From Compromise to Concept? – A Review of ‘Other Comprehensive Income’

This paper reviews how ‘other comprehensive income’ (OCI) entered financial reporting by tracing major Financial Accounting Standard Board (FASB) and International Accounting Standards Board (IASB) projects that required direct entries to equity and describing recent efforts to make sense of the practice. It was the fixation on net income that brought about departures from all-inclusive income, which were repeatedly made over the years without decidedly devoting attention to developing a conceptual basis. OCI was used as a compromise to incorporate current values in the balance sheet, while retaining historical cost principles in the income statement. When the practice was labeled as OCI, it became institutionalized without a clear meaning. A sense-making of the practice then replaced the debates on the adequacy of using OCI and standard setters have realized that additional layers of theory became necessary to explain, for example, reclassification adjustments. Yet, the IASB has made clear in its recent Exposure Draft of a revised conceptual framework that it does not intend to pursue a fresh start in performance reporting that appears to be needed conceptually. Instead, practical considerations, primarily on International Financial Reporting Standards adoption in Japan, seem to lead to another ex-post rationalization of OCI, this time around a conceptually vacuous use of the relevance characteristic

Inflation, Exchange Rates and the Conceptual Framework: The FASB’s Debates from 1973 to 1984

In this article, I explain how two economic forces of the 1970s and 1980s, volatile exchange rates and inflation, provided a constant and compelling backdrop to the FASB’s debates on its conceptual framework. While it has been acknowledged that rising prices contributed to a move towards greater flexibility in measurement, the role of fluctuating exchange rates has not been addressed so far. When, in 1976, a first foreign currency translation standard became effective, it sparked considerable controversy such that the FASB reconsidered the statement, embracing an exception to the allinclusive income concept. This seemingly ad hoc exclusion, which is now described as other comprehensive income (OCI), was to be addressed conceptually in the further course of the conceptual framework project. However, the Board was not able to agree on its recognition and measurement project, issuing a descriptive Concepts Statement No. 5. By abandoning further work on reporting income, the FASB included an insufficient ex post justification of OCI in SFAC No. 5. Without conceptual guidance on when to use the concept, the Board’s subsequent OCI decisions became vulnerable to political forces

The regulation of asset valuation in Germany

This article examines the regulatory history of asset valuation in Germany from the fifteenth century to the implementation of the European Economic Community's Fourth Directive in 1986. Aiming to explain regulatory changes by reference to preceding socio-economic and political developments, we find that accounting requirements often became more restrictive following economic crises, after which regulation was perceived to be inadequate. In the nineteenth century, fair valuation replaced the early practice of historical cost accounting. Following a severe economic crisis in the 1870s, historical costs were reintroduced as an upper valuation boundary for Aktiengesellschaften (stock companies). However, the requirements were unspecific and discretionary and provoked a lively debate on principles-based accounting after 1900. The interwar years and the Great Depression encouraged the Government also to implement historical cost as a lower boundary to asset valuation. Following the Second World War, the valuation principle was extended to all company forms. © The Author(s) 2013

Bright Pharmaceuticals SE: Accounting for a Business Combination under IFRS 3

This instructional resource familiarizes students with the accounting for business combinations under IFRS 3 and illustrates the uncertainty and professional judgment involved in asset valuation and consolidation. First, students need to assess the quality of information generated under IFRS 3 and fair value accounting. Second, they are asked to account for a business combination by identifying possible input parameters to measure several intangible assets and a contingent liability. Based on their valuation results, they compute the amount of goodwill recognized on the acquisition and assess the effects of their parameter choices on the values of different assets and liabilities. As an optional third task, the case asks students to consolidate the financial statements and evaluate the impact of the acquisition on the financial position of the acquirer. © 2013 Copyright Taylor and Francis Group, LLC

Bleak Weather for Sun-Shine AG – A Case Study of Impairment of Assets

This case originates from a real-life business situation and illustrates the application of impairment tests in accordance with IFRS and U.S. GAAP. In the first part of the case study, students examine conceptual questions of impairment tests under IFRS and U.S. GAAP with respect to applicable accounting standards, definitions, value concepts, and frequency of application. In addition, the case encourages students to discuss the impairment regime from an economic point of view. The second part of the instructional resource continues to provide instructors with the flexibility of applying U.S. GAAP and/or IFRS when students are asked to test a longlived asset for impairment and, if necessary, allocate any potential impairment. This latter part demonstrates that impairment tests require professional judgment that students are to exercise in the case