Free Essay

Rise of Economic Consequences

In: Business and Management

Submitted By jtshiv
Words 1271
Pages 6
The Rise of “Economic Consequences” – Notes
The impact of accounting reports on decision making may be the most challenging accounting issue of the 1970s.
By Stephen A. Zeff
Notes by Tyler Shivers
There are increasing “outside forces” in the standard setting process since 1960s.
Two parallel developments marking this trend * Individuals and groups rarely had shown interest in setting accounting standards but then started intervening actively & powerfully in the process * New arguments had be brought up and the term “economic consequences” has been used to describe them
Economic consequences – the impact of accounting reports on the decision making behavior of business, government, unions, investors, and creditors. * Accounting standards setters must take into consideration of detrimental consequences when deciding on accounting questions.
Until recently, accounting policy making was deemed neutral in effect or was considered not responsible.
Policy makers have been aware since 1960s that there was a third party intervention issues but not the Economic Consequences argument till 1970s
When management began intervening, its true position was probably disguised
This is the tactical rhetoric suggested by examination of arguments 1. The traditional accounting model, where management was genuinely concerned about unbiased and “theoretically sound” accounting measurements. 2. The traditional accounting model, where management was really seeking to advance its self-interest in the economic consequences of the contents of published reports. 3. The economic consequences in which management was self-interested.
It can be assumed the 1st point has seldom been used in 3rd party interventions as it would take a lively imagination to believe that management cares about fair presentation.
Two factors in why economic consequences did not become a major issue till 1970s 1. Management and other parties tended to use the second argument above, encouraging the standard-setting bodies to confine themselves to traditional accounting model 2. The CAP and APB were determined to solve controversies in context of traditional accounting.
Early Uses of Economic Consequences Arguments
Earliest possible use of economic consequences reasoning in policy pronouncements was possibly in 1941. Accounting Research Bulletin no. 11, Corporate Accounting for Ordinary Stock Dividends required fair market value be used to record issuance of stock dividends where fmv was significantly higher that bv.
A clear used was made in 1958 when the American Electric Power Company sued the AICPA to stop the CAP from issuing a letter that said the deferred tax credit account should be classified as a liability. They said that it would mess with their debt-to-equity ratios and make them unable to issue debt securities. In the end the letter was issued. “The SEC accommodated the companies by consenting to exclude the deferred tax credit from both liabilities and stockholders’ equity for purposes of decisions taken under the Public utility Holding Company Act.”
Several examples of cases were given on page 59
Economic consequences have shown up far more in the short life of the FASB.
The Standard-Setting Bodies Respond
1940s & 1950s the CAP enhanced with wider circulation of exposure drafts and subcommittee reports
1958-1971, the APB acted to bring interested organizations into the standard setting process so that their views would be given full consideration and they’d be more satisfied. During 1971 in deliberations of Opinions no. 16 & 17, companies asserted that economic consequences were a valid concern but the APB’s committee neither asked for proof nor questions relevance.
Since not coping quickened the APB’s demise, it’s worth noting that the FASB includes the Financial Executives Institute (FEI) among its cosponsors. The FEI is incorporated in the formal structure of the Financial Accounting Foundation (FAF and the parent of the FASB)
The FASB has more elaborate procedures than the final years of the APB. The object is to expand and intensify interactions between: * The board * Companies * Industry associations * Government departments & agencies
A task force is made of a wide range of people from interested groups and made before each Discussion Memorandum. The DM is bulkier than APB ones, and it contains neutral discussion of the entire policy issues of the controversy at hand. The Financial Accounting Standards Advisory Council (FASAC) was supposed to be a sounding board for the FASB and composed of people the accounting practice, universities, companies, and government.
In 1977 in response to criticisms, the FAF studied the entire FASB operation. They made many recommendations. They said the Board should expand its formal and informal contracts with interested groups, and that it should include an economic impact analysis in important exposure drafts. The later point, the FAF committee concluded
“The Board need not be unduly influenced by the possibility of an economic impact, but it should consider both the possible costs and the expected benefits of a proposal.” By mid 1970s, it was decided that the FASB needed to add economic and social consequences to the substantive issues it normally addresses. The economic consequences changed from just being a procedural implication to being part of the standard setters’ substantive policy framework.
Economic Consequences as a Substantive Issue
Economic consequences have finally become accepted as a valid substantive policy issue for a number of reasons: * Society has changed and has made institutions responsible for their social, environmental, and economic consequences of their actions. * The sheer difficulty to change the accounting problems being addressed. Many managers are loathe to change the way they make decisions because of changes in accounting standards. * The enormity of the impact. Some issues are so massive, just discussing them leads to incessant arguments over probably economic consequences. * The growth in the information economics-social choice, behavioral, income smoothing and decisions usefulness literature in accounting. * The insufficiency of the procedural reforms adopted by the APB and the FASB. The conclusion has evidently been reached that procedural remedies alone will not meet the problem. * The Moss and Metcalf investigations. The congressman and senator conducted investigations of the accounting profession and the standard setting body and inferred that the responsiveness of the standard-setting bodies to economic and social effects of their decisions would be an issue. * The increasing importance to corporate managers of the earnings figure in capital-market transactions. This figure was important to corporations when the capital markets intensified and merger movement was fast paced * Accounting figures came to be viewed as an instrument of social control. * The realization that outsiders could influence the outcome of accounting debates. Before the 1960s, accounting controversies were rarely reported in financial press. It was believed that it was a fixed parameter. With rising publicity in ’62-’63, managers and others are starting to view the rules of accounting as a variable that can be changed * The growing use of the third argument, advanced earlier in the article, in accounting debates. True reasons came out into the open, and accounting policy makers could no longer ignore their implications.
The Dilemma Facing the FASB
What are the implications of the economic consequences movement for the FASB? Governments and other entities are increasingly assuming that standard-setting bodies are taking into consideration possible adverse economic effects of accounting standards. The FASB must take this information and compare it with the proposed policy to see if the benefits of the policy outweight the adverse economic and social effects.
To what degree should the FASB have regard for economic consequences? The FASB is recognized as a group of accounting experts and should focus their efforts where their expertise will be useful and acknowledged.
The Board has to balance accounting issues and nonaccounting variables. It must be based mostly on accounting considerations but must also study and be seen studying the possible adverse economic and social consequences of proposals.

Similar Documents

Premium Essay


...what it does. They define globalization as a set of processes, that embodies a transformation in the spatial organization of social relations and transactions, generating trans-continental or interregional flows and networks of activity, interaction, and power. What globalization is, isn’t as important as what it does. It is a benefit to society as it is a consequence. It is a truth, and also a paradox. The best way to form the answer of what globalization does is by understanding its dimensions. There are 6 defined dimensions of globalization. The first is its integration and interdependence of national economies. This is referring to how the aggregate activities to the value chain are used more frequently, and that it interconnects economies from other countries. This also harmonizes the fiscal policies of these economies so they can run these activities more effectively and efficiently. This concept brings us to the next dimension of globalization: the rise of regional economic integration blocs. Over time, globalization has given rise to blocs consisting of groups of countries that reduce trade barriers and given rise to free trade to one another. For example, the NAFTA or APEC to name...

Words: 1378 - Pages: 6

Free Essay

Oil Prices

...OUTLINE Introduction A. What effects can produce oil prices increase? a. Brief history and evolution in oil markets b. Causes of the increment in oil prices B. Colombia on the two sides of oil prices rise effects c. Brief description of effects d. Brief history of petroleum industry Body I. International context a. Global situation of oil prices b. Volatility and Dutch disease II. Colombia Case c. analysis of effects in the macroeconomic view: inflation and currency appreciation Conclusion A. Which are the solutions to control the harmful effects of oil prices increase B. What strategies are implementing in Colombia to deal with the effects of oil prices increase. Thesis statement Since the 1970s the world hadn`t experienced an oil increase like the one that is happening these days where many countries are concerned about the effects that this phenomenon can bring to their economies. As an oil exporting country, Colombia has to deal with a lot of challenge in order to transform all the revenues from petroleum into benefits to their society. However there are some effects that can bring some instability to this small economy, especially the one that international markets create a speculative bubble which can end in the Dutch disease. ‘The Dutch disease is a major market failure originating in the existence of cheap and abundant natural or human resources that keep the currency of a country......

Words: 2669 - Pages: 11

Premium Essay


...economy is often compared to the performance of other countries' economies. There are four key indicators that are used when comparing economic performance: 1. Economic Growth 2. Unemployment 3. Balance of Payments 4. Inflation Economic Growth: Economic growth is defined as 'an increase in the productive capacity of an economy'. This is shown on The Production Possibility Frontier (PPF) below: There are a number of different causes of economic growth - Improving quantity and quality of labour will cause economic growth: * A decrease in income tax encourages the unemployed to find work and increases the quantity of the work force. * Inward migration results in more skilled workers within the country and with better labour available efficiency will increase. * Technological advancements will mean that the quality and efficiency of capital used by firms will increase and therefore productivity will rise. The Economic Cycle All countries at every stage of their economic development experience periodic business cycles where the rate of growth of production (real GDP), incomes and spending fluctuates. The length and volatility of each cycle varies over time. There are booms: * Higher consumption * More houses built * Imports rise and exceeds rise in exports (deterioration) * Lower unemployment * Rise in AD * Higher tax revenue for govt There are also recessions: * Declining AD * Rising Unemployment * Falling......

Words: 1647 - Pages: 7

Free Essay

Max Weber

...Religion and the Economy Max Weber postulates in his book “The Protestant Ethic and the Spirit of Capitalism” the hypothesis that the work ethic derived from the Protestant religion that gives rise to modern capitalism. Weber supports his argument with the use of statistical studies showing that the predominantly Protestant regions are more successful than of the Catholic regions in Germany due to the concentration of a highly educated and skilled workforce, and the concept of “worldly asceticism” that encouraged capital reinvestment. And while, the connection between human and social capital as an expansionary force in output production is well established in economic theory (Adam Smith, Karl Marx, the Chicago School of Economics, and others); the hypothesis advanced by Max Weber that this skilled workforce is the direct consequence of the Protestantism ideal of “worldly vocation” ignores the rise of the trade unions from the medieval guild system as indicated by Lujo Brentano. Furthermore, many of these trade unions promoted nepotism and were discriminatory excluding Catholics from their ranks, the consequence of Bismarck’s policy of “Kulturkampf” that reduced the power of the Catholic Church in public affairs, and kept the Poles under control during the 1870s. As for his assertion of capital reinvestment as fundamental to the Protestant ethos; it is more likely that this reinvestment of capital came as a result of the population growth experienced during the first half of...

Words: 392 - Pages: 2

Free Essay

China and India: World's Next Superpowers?

...MGMT 002 Technology and World Change Topical Written Report Term 1, AY 2011-2012 G22, Project Group 4 Word Count: 1000 1 Table of Contents I. Synopsis ............................................................................................. 3 II. Relationship between technological and economic developments ............................................................................................................... 3 A. How technological developments fuel economic developments........................................................................................ 3 B. How economic developments fuel technological developments........................................................................................ 3 C. How sustainable are these developments? ............................. 4 III. Impact of economic and technological developments ................. 4 A. On Asia ........................................................................................ 4 B. On the world now ........................................................................ 4 C. On the world in the future .......................................................... 5 IV. Conclusion ....................................................................................... 5 2 I. Synopsis Will China and India be the world’s next superpowers? Perhaps history has its answers. Mankind has always been in search of for greener pastures, and there has always been powerful of empires that have...

Words: 1144 - Pages: 5

Free Essay

Mother's Role in China

...Before 1950, the role of the Chinese mother was based on the satisfaction of their husbands and bearing children. However, since this date, many factors such as the political environment, economic development and migration have been considerably responsible for changing the role of the mother in China. In fact, the rise of technology and the economic development of China resulted consequently in an increase of women's status, rights and opportunities. However, women's status is still slowed by the Chinese society who does not endorse completely its role in some essential areas such as childbearing. This essay will discuss how role of the Chinese mother has changed over almost sixty years and is still in changing. In feudal China, the status of women and in particular the mother's role in the family was very different from nowadays. Indeed Confucian philosophy was mainly based on women's inferiority to men. Women had to obey their fathers first, their husbands after marriage and their sons if they were widowed. Moreover, weddings were arranged and the responsibility of the woman was to remain married because divorce was not allowed (Heng, 1994). The main role of women was to be assimilated as the private property of men and was to satisfy their husbands and to bear children. What is more, the symbol of women's subservience was the practice of binding women's feet, "this practice lasted nearly 1,000 years and during the Ming and Qing dynasties to be eligible for a husband"...

Words: 2007 - Pages: 9

Free Essay

Assess the Causes and Consequences of Coastal Flooding

...Using a case- study, assess the causes and consequences of coastal flooding. 15 marks Coastal floods occur primarily due to physical causes. A depression can produce low pressure conditions which pull water particles up, giving to a rise in sea level. Similarly strong winds can occur due to change in meteorological conditions which can also rise the sea level. At this point the sea level is much higher than a normal spring tide, and this is called a storm surge. However many human causes, particularly the lack of preparation and costal defences, can lead to lead to any storm surge having a much larger impact on local communities near the coastline. The North Sea storm surge occurred in 1953 and had a huge impact on many communities in places including Britain and the Netherlands. In the Netherlands 1,835 people were killed and 47,000 buildings damaged. While in Britain 307 people died but over 30,000 people had to be evacuated from their homes. This initial storm surge was inevitable. A deep Atlantic depression moved across Scotland, meaning the central pressure had dropped to 970 mb by the coast of Denmark. This reduction is pressure is responsible for the rise in the surface of the sea level by 0.5m. Strong winds also drove the waves ahead of the storm. This was combined with high spring tides when the Sun and Earth and Moon are all in line. So the result was 6m waves approaching both Britain and the Netherlands. Additionally Canvey (one of the areas most affected in......

Words: 741 - Pages: 3

Premium Essay

Systems Thinking to sustainability challenges? Systems thinking is a method of thinking that looks at the interconnectedness between different elements rather than a linear cause and effect approach and sees patterns of change rather than fixed “snapshots”. In essence it is a view on the “whole picture” (Anderson, R 1994). Peter Senge and Andres Edwards expressed the importance of system thinking in that it is necessary for “understanding the dynamic complexity of a situation”, anticipating “the unintended consequences of proposed actions” and implementing “lasting solutions” (Higgins, K 2014). Obesity is a wicked problem we face today where systems thinking is necessary as it is a sustainability issue that flows into the three pillar model. It affects the social, economic, and environmental pillars, as well as physiological and psychological factors on an individual level making it a unique and complex system. By looking at genetics, psychological disorders, social norms and consequences, the food we buy and energy we use as well as the economy we can see why past and current attitudes have failed and that by encouraging a system thinking approach a new understanding of the circumstances can be achieved helping to identify prospects for action that may not have previously be seen; altogether illustrating systems thinking’s critical role in developing solutions to sustainability challenges. Over the last few decades obesity has rapidly become a worsening global health problem.......

Words: 2606 - Pages: 11

Premium Essay

China Finance

...lowered its growth target from 8% to 7% for the next five years. Discuss the possible consequences of slower growth in China to the UK economy. On one hand, slower Chinese growth may reduce Chinese domestic consumption. This will have two possible consequences. Firstly, it may reduce Chinese imports and the Chinese are not able to afford as much luxuries from abroad and therefore reduce British exports, thus increasing costs to British exporters and causing unemployment in the UK and lower income. Secondly, as Chinese domestic demand is reduced, Chinese export capacity increase. This will free up Chinese capacity for exports putting more pressure on other exporters such as the British exporters market. This will make Chinese exporting firms more competitive abroad but also foreign firms more competitive as their exports will fall too. However, if economic growth in China is slowing down because it is becoming more developed and moving away from cheap manufacturing goods, it will mean that they will start to demand more financial services so British exports may actually increase. Yet, only a small component of our exports goes to China so a slowdown in their growth may actually have small effect on the UK economy. Furthermore, the growth target has only faller from by 1% so nothing much has changed. On the other hand, slowing growth in China and in the UK could lead to slowing price rises for a wide range of commodity goods as well as consumer goods which will reduce......

Words: 382 - Pages: 2

Premium Essay


...Timeline Part II Major Event/Epoch in American History | Time Period/Date(s) | Description and Significance of the People/Event(s) to American History | 1) The evolution of the institution of slavery from the Colonial Period to the 1860s. | 1860-1865 | To the southern colonist, slavery became profitable after the cotton gin was invented. The cotton gin helped produce a large cash flow along with manual labor jobs. Prior to the cotton gin slave trade was done most by the New England colonies, this was called “Triangle Trade”. ( | 2) The socio-cultural impact of the abolitionist movement including: a) The effect of Uncle Tom’s Cabin b) The Kansas-Nebraska Act c) The Compromise of 1850 d) The Underground Railroad | 1800-1870 | In the middle colonies the abolitionism began early. Most people in Pennsylvania were against slavery due to a moral stand, while the upper and middle colonies did not contribute to the slave market. While on the other hand in the south the use of slaves continued to thrive for labor plantations as well as creating a group in which the poorest of whites could turn their noses up at. A small group of religious and moral causes began the Abolition Movement. Nevertheless they took to the north as a political group with federal powers. In the 1800’s efforts were curved too avoid the issues of slavery altogether such as Henry Clay’s compromises attempting to delay conflict, which quickly deteriorated after......

Words: 895 - Pages: 4

Premium Essay

American History Timeline Part Ii

...Timeline Part II NOTE: Before starting the Timeline project please refer to the "Example Timeline Matrix" document. Instructions: Complete the matrix by providing the Time Period/Date(s) in column B, and the Description and Significance of the People/Event(s) to American History in column C. See complete instructions in the Syllabus for the Module 3 assignment entitled. “Timeline Part II.” NOTE: The timeline project does not need to be submitted to turnitin. NOTE: Please write your answers in a clear and concise manner. Limit your submission of the Timeline Part II up to 250 words per topic/subtopic. For example, if a topic is divided into 3 subtopics, you may write a maximum of 250 per subtopic listed. Be sure to cite all sources. Major Event/Epoch in American History | Time Period/Date(s) | Description and Significance of the People/Event(s) to American History | 1) The evolution of the institution of slavery from the Colonial Period to the 1860s. | 1619 - 1865 | Slavery began with in 1619 with the first slaves brought to Virginia as indentured servants. As time goes by, slavery becomes more popular, to help with farming large farms or plantations. Though the Declaration of Independence in 1776 states that “all men are created equal” this did not apply to people of color. By the time the Civil War starts, slavery is big business, and the south is fighting for the right to keep it. In 1865 the U.S. abolishes slavery with the 13th Amendment. | 2) The......

Words: 1330 - Pages: 6

Premium Essay

Treaty of Versailles

...Were Economic Problems the Main Consequence of the Treaty of Versailles for Germany in the Years 1919-1933? Throughout 1919 to 1933 Germany made many socio-economic decisions based on The Treaty of Versailles. This essay explores the extent and importance of economic policies implemented that are related to the Treaty of Versailles and whether they were the main consequence that came of it. The essay is divided into one side agreeing with the statement and one disagreeing with the statement. Economic Problems were largely the main consequence of the Treaty of Versailles and played a vital role in the instability and volatility of the Weimar Republic. At the end of the war many countries had to rebuild, especially after the widespread devastation and financial ruin that the war left them in. Germany, just like Britain and France had to recover, however at the Treaty of Versailles they were made out to be guilty and therefore had to pay huge reparations; this was a double blow to Germany , on top of rebuilding costs Germany had to pay 132 Billion Marks (equivalent of $33 Billion). This, coupled with the already outstanding war debt of 150 Billion marks crippled the government financially. The pressure took its toll and when Germany failed to pay its reparations (December 1922) the Ruhr was resultantly taken away. With no industrial and agricultural output the crisis escalated rapidly; inflation became hyperinflation. Hyperinflation was devastating the economy, causing......

Words: 480 - Pages: 2

Premium Essay

Counteracting the Global Economic Crisis: Values, Institutions, Policies.

...Counteracting the global economic crisis: values, institutions, policies. When talking about the broad and complicated subject of economic crisis, it is important to mention ideas concerning neutralization of its consequences and prevention of future calamities. The current disturbance in the global economy requires not only to understand how it was initiated, but also how to counteract and draw conclusions from it. The Chinese proverb says: “may you live in interesting times.” These times are now- financial markets are in turmoil, China is rising as economic power, young people from Europe and America are protesting against, what they see as ineffective government and regulations. In next years the world will change even more- also thanks to changes, that will be made as an answer to the global economic crisis- in terms of values, necessary institutions and policies. The first step toward ending the crisis is to introduce new regulations, that would stabilize the market. Since 1980’s the American financial market has been experiencing a long period of deregulation. Although the obvious results of this move- the example can be the deregulation of savings and loans companies, that led to crisis in 1989, the process continued. Decade later, in 1990’s the new market instruments- derivatives, became increasingly popular. Although, their allies argued that they would stabilize the market, the opposite happened. Any attempt to regulate hedge funds was cut out by......

Words: 902 - Pages: 4

Premium Essay

The Coming Economic Collapse

...Is there a coming economic collapse? When will this happen? How will this affect us? Many wonder what the future is for the global economy. Over the last few years economists have been expressing increasing concerns about the direction the global economy is going in, and the possibility of a worldwide depression. They have been warning about the growing global imbalances in the world economy, and the consequences if not corrected. Yet we live in a time where the global economy is booming, especially in the Anglo-Saxon and Asian economies. Consumer spending is up. House prices around the world have risen dramatically. Unemployment remains low. The global economy has experienced the longest period of sustained economic growth in recent history. The US$ continues to remain stable. Why has the global economy experienced such strong growth? Will this growth continue? What does the future hold? Interestingly, some of the stimulus for the growth the global economy has recently experienced is a result of decisions made following Sept 11th. Already, prior to Sept 11th the US Federal Reserve was maintaining a loose fiscal policy in an effort to stimulate economic growth in the US economy, which had slowed down following years of strong growth during the Clinton administration. Then along came Sept 11th, which threatened to destabilize the American banking system. To prevent this happening, the Fed injected billions into the banking system to provide......

Words: 2156 - Pages: 9

Premium Essay

Unit 5 Ap World Review Guide

...AP* World History Study Guide and Graphic Organizers – Unit 5: The Modern World, 1914 CE – present 1. World War I Students are required to know the causes, major events, and consequences of WWI 1) Causes a) Imperialism i) No new lands to expand into – some nations didn’t have many colonies (Germany, Italy) ii) Rivalries as nations competed for colonies iii) Sometimes armed conflict in colonial lands for control over resources b) Nationalism i) Pride in one’s nation, want one’s nation to be the best and most powerful ii) Fostered conflict as nations competed to be the best iii) Justified imperialism, militarism iv) Caused disruptions in multi-ethnic nations (Austria-Hungary, Ottoman Empire); rebellions, revolts against foreign rule c) Militarism i) Build up of a country’s military; keeping a large standing army ii) Nations expanded their militaries as a show of power iii) Arms race: each nation needed to have a standing army because their neighbors had standing armies d) Alliances i) Bismarck: German chancellor behind alliance system in Europe ii) Germany, Austria-Hungary, Italy allied; France, Great Britain, Russia allied 2) Events a) Assassination of Archduke Frantz Ferdinand: Serbian terrorists kill the Austrian duke and his wife as they honeymooned in Sarajevo i) Austria demands Serbian submission ii) Russia offers to back Serbians in defying Austrians iii) Austria and Germany declare war on Serbia and Russia (along with Russia’s......

Words: 3465 - Pages: 14