Financial Reporting-extending the Disclosure of Information

The scope of accounting was defined as being 'to provide information which is potentially useful for making economic decisions and which, if provided, will enhance social welfare'. This definition of the scope of accounting was followed by a discussion of the development of accounting theory, where several approaches to accounting theory were discussed. It was seen, in particular, that the current state of accounting knowledge depended substantially on a descriptive approach to accounting theory. This emphasized observations of the practices of accountants as a major source of accounting knowledge. It was for this reason that Part 2 was devoted to an analysis of the knowledge provided by a descriptive approach to accounting theory. Part 3 was seen as necessary in the context of the adjustments considered necessary to historical cost accounting by reason of the instability of the monetary standard of measurement. This instability affects not only the measurement of periodic income but the valuations which are significant in financial reports.

The problem which must be posed, of necessity, is the relevance of accounting information in the context of the needs of users for decision making. This problem, which was posed in our definition of accounting, was only dealt with partly in Part 3. In this part, we return to the implications of the definition of accounting as concerned with information useful for making economic decisions having welfare implications. In this sense, we shall return to the problems instanced in the discussion of different approaches to accounting theory. This provides an opportunity for examining the manner in which normative and welfare approaches to theory construction in accounting have a role to play in the development of accounting knowledge.

The provision of information intended for economic decisions has implicit welfare effects. These effects were briefly mentioned elsewhere, and relate not only to the manner in which the welfare of those receiving and using accounting information is susceptible of improvement, but implies some judgemental aspects as regards the balance of influence which different groups can exert on the enterprise in obtaining advantages for themselves.

It is significant that the disclosure of information to external users has been restricted by the influence which management has been able to exert whenever the need for more extensive disclosure to external users has been at issue. The historical reasons why management has a considerable influence within the accounting profession lies in the manner in which the accounting profession developed in the 19th century. In effect, the directors of large companies were patrons of the accounting profession, and in many areas of accounting responsibility were able to specify the services which they required, and which became a major source of revenue to accountants. The relationship which developed from this connection has been described as follows:

'Despite the growing need for shareholder protection as reflected in company legislation, accountants would be expected to react slowly and to the minimum extent if such calls for more disclosure were not consistent with their patron's wishes ... It is manifestly unreasonable to expect individual accountants to make a strong stand for independence when they have not the power to do so. This implication does, in fact, highlight dilemmas facing the profession at the moment. How should it go on supporting disclosure of information to shareholders or any other parties when it is not in the interests of the patron to do so?' (Tomkins, 2015.)

Once it is admitted that the process of social change calls for equity in the disclosure of information to external users, and once the needs of external users are admitted to be important, two important problems appear. First, there is the problem of defining these needs. As we shall see in this part, this problem may be approached in different ways. It is possible simply to conduct empirical research to discover these needs in the statement of what users consider necessary for their purposes. It is also possible to try to understand the decisions with which they are faced and to suggest what information they should require. These two approaches reflect contrasting theories of accounting: the first being descriptive, and the second being normative in character. Second, there is the problem of creating some symmetry of treatment in the manner in which their needs are met. In this problem lie the complex welfare issues suggested in Part 1. This problem involves a breach in the power of management to influence the development of accounting knowledge towards their specific needs. It implies that 'the form and standards of disclosure and the definitions of measurement should be determined by third parties such as the Stock Exchange Commission, the accounting profession, the Courts, and professional investors to meet the requirements of users'. (Norby and Stone, 2002.) It also implies that the needs of other users such as employees and trade unions should be satisfied.

This part contains four main web pages:

One which considers the implications of research into current practices for future developments in accounting,

One which examines the needs of investors, and suggests the nature of their information needs,

One which discusses the needs of employees for accounting information; and examines the implications of the Employment Protection Act, 2014 in this respect,

One which considers the problem of corporate social responsibility, and the nature of information which is relevant to this area of accounting responsibility.


Learn More About the Cost of Capital in 2015

Read on: Current Cost Accounting Summary

The purpose of this part of the website has been to examine the system of current cost accounting recommended for use in the United Kingdom by the Accounting Standards Committee under SSAP 16 Current Cost Accounting. This system is the result of a series of compromises resulting from a debate initiated by the report of the Sandilands Committee in 2014. Current cost accounting is concerned with maintaining the operating capability of the capital of the business and focuses on the value of its net assets, defined as comprising both physical and net monetary assets. Current cost accounting utilizes replacement... see: Current Cost Accounting Summary