to be reconciled with real accounting income (CPP profit) by two steps within a single simple statement. Edwards and Bells contribution is clarified in this paper, by proving rigorously the two theorems which underlie their method of applying general price level adjustment to historical cost. A numerical example is used to illustrate pure historical cost, traditional CPP, Edwards and Bell general price level adjustment, and Ijiris dual, which is found to contain similar information to the Edwards and Bell system. This is followed by a discussion of Edwards and Bells preferred method of price level adjustment to a replacement cost base. This method of adjustment, applied to a current cost base, underlay FAS33 as modified by FAS82 in the USA. Finally, Edwards and Bells historical cost base is compared with a recent British proposal for a...

Unto Every One That Hath Shall Be Given: The Subject Areas Under The HEFCE Formula

The Higher Education Funding Council for England and Wales (HEFCE) has recently revised its formulae for the distribution of teaching and research funds between universities. The new formulae are intended to increase the transparency of the allocation process and reduce the reliance on historical patterns of allocation. Analysis shows that the coefficients (costs and prices) on which the formulae depend are estimated from historical data, so that reliance on historical patterns has not been eliminated. Moreover, the process by which the coefficients were derived is not transparent and the data used are not necessarily the most appropriate. Thus, the new formulae, which lead to significant shifts in the allocation of funds between subject areas, cannot be shown to have the transparency and sound empirical basis to which HEFCE aspires.