Measurement in financial accounting: critical support for historical cost

Historical cost accounting properly interpreted, referred to as the monetary model, is critically evaluated as the main source of financial information relevant for assessment of money capital maintenance, and also as a major component of accountability of directors to shareholders. The formal representation of the elements of the accounting equation in the double entry calculus ( D E C ) portrays the relationships between the elements. Changes in assets and liabilities comprise the primitives of the system. General postulates provide the means for deriving a specific interpretation of the D E C from information needs of users. M o n e y capital maintenance and stewardship of money funds are the needs recognised as relevant in the monetary model. In this interpretation, capital is the money amount of the paid in capital, or "money equivalent" for assets contributed in a form other than money. Interpreted consistently within this framework, monetary profit takes on a unique and definite meaning, although due to future uncertainty its periodic measurement can be no more than a test reading. Central to this explanation is the identification of property rights as the qualitative, empirical property for conferring meaning on the elements of the D E C . For the money capital maintenance information need, ownership is the relevant aspect of property rights. As ownership (of property rights) is changed by contracts, contracts provide the means for the interpretation of changes in assets and liabilities the primitives of the system. Contracts express the consideration as an amount of money. O n execution, contracts give rise to transactions, with their consideration providing the quantity for recording the changes in the elements. The acceptance of transactions (via the money consideration) as the fundamental measurements (Willett, 1987, 1988) contributes to the transactions based research Furthermore, the contracts written by the company include those initial transactions with shareholders, the beneficial owners, when the money capital was contributed. Hence the link to money capital, and to the legal concept of money capital maintenance for the protection of the right of creditors to precedence over shareholders in the settlement of their debts. Writers from both sides of the Atlantic, economists and lawyers as well as accountants, over a long period of time have supported the need for financial information disclosing profits available for distribution. D u e to its future orientation, the concept of economic income does not appear suitable for this purpose. The economic context identified as relevant for this research is Post Keynesian economics, in which future uncertainty, contracts, transactions, money, and time past, present and future are specifically recognised for their role in the economic system. Current cash equivalents (CCEs) are selected as an alternative interpretation of the DEC to contrast with the monetary model. D u e to the emphasis of the property right to dispose of assets, assets and liabilities were interpreted as wealth. Although providing relevant information for the information needs selected (debt paying potential, potential for adaptation, and calculation of net exchangeable asset backing per share), C C E s do not appear to meet measurement theory criteria. However, C C E s do qualify under the conditions suggested by Vickrey (1970). Moreover, a series of surveys initiated by Chambers provided evidence of support for disclosure of measurement of the wealth of a company. Such disclosure would complement the disclosure of the traditional profit statement and balance sheet prepared using the monetary model. Each of these two models provides financial information relevant to different purposes.