The History and Tradition of Accounting in Italy

David Alexander, Stefano Adamo, Roberto Di Pietra, Roberta Fasiello, David Alexander, Stefano Adamo, Roberto Di Pietra, Roberta Fasiello

• Publisher: Routledge
• Year: 2017
• ISBN:
  9781317206552
• Edition: 1
• Topic: Negocios y empresa
• Subtopic: Negocios en general

Italian accounting has a long and honourable tradition of theoretical and applied analysis of the accounting and reporting function, perceived and defined much more broadly than in the Anglo-Saxon tradition. The high point of this perhaps, is the creation of what is known as Economia Aziendale (EA). The antecedents, genesis and later developments are presented here in detail by highly knowledgeable specialists in the field.

EA takes as a prerequisite the necessity of the business (entity/azienda) to ensure its own long-run survival. This requires that the necessary resources are retained and preserved, so operating capital maintenance, by definition future-oriented, is essential. It requires a focus on the particular business organization, entity-specific and consistent with today's notion of the business model. Entity-specific information relevant to current and future cash flows is a necessary pre-requisite for ensuring long-run survival, which historical cost accounting, or fair value (being market-specific not entity-specific) satisfactorily achieve.

Flexibility of valuation and of reporting, always relevant to the specific asset at the specific time in the specific place, is a necessary condition for effective management. This is exactly the focus of EA and its analysis and tradition. Scholars and advanced students of international regulation and accounting, as well as accounting history, will find this an invaluable guide to a vibrant, scholarly tradition of great practical relevance today.

1 The contribution of Maffeo Pantaleoni in the field of financial valuation

Luciano D’Amico and Riccardo Palumbo

1 Introduction

Maffeo Pantaleoni (1857–1924) was a distinguished Italian economist and politician.

After his doctorate in law at the University of Rome (1881) he became fond of Economics and Finance. He obtained a licence for teaching Finance in 1884, then he taught in several Italian universities.

Although he had many disciples, he didn’t found any “school”. His aversion to the formation of “schools” is well known; he said there are only two schools “the school of those who know economics and the school of those who do not” (Pantaleoni 1897: p. 158).

The contribution of Maffeo Pantaleoni to the development of Economics has been studied by many scholars; in particular in relation to the development of the theory of value, considerably influenced by the great attention to empirical studies.

Maffeo Pantaleoni actively participated in the political life of his time. In 1901 he became part of the Chamber of Deputies. He was Minister of Finance in the government of Gabriele D’Annunzio in Fiume (1919). In 1923 he entered the Senate and was a member of the League of Nations.

Maffeo Pantaleoni’s bibliography is remarkable. In 1904 Pantaleoni published in the Giornale degli economisti an essay entitled “Some observations on the valuations in the absence of market price formation” (“Alcune osservazioni sulle attribuzioni di valori in assenza di formazione di prezzi di mercato”).

This essay plays a leading role in the theory of value applied to the financial statements.¹

Maffeo Pantaleoni is the first economist quoted by Fabio Besta in the “Prolegomeni” [Introduction] of his “La Ragioneria” (Besta 1922). Besta does not quote this specific essay. The work of the illustrious economist has contributed to the cultural background of Besta marginally, i.e. in relation to the general theory of value and not to financial statement valuation. Differently, Pantaleoni’s “Observations” greatly influenced the work of Gino Zappa and of his disciples.

The essay consists of propositions and proofs.

Among the cases of valuations in the absence of market prices, Pantaleoni focuses on the case relating to the preparation of financial statements of a company. Pantaleoni poses a first research question: “What amount of money, having legal tender status, should be allocated to the various assets and liabilities of financial statements of a firm [‘azienda economica privata’] where there is no formation of prices in a market?” (Pantaleoni 1904: p. 199).

To answer this question, he formulates the following five propositions:

• first proposition: “The end (or purpose) for which financial statements are prepared solely and entirely gives meaning to the valuations that constitute its assets and liabilities” (Pantaleoni 1904: p. 199);

• corollary to the first proposition: “The same set of rights constituting an asset, not only can, but must, receive allocations of different values, depending on the purpose of the valuation” (Pantaleoni 1904: p. 203);

• second proposition: “A financial statement forecast, in the absence of a specified purpose, is subject to only one absolute rule, that is, being able to approximate as much as possible what the final statement will actually be” (Pantaleoni 1904: p. 205);

• third proposition: “Valuations that consist of forecasted values, (i.e. are forecasted values about the price of actual future realization), have nothing to do with current market or cost prices, no matter how manipulated” (Pantaleoni 1904: p. 208);

• fourth proposition: “Valuations in line with forecasts of actual realization should not suffer degeneration for reconciliation with criteria other than the terms of research” (Pantaleoni 1904: p. 219);

• fifth proposition: “With financial statements different purposes can be achieved, but these then need to be compatible with each other; if not, different statements should be drawn up for the same company” (Pantaleoni 1904: p. 225).

2 The first proposition

First of all, Pantaleoni states that valuations depend upon the end or purpose for which financial statements are prepared. This means that, when interpreting a statement, readers ascribe an explicit or implicit purpose to their interpretation (Pantaleoni 1904: p. 201); a reader can interpret the “symbols” contained in a financial statement, only by knowing its purposes:

A financial statement is a set of symbols: the meaning of each symbol is linked to the purpose of the statement: it is illogical to interpret those symbols with criteria that are not linked to the purpose of the statement, even though these criteria are or might be valid in other cases.

(Pantaleoni 1904: p. 199)

Therefore the purposes that underlie the choice of assesment criteria for the preparation of financial statements are the same purposes that allow the interpretation of the financial statement itself:

If one criterion inspired the construction of the financial statement (i.e. the valuation) no other criteria can be used for its intepretation. If no conscious criterion, albeit implicitly, inspired the financial statement valuations, the statement lacks any sense and has nothing but the outward appearance of a statement.

(Pantaleoni 1904: p. 202)

When defining the purposes to be ascribed to the statement that the editor of the financial statement not only can, but must take into consideration during the valuation process, Pantaleoni clearly distinguishes between liquidation and going-concern hypotheses (i.e. “a company … [that] is fully performing its physiological functions”).

The distinction between liquidation and going concern is linked to the formation of reserve funds.

In fact … reserve funds (fondi), inter alia, serve as coefficients of transformation of the value of a going concern into the value of the same concern, in case of liquidation.

The reserve fund in question is therefore necessary to preserve the capital in case of a writedown deriving from the liquidation of a company (Pantaleoni 1904: p. 224).

One of the most important purposes of a financial statement in a going-concern hypothesis is the dividend calculation. In such a hypothesis we must consider that,

the members of a company are not only the current shareholders, but also the future ones, as corporations, having a separate legal entity and thus being independent from the individuals composing them, represent also the interests of those individuals that might join the company in the future. The current dividend must be neither lower nor higher than the current income. If lower, the current shareholders would be disadvantaged compared to the future ones; the opposite occurs if the current dividend happens to be higher.

(Pantaleoni 1904: p. 201)

3 The second proposition

Going to the second proposition, Pantaleoni clarifies the concept of “forward looking operating statement”. The scholar states that “a financial statement forecast, in the absence of a specified purpose, is subject to only one absolute rule, that is, being able to approximate as much as possible what the final statement will actually be”; in such a context, “financial statement forecast” stands for the statement drawn up in the case of a going concern, while “final statement” refers to the statement drawn up in the case of liquidation of the company.

In order to better define these concepts, the author describes and classifies companies according to their production process, that is the “destruction of direct goods aimed at producing capital goods that, in turn, are re-transformed into direct goods” (Pantaleoni 1904: p. 208).

So, at one end of the spectrum, he puts what he defines as “companies with an annual-oriented gestation period”, i.e. those companies “whose total assets, originally liquid, will be reconverted into liquid assets within a budget period; namely, one year”; on the other end of the spectrum he defines the “companies with a strongly multi-year-oriented gestation period”, i.e. “those companies whose asset transformation process requires a longer period” (Pantaleoni 1904: pp. 205–208).²

4 The third proposition

In his third proposition, Pantaleoni states that the valuation should be carried out in accordance with the “forecasted realization values” rather than with the “current prices” or with the “cost values”; no relationship of dependency occurs between the former and the latter. In this way he criticizes both jurists and accountants, who “usually believe they can use a couple of rules as a passe par tout”³ and he stands against the so-called “legalistic-conservative model” (Perrone 1997), disregarding the rule according to which assets must be assessed at the lower of cost and current price.

The arguments provided by Pantaleoni in order to prove the ineffectiveness of the above-mentioned rule can be summarized as follows.

a Entrepreneurs evasive behaviour:

This old rule has always been taught but never been applied.… The rule does not hold up, because it does not pursue its own purpose.… Let us consider business owners who have, in their financial statements, some assets that costed less than their current market price; it is impossible for them to value their assets according to this criterion without disregarding the law which might require, for example, a different valuation based on costs. They can only sell and buy again their own asset.… In case of securities and values bound with a published price – or in case of goods that generally belong to an organized market – the inadequacy of this rule is so clear that it is usually not prescribed by law; it does only apply in the case of real assets, or movable properties treated as real assets.

(Pantaleoni 1904: pp. 209–210) (here he refers to the Swiss law)

b “Arbitrariness” when determing the production costs linked to the allocation of indirect costs:

The rule does not hold up, because a cost is often the result of a combination of expenses that might be arbitrarily allocated to one product rather than the other. When, for example, there is more than one product resulting from the same technical process, or when the production of a set of products is so interconnected that the expenses incurred for the first product are definitely linked also to the production of the second and the third ones, it is impossible to allocate the whole total cost to just one of these products.…

Effectively, specific expenses, such as any raw material incorporated into a specific product, represent in most businesses just the lowest share of expenses and it is certainly not wrong to say that all kinds of expenses are general charges.

(Pantaleoni 1904: pp. 210–212)

c The “retrospective” meaning of “cost”:

a cost is the result of produced and marketed quantity and so it is subsequent to the drawing up of the financial statements, unless the statement is just a mere balance-sheet.

(Pantaleoni 1904: p. 212)

d Complementary factors of production:

When calculating assets according to costs or to current market prices, the concept of utility of products is not taken into consideration. This happens because products are usually grouped according to their complementarity. Juri...