Financial accounting: crisis and the commodity fetish
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( )Critical Perspectives on Accounting 1998 9, 567]599Article ID: pa970263
FINANCIAL ACCOUNTING: CRISIS AND THECOMMODITY FETISH
JOHN F. MCKERNANU AND PATRICK ODONNELL
Departments of UAccounting and Finance and Psychology, TheUniversity of Glasgow, Glasgow, UK
We analyse the controversy surrounding the UK Accounting Standards( )Boards ASB efforts to develop a Statement of Principles for Financial
Reporting. We employ advances in experimental research in the psy-chology of human decision-making to ground an immanent critique ofthe ideology of the fetishised commodity in financial accounting. Weargue that the controversy reveals the contradictions and crises tenden-cies immanent to financial accounting, and we contend that in pressingthe logic of commodity fetishism towards its ultimate rationality, ineconomic income, the ASB threatens to bring those contradictions, andthe remoteness of financial accounting from human use-values, intosharp relief. We suggest that this underlies the resistance the ASBsproposals have encountered in some quarters. We conclude by outliningthe implications of our analysis for the possibilities of an emancipatoryaccounting.
1998 Academic PressQ
The aim of socialism is to liberate the rich diversity of sensuoususe-value from the metaphysical prison-house of exchange-value} toemancipate history from the specious equivalences imposed upon it by
( )ideology and commodity production. Eagleton, 1991, p. 127
( )The UK Accounting Standards Board ASB recently published a draft1 (conceptual framework for financial reporting Accounting Standards
)Board, 1995 . The draft proposes, inter alia, that practice should movetowards a balance sheet orientated current value accounting model. Asmight well have been anticipated, the proposals have run into a wall ofopposition from preparers and auditors. In this paper we set out toexplore two questions. Firstly, why has the ASB adopted such obviously
Address for Correspondence: John McKernan, Department of Accounting and Finance,The University of Glasgow, 65]71 Southpark Ave., Glasgow G12 8LE, UK.
Received 4 November 1996; revised 14 May 1997; accepted 22 May 1998.
1045-2354/98/050567+33 $30.00/0 1998 Academic PressQ
J. F. McKernan and P. ODonnell568
controversial proposals? And secondly, why do the proposals provoke analmost visceral resistance in some quarters? It is not our intention togive full answers to these questions, and we will not draw on the vastliterature concerning the putative advantages and disadvantages of alter-native accounting models.
We analyse the ASBs proposals and the reaction to them in terms ofthe crisis tendencies which are immanent to capitalism; we investigatethe pressures and contradictions which have impelled accountancy in theUK to the edge of the abyss: ... the Accountancy Profession is stand-ing on the edge of a precipice and is in danger of taking a giant step
( )forward... The Group of Scottish Finance Directors, 1996, p. 358The paper contains seven parts. We begin by briefly contextualising
( )surrounding them, using Habermass 1976 exposition of the crisis ten-dencies immanent to advanced capitalism as an analytical framework. Inthe final part of the essay we return to the key issue of accountingsreflection of the commodity fetish}accounting as identity thinking}andconsider the implications for critical accounting.
Basic Income Measurement Alternatives
Accounting income may be determined in two fundamentally different( )ways. It may be calculated as the change in the worth net assets of
the business during a period, excluding the change resulting from thetransfer of resources to and from owners. This approach reflects along-standing consensus that business income must ultimately be under-
( )stood in terms of wealth enhancement see Gellein, 1987, p. 60 , and
Financial accounting: crisis and the commodity fetish 569
corresponds closely with certain conceptions of income developed byeconomists. It implicitly requires current value measurement of assetsand liabilities as it makes little sense to define income in terms of thechange between two balance sheets unless those balance sheets reflectsome measure of current value. In this paper we will refer to thisapproach as either the current value or economic income approach.
The alternative approach to income measurement allows only realisedgains to be recognised in accounting income. It requires the institutionof revenue recognition criteria and rules for the allocation of costs, that
(is, the matching of costs against recognised revenue see Paton &)Littleton, 1940 . We will refer to this profit and loss account orientated
method as the matching approach. It might seem that both systemsmight tend to produce the same results. This is not so} the currentvalue approach allows unrealised gains to be included in income whilstthe matching approach does not. Furthermore, the revenue recognitioncriteria applied under the matching approach are more demanding thanthe criteria for recognising changes in the value of assets and liabilitiesapplied under the current value approach. This is because the matchingapproach embodies the idea that revenue should only be recognisedonce it has been earned, that is, revenue recognition should be basedon performance. Financial accounting practice has been dominated bythe matching approach for almost all of this century2, and revenuerecognition criteria have been dominated by the concept of prudence.
The current value approach has theoretical appeal. However, the ap-proach is unattractive to both preparers and auditors3, and its translation
(from theory to practice has been difficult and highly controversial see)Miller et al., 1994, p. 142 . The American Financial Accounting Standards
( )Boards FASB efforts to develop a conceptual framework for accountingwere effectively derailed by the current value issue in the early 1980s.And experiments with its application, as current cost accounting, by
( ( )both the FASB Statement of Financial Accounting Standards SFAS No.)33 - Financial Reporting and Changing Prices, 1979 , and the Accounting
( ) (Standards Committee ASC in the UK, Statement of Standard Account-( ) )ing Practice SSAP No. 16 - Current Cost Accounting, 1980 , ended in
failure. The collapse of SSAP16, due to preparer non-compliance, re-(sulted in a serious loss of confidence by and in the ASC Whittington,
)1989, p. 195 .Despite the controversial nature of the current value issue, standard
setters have been unwilling to drop it entirely from their agendas. Inrecent years the FASB has issued a number of accounting standards
(requiring disclosure of fair value information see Barth & Landsman,)1995 . However, the FASBs approach has been cautious. They have
required fair value information principally in respect of financial instru-ments. And whilst initiating fresh proposals for the reporting of compre-
( )hensive income Financial Accounting Standards Board, 1996 they haverecognised that given the lack of preparer enthusiasm for the fullerapplication of the concept4 a project that considers all aspects ofcomprehensive income. including recognition and measurement of its
J. F. McKernan and P. ODonnell570
(components, is not practical at this time see Johnson et al., 1995, p.)133 . The same degree of caution has not been shown by the ASB in
The Way Ahead for UK Financial Reporting
The publication in 1995 by the ASB of its Statement of Principles forFinancial Reporting; Exposure Draft has brought the current value ac-counting issue back to the centre of contemporary financial reportingdebate in the UK. The exposure draft is wide ranging. We will focus oncertain key features which are particularly relevant to the concerns ofthis paper.
Gains and losses are defined in chapter 3 of the exposure draft asincreases or decreases in ownership interest, other than those relating to
(contributions from or distributions to owners Accounting Standards)Board, 1995, para. 3.47 . Ownership interest itself is defined as the
(entitys assets less its liabilities Accounting Standards Board, 1995, para.)3.39 . The determination of entity performance becomes essentially
derivative of the measurement of assets and liabilities in the balancesheet, and the key issue becomes getting the balance sheet right.Only a very small proportion of the 175 published responses to theexposure draft were positively supportive of the balance sheet orienta-tion put forward by the draft. Table 1 presents a basic6 analysis of ourinterpretation of comments on this issue.
Measurement is dealt with in chapter 5 of the draft, and a preferencefor current values is made plain: practice should develop by evolvingin the direction of greater use of current values to the extent that this
(is consistent with the constraints of reliability and cost, Accounting)Standards Board, 1995, para. 5.38 . Table 2 presents our analysis of
comment on this issue and shows that preparers and accountants tendto be quite clearly opposed to significant extension of the use of currentvalues.
The presentation of gains and losses is dealt with in chapter 6 of theexposure draft. It is suggested that the statement of total recognised
Table 1. Analysis of comment on the Statement of Principles For Financial Report-( )ing; Exposure Draft Accounting Standards Board, 1995 : on the proposals which
(favour the adoption of a balance sheet orientation comments alternatively)expressed in terms of a preference for the matching approach
Classification Number of Supportive Opposed No unequivocal( ) ( ) ( )of commentators responses % % comment %
Users 10 10 30 60Preparers 91 3 52 45Accountants 54 2 48 50Academics 12 ] 33 67Others 8 13 37 50
Financial accounting: crisis and the commodity fetish 571
Table 2. Analysis of comment on the Statement of Principles: on the proposal thatthe use of current values in accounts should be extended
Number Supportive Supportive in Opposed No( ) ( )% principle with % unequivocal
reservation on comment( ) ( )practicality % %
Users 10 40 ] 30 30Preparers 91 3 1 84 12Accountants 54 2 7 69 22Academics 12 ] ] 42 58Others 8 50 ] 25 25
gains and losses, a statement introduced by Financial Reporting Standard(No. 3}Reporting Financial Performance Accounting Standards Board,
)1992 , should become the key performance statement: In assessing theoverall financial performance of an entity during a period, all gains andlosses need to be considered. The statement of total recognised gains
( )and losses as its name implies reports the total amount of the gains(and losses recognised in the period... Accounting Standards Board,
)1995, para. 6.20 . The chapter 6 proposals would discard the traditionalrule that only realised profits appear in the profit and loss statementand would require that the profit and loss account, and the statementof total recognised gains and losses, report the gains and losses that
(arise in the period, irrespective of when they are realised Accounting)Standards Board, 1995, para. 6.25 . The distinction between realised and
unrealised gains and losses, which has been a cornerstone of conventio-(nal accounting, would be relegated to notes to the accounts Accounting
)Standards Board, 1995, para. 6.24 . Our analysis of comment on theproposal that the realisation principle be abandoned is shown in Table3. Few commentators supported this proposal. We have recorded com-mentators as opposed to the ASBs proposals on any issue only wherethey have made specific statements to that effect. This issue did notexcite as high a volume of direct comment as the proposal that greateruse be made of current values. Many of the comments opposing greateruse of current values could be more liberally interpreted as opposingany change to the tried and trusted historical cost and realisationbased accounting model. We thus consider that Table 3 probably under-states the extent of real opposition to the ASBs proposals.
Chapter 6 of the exposure draft goes on to draw a distinction betweenprofits or losses arising from operating activities and gains and lossesresulting from changes in the value of assets and liabilities held toenable those operations. The latter would be dealt with in the statement
(of total recognised gains and losses Accounting Standards Board, 1995,)para. 6.27 , and never feature in the profit and loss account. All other
gains and losses would be dealt with in the profit and loss account,( )Accounting Standards Board, 1995, para. 6.28 . The proposals wouldtend to lead towards a standardised profit being reported in the profit
J. F. McKernan and P. ODonnell572
Table 3. Analysis of comment on the Statement of Principles: on proposals whichwould abandon the traditional rule that only realised profit appears in the profit
(and loss account comment alternatively expressed in terms of support for the)prudence concept
Number Supportive Not No( )% supportive unequivocal
( ) ( )% comment %
Users 10 10 10 80Preparers 91 3 39 58Accountants 54 6 52 42Academics 12 ] 42 58Others 8 13 50 37
and loss account without regard to the terms of transactions that thecompany has undertaken. For example, revaluation of loans would leadto interest expense being recognised in the profit and loss account atcurrent rates irrespective of the contracted rate. The revaluation ofleasehold interests would standardise lease charges to the market rate,
( )irrespective of the lease terms negotiated Ernst & Young, 1996, p. 7 . Ineffect the profit and loss account would no longer present a full state-ment of gains and losses arising fro...