OVERVIEW On the Balance Sheet-Based Model of Financial Reporting.pptx - On the Balance Sheet-Based Model of Financial Reporting Overview A CRITIQUE OF

OVERVIEW On the Balance Sheet-Based Model of Financial Reporting.pptx

This preview shows page 1 - 5 out of 13 pages.

On the Balance Sheet-Based Model of Financial Reporting Overview
Image of page 1

Subscribe to view the full document.

A CRITIQUE OF THE BALANCE SHEET-BASED MODEL OF FINANCIAL REPORTING MICHAEL BROMWICH IS PROFESSOR EMERITUS OF ACCOUNTING AND FINANCIAL MANAGEMENT, LONDON SCHOOL OF ECONOMICS; RICHARD MACVE ([email protected]) IS PROFESSOR OF ACCOUNTING, LONDON SCHOOL OF ECONOMICS; SHYAM SUNDER IS JAMES L. FRANK PROFESSOR OF ACCOUNTING, ECONOMICS, AND FINANCE, YALE SCHOOL OF MANAGEMENT.
Image of page 2
A CRITIQUE OF THE BALANCE SHEET-BASED MODEL OF FINANCIAL REPORTING The balance sheet approach is problematic because it is at odds with how most businesses operate, create value, and are managed The alleged conceptual superiority of the balance sheet approach is unclear. If anything, one can argue that the concept of income provides a clearer and stronger foundation for financial reporting Balance sheet accounting is likely a major contributor to the substantial temporal decline in the forward-looking usefulness of earnings There are substantial problems with applying the balance sheet- based model of accounting in practice
Image of page 3

Subscribe to view the full document.

B. Sh. orientation of accounting standard-setting is flawed, for the following reasons: Accounting is supposed to reflect business reality, and thus the essential features of the financial reporting model need to reflect the essential features of the underlying business model. However, the balance sheet orientation of financial reporting is at odds with the economic process of advancing expenses to earn revenues, which governs how most businesses create value, and which represents how managers and investors view most firms. The adoption of the balance sheet approach was driven by conceptual considerations; standard setters argued that the concept of assets is more fundamental and logically prior to the concept of income. However, some
Image of page 4
Image of page 5
  • Spring '16

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern

Ask Expert Tutors You can ask 0 bonus questions You can ask 0 questions (0 expire soon) You can ask 0 questions (will expire )
Answers in as fast as 15 minutes