Academic journal article Accounting Horizons

Recognition: An Information Content Perspective

Academic journal article Accounting Horizons

Recognition: An Information Content Perspective

Article excerpt

SYNOPSIS: This essay offers a synthesis of the varied accounting literature on recognition. First, in a review of the historical evolution of accounting thoughts, two debates on accounting measurements stand out: historical cost as the basis for asset valuation and realization as the basic test for income determination. These debates have specific implications for the recognition issue. Second, I examine the shift from the traditional measurement perspective to an information content perspective in both rhetorical policy debates and academic accounting thoughts. Under the information content perspective, the (strategic) decision-making context becomes particularly important. Last, I advocate information content as a combining perspective, not as a replacement of the measurement perspective. In particular, I draw attention to the recent academic studies with an explicit or implicit theme of recognition. These studies combine modern information economics with the accounting measurement structure. This line of r esearch has the potential to provide further understanding of the comparative advantage of accounting as a source of information.

INTRODUCTION

The purpose of this essay is to provide a synthesis of the varied accounting literature on recognition to accounting scholars, students, and practitioners. Glancing through the accounting literature dating back to early 20th century shows recognition has been a pervasive and fundamental issue in accounting practice and in the accounting academy. Recognition serves a key role in both the traditional measurement perspective in accounting (which stresses the accounting measurement structure) and the newer information content school (which emphasizes the economic use of accounting information). This essay advocates information content as a combining perspective, not as a replacement of the traditional measurement approach. Recent studies in accounting have moved to combine the two perspectives in a variety of settings. This approach has the potential to further our understanding of the comparative advantage of accounting as a source of information.

By recognition, I refer to the ubiquitous accounting issue of determining when and how particular items (e.g., transactions) enter the accounting records of an entity. These records are the basis of the entity's financial statements. By specifying what to include, recognition also excludes all other events from the accounting records. [1] Therefore, accounting recognition, manifested in accounting standards, conventions, and in professional judgments by accountants, prescribes the boundaries of accounting records and governs the content of the accounting products (e.g., financial statements). [2] It is, thus, fundamental to accounting.

Recognition is often at the center of accounting controversies such as recent debates on stock options, R&D, and revenue recognition. Many firms objected to the proposed rule by the Financial Accounting Standards Board (FASB) that would have required recognition of economic costs associated with granting employee stock options. Questionable revenue recognition practices by some firms have drawn the attention of the SEC as well as the financial community. International differences in recognition rules are also well noted. For instance, in Great Britain and Brazil, accounting practices on assets reevaluation are different from the U.S., similarly for the recognition of internally generated intangible assets in Japan. Recognition is, thus, a pervasive accounting issue and it is no wonder that debates over various recognition issues have had a rich and lengthy history.

I begin with the long and varied standing of accounting recognition in the history of accounting thoughts. First, searching through the historical discussions on recognition uncovers a measurement approach with emphases on asset valuation and income determination. Second, I review the rise of the information school of accounting and its influences on the way recognition questions are framed. …

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