The Pure Logic of Accounting

The Pure Logic of Accounting: A Critique of the Fair Value Revolution

Yuri Biondi (



When international accounting standards were renamed to become international financial reporting standards, this seemed to imply that accounting no longer needed to exist, but rather had to be reconsidered as a part of financial communication and advertising. Does traditional accountability no longer matter? Betrayed investors and globalized stakeholders would dissent. A difference of nature continues to exist between fair values disclosed by managers and certified by auditors, and the actual performance generated by the enterprise entity through time, space, and interaction. In a world shaped by complex organizations facing unfolding changes, hazard and limited knowledge, the quest for fundamental principles of accounting is not academic. Accounting principles constitute a primary way that the creation and allocation of business incomes is governed; that is, fairly managed and regulated in the public interest, having respect to “other people interests.” This article adopts a dualistic posture that opposes the accounting conceptual frameworks based on fair value (market basis) and historical cost and revenue (process basis). The fundamental premises about the underlying economics of the enterprise entity are discussed, including the representation of the business and the concepts of asset and liability. References are made to the case of accounting for intangibles, and to the distinction between equities and liabilities. The cost and revenue accounting perspective is then defended in terms of accountability, but also from the informational viewpoint: historical accounting information plays a special role as a lighthouse in the dynamic and strategic setting of the Share Exchange. In particular, two refinements of the historical cost (and revenue) accounting model are suggested. The first one regards the treatment of earned revenues from continuing operations, and the second, the recognition of shareholders’ equity interest computed on the actual funds provided in the past, coupled with the distinction between shareholders’ equity and entity equity.

Review by: Masayoshi Noguchi

This is an interesting piece of work distributed by NEP-HIS on 2011-02-19. Historians commonly use certain indications when they specify objects, organisations or periods to be analysed. Accounting income is one such indicator in accounting, business and economic history. But it is often assumed that firms gained their income through its main business activities. However, this is not always the case. More and more so, firms diversify and generate profitability from non-core activities (such as financial transactions). In the not so distant future, historians will have to face this and therefore, pay greater attention to the accounting assumption made by specific enterprises.

Yuri Biondi

This paper is not an historical study but makes timely comments on fair value accounting as represented by International Financial Reporting Standards (IFRS), under which an accounting income is assumed to be measured though changes in the market price of net assets. The author’s attempt is in fact a rehabilitation of cost-based accounting. An approach which builds on transaction-based measurements. This paper thus adopts the so-called ‘a dualistic approach’ (p. 3) or one that contrasts results from cost-based and fair value-based approaches. It is certain that papers like this will serve as a useful frame of reference for historical research.

Bondi criticises fair value accounting which, according to him, adopts ‘a market view’:

‘The underlying economics of the business firm is not considered by measuring the entrusted wealth and related (quasi-)rents (i.e., changes of value), but instead by representing its economic and monetary process as an enterprise entity’ (p. 7).

This view assumes that ‘the business entity is framed in a world of market forces capable of addressing and solving its accounting issues’ (p. 7). Bondi adds that ‘[t]he preference for fair value is motivated by this piecemeal valuation which does not consider the whole entity and the overall representation of business capital and income to the firm’ (p. 14). Furthermore that ‘[t]he fair value perspective appears to be at odds with the nature and role of enterprise entities that actually are socio-economic systems involving continuing relationships among interested parties and which raise public interest concerns’ (p. 10).For Bondi there main problem of fair value accounting is that it might lead to ‘inconsistencies'(p. 34).

At the same time, however, the advocates of fair value accounting are not so naïve and do recognise some of its limitations. And to be fair, assume a form of market behaviour much more complex than that Bondi has represented. In a way Bondi oversimplifies assumptions of market behaviour by stating that ‘[f]air value relies on perfect and complete financial markets’ (p. 33).

Bondi insists on the rehabilitation of cost-based accounting by stating that ‘the classic accounting principles fit a broader “accountability” framework that recognises the socio-economic nature of business entities’ (p. 10). From this perspective, ‘[a]ccounting is then understood as a mode of representing, organising and regulating these socio-economic systems and their institutional, organisational, and cognitive patterns and interactions’ (p.10).

However, the criticism to fair value accounting and the support for cost-based accounting do not necessarily mean that the latter comes out as the best choice. Bondi acknowledges that cost-based accounting is in need of reform. Specifically in the areas of intangibles and shareholders’ equity.

Bondi’s ultimate goal is to contribute to the ‘ongoing effort of conceptual clarification by drawing upon theoretical debates that have been going on for at least a century with respect to fair (current) value versus historical cost accounting’ (p. 3). But as of today it is far from clear there has been substantial progress on this debate.

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