Accounting errors, Accounting allocation, Uncertainty

The outlines an accounting theory approach to the problem of determining the appropriate times to record the employer's pension expense. In the proposed approach, the expense timing problem becomes a problem of asset and liability measurement. "Pension liability" can be defined as the value of the employer's obligation to make future pension payments to current and retired employees. This includes the obligation to make future payments based on or "related to" services yet to be performed but excludes anticipated pension payments to those to be employed in the future. "Pension asset" can be defined as the value of the expected future employee services for which part of the pension liability has been incurred. When an individual is employed, a pension liability arises immediately. There arises at the same time a pension asset, which may normally be supposed to equal the pension liability. At the time when an employee retires, the pension liability will have grown larger because of the time value of money, but the pension asset will have decreased to zero.

The accounting theory revolution consists essentially of an attempt to overthrow the traditional emphasis on costs in accounting theory and to replace it with a logical structure centered on values. It is hoped that this will provide a basis for resolving major theory controversies and for narrowing the present diversity of accepted practice. The "pure theory" of accounting rests on a definition of resources in terms of economic power of an entity and a definition of income in terms of changes in resources. The ideal measure of resources is current exchange value. This is not the same as either liquidation value or market replacement cost, though these set lower and upper limits, respectively, and can often be used to measure value. When these limits are widely separated, value must be estimated. It is often appropriate to forecast future benefits in making these estimates. The amount expended for an asset is ordinarily a reliable measure of its value at the time of acquisition. In some cases it is impossible to get a reasonable approximation of the value of an asset, though there may be no doubt that some exchange value exists. Such assets are included in the term "goodwill," and are not recorded in the absence of an actual exchange.

This article is an attempt to demonstrate that progress in accounting theory must begin with income concepts, secondly, the appropriateness of a single concept, accretion, rather than a variety of concepts, third, that the accretion concept is an all-purpose concept, relevant to taxation and other areas as well as accounting, and finally, that general acceptance of this concept would have significant effects on accounting practice as well as "theory." The accretion concept is neither complex nor difficult but has far reaching implications for accounting theory and practice. The accretion concept defines income as an increase in economic power which can be measured with reasonable objectivity. For an individual, income for a period equals the change in economic power during the period plus the value of goods and services consumed. For other entities, income is the change in economic power adjusted for capital contributions and distributions. In emphasizing objective measurability, the accretion concept differs from the economic concept of income, as usually conceived, and also from the concept implicit in conventional accounting practice.

Reviews the book "Financial Aspects of Private Pension Plans," by Mario Leo, Preston C. Bassett and Ernest S. Kachline.

Reviews the book "Value Added Income," by Gokul Sinha.

Reviews the book "Making Accounting Decisions," by George J. Staubus.

Reviews the book "Truth in Accounting," by Kenneth MacNeal.