Reading Kothari, Ramanna and Skinner’s answer to the question “What Should GAAP Look Like?” makes me want to get a better handle on the different perspectives academics are bringing to their criticism of accounting standards and the standard-setting process.  This will probably be the first of several posts, and I want to start with the biggest picture:  identifying the major ‘camps’ in academia by their broadest positions, from which others can be derived.  At risk of oversimplification, here goes:

  • A status quo camp is exemplified by the many academics who largely agree with the FASB’s conceptual framework on several key issues: that standards should be mandated and as unified as possible across industries and countries, should serve the needs of equity and credit investors, and should be founded on careful identification and neutral measurement of assets and liabilities, with changes in net assets reported as part of comprehensive income.

I see three main camps of dissenters:

  • Penman and Ohlson exemplify a ‘meaningful income’ camp.  This camp takes a position pretty similar to the FASB positions, in that they accept the need for mandated and similar standards, but they focus more on the need to serve equity investors, whom they believe need information about sustainable earnings.  This leads them to reject FASB’s focus on asset-liability/comprehensive income, in order to provide a more meaningful income number.
  • Watts exemplifies a conservatism camp.  This camp also accepts the need for mandated unified standards, though more grudgingly than Penman and Ohlson, but differs from FASB by wanting those standards to serve the needs of the firm and its contractual counterparties.  This differing objective leads Watts and others in this camp to advocate conservative measurement, rather than neutral measurement.  Watts prefers matching to fair value, but more for its objectivity than for its ability to generate a meaningful income number (which it also does as a happy side effect).
  • Sunder and Jamal exemplify a libertarian camp.  They differ most sharply from FASB in that they do not see a need for mandated unified standards.  In fact, they argue explicitly against unity, and instead recommend competition among private standard setting bodies.  (I don’t mention any of their views of standards, which become far less important to their position when they are willing to let the best ideas win out.)

Naturally, all of the people named here have a variety of other beliefs, some of which are entailed by the key positions I characterize here, and others not. For example, those who want meaningful income will tend to accept fair value for non-operating assets when it is easily measured and when changes in fair value are not mixed up with operating income.  Those who want conservatism tend to oppose fair value accounting for all but the most reliably-measured increases, but are willing to accept fairly unreliable writedowns.  Also, there is a wide variation in all four of these camps.

I think these are useful simplifications, but let me know if you disagree.  Did  I miss a major camp?  How badly did I mischaracterize these views?  What are the most important divisions within any of these camps?

p.s.  I tentatively put Kothari, Ramanna and Skinner”s paper primarily in the conservatism camp, but will wait till after this weekend’s JAE conference before I commit to that.

Update:  In the original version of this post I made some remarks about individual standard setters’ views.  I have deleted them, as it was clearly too difficult to represent subtle and complicated position in such a condensed fashion, and at least some disagreed with my characterization.  My highly simplified characterizations of the camps above are drawn  from the Conceptual Framework (for the staus quo view) and various academic articles.  I also renamed the first camp the ‘status quo’ camp, because it relies on a decades-old framework that has been central to standard-setting activity.

I also want to emphasize that nothing I written above is meant to imply that those who support the FASB’s conceptual framework see a direct link between an asset-liability approach and any particular measurement method (particularly fair value).  My personal impression is that this link is primarily a conception of academics (or, as Jeffrey Hales might say, a misunderstanding).  In fact, I quite consciously avoided mentioning fair value in the primary statement of the ‘status quo’ camp because the use of fair values is actually a very small part of the conceptual framework.

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