What Should GAAP Look Like? A Survey and Economic Analysis
We develop an economic theory of GAAP under the assumption that GAAP’s objective is to facilitate efficient capital allocation within an economy. The theory predicts that GAAP as shaped by the economic forces of demand for and supply of financial information would focus on performance measurement an...
| Main Authors: | , , |
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| Format: | Working Paper |
| Language: | en_US |
| Published: |
Cambridge, MA; Alfred P. Sloan School of Management, Massachusetts Institute of Technology
2011
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| Online Access: | http://hdl.handle.net/1721.1/66935 |
| _version_ | 1826197292920602624 |
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| author | Kothari, S.P. Ramanna, Karthik Skinner, Douglas J. |
| author_facet | Kothari, S.P. Ramanna, Karthik Skinner, Douglas J. |
| author_sort | Kothari, S.P. |
| collection | MIT |
| description | We develop an economic theory of GAAP under the assumption that GAAP’s objective is to facilitate efficient capital allocation within an economy. The theory predicts that GAAP as shaped by the economic forces of demand for and supply of financial information would focus on performance measurement and control through the income statement and balance sheet. In addition, the theory allows us to compare and contrast extant GAAP, as produced in a regulated setting, with a GAAP that might arise endogenously as a result of market forces. We conclude that verifiability and conservatism, while detracting accounting from a valuation objective, are critical features of an economic GAAP. We recognize the advantage of using fair values in circumstances where these are based on observable prices in liquid secondary markets, but caution against expanding fair values to areas such as intangibles where their opportunistic use is predictable. We conclude that the convergence project between the FASB and IASB should be dismantled and that competition between the two bodies would be the most practical means of achieving an economic GAAP. |
| first_indexed | 2024-09-23T10:45:49Z |
| format | Working Paper |
| id | mit-1721.1/66935 |
| institution | Massachusetts Institute of Technology |
| language | en_US |
| last_indexed | 2024-09-23T10:45:49Z |
| publishDate | 2011 |
| publisher | Cambridge, MA; Alfred P. Sloan School of Management, Massachusetts Institute of Technology |
| record_format | dspace |
| spelling | mit-1721.1/669352019-04-12T15:00:29Z What Should GAAP Look Like? A Survey and Economic Analysis Kothari, S.P. Ramanna, Karthik Skinner, Douglas J. We develop an economic theory of GAAP under the assumption that GAAP’s objective is to facilitate efficient capital allocation within an economy. The theory predicts that GAAP as shaped by the economic forces of demand for and supply of financial information would focus on performance measurement and control through the income statement and balance sheet. In addition, the theory allows us to compare and contrast extant GAAP, as produced in a regulated setting, with a GAAP that might arise endogenously as a result of market forces. We conclude that verifiability and conservatism, while detracting accounting from a valuation objective, are critical features of an economic GAAP. We recognize the advantage of using fair values in circumstances where these are based on observable prices in liquid secondary markets, but caution against expanding fair values to areas such as intangibles where their opportunistic use is predictable. We conclude that the convergence project between the FASB and IASB should be dismantled and that competition between the two bodies would be the most practical means of achieving an economic GAAP. 2011-11-04T16:52:32Z 2011-11-04T16:52:32Z 2009-09 Working Paper http://hdl.handle.net/1721.1/66935 en_US MIT Sloan School of Management Working Paper;4740-09 application/pdf Cambridge, MA; Alfred P. Sloan School of Management, Massachusetts Institute of Technology |
| spellingShingle | Kothari, S.P. Ramanna, Karthik Skinner, Douglas J. What Should GAAP Look Like? A Survey and Economic Analysis |
| title | What Should GAAP Look Like? A Survey and Economic Analysis |
| title_full | What Should GAAP Look Like? A Survey and Economic Analysis |
| title_fullStr | What Should GAAP Look Like? A Survey and Economic Analysis |
| title_full_unstemmed | What Should GAAP Look Like? A Survey and Economic Analysis |
| title_short | What Should GAAP Look Like? A Survey and Economic Analysis |
| title_sort | what should gaap look like a survey and economic analysis |
| url | http://hdl.handle.net/1721.1/66935 |
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