![]() The conflict of interest that surrounds performance measurement is not limited to the relationship between the entity and the recipient of the entity’s performance measure. 32–34) regards accountability based on the recording and reporting of an organization’s activities as a valid objective of accounting and emphasizes on performance measurement, which affects the economic interests of the organization and its various stakeholders. The perspective of this paper aligns with equity accounting, which supplies information affecting the distribution of payoffs generated by a firm, among various interested parties. ![]() We shall call the former “equity accounting” and the latter “operational accounting.” The other is accounting aimed at providing useful information for management and investor decisions, especially decisions concerning resource allocation. One is accounting aimed at reconciling the equities of shareholders and other interested parties inside or outside an organization, in order to achieve an equitable distribution of the proceeds or benefits from operations. In other words, equity is essentially a relative concept and depends on a norm of profit distribution among stakeholders of a corporation.ĪAA Committee on Foundations of Accounting Measurement (1971) recognizes two different categories of accounting: The amount of equity (shareholders’ equity) cannot be necessarily determined uniquely even though the amount of net assets of a firm is determined. However, equity originally involves a notion of a share or an appropriation, and accordingly an equitable distribution of business profit among its stakeholders (rather than claims on assets of a firm) should have been considered. In particular, shareholders’ equity is synonymous with a firm’s net assets under both FASB’s and IASB’s Conceptual Frameworks. ![]() We should critically examine the foundation of the current corporate accounting in order to design a more equitable and efficient corporate accounting in which business profit is attributable not only to shareholders but also to other stakeholders who contribute to its generation.Īccounting standard setters such as the Financial Accounting Standards Board (hereafter, FASB) and the International Accounting Standards Board (hereafter, IASB) typically do not make a sharp distinction between net assets, capital, and equity. Without firm-specific investments by employees and/or entrepreneurial activities by managers, the excess profit would never emerge. The ownership interest cannot generate the excess profit by itself. In this paper I reconsider the significance of the entity theory, which emphasizes an entity as an organization comprising various stakeholders and attributes business profit above shareholders’ expectations to an entity itself. If shareholders are not the sole residual claimants, it is necessary to revisit the proprietary theory under which equity is identical to shareholders’ equity. However, the existence of implicit contracts in corporate activities implies other residual claimants in addition to shareholders. We should note that, under the current corporate accounting system, shareholders are assumed to be the sole residual claimants. From this viewpoint, shareholders’ equity consists of retained earnings attributable to shareholders’ as well as invested capital provided by them. We may regard equity as the interest in the corporate capital itself. However, it is not the sole definition of equity. In both Financial Accounting Standards Board’s (FASB’s) and International Accounting Standards Board’s (IASB’s) Conceptual Frameworks, shareholders’ equity is synonymous with a firm’s net assets. In this paper I reconsider the concept of equity in corporate accounting from the perspective of the origin and attribution of business profit.
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