Chapter 7

Fairness, disclosure and future

trends in accounting
Yusuf Hussein

Contents

Issue of Fairness and equity in accounting

The concept of Fairness in distribution

The concept of Fairness in disclosure.

Fairness in accounting
Fairness as neutrality in presentation
Fairness is best understood in the professional
accounting literature and pronouncements as an
expression of neutrality of the accountant in the
presentation of Financial report.
The fist suggestion of the use of fainess in
accounting was made by scott in 1941.
Other Scholar such as Arthur
Anderson,Skinner,Flegm

Cont...

This is generally associated with the

measurement and reporting of information in
an objective and neutral way

It implies that accounting statements have not

been subject to undue influence or bias

True and fair doctrine

There is no comprehensive definition of
the concept of true and fair
Much confusion exists among producers
and users of accounting information as to
its exact meaning

Self Study Questions

1.
2.

3.

Discuss the concept of Fairness?

Explain your understanding of the true and
fair doctrine?
How should accountants interpret true and
fair view?

Fairness in distribution

Fairness judgments are taken for granted in

accounting. Although their clear meaning is not
well specified. Two general accepted meanings
concern the idea of neutrality in preparation ,

presentation of financial report

the idea of justice in outcome.

 Rawls

economic system

Rawls theory would probably involve a

constitutional democracy, which
preserves equal basic liberties while
promoting equal opportunity and
guaranteeing a social minimum and a
market-based economy
There is great disagreement over
whether or not Rawls difference
principle (calling for the establishment of
social minimums) would assure an
adequate supply of goods and services

Fairness in distribution
According to Williams:
decision usefulness (the principle of
organizing accounting research and
practice) is incomplete, while
accountability at least possesses fairness
as an inherent property
the concern of accounting with efficiency
makes accountings fairness judgment
implicit, not absent

Concern with distribution questions

Williams characterized fairness as an
evaluation process with the following
attributes:
the evaluator is aware of the conditions that
any consequences of his or her actions will be
judged as fair or unfair
the evaluation attempts to adopt a perspective
of impartiality

Fairness in disclosure
The fairness in disclosure principle calls
for an expansion of conventional
accounting disclosures to accommodate
all other interest groups in addition to
investors and creditors
Bedford called for the development of
new tools under diverse new disciplines
to provide management and decisionmakers with useful information

Characteristics of disclosure to be
expanded

The scope of users should expand to include

public groups
The scope of users should expand to providing
for inter-company coordination, meeting
specific user information needs and
developing public confidence in the firms
activities
The type of information disclosed should
expand to reveal both internal activities and
the environmental setting of those activities of
a socioeconomic nature

Levs theory of equitable and

efficient accounting policy
Equity of the capital markets
Equality of opportunity or symmetric
information
Risk-adjusted returns identical across
investors
The standard for the equity concept is:
The interests of the less informed
investors should, in general, be
favored over the more informed
investors

Purposes of disclosure

The FASB statement sees the purposes of

disclosure as being:
1. To describe recognised items and to
provide relevant measures of those
items other than the measures in the
financial statements
2. To describe unrecognised items and to
provide a useful measure of those items
3. To provide information to help investors
and creditors assess risks and potentials
of both recognised and unrecognised
items

Purposes of disclosure
4. To provide important information that
allows financial statement users to
compare within and between years
5. To provide information in future cash
inflows or outflows
6. To help investors assess return on their
investments

Required financial statement disclosures

an analysis
1.

2.

The most frequently required disclosures

relate to amounts recognised in the financial
statements, particularly to disaggregating
them and providing relevant measures other
than the measure in the financial statements
disaggregation of recognised amounts
represents 26 per cent of all required
disclosures
Six subjects stockholders equity, leases,
pensions, income taxes, other postretirement employee benefits and

Cont...

4.

5.

6.

commitments and contingencies account

for 45 per cent of all required disclosures;
five standards SFAS nos 15, 87, 88, 106
and 109 account for 28 per cent.
Few disclosures explicitly provide
information on future cash inflows or
outflows
Few disclosures provide measures of
unrecognised items
Disclosure requirements have increased
over time; few have been eliminated

1.

Self Questions

1.

Compare the concept of fairness in

distribution and fairness presentation?
What do you understand by Rawls theory
of justice?
Discuss the concept of fairness in
disclosure?

2.

3.

New accounting disclosures

New accounting disclosures under

the principle of fairness in disclosure
are:
value-added reporting
employee reporting
human resource accounting
social accounting and reporting
budgetary information disclosures
cash flow accounting and reporting

Social accounting and reporting

The measurement of social performance
falls in the general area of social
accounting. The four various activities
are:
1.
2.
3.
4.

social responsibility accounting (SRA)

total impact accounting (TIA)
socioeconomic accounting (SEA)
social indicators accounting (SIA)

Budgetary information disclosure

Accountants and non-accountants alike have

recommended that forecast information be
incorporated into financial statements
One objective of financial reporting set forth
in the True blood Report supports such
disclosures:
An objective of financial statements is to
provide information useful for the predictive
process. Financial forecasts should be
provided when they will enhance the
reliability of users prediction

 Including

forecasts in
accounting reports

In the UK, the revised version of the City

Code on Takeovers and Mergers requires
profit forecasts to be included in takeover-bid
circulars and prospectuses
In February 1975, the US Securities and
Exchange Commission (SEC) first announced
its intention to require companies disclosing
the forecasts to conform with certain rules to
be laid down by the SEC
In 1976, the SEC called for voluntary filing of
forecasts

Problems encountered by the SEC

The definition of earnings forecasts:

concerns determining which forecasted
items are to be disclosed (the two possible
solutions are disclosing budgets or disclosing
probable results (forecasts))
Ijiri makes the distinction as follows:
Forecasts are estimates of what the
corporation considers to be the most likely
to occur, whereas budgets may be inflated
from what the corporation considers to be
most likely to occur in order to take
advantage of the motivational function of
the budget

Cont

from the point of view of the user,

therefore, the disclosure of forecasts,
rather than budgets, may be more relevant
the trend seems to be in favour of the
disclosure of forecasts
Whether disclosure should be mandatory or
optional:
the principle argument in favour of
mandatory disclosure is that it creates a
similar and uniform situation for all
companies

Cont

mandatory disclosure could create an

unnecessary burden in terms of competitive
advantage, and certain firms would have to be
viewed as exceptions
some firms lack adequate technology,
experience and competence to disclose
forecasts adequately, and outlays to correct
this situation may create an unnecessary
burden on these firms
The possible advantages of such disclosure:
both companies and analysts have been
unsuccessful in accurately forecasting earnings

Ijiris primary issues in corporate financial

forecasts

Reliability:
related to the relative accuracy of the
forecasts
Responsibility:
related to the possible large liabilities of
firms making forecasts and accountants
auditing such forecasts
Reticence:
related to the degree of silence and inaction
of firms that are at a competitive
disadvantage due to forecast disclosure

The usefulness of published

forecasts

Acccording to Mautz, three kinds of difference

must be considered when evaluating the
usefulness of published forecasts:
1. differences in the forecasting agilities of
publicly owned firms
2. differences in the attitudes with which
managements in publicly owned companies
might be expected to approach the forecasting
task
3. differences in the capacities of investors to
use forecasts

Cash flow accounting and reporting

Stewardship function
Management is entrusted with control of
the financial resources provided by
capital suppliers
The purpose of financial statements is to
report to concerned parties to facilitate
the evaluation of managements
stewardship
To accomplish this objective, the
reporting system favoured the accrual
system

The accrual basis of accounting

Refers to a form of keeping those records

not only of transactions that result from the
receipt and disbursement of cash, but also
of amounts that the entity owes others and
that others owe the entity
At the core of this system is the matching of
revenues and expenses
The system is challenged by proponents of
cash flow accounting

Cash flow accounting

Defined as the recording not only of cash
receipts and disbursements of the period,
but also of the future cash flows owed to
or by the firm as a result of selling and
transferring the title to certain goods (the
accrual basis of accounting)

Accrual accounting versus cash flow

accounting

Accrual accounting facilitates the evaluation

of managements stewardship and is
essential to the matching of revenues and
expenses
The efficiency of the accrual system has been
questioned
Many decision-usefulness theorists advocate
a cash flow accounting system based on the
investors desires to predict cash flows

Cont....

Most advocates of cash flow accounting

feel that the problems of asset valuation
and income determination are so
formidable as to warrant a separate
accounting system, and propose the
inclusion of a comprehensive cash flow
statement in company reports.

THE END

QUESTION
7.7
a.
b.
c.
d.
e.
7.9