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Electronic copy available at: 0 MICHAEL BROMWICH, RICHARD MACVE, AND SHYAM SUNDER Hicksian Income in the Conceptual Framework M ICHAEL B ROMWICH IS P ROFESSOR E MERITUS OF A CCOUNTING AND F INANCIAL M ANAGEMENT , L ONDON S CHOOL OF E CONOMICS ; R ICHARD M ACVE ( [email protected] ) IS P ROFESSOR OF A CCOUNTING , L ONDON S CHOOL OF E CONOMICS ; S HYAM S UNDER IS J AMES L. F RANK P ROFESSOR OF A CCOUNTING , E CONOMICS , AND F INANCE , Y ALE S CHOOL OF M ANAGEMENT . Acknowledgements: We are grateful to Richard P. Brief for correspondence and to Mrs. Leena Baxter for access to the library of the late Professor Will Baxter and to relevant correspondence. Our thanks are also due to David Gwilliam, Mike Jones, Richard Slack, Ananda Ganguly, and Min Qi, as well as to participants in the Accounting Standards Board’s Academic Panel meeting, London, 4 November 2005; in the LSE Economics of Accounting workshop, 13 December 2007; in the BAA FARSIG Colloquium on The Future of Financial Reporting, London, 11 January 2008; in the EAA Annual Congress, Rotterdam, May 2008; in the AAA Annual Meeting, Anaheim CA, August 2008; and in the University of Sydney Accounting Research Seminar, 12 December 2008, for their constructive comments on earlier versions. We are also grateful for the advice of this journal’s editor and referees and for the accompanying commentary by Frank Clarke. The remaining faults are ours. © Michael Bromwich, Richard Macve, and Shyam Sunder, 2010 Corresponding author: Professor Richard Macve, Department of Accounting (A337) London School of Economics, Houghton Street, Aldwych, London WC2A 2AE, UK Telephone: +44 20 7955 6138 Email: [email protected] First draft: 24/07/2005; this version: 22 March 2010
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1 Hicksian Income in the Conceptual Framework ABSTRACT In seeking to replace accounting ‘conventions’ by ‘concepts’ in the pursuit of principles-based standards, the FASB/IASB joint project on the conceptual framework has grounded its approach on a well-known definition of ‘income’ by Hicks. We welcome the use of theories by accounting standard setters and practitioners, if theories are considered in their entirety. ‘Cherry-picking’ parts of a theory to serve the immediate aims of standard setters risks distortion. Misunderstanding and misinterpretation of the selected elements of a theory increase the distortion even more. We argue that the Boards have selectively picked from, misquoted, misunderstood, and misapplied Hicksian concepts of income. We explore some alternative approaches to income suggested by Hicks and by other writers, and their relevance to current debates over the Boards’ conceptual framework and standards. Our conclusions about how accounting concepts and conventions should be related differ from those of the Boards. Executive stock options (ESOs) provide an illustrative case study. JEL
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