Article Summary on Financial Accounting Theory

Posted: August 27th, 2021

Article Summary on Financial Accounting Theory

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Article Summary on Financial Accounting Theory

The article “The Historical Evolution from Accounting Theory to Conceptual Framework in Financial Standards Setting” by Richard Baker and Alain Burlaud briefs on the widely accepted debates concerning varied standard accounting practices. Both the American and European accounting theorists have occasioned debates on determining assets and liabilities, business performance, allowable dividend payments, taxation of corporations, and creditors’ protection during insolvency and bankruptcy. Since many countries’ accounting standards affect governments and enterprises’ behaviors, many stakeholders do not participate in setting the conceptual framework. Therefore, accounting standards do not represent employees’ interests, environmental and consumer groups, and the public at large.

With Germany undertaking the role of developing accounting doctrine under the German Code of Commerce in the 20^th century, there was a debate regarding how companies need to prepare books of accounts and balance sheets. Specifically, many accounting pundits differed on determining assets and liabilities at value during drawing up of inventory. For example, the theorists eventually agreed on valuing assets based on market value so that creditors could be settled first before stakeholders in the event of bankruptcy. On the contrary, the debate on whether to transit from the static approach of valuing assets to the dynamic method has conflicted with capitalist entrepreneurs’ thinking from capital providers. Indeed, different viewpoints of measuring assets/liabilities versus revenue/expense dominated the development of accounting theory. Consequently, the transition of static to dynamic approach was occasioned due to the importance of determining dividend payments.

Unlike the static approach to accounting standards, the dynamic measure seems compatible with fluctuations in assets and liabilities’ market value. The latter approach recognizes assets and liabilities at the historical costs by allowing for depreciation and amortization of the deferred charges. The viewpoint on the valuation of income by matching revenues against expenses regards the dynamic approach as the primary basis of accounting theory in the US. Nonetheless, varying arguments have emerged in the US concerning market values’ employment as the yardstick for accounting measurements. The argument is that value seems subjective to future prices. The American accounting pundits do not consider value as an object of measurement. Instead, they consider costs a practical element of measurement since it is a variable of profits and prices. Hence, in other words, the cost is regarded as a proper basis for measuring the inventory of unsold goods.

Despite accounting theory’s failure to set standard accounting practices for all countries worldwide, pundits have viewed standard-setting bodies as important. Precisely, the government and professional accounting bodies have partnered to facilitate legitimate financial information, leading to accounting standards’ enforcement. Enactment of Securities Acts of 1933 and 1934 has occasioned the establishment of the US standards-setting bodies intended to compel publicly listed companies to prepare an audit of their financial statements. Indeed, accounting theory’s replacement with the FASB conceptual framework has been relevant in reviewing the previous global financial crises.  International accounting standards are useful in reshaping the future of IASB and IFRS based on the implementation of proper global capital markets and business enterprises despite different political influences from different nations. Thus, standard-setting accounting processes contribute to the relevance of management practices at the expense of accounting theory reliability.