The Decision Usefulness Theory of Accounting

A Limited History

George J. Staubus

• Publisher: Routledge
• Year: 2013
• Print ISBN:
  9780815334446
• eBook ISBN:
  9781136533792
• Topic: Business
• Subtopic: Business General
• Index: Business

This book ties together selected contributions by George Staubus to the early development of the decision-usefulness theory of financial accounting--the theory that has become generally accepted accounting theory in the last half of the twentieth century and is the basis for the FASB's conceptual framework.

Maturity of the Theory:
The Nineteen-Seventics Edition

Commentary

The nineteen-sixties was a decade in which I gave little attention to decision-usefulness theory as such, although everything I wrote was based on it. After completing ATOATI in 1959, I turned my attention to a line of empirical work that followed from it. According to decision-usefulness theory, both changes in the residual equity and changes in cash (or some related pool of liquid funds) were relevant to cash flow-oriented decisions. But which historical data were the more relevant: cash flows or earnings flows? Which measure provided the better basis for choosing stocks for investment? With very little research literature to guide me, and with a minimal understanding of empirical research methods, I decided that I must find which measure was the more closely correlated with stock values. The accounting issue was: Does depreciation accounting contribute any information of incremental value for the investor—a serious challenge to depreciation accounting. Thus began seven pre-CRISP years of frustrating empirical research that yielded relatively little in the way of answers to that important question. Both cash flows and earnings flows were helpful in explaining stock prices. In the course of work on that issue, the data were moved from multicolumn “worksheets” and Marchant calculators to punched cards and an IBM 701. Other accounting questions that could be addressed with the same research approach were added. Results were reported in 1965a, 1967b, 1968d, and 1968e, the last one appearing more than nine years after the project began and the same year that Ball and Brown (1968) and Beaver (1968) published works setting a new quality standard for empirical work on relationships between accounting variables and securities prices (and premised on decision usefulness).

The second research topic that took a lot of my attention in the nineteen-sixties was activity costing, which was finished in the spring of 1970 (Activity Costing and Input-Output Accounting, 1971c). That work was another response to the decision-usefulness theory developed in the nineteen-fifties. ATOATI represented the application of the decision-usefulness approach to financial accounting. My interest in managerial accounting led me to turn to the heart of that field: cost accounting. “Activity costing” was the result. I am pleased to see that many academics and practitioners have become interested in that approach to cost accounting, even if it has not been as widely accepted as decision-usefulness theory. Neither theory has been applied to its potential.

My return to work on decision usefulness in financial accounting was stimulated by my association with Bob Sterling and Ray Chambers while on leave at the University of Kansas in the 1969–70 academic year. That was the heyday of the “Kansas Conferences,” then organized by Bob Sterling, and he asked me to present a paper arguing the merits of measuring assets and liabilities by discounting their future cash flows, which was emphasized in ATOATI, for comparison with Ray Chambers' current cash equivalent view, Yuji Ijiri's justification for historical cost measurement, and Philip Bell's presentation of the Edwards and Bell current replacement cost reporting scheme. (See Sterling, 1971a.) The resulting lengthy paper was divided into two for publication (1970, 1971b).

In 1975, it seemed that so many extensions and repairs had been made to the decision-usefulness theory as I left it in the late fifties that a revised edition might be useful — one that could serve as a text for graduate theory courses. So I wrote a new book, starting from scratch, and including a list of additional readings and study questions at the end of each chapter as well as a substantial number of reprinted materials from other sources so as to give students both reinforcing ideas and alternatives. I gave a great deal of emphasis to the criteria approach to choosing among alternative accounting methods, so I gave the book the title Making Accounting Decisions (MAD, 1977c) although “making accounting choices” seemed equally good. MAD was finished and published during my term as Director of Research and Technical Activities at the Financial Accounting Standards Board (1976–78) — a time when the Board was deeply involved in its “conceptual framework” project which eventually completed the acceptance of the decision-usefulness theory by theory-oriented accountants in English-speaking countries. All but one of the reprinted materials in this Part have been selected from publications that appeared between 1970 and 1977 to show the development of the second stage of the theory. To my knowledge, no substantial changes in the theory have been made since that period. One later publication (1989a) is reprinted here because I believe it contributes to an understanding of why a few accounting scholars have been attracted by the ideas that “cash flow accounting” and emphasis on measurement of assets at their “as-is net realizable value” have more to offer to users than does emphasis on cash flow potential. My explanation is that those scholars are more concerned with reporting on enterprise liquidity than in reporting on enterprise wealth. Both are required by decision-usefulness theory. Standards setters appear never to have been impressed with such an emphasis on reporting on liquidity.

A word about the nineteen-sixties publication that did so much to publicize the decision-usefulness objective and thereby to stimulate interest in the development of decision-usefulness theory is appropriate here. In the nineteen-fifties and early sixties I seemed to be a lone voice for decision usefulness (excepting Supplementary Statement No. 8 of the AAA, on disclosure (1955)). Furthermore, ATOATI was not widely read in its early years. But then the American Accounting Association published the report of its Committee to Prepare a Statement of Basic Accounting Theory (ASOBAT) in 1966. I had no direct part in the work of that committee, but my colleague for fourteen years, the late L. L. Vance, was a member as was the very persuasive George Sorter from the University of Chicago who had reviewed ATOATI for The Accounting Review (1963). I was immensely pleased with the result, because it accepted and called attention to the decision-usefulness objective as the starting point for thinking about accounting issues and identified relevance as the primary “standard” for evaluating accounting methods. The committee could not have picked two features of decision-usefulness theory to emphasize that could have played bigger roles in the promotion of the whole theory than those two did. By then, the time apparently was ripe for theory-oriented academic accountants to think about objectives of accounting and criteria for making accounting choices. The result was instantaneous acceptance of the decision-usefulness objective by a substantial set of interested parties, especially academics and several members of the AICPA's Accounting Principles Board and its staff. It seemed that within a matter of months most of the research that related in any way to accounting theory either explicitly or implicitly incorporated decision usefulness as a premise. Completion of that prerequisite made subsequent acceptance of other features of decision-usefulness theory feasible, perhaps inevitable. The decision-usefulness objective became the nucleus of a snowball that, once it started to roll, picked up all of the other features of the theory. ASOBAT was followed by APB Statement No. 4 in 1970, and The Objectives of Financial Statements in 1973, each of which accepted several of the basic features of the decision-usefulness theory so can be said to have contributed to its eventual widespread acceptance. The final (to date) “official” document in that series was, of course, the FASB's “conceptual framework,” starting with preliminary documents in December 1976 and concluding with concepts statement No. 5 in December 1984. That conceptual framework includes most of the features of decision-usefulness theory as I see it, so I call it a version of the theory. But without ASOBAT, who knows how long widespread acceptance would have taken?

Acceptance of Theory Features Emphasized in Nineteen-seventies Works — The multiple criteria approach to making decisions, and the set of criteria to be used, were not major features of my work on decision-usefulness theory until the nineteen-seventies. The exception was the emphasis on information relevant to cash flow-oriented decisions and mention of cost and bias in ATOATI. Several other academics published papers dealing with criteria in the nineteen-sixties. (See below.) My publications emphasizing this area started in 1970 and ended with 1977b. The big step towards acceptance of the multiple criteria approach in the broad community of accountants was made in APB Statement No. 4 (AICPA, 1970). After the FASB officially adopted the decision usefulness objective in its Statement of Financial Accounting Concepts No. 1(1978), it chose the multiple-criteria approach (without using that term) as the second building block of its conceptual framework. As FASB director of research and technical activities, I commissioned Professor David Solomons to prepare a groundwork document on qualitative characteristics of financial information for the Board in 1977. His work was well received by the Board and Solomons was asked to continue to advise the Board as it developed the exposure draft and Statement of Financial Accounting Concepts No. 2, Qualitative Characteristics of Accounting Information. (1980) The multiple criteria approach to making accounting choices was thus put into the official approach to standards setting in the U. S. in 1980, even though “criteria” terminology was not explicitly accepted and the effects-via-other-parties criterion was not addressed. Other differences between the Board's and my set of criteria in MAD were immaterial. Relevance was defined in different words, but the Board's meaning is similar to mine. The Board chose “materiality” instead of optimal quantity. I do not see either as important now. Costs of utilizing and producing information were merged and are to be compared with bemefits; no quarrel there. In general, this part of the decision-usefulness theory has been well accepted by neutral participants in standards setting.

Recognition of the alternative measurement methods has been a gradual process over many years, even decades, so no particular evidence of acceptance is noteworthy. The rankings of measurement methods on the relevance criterion, however, has neither been accepted nor rejected by authoritative bodies in accounting; they have not addressed the subject. The FASB tried to deal with it in the 1980s but the Board members could not reach agreement, although they did accept the idea of an array of measurement methods. Acceptance of the implications of decision-usefulness theory for inflation accounting has not been universal. In general, restatements of old measurements using a consumer price level index in inflationary environments has been accepted, so decision-usefulness thinking has prevailed there. On several other specific issues, however, the decision-usefulness approach has been rejected, as noted in the section on inflation accounting near the end of this part of the book.

Locations of Theory Features in the Nineteen-seventies Works.—The publications included in this part of the book represent a second look at decision-usefulness theory. Several features of the theory that are emphasized in the diagrammatic outline (p. x) were revisited or introduced in these materials. For the benefit of those readers who are looking for material on a particular feature, a few places to look are mentioned here.

The decision-usefulness objective was restated in the 1971 relevance paper, p. 42 (reprinted) and in MAD, Chapter II. Investors' cash flow-oriented decisions and information for them were addressed in the 1989 Accounting and Business Research (A&BR) paper, pp. 161–4. Alternative versions of historical cash flows were elucidated in the 1966 Accounting Review article and in the 1989 A&BR paper. Evidence of cash flow potential was discussed in the 1971 relevance paper, especially on pp. 48–50, and in the 1989 A&BR paper, pp. 166–8.

The criteria approach to accounting choices and the individual criteria were most fully developed in the 1976 A&BR article, with a further development of the effects-via-other-parties criterion in Chapter III of MAD and in the introduction to the FASB Economic Consequences volume. Descriptions and rationales for the ranking of measurement methods on the relevance criterion were addressed in depth in the 1971 relevance paper, pp. 50–62, and in Chapter VII of MAD. Relationships among the methods were also discussed in the 1989 A&BR paper, pp. 166–7. Finally, the measuring unit issue and other aspects of “inflation accounting” were attended to in MAD, Chapter IX.

The materials from the 1970s period that are reprinted in this Part emphasize only a few of the major features of the decision-usefulness theory, as outlined in the diagrammatic outline (page x). Explanations of other features of the theory, included in the nineteen-fifties materials, reprinted in Part I, were not improved significantly in the nineteen-seventies....

Table of contents

• Cover
• New Works in Accounting History
• Full Title
• Copyright
• Acknowledgments
• Preface
• Contents
• I. In the Beginning: the Nineteen-Fifties Edition
• II. Maturity of the Theory: The Nineteen-Seventies Edition
• III. Summary of the Decision-Usefulness Theory of Accounting to Investors
• IV. Impact
• V. Publications of George J. Staubus
• Reference