FASB AND THE IASB VERSUS

J.R. HICKS

Joel Jameson

ABSTRACT

The Financial Accounting Standards Board (FASB) and the Interna-

tional Accounting Standards Board (IASB), in asserting their preference

for the ‘‘asset and liability view’’ of income over the ‘‘revenue and expense

view,’’ have mistakenly invoked J.R. Hicks as grounding their position. In

fact, Hicks argues that income based upon the ‘‘asset and liability view’’ is

irrelevant when windfalls are present and that non-objective analysis is

required to remove such windfalls to obtain an income measurement suit-

able for decision making. Hicks’ objective is actually aligned with the

intention of the ‘‘revenue and expense view.’’ Given that both FASB and

the IASB hold Hicks as a foundational authority, it is incumbent upon

both of them to pursue accounting standards that remove windfalls as he

suggested.

In May 2005, the Financial Accounting Standards Board (FASB) and theInternational Accounting Standards Board (IASB) announced the begin-ning of a joint project to develop a converged conceptual framework thatwill help to develop future accounting standards internationally.

Their paper, ‘‘Revisiting the Concepts – A New Conceptual FrameworkProject,’’ mistakenly invokes Nobel laureate economist J.R. Hicks as

Research in Accounting Regulation, Volume 18, 331–334

Copyright r 2005 by Elsevier Ltd.

All rights of reproduction in any form reserved

ISSN: 1052-0457/doi:10.1016/S1052-0457(05)18020-5

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grounding their ‘‘asset and liability view’’ of income determination, whilearguably he is more aligned with the intent of the opposing ‘‘revenue andexpense view.’’ In the paper, FASB and IASB (2005) define the ‘‘asset andliability view’’ of income as:

a measure of the increase in the net resources of the enterprise during a period, defined

primarily in terms of increases in assets and decreases in liabilities. (p. 7)

and they define the ‘‘revenue and expense view’’ of income as:

the difference between outputs from and inputs to the enterprise’s earning activities

during a period, defined primarily in terms of revenues (appropriately recognized) and

expenses (either appropriately matched to them or systematically and rationally allo-

cated to reporting periods in a way that avoids distortion of income.) (p. 7)

In championing and adopting the ‘‘asset and liability view’’ of income,FASB and IASB (2005) attempt to ground their position:

[The ‘asset and liability view’ of] income is grounded in a theory prevalent in economics:

that an entity’s income can be objectively determined from the change in its wealth plus

what it consumed during a period. (p. 7)

and then they paraphrase and quote Hicks:

Hicks defines an ‘income ex post’ as the value of an entity’s1 consumption plus the

increment in the value of its prospects during the period, and notes that it has ‘one

supremely important property.y [That kind of income] ex post is not a subjective affair,

like other kinds of income; it is almost completely objective.’ (Hicks, 1946, pp. 178–179;

FASB & IASB, 2005, p. 18)

They conclude:

By subtracting the entity’s capital value – in accounting terms, its assets less its liabilities

– at the beginning of the period from its capital value at the end of the period and adding

its consumption during the period, the ‘income ex post can be directly calculated.’

(Hicks, 1946, pp. 178–179; FASB & IASB, 2005, p. 18)

The FASB and IASB attribution – ‘‘grounded in a theory prevalent ineconomics’’ – takes Hicks’ words out of context. Furthermore, Hicks’ ‘‘nota subjective affair’’ is an interim remark and not to be taken as final.Immediately following the quoted paragraph, Hicks (1946) dismisses theinterim remark and refutes the ‘‘asset and liability view’’ by stating:

This [interim remark] is a very convenient property, but unfortunately it does not justify

an extensive use of the concept in economic theoryy . On the general principle of

‘bygones are bygones’, it [‘asset and liability view’ income, i.e. comprehensive income]

can have no relevance to present decisions. The income which is relevant to conduct

must always exclude windfall gains; if they occur, they have to be thought of as raising

income for future weeks (by the interest on them) rather than as entering into any

FASB and the IASB versus J.R. Hicks 333

effective sort of income for the current week. Theoretical confusion between income ex

post and ex ante corresponds to practical confusion between income and capital. (p. 179)

Hicks rejects the ‘‘asset and liability view’’ because inclusion of one-timewindfalls results in an income measurement that is not useful for decisionmaking – the very purpose that FASB and the IASB deem as most impor-tant: ‘‘Usefulness in making economic decisions is the overriding objec-tivey ’’ (FASB & IASB, 2005, p. 3).

Hicks (1946) specifically focuses on income determination that providesguidance regarding what can be consumed and that has a predictive value.He states:

The purpose of income calculations in practical affairs is to give people an indication of

the amount which they can consume without impoverishing themselves. Following out

this idea, it would seem that we ought to define a man’s income as the maximum value

which he can consume during a week, and still expect to be as well off at the end of the

week as he was at the beginning. Thus, when a person saves, he plans to be better off in

the future; when he lives beyond his income, he plans to be worse off. Remembering that

the practical purpose of income is to serve as a guide for prudent conduct, I think it is

fairly clear that this is what the central meaning must be. (p. 172)

On the very page that the FASB and the IASB paper draws quotations tosupposedly ground the ‘‘asset and liability view,’’ Hicks (1946) prescribesthe following:

It seems to follow that anyone who seeks to make a statistical calculation of social

income is confronted with a dilemma. The income he can calculate is not the true income

he seeks; the income he seeks cannot be calculated. From this dilemma there is only one

way out; it is of course the way that has to be taken in practice. He must take his

objective magnitude, the Social Income ex post, and proceed to adjust it, in some way

that seems plausible or reasonable, for those changes in capital values which look as if

they have had the character of windfalls. This sort of estimation is normal statistical

procedure, and on its own ground it is wholly justified. (pp. 179–180)

Restated, Hicks is suggesting that ‘‘asset and liability view’’ income needs tobe adjusted in a non-objective way to remove capital windfall effects inorder to obtain an income that can be consumed and that reflects currentand future-expected financial return, i.e. constant mathematically-expectedfuture income.

Rather than supporting the ‘‘asset and liability view,’’ Hicks argues forthe objectives of the ‘‘revenue and expense view,’’ which through matchingand allocation, attempts to time-phase revenues and expenses to obtain anestimate of what can be consumed, and which by downplaying asset andliability value fluctuations attempts to obtain an income that excludeswindfall gains – exactly what Hicks recommends.

JOEL JAMESON334

Given that both FASB and the IASB hold Hicks as a foundational au-thority, it is incumbent upon both of them to pursue accounting standardsthat remove windfalls from income as Hicks suggested.

NOTES

1. Hicks does not discuss ‘‘entities’’ nor incorporated companies, but ratherindividuals and society as a whole.

REFERENCES

Financial Accounting Standards Board (FASB), & The International Accounting Standards

Board (IASB). (2005). A new conceptual framework project, revisiting the concepts.

Norwalk: FASB. http://www.fasb.org/project/conceptual_framework.shtml.

Hicks, J. R. (1946). Value and capital: An inquiry into some fundamental principles of economic

theory (2nd ed.). Oxford: Clarendon Press.