What Should GAAP Look Like?
This chapter develops the economic theory of corporate financial reporting that provides – from first principles – the properties of a sound accounting system. This economic framework is used in subsequent chapters as a basis to evaluate outcomes from accounting’s political process. In the economic framework, sound accounting rules can be characterized by their ability to represent the underlying substance of a business transaction in a manner that is both relevant and reliable. In practice, this is achieved through the basic accounting principles of matching, verifiability, and conservatism. The chapter also compares and contrasts the economic framework of accounting with the FASB’s own conceptual frameworks. It notes how the economic framework is similar in many respects to the FASB’s original framework, introduced in the 1970s and 1980s, but differs in important ways from the FASB’s current framework introduced in the 2000s. This new FASB framework has been used to justify some significant changes to GAAP that subsequent chapters argue can be attributed to special-interest politics.
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