国際会計研究学会年報 2006年度

The Edwards and Bell Theory
as an Information Set Approach
Shuko Naito
International Graduate School of Social Sciences
Yokohama National University, Japan

Abstract
In this paper,we investigate the concepts of ﬁnancial performance in the Edwards
and Bell theory. M any prior studies tried to show the contributions of the Edwards
and Bell theory. However, there is no study on ﬁnancial performance, whichinvestigated their proﬁt concepts from accounting views such as“Asset and Liabilityview”and “Revenue and Expense view.”
Consequently we conclude that ﬁnancial performance is deﬁned in two dimensions. The theory implies that the combination of the components is not only basedon Asset and Liability view but also on Revenue and Expense view. Thus, in orderto present proﬁt components, they exploited the “dual bottom line”disclosure.
The Edwards and Bell theory has three proﬁt concepts: accounting proﬁt, realized proﬁt and business proﬁt. Each of the proﬁt concepts is combination of four
proﬁt components, such as current operating proﬁt, realizable cost savings, realized
capital gains and realized cost savings. Through the process of proﬁt determination,
we separate the proﬁt regarding activities: operating and holding. This feature canbe used as an information set approach to solve reporting problems regarding
ﬁnancial performance.
The information set approach is an idea accepted in the United Kingdom,that canbe explained as follows: “the performance of complex organisations cannot besummarised in a single number and has therefore adopted an ʻ
information setʼ
approach that highlights a range of important components of performance”in FRS(Financial Reporting Standard) No.3.
We may consider the subject following two points. First,we need to consider whatkind of data should be disclosed related to the ﬁnancial performance. Each item ofﬁnancial statements is not statistical data. Thus, it is worthwhile to reexamine themeanings of proﬁt components in the Edwards and Bell theory.
Secondly,we should examine whether the Edwards and Bell theory is based on the
two accounting views. Regarding current trends where Asset and Liability view
seems to be superior to Revenue and Expense view, the Edwards and Bell theory
suggests a clue to solving problems regarding reporting ﬁnancial performance.
Recently, the ﬁnancial reporting is controversial since the joint “performance
reporting” project by the ASB (Accounting Standards Board). This debate iscurrently studied extensively by the IASB (International Accounting Standards
Board) in collaboration project with the FASB (Financial Accounting Standards
Board). Since the convergence of accounting standards is a fundamental issue, weshould focus on problems on classiﬁcation of performance. It is necessary toreexamine the performance of the ﬁrm in the ﬁnancial statements from the information set approach. This approach means a departure from a single performanceindicator.
Since the Edwards and Bell theory splits proﬁt regarding activities, the notablefeature propose solutions to the ﬁnancial performance problem. We will conﬁrm
that since ﬁnancial statements are fundamentally related with and based on thesame underlying data, the deﬁnition of performance is originated from the Edwards
and Bell theory.

1271. Introduction

Nakamura (2005) mentioned that this
discussion of ﬁnancial performance start-

A bewildering problem, common toed primarily in the 1930s in the United

ﬁnancial statement presentation, is theStates with a developing stock market.

meaning of disclosed ﬁnancial data and

The information set approach has theaccounting models used to generate such

sort of impact, so that it is natural to takedata. The meaning of disclosed ﬁnancial

up the problem from the information set

data is usually related in one sense toapproach, which means a shift from a

proﬁt components and combinations of

single performance indicator.

the components in ﬁnancial statements.

Some problems with accounting models

The Edwards and Bell (hereafter, E&B)

have been discussed in FASB discussion

theory is widely noticed as a theory tomemorandum (1976), and it revealed

split proﬁt into segments regarding activi-that there are two accounting models:ties. The separation of the proﬁt into

“Asset and Liability view”and “Revenue

plural parts reveals tantalizing clues a-and Expense view”. The deﬁnition of thebout reporting problems of ﬁnancial per-accounting models is given in Section 4.

formance as an information set approach.

In FASB discussion memorandum

The information set approach is the(1976), the both views assume articulated

idea in FRS (Financial Reporting Stand-ﬁnancial statements. A view of nonar-ard) No. 3 in the United Kingdom. Al-

ticulated ﬁnancial statements is discussed

though the deﬁnition will be presented

as well. For the moment,we shall conﬁne

fully in Section 3, the outline of the ap-

our attention to articulated ﬁnancial

proach is that the performance of com-statements. Financial statements are fun-plex organisations cannot be summarized

damentally related and are based on thein a single number and has therefore

same underlying data〔FASB discussion

adopted the information set approach

memorandum (1976), para. 35〕, and thethat highlights a range of important com-thought is in E&B (1961).

1)

ponents of performance.

This paper is organized as follows.

Recently, the IASB (International Ac-

Section 2 furnishes descriptions of thecounting Standards Board) discuss the

E&B theory so as to clarify this theory,

problem regarding ﬁnancial performance

which adopts a decision usefulness ap-

in a joint project with the FASB (Finan-

proach. Section 3 surveys FRS No.3 withcial Accounting Standards Board) for

special emphasis on the information set

the convergence of accounting standards.

approach. In Section 4, we will begin by

Although E&B (1961) do not employ the term “articulation”itself, the thought is shown in theirfigure.

128

The Edwards and Bell Theory as an Information Set Approachconsidering confusion regarding ﬁnancial

pose of accounting as internal function

performance.

ﬁrst. E&B (1961) has written three kinds

Two accounting views,“Asset and Liability view”and “Revenueof business decisions:and Expense view”, oﬀer a clue to anunderstanding of ﬁnancial performance.

... accounting data serve as a means

Section 5 provides concluding remarks.

of protecting against fraud or theft ;but, much more important, the data

2. The Edwards and Bell
Theoryserve as a means of evaluating business decisions, thereby contributing(1) to the control of current events in

2―1 The Purpose of Accounting in thethe production process, (2) to the

Edwards and Bell Theory

formulation of better decisions in the
future, and (3) to the modiﬁcation

Tweedie and Whittington (1984) express a decision usefulness approach inof the decision-making process itself［p. 4］.

E&B theory best, when he mentions:
In addition to these interested parties,... the Edwards and Bell approachthey alluded to various outside users:

provides a broad set of information
about the eﬀects of both general andThat outside users ofaccounting data

speciﬁc price changes. This is con-such as stockholders, stock analysts,

sistent with the user-oriented view oflabor union oﬃcials, government

accounting which has become fash-

statisticians and policy makers［p.

ionable in both theory and practice5］.

during the past twenty years, andwith the view that there are a variety
of uses with a variety of information

This is what E&B has to say on thematter:needs［p.271］.
... just as management uses such data
E&B then list up varied interested par-primarily for purposes of evaluation,

ties. It is for this reason that the purpose

most external uses involve similarof accounting is useful for decision mak-evaluations. It should not be surpris-

2)

ing for a variety of information needs.

ing then if the same set of accounting

They get a mention concerning the pur-principles can be used to develop

The explanation of E&B approach, “true income”approach and “decision usefulness”approach are
fully developed in Revsine (1981).

129

data suitable to external as well as towhose sale value exceeds the value ofinternal users［p. 5］.

the factors, and (2) those that yielda gain because the prices ofassets rise

It is obvious that E&B intended the(or prices of liabilities fall) while

ﬁnancial statement, which is a composite

such assets (or liabilities) are in pos-of information to satisfy the needs ofsession of the ﬁrm. In the ﬁrst in-users. The E&B theory aims to develop

stance proﬁt is developed by using

data suitable to the variety of users espe-

factors; in the second it results fromcially for external users.

holding factors or products［p.36;

We would be inclined to interpret theitalics in original］.

authors E&B approves of suggesting that
nothing should be better than to have

As far as the discussions concerning E&

information of all sorts for people with

B, Tsujiyama observed that the joint

variegated needs.

The thought cannot

ASB IASB project on ﬁnancial perform-

possibly be true, for business is restrictedance had the idea which was based on E&

in resources. We shall now look more

B theory〔Tsujiyama (2004), p. 11〕. At

carefully into E&B regarding the criteriathat time, the issue is involved with divid-

for deciding the components.

ing proﬁt into two parts, such as changes

3)in current value and the other parts. It

2―2 Operating Activities and Holding

appears that the divided proﬁt bear someresemblance to the E&B theory.

Activities

The

theory proposes to make the distinction
For the purpose of E&B (1961), they
split proﬁt into two parts. It is necessary

between operating proﬁt and holding
gains.

for the evaluation of business decisions,

It was observed in this section that thethe accounts should be classiﬁed accord-

purpose of accounting intended for a

ing to the activity undertaken.

variety of interested parties. E&B theory

Theystate:

shows that the purposive proﬁt-making
activities of a ﬁrm can be conveniently

The purposive proﬁt-making activi-

divided into using and holding. Thus,

ties of a ﬁrm can be conveniently

operating proﬁt, which is developed by

divided into (1) those that yield ausing is separated from holding gains as a

proﬁt by combining or transforming

result of holding activities.

factors of production into products

The IASB agreed to take a fresh look at the problem in presentation of information in the financial
statements. The joint projects with the FASB expand scopes as financial statement presentation.

130

The Edwards and Bell Theory as an Information Set Approach

2―3 Four Proﬁt Components and ThreeProﬁt Concepts

historic costs on the irregular saleor disposal of assets.
D. Realized cost savings− the excess

For what has been discussed above, weof the current cost over the historic

can devote some space to the discussion

cost of inputs used in producingof three proﬁt concepts in the E&B theo-output sold.

ry: accounting proﬁt, realized proﬁt andbusiness proﬁt.

Each proﬁt concep isSecondly, an important point to be

combination of four proﬁt components

emphasized is that three proﬁt concepts

which are listed below.

contain four components A, B, C and D.

Two activities are key concepts for E&

The deﬁnitions of these three proﬁt con-

B. As two elements are classiﬁed regard-

cepts are given below to facilitate compar-

ing the activities such as operating andison〔E&B (1961, p. 121〕. They show:

holding. Four proﬁt components include
these companyʼs activities. Referring tofour proﬁt components, three proﬁt concepts are deﬁned.
First, we will make clear the basic components with which we shall deal. The
basic components are four in number:

It seems that E&B intended to separate

current operating proﬁt, realizable cost

proﬁt elements by the nature of activities.

savings, realized capital gains and real-

As one of the distinctive features in theized cost savings. The possible compo-

theory is “cost savings.” E&B (1961)

nents of proﬁt concepts can be summa-

refers to the saving in detail that “Anrized by E&B〔1961, p.115; italics in o-increase in the current cost of assets held

riginal〕:

represents instead a cost saving....［cost］
saving attributable to the fact that input

A. Current operating proﬁt− theused was acquired in advance of use.

excess over a period of the current

This saving is attributable to holding

value of output sold over the cur-activities ...［p.93; italics in original］.”

rent cost of the related inputs.

Hence, cost savings are one type of capi-

B. Realizable cost savings− the in-tal gains.

crease in the current cost of assets

To begin with,we will mention realized

while held by the ﬁrm during the

proﬁt in comparisons with accounting

ﬁscal period.

proﬁt so that we can identifythe nature of

C. Realized capital gains− the ex-

all four components. E&B are indiﬀerent

cess ofproceeds over (depreciated)to the mixture of component C and com131

ponent D in realized proﬁt,while accountty standpoint. One of the reasons for the

3. An Information Set Approach

mixture is that it does not matter for

3―1 An Information Set Approach ining proﬁt takes notice of it from an activi-

realized proﬁt whether the gains caused

FRS No.3

at irregular sale (or disposal) or not.
Realized proﬁt identiﬁes realized cost sav-

FRS No.3 stated that :ings while accounting proﬁt does not.
Accounting proﬁt, or rather traditional

The Board

believes thatthe

proﬁt shows a stage primarily for

performance of complex organisa-classiﬁcation method for information.

tions cannot be summarised in a sin-

Since they have a desire to show compo-

gle number and has therefore adopt-

nent A single, the component A is inde-

ed an information setʼapproach thatpendent as an absolute operating proﬁt.

highlights a range of important com-

This classiﬁcation is manifest in the man-ponents of performance［The devel-ner of their separation of proﬁt compo-

opment of the standard, para. iii;

nents by the nature of activities.

emphasis in original］.

Component D is included in cost savings when they adopt realized proﬁt as

We employ the term “an informationcompared with accounting proﬁt. The

set approach”deﬁned above. To sum up

nature is not from operating activities but

the basic characteristics of the informa-from holding activities. Cost savings aretion set approach, we can state that therealized through the use of assets in pro-approach is unfocused on a single num-

duction and sale〔E&B (1961), p. 112〕.

ber in bottom line and focused on a rage

E&B insinuate that they are willing toof important components.

eliminate component D from operating

discuss the issue on components, let us

proﬁt when they invent a new proﬁt con-draw attentions to the issue of the bottom

cept, that is, realized proﬁt.

line.

Before we

Component B in business proﬁt is

On website of the FRC (Financial Re-

mentioned by E&B taking inventories for

porting Council), they mentioned theexample. In order to record increases inbottom line also. Although we do not

the value of inventories held during the

purpose that we should deal with stand-year and related cost savings accruing,ard setting, it is interesting to note what

E&B carry the analysis a stage further

the website pointed out. Regarding theregarding holding,so the gains are includ-development of accounting standards,theed as cost savings.

website produces one of the ASB set
which itself proposes ﬁve principle objec-

132

The Edwards and Bell Theory as an Information Set Approachtives. It mentioned as one ofthe principal

information is classiﬁed ; all of the ac-

objectives that “Reverse the bottom lineʼ

counting ﬁgures are led from daily record

mentality by focusing performance re-rationally, of course, not hazarding a4)

porting on the components of income.”

conjecture that the management will suc-An overemphasis on the bottom line

ceed.

ﬁgure is one of the reasons for “creative
5)

accounting”practice.We have mentioned

3―2 Flexible Data in the Edwards andthis digression as we needed to explain

Bell Theory

the unfocused on the bottom line for
performance reporting.

In order to explain that each item of

We will clarify that the E&B theory has

ﬁnancial statements does not mean only

a common feature with the view of FRS

statistical data, let us reconsider proﬁt

No.3 regarding

the information set

elements in the E&B theory. For an illus-

approach. The preface of E&B (1961)

tration, we utilize E&Bʼs statement of

mentions:

proﬁt and loss. The statement can be

6)called “the statement of ﬁnancial perAccounting techniques are needed ...

formance.”E&B (1961) stated :which are suﬃciently ﬂexible to provide data for the business proﬁt con-

It has been our position ... that the

cept as well as for certain additional

primary function of accounting

proﬁt concepts, shown to be intimate-processes is to evaluate the existing

ly related to business proﬁt, but tech-made of production in a dynamic

niques which at the same time do notsetting［p. 285］.

burden the ﬁrm with the unnecessary
cost of multiple daily records［p. ix］.

Not all companies see the primary business in the same sense of production, so

According to this citation, we can em-

we need to take the economical context ofphasize further possibilities on proﬁt con-the E&B time into consideration. The

cepts as business income. It is reasonablepurpose of this quotation is to show E&B

to suppose that an idea of the information

assert that companies need to evaluate

set approach is equivalent to the idea inﬁnancial performance by accounting

the E&B theory.

data.

However, much the

See to the website (http: www.frc.org.uk students faqs.cfm #q7).
The website mentions briefly “creative accounting”is a journalistic term.
The proposals in FRED No. 22 retain the information set approach of FRS No. 3.
Maeda (2001, p. 206) asserts that the thought of an information set approach is recognized in “TheCorporate Report (1975)”in the United kingdom.

133

We explicate on the statement of ﬁnan-

common extent of relevance in the state-cial performance in the E&B theory. It is

ment, and users will select information inevident that plural proﬁt concepts can betheir own way.

meant as ﬁnancial performance.
The E&B theory shows plural proﬁt

following Statement 1〔E&B (1961), p.

4. The Edwards and Bell
Theory and Accounting
Views218〕. We add the each symbol of proﬁt

4―1 Confusion on Financial Performance

concepts in a single set of statements, as
the proﬁt concepts can be seen in thecomponents A, B, C and D for easy tounderstand.

Before turning to a detailed discussion

Statement 1 tells us that four proﬁt

of ﬁnancial performance, we should illu-

elements are included in three proﬁt con-minate our central concept of two ac-

cepts in the statement. According to thiscounting views.

statement of ﬁnancial performance, it is

Liability view”is deﬁned in FASB discus-

apparent that E&B put a great emphasission memorandum (1976) as:

The term “Asset andon proﬁt components. The four components which stated above are placed inSome people view earnings as a mea-

the order of the activities on a single set ofsure of increase in net resources of astatements. That is, they displayed infor-

business enterprise during a period.

mation as four components which have aThus, they deﬁne earnings primarily

134

The Edwards and Bell Theory as an Information Set Approachin terms of increases and decreases inching replacement costs with sales

assets and liabilities.［para.34］.

revenue to measure

operating

proﬁts”as distinguished from holdThe term “Revenue and Expense view”
is deﬁned in FASB discussion memoran-

ing gains and losses”［p. 54, endnote
1; emphasis in original］.

dum (1976) as:
FASB discussion memorandum (1976)
Some people view earnings as a mea-

refers to it in the following context :sure of the eﬀectiveness of an enterprise in using its inputs to obtain andCurrent replacement costs can besell output at a period. They deﬁnematched with sales revenue showing

earnings primarily in terms of thethat the revenue and expense view is

diﬀerence between revenues and ex-

not limited to matching expired his-penses for a period［para.38］.

torical costs with revenue［para.47］.

In addition, we may now proceed to the

The E&B theory seems to be predicateddiscussion of the key concept regarding

upon Revenue and Expense view as

Revenue and Expense view in FASB dis-mentioned above. However,it seems thatcussion memorandum (1976).

little attention has been given to “holding
gains and losses” itself, even if it is a

They commonly describe ﬁnancial

remarkable idea in the E&B theory.

accounting, and especially earnings

Additional particulars of the considera-

measurement, as a process of match-tions to the matters on holding gains anding costs with revenues［para.39］.

losses are given below.
The diﬀerent accounting views were theAfter pointing out that the key concept

main cause of the confusion of the mean-of Revenue and Expense view is “a proc-

ing regarding ﬁnancial performance. For

ess of matching costs with revenues,”

example, when we say proﬁt shows ﬁnan-

FASB discussion memorandum (1976)

cial performance, it is not clear what kind

continues:

of ﬁnancial performance it is.

Sato(2003c) argues that this confusion is led［E&B］were early advocates of mat-by double meanings of ﬁnancial perform-

Professor Sato announced this translation in the form of an informal talk.
Paton and Littleton (1940) must be recalled in the gist of what is on “accomplishment.” To quote
Paton and Littleton (1940, p. 15), “Costs are considered as measuring effort, revenues as measuringaccomplishment.”135

ance〔p. 69〕. The reason for this is notaccounting views in terms of the informa-

hard to see in two accounting views. Onetion set approach.

is Asset and Liability view and the otheris Revenue and Expense view. In Asset

4―2 How is the bottom line of theand Liability view, performance means

Edwards and Bell Theory to be“Remains.” In Revenue and Expense

accepted?

v iew,

p e r fo r m a n c e

m ea n s

7)“Accomplishment.”

It has been recognized that E&B do not

The term “performance” is used as

put a great importance on the bottom line

diﬀerent meanings person by person.

ﬁgure. Tweedie and Whittington (1984)

One may think the ﬁnancial performancemakes the following remark :as accomplishment, which is from eﬀorts,
but the other may think the ﬁnancial... Edwards and Bell proposed, with-performance as remains, which is only a

in a single set of accounting state-

result from calculation.

ments, to show a variety of informa-

For reasons mentioned above, we cantion which they considered to be rele-

deduce each meaning of the performancevant to the evaluation of a ﬁrmʼs

on proﬁt concepts from the accounting

activities for diﬀerent purposes. The

views. Similarly, it is necessary to ob-important result of this approach isserve each of the components from theto draw attention to the multiple

136

The Edwards and Bell Theory as an Information Set Approachdimensions of a ﬁrmʼs performanceﬁgure of the bottom line, but also on eachand to de-emphasise the bottom lineʼ

of four proﬁt components regarding activ-of the income statement［p. 54; em-

ities in the statement. They persist tophasis in original］.

plural proﬁts combined with proﬁt components in ﬁnancial statements.

First of all,when we take a close look at

The two statements: Statement 2 andrealized proﬁt and business proﬁt, bothStatement 3 which are illustrated by two

proﬁts seem as the bottom line in theaccounting views. Both of the statements

same level. We will use the term “dualwere developed from Statement 1〔E&Bbottom line”to refer to plural bottom line

(1961), p. 218〕. In the statements, we put

which is regarded as a signiﬁcant per-contracted forms: Revenue and Expense

formance in a single set of statements,

view as REv,and Asset and Liabilityview

such as realized proﬁt and business proﬁt.

as ALv.

The statement of ﬁnancial performance

We specify the statement of ﬁnancial

in the E&B theory tells a dual bottom

performance by E&B. They show dual

line.

bottom line regarding accounting views.

What the passage makes clear at once isStatement 2 shows that realized proﬁt isthat E&B stress not only on the single

consisting of Revenue and Expense view.

Accounting profit is not the point on the grounds that E&B do not show accounting profit itself on
their main statement here.Statement for accounting profit has been obtained from E&B (1961,p.219 ).

137

It means that component A, C and D isargues that proﬁt should be divided into

led by Revenue and Expense view. They

two elements regarding ﬁrmʼs activities

accentuate current operating proﬁt, andand they also suggested three proﬁt con-component A is shown single, for the

cepts (not other numbers) at once.

component is only led from decision

Without emphasizing the bottom line

making from operating nature. Current

proﬁt,E&B put an importance on activity

operating proﬁt is led from Revenue andcriteria. It means that dividing proﬁt by

Expense view. Since current operating

activities is one of the criteria for disclos-

proﬁt is primarily in terms of theing proﬁt in the statements.

diﬀerence between revenue and expenses
for a period.

We will now proceed to examine ﬁnancial performance on E&B from two proﬁt

In Statement 3, Revenue and Expense

views. It is concluded that E&B deﬁneview, and Asset and Liability view are

ﬁnancial performance in two dimensions.

performance for business proﬁt. Regard-

The reason for the dual bottom line ising component B, it can be known onlythat their proﬁt concepts are based on notfrom the observation on the holding

only Asset and Liability view but also

assets. The holding gains as realizable

Revenue and Expense view. The bottom

cost savings are caused in the period,

line shows realized proﬁt and businesstherefore component B is only led from

proﬁt in the statement of ﬁnancial per-Asset and Liability view.

formance.

When it comes to accounting proﬁt andOne ﬁnal point is that the position isrealized proﬁt, both proﬁts are composed

taken that both accounting views put im-of the three same components A,C and D,

portance rationally, as was stated above,and it is just a question of order. It isfrom the view point of the information set

needless to say that both proﬁts are of theapproach.

An examination of two ac-

8)same amounts. I have already indicatedcounting views can be a clue for solving

the answer to the bottom line problem byproblems about the concept of ﬁnancial

passing reference to the dual bottom line.

performance.
Recently, Asset and Liability view

5. Conclusion

seems to be superior to Revenue and9)

Expense view, and we have much argu-

We have explored the E&B theory fromment about ﬁnancial performance in con-the point of view of the information set

fusion. For solving ﬁnancial performance

approach. For one thing, the E&B theory

problems, it is essential to pay attention

In particular, Watanabe (2005, 2006) sketched out the past few decades on an historical overview.
This issue has been developed in a considerable number of studies on two accounting views.

138

The Edwards and Bell Theory as an Information Set Approachto both proﬁt views.

Eventually E&B

suggest that there is no need to select the
only one proﬁt concept for decent ﬁnancial performance.
The implication of E&B regarding
ﬁnancial performance is shown in theirbottom line. We ﬁnd that the E&B theory
deﬁnes ﬁnancial performance in two
dimensions. Thus, in order to solve theproblem on ﬁnancial performance presentation, they exploited the dual bottom
line.
Selected References
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Income. Berkeley and Los Angeles: University of California Press.
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・ASB (1999). FRS No. 3 : Reporting Financial Performance. amended.
・ASB (2000). FRED No. 22 : Revision of
FRS 3 Reporting Financial Performance.
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and Reporting : Elements of Financial Statements and their Measurement.
(Trans.) Tsumori, Tsunehiro (supervisor)
et al. (1997). FASB Zaimukaikei no gainen
fureimuwaaku. Tokyo : Chuokeizai-sha. (inJapanese)・Drake, David F.
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3 No. 2 (Autumn 1965), pp. 192‑205.
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(in Japanese)
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