Yuri Biondi

The double emergence of the Modified Internal Rate of Return: The neglected financial work of Duvillard (1755 - 1832) in a comparative perspective

Abstract This article aims at enhancing current understanding of the history of investment evaluation criteria based on discounting. Their emergence constitutes a challenging issue for scholars devoted to the history of financial economics, as well as to fundamental tools of economic analysis. Their history is analysed in a comparative perspective, starting with the neglected contribution of Duvillard as a reference case. More than two centuries ago, this French language scholar developed, by an optimizing analytical machinery, a financial measure technically similar to Modified Internal Rate of Return (MIRR). In order to assess his theoretical contribution in a comparative perspective, the author will try to briefly account for the different contexts where the financial measure has been invented twice. This approach, indeed, is concerned with the institutional changes and the theoretical developments they fostered. It analyses concepts such as time preference, techniques such as discounting and issues such as the ‘reinvestment problem’. On the one hand, the Past (especially around the eighteenth century) and Duvillards contribution is explored. On the other hand, the Present is reconstructed (in particular the late Fifties and later), especially the recent debate that re-invented the MIRR. This article will conclude with some comparative results.

Should Business and Non-Business Accounting Be Different? A Comparative Perspective Applied to the New French Governmental Accounting Standards

The French General Law of Finances of 2001 introduced a set of accounting standards including an explicit conceptual framework reconciling accrual basis accounting with the specific aspects of accounting for central government activities. This article analyzes this French set of accounting standards from a dualistic perspective that compares both business and non-business accounting. Three different views of accounting for business enterprises are addressed: the wealth-basis (static), the cash-basis, and the accrual-basis (dynamic). A dynamic view of the accrual basis is adapted to the specificities of non-business entities, including governments. The accounting representation is used here to explore further the nature and role of public sector activities within the economic system and their economic and monetary significance.

Formation of share market prices under heterogeneous beliefs and common knowledge

Financial economic models often assume that investors know (or agree on) the fundamental value of the shares of the firm, easing the passage from the individual to the collective dimension of the financial system generated by the Share Exchange over time. Our model relaxes that heroic assumption of one unique “true value” and deals with the formation of share market prices through the dynamic formation of individual and social opinions (or beliefs) based upon a fundamental signal of economic performance and position of the firm, the forecast revision by heterogeneous individual investors, and their social mood or sentiment about the ongoing state of the market pricing process. Market clearing price formation is then featured by individual and group dynamics that make its collective dimension irreducible to its individual level. This dynamic holistic approach can be applied to better understand the market exuberance generated by the Share Exchange over time.

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

Abstract Hyman Minsky’s view of the accounting structure of economy is essentially based upon ownership of wealth, cash flows and financial instruments as entitlements to both. Further accounting notions are introduced here that improve on Minsky’s financial analysis. From the accounting viewpoint, revenues and expenses, assets and liabilities are organized through economic entities that frame and shape cash transfers through an accruals basis of accounting. Including these ongoing entities and their accruals upgrades Minsky’s frame of analysis from both heuristic and theoretical viewpoints. Current international and US accounting standards and practices provide examples concerning leases, repos, special purpose entities, goodwill, depreciation and liquidation values, and mark-to-market valuation of corporate liabilities. Notably, banking and government agencies can then be understood as dynamic holistic connections that layer upon ownership of wealth and entitlements to it, generating a credit-debt economy that fundamentally differs from a “capitalist” economy. Among others, Schumpeter and Keynes originate this collective dynamic understanding of bank borrowing and government borrowing, respectively. Both borrowings can be and have been employed to generate investment, production and consumption that could not have been generated without them. Some implications for economic theory and analysis of financial stability, banking and money are developed.

Harmonising European Public Sector Accounting Standards (EPSAS): Issues and Perspectives for Europe’s Economy and Society

Abstract Accounting systems play a hidden but fundamental role as mode and instrument of representation, coordination and organisation for the public sector and its specific public action. Therefore, financial and accounting reforms transform, implement and reshape public policies as well as the working and very existence of public administration. Last March 2013, the European Commission started a relevant project with the intention to create harmonised “European Public Sector Accounting Standards” (EPSAS) and implement them in the Member States. Between 1995 and 2002, a similar project was already achieved for private sector accounting standards-setting, leading to adoption and implementation of International Financial Reporting Standards (IFRS) issued by International Accounting Standards Board (IASB). The EPSAS project should decide if public sector accounting standards-setting shall follow a similar pattern to converge towards the International Public Sector Accounting Standards (IPSAS) that transplant the IFRS in the public sector. This choice may have fundamental implications for the European (Monetary) Union, since public sector accounting and public finances are fundamental elements of its institutional framework. This thematic issue aims to provide analyses and perspectives on this ongoing public sector accounting harmonisation process in Europe, addressing its governance and contents, as well as its consequences and implications for Europe’s economy and society.

Money Without Value, Accounting Without Measure: How Economic Theory Can Better Fit the Economic and Monetary System We Live In

The financial crisis of 2007 was unanimously declared a liquidity crisis, and governments and central banks worldwide reacted by injecting massive amounts of fresh money to rescue the financial system. Whilst this response succeeded in effectively restoring ordinary inter-bank credit, it did not address the systemic issues raised by the crisis.

Cost of capital, discounting and relational contracting: endogenous optimal return and duration for joint investment projects

Concession, project financing and public-private partnership schemes are investment projects that are generally submitted to valuation criteria based on discounted cash flow analysis. The theoretical basis of these valuation criteria are now at issue. Pursuant to recent advances in relational contracting economics and behavioural finance, joint investment projects can be considered as special relational environments where the projects returns improve on alternative replacement opportunities. This article seeks to bridge the gap between new theories and widely used valuation techniques by providing a generalized approach to investment valuation. This article suggests reasonable valuation criteria that fit these new theoretical developments, including an endogenous optimal duration function that may be integrated into the projects contractual agreement.

What Do Shareholders Do? Accounting, Ownership and the Theory of the Firm: Implications for Corporate Governance and Reporting

In the last three decades, corporate governance and reporting have been confronted to a drift toward shareholders’ primacy and value, and the revival of old-fashioned proprietary views against entity views on the business firm. This paper develops an accounting perspective of the relationship between shareholding and the inner congeries of the enterprise entity. These congeries require an accounting system, instead of a market price system, to deal with. Theoretical insights and improved accounting reporting methods are then presented to better represent and control the relationship between shareholding and the business firm, based upon the distinction between shareholders’ income and equity from income and equity to the enterprise entity. This distinction is especially important in case of goodwill, asset revaluations and share buybacks, as well as share issuance (use) for employee benefits and business combination considerations. Absent this distinction, accounting systems might enable corporate Ponzi schemes (through the corporate shield) by insiders (either executive management or controlling blockholders) to the detriment of other stakeholders, including outsider shareholders, and the continuity of the business enterprise over time.

Should Merger Accounting be Reconsidered?: A Discussion Based on the Chinese Approach to Accounting for Business Combinations

In 2006, the China Accounting Standards Committee (CASC) issued its Statement No. 20, which permits both the purchase and pooling of interests (or merger) method of accounting for business combinations. The decision of the CASC in Statement No. 20 stands in contrast to the decisions taken by the US Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) which both eliminated the pooling of interests method. As a result of the issuance of CASC 20, along with similar pronouncements by the Japanese standard setters and other standards setting bodies, the goal of harmonizing international accounting standards has been faced with a lack of convergence in the area of accounting for business combinations. In this paper we examine the reasons for this lack of convergence in order to develop a reconciled framework. In particular, the Chinese standards setters have sought to develop an approach to accounting for business combinations which distinguishes between instances where the combining entities are under common control or not under common control. Using a relatively narrow definition of common control, both the FASB and the IASB have excluded business combinations among entities under common control from the scope of their respective pronouncements. The purpose of this paper is to analyze the reasons for the distinctly different approach taken by the Chinese accounting standards setters by comparing the provisions of FASB 141, IFRS 3 and CASC 20. Our analysis will show that the technical differences between the standards are based on different understandings of the underlying economics of business combinations (Anthony, 1987), which leads in turn to different representations of the combination process. We believe that a forthright recognition of these differences may lead to a reconsideration of the pooling of interests and merger methods in a new comprehensive framework.

Accounting Rules for the European Communities: A Theoretical Analysis

In the last decade, the European Union (EU) has reformed its accounting system, issuing its own conceptual framework and 18 accounting standards that draw upon the International Public Sector Accounting Standards (IPSAS) issued by the IPSAS Board. The aim of this article is to analyse this renewed EU accounting system that frames and shapes financial accounting and reporting of the European Communities (EC), in order to assess its capacity to “truly and fairly” represent EC economic activity as a non-business entity.