Exiting Intellectual Grooves in the Reporting of Liabilities

John Staunton

This thesis deals with tensions met in accounting for liabilities. Over the years, those tensions arose in definition, recognition and measurement of liabilities. While once regarded as quite uncomplicated (and requiring little thought), liabilities became most complex as the definition broadened and new financial instruments (both primary and secondary) were created, causing recognition and measurement tensions within accounting. The 21st Century has witnessed continued debate on Equity/Liabilities.

The thesis developed here is that attempts to develop a theoretically sound and practically workable way of accounting for liabilities have been constrained by a recycling of ideas, of being stuck in an intellectual groove. It is argued that to exit that groove requires agreement that tensions follow from the provision of intermingled data - conventional accounting, financial, economic and social - in one report.

The proposal here is any approach to unravel that intermingling must:

  • Produce a contemporary statement of financial position,
  • Allow for tensions from a mixing of ideas and concepts of an interdisciplinary type,
  • Produce an interrelated hierarchy in the definition of terms,
  • Accept that values are distinct from prices, and
  • Allow for dilemmas met in measurement, including those related to the time factor, markets and models.

Above all else, consideration must be given to 'The total scene' - one of the major themes of Chambers' works.

While research in this area may be conducted in distinct ways, here Chambers' 'method of construction' is employed - one which analyses the environment in which accounting for liabilities is placed. Chambers (and others before and after him) claim that to provide a proper method of accounting for elements (including liabilities), one must first establish the function of accounting. It is argued this is to provide financial statements which act as a device to steer or control corporations as well as assisting related decision-making (or what Chambers would term 'choice') by stakeholders. Chambers used, among other techniques, a flight instrument navigation analogy to support his required outputs of an accounting system. This is consistent with the use of the term 'governance' which may be traced back to early Greek origins. While 'corporate governance' is a phrase arguably coined in the late 1980s, the idea is much older. It was certainly discussed in the 1800s in both UK and USA, as shown in Chapter 2.

It is shown that throughout the 19th and 20th Centuries, issues emerged in respect of financial reporting, a category more general than financial statements, resulting in lengthy debate. Chambers saw a link between the reporting of (sometimes misleading) accounting data, (especially that found after unexpected corporate collapses, in mergers/takeovers/amalgamations battles and in the dilemmas met in times of rapid changes in prices and price levels), and calls for reform of accounting of a conventional type. In Chapter 2, within a context of events in a dominant (in the Anglo-Saxon sphere) UK, it is argued that earlier analysis of companies was generally at a legal level. Later, the advantages of a company format to finance and manage large investment projects led to analysis at an economic level. Towards the end of the 19th Century, a major issue of debate was 'big business'. In the 20th Century, as USA dominance grew, 'publicity' as a control device was debated - times when accounting reports arguably had a stated function. However, it would take a lengthy period to identify what was to be published. In general, the reports were of position and performance (Chapter 3). Control of the contents of these reports was 'captured' by the accounting profession, a well-known practitioner George O. May playing a pivotal role. The 'May legacy' saw consolidation of allocated historical cost as the foundation of what is referred to as conventional accounting (Chapter 4).

In Chapter 5, the 1940s are identified as times when the corporation's role moved to the social level. During that time, the May legacy led to tensions, as others sought financial statements of a more relevant, contemporary type. From the late 1940s to the mid-1960s, Chambers developed a rigorous system of financial reporting to help users understand the nuances of financial adaptation. Developed in a series of journal articles, it was published (in its then form) as a book in 1966 - a magnum opus of accounting to external users. Continuously Contemporary Accounting (CCA) was Chambers' solution. The acronym was later usurped by another system  'Current Cost Accounting'  and Chambers' model became known as CoCoA. This model, despite incorporating the works of various scholars and applications from practice, was seen as being novel and quite radical.

The system was quickly attacked by some academics, their students and practitioners. They saw minimal net benefit in adopting the system, preferring instead the status quo of conventional accounting or their own proposals for reform. Other academics, their students and practitioners were to support the model in full or in part. Changes were suggested. One area of contention was to be the treatment of liabilities.

Some debates achieved little; others led Chambers to incorporate changes from his original tenets. Still others were vigorously defended by Chambers. A broadening of any reporting to include economic and social data led to debate, introduced in Chapter 6, that too much was expected of financial statements. To Chambers, this was a key issue. His CoCoA and other works are placed in Chapter 7 within a context of the conceptual framework projects and their historical development. It is argued that the projects have led to tensions by including economic and social data. Chambers' fundamental ideas are shown to underpin (in principle) developments in the Australia project.

Building on the framework projects worldwide, analysis follows in Chapter 8 of issues of definition, recognition and measurement in general and of liabilities in particular. The definition of liability under CoCoA is quite explicit, as Chambers took an approach consistent with his general accounting theory. His argument does not reject a hierarchy of interrelated terms regarding liabilities. Support is also provided by arguments for economic market-type data and more relatively recent debates regarding social data.

Debate, as shown in Chapters 1 and 9, continues. Chambers' 'revolution', associated with the acronym CoCoA, continues, but at a gradual rate. His arguments regarding liabilities remain very contentious, given moves to 'fair value' liabilities. However, benefit-cost analyses of changes in accounting for liabilities include, either explicitly or implicitly, effects of applying issues of the underlying reasoning provided by the tightly structured CoCoA.


Professor Graeme Dean