Teorias Cientificas y Teoria Contable

Critical Perspectives on Accounting 25 (2014) 539–557
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Critical Perspectives on Accounting

journal homepage: www.elsevier.com/locate/cpa
An accounting revolution? The financialisation of standard

setting
Julian Müller *
Sociology Department, Lancaster University, Lancaster LA1 4YD, UK
A R T I C L E I N F O A B S T R A C T
Article history: This paper analyses the political-economic content of the recent ‘revolutionary’ shift in
Received 17 December 2012 financial accounting rules for listed companies, specifically the rise of IFRS and fair value. It
Received in revised form 12 August 2013 connects this shift to the socio-economic changes that are currently being discussed in the
Accepted 12 August 2013
literature on financialisation, e.g. the rise of shareholder value and the proprietary view of
Available online 28 August 2013
the firm. Two ideal-typical accounting systems are constructed on the basis of normative
accounting theory and extant standards – historical cost accounting (HCA) and fair value
Keywords:
accounting (FVA). The ‘accounting revolution’ of the past 10–15 years can be understood as
Critical
Social a qualitative shift from HCA to FVA. It is further argued that these ideal-typical systems are
Accounting change related to different circuits or forms of capital – productive and money capital respectively
Political economy – and to the particular perspective that these afford on the, capitalist firm. Inasmuch as
Financialization financialisation is related to the circuit of money capital one can make sense of the rise to
IFRS prominence of FVA, which represents the dominance of a financial view of the firm in the
field of financial accounting. Throughout this paper, however, the limits to financialisation
are also highlighted and traced back to the ineradicable manifestation of the circuit of
productive capital.
ß 2013 Elsevier Ltd. All rights reserved.
1. Introduction
What are the form and social content of the recent changes in financial accounting standards epitomised by the rise of
IFRS and the increasing use of fair value accounting over roughly the past ten to fifteen years? And how are these changes
related to the dominance of finance that is currently being discussed in the financialisation literature? These are the
questions that this paper addresses by providing a systematic theoretical account of accounting change that focuses on the
political-economic content of accounting standards.
Profound changes have taken place in the regulation of financial accounting for listed companies in the recent past, and
IFRS are just one, albeit very important part of this. It has provoked proclamations of an ‘accounting revolution’ or a
‘paradigm shift’. Such claims may be exaggerated, but we are indeed witnessing a qualitative and systematic change rather
than a string of unconnected modifications that leave the fundamental nature of the accounting system untouched. There are
two important aspects to this shift: the first concerns the governance of accounting regulation. Here we have seen the shifting
of sovereignty from national regulatory institutions to a largely unaccountable transnational private body. The other
concerns the substance of accounting regulation, i.e. the principles and objectives that inform accounting standardisation. It
is this second aspect in particular that has been labelled, both by professionals and academic observers, as ‘revolutionary’,
* Correspondence to: Forschungskolleg Postwachstumsgesellschaften, Humboldtstraße 34, 07743 Jena, Germany. Tel.: +49 03641 945030.
E-mail address: julianporto@gmx.de.
1045-2354/$ – see front matter ß 2013 Elsevier Ltd. All rights reserved.
http://dx.doi.org/10.1016/j.cpa.2013.08.006
540 J. Müller / Critical Perspectives on Accounting 25 (2014) 539–557
and I will analyse it in terms of ideal typical accounting systems which I construct on the basis of normative accounting
theory and extant accounting standards. The aim is to provide a conceptually grounded account of this change that makes
sense of its systemic dimension, its profound nature and its political-economic content. This is more than just an
understanding of this or that individual accounting standard; it provides a comprehensive view and an understanding of the
meaning and general direction of accounting change. Apart from getting to grips with current developments, this description
and its unique methodological approach can also direct further research into accounting change. Moreover, the two ideal-
typical accounting systems can be linked to different circuits of capital as described by Marx in Capital Vol. II, namely those of
productive and money capital. That makes it possible to make causal sense of the current shift by linking it to financialisation,
the preponderance of financial incomes, motives and strategies both in the wider economy and the management of
individual businesses.
The literature on accounting and financialisation now covers a broad range of topics. Some studies examine how
management accounting is implicated in the financialisation of businesses (Ezzamel et al., 2008; Gleadle and Cornelius,
2008). The connection between financial accounting and financialisation has also been discussed. Newberry and Robb
(2008), for instance, examine how financial reporting is complicit in that ‘‘endless series of cheap financial dodges’’ (Froud
et al., 2000, p. 109) that companies driven by the doctrine of shareholder value tend to engage in so as to ‘make the numbers’
that impatient capital markets want to see. Another strand in this debate is concerned with the inherent connection between
financialisation (and/or the advance of shareholder value) and accounting standards – particularly the switch to IFRS and the
increasing use of fair value (Andersson et al., 2006, 2007a,b, 2008; Nölke and Perry, 2006, 2007; Walker, 2010; Zhang, 2010).
In this context it is usually claimed that recent changes in accounting standards do not merely reflect a financialised view of
the firm, but that they reinforce financialisation at the level of individual companies because they favour ‘‘the penetration of
enterprises by the logic of finance’’ (Aglietta and Rebérioux, 2005, p. 114). Another goal of this paper is to contribute to this
last strand of debate through an analysis of the political-economic content of accounting change. Grasping the general
tendency of accounting standardisation helps us understand why IFRS and fair value may reinforce financialisation.
First, I will discuss the various ways in which terms like accounting revolution or paradigm shift have been used, and I will
argue that they are an expression of the systemic nature of the current accounting change. This change, however, is more
adequately grasped through the lens of a binary typology of (ideal-typical) accounting systems. I will then construct those
ideal types as logically consistent combinations of three dimensions, based on two key works in normative accounting
theory and on publications by standard setters IASB and FASB. After explaining financialisation and introducing Marx’s
circuits of capital, I will finally connect the discussion of accounting systems to the issue of financialisation by demonstrating
the link between the two ideal types and the circuits of productive and money capital respectively. The conclusion – which is
preceded by an excursus on the work of R.J. Chambers – draws together the argument.
2. An accounting revolution?
Accountants may be a conservative bunch, but recent developments have prompted commentators, from academics to
journalists to standard-setters themselves, to use vocabulary that suggests fundamental upheaval. Nobes (1999), a former
member of the British delegation to the IASC, proclaims ‘‘The beginning of the end of conventional accounting’’, referring
chiefly to the expansion of fair value. Barker (2003) and Damant (2003b), both also previously involved with the IASB and/or
other standard-setters, see ‘‘The revolution ahead in financial reporting’’ in the context of the then plans to re-format the
income statement. Elsewhere Damant sees ‘‘a new era’’ dawning and predicts that the consistent application of fair value in
international standards and the shift towards decision-usefulness for investors as primary purpose of financial reporting will
have revolutionary consequences (Damant, 2003a; cf. Baetge et al., 2002). He stresses in particular the systemic nature of the
connection between the elements of these frameworks and therefore the qualitative nature of the resulting changes
(Damant, 2003a:12). One can agree or disagree only with the entire set of principles, but one cannot pick and mix.1
In some cases, the term ‘‘revolution’’ simply points to the perceived magnitude of accounting change (e.g. King, 2008;
Biondi, 2011). Others are more aware of its implications. They may, like Damant, stress the inter-connectedness of the
principles behind the revolution; or they may cite Thomas Kuhn’s theory of scientific revolutions (1996) according to which
natural science does not progress through incremental additions to the sum of knowledge, but through periods of upheaval
in which disciplines are thoroughly redefined, followed by periods of unspectacular ‘normal science’ within an established
paradigm (Barlev and Haddad, 2003; Dodd et al., 2008, p. 43; Nölke and Perry, 2005, pp. 1–5; Wells, 1976). Such scholars also
use Kuhn’s concepts of ‘‘paradigm’’ or ‘‘disciplinary matrix’’. Wells in particular noted how a ‘‘historical cost disciplinary
matrix’’ (1976, p. 474) was giving way to a new disciplinary matrix, although at the time it was too early to predict the
eventual winner in the competition to replace HCA.
The revolution (if it really is one) did not start at the level of accounting practice, but on the level of academic accounting
theory and the work/thinking of standard setters, though by now this has obviously influenced practice too. As Wells’ (1976)
article, which refers to accounting theory alone, demonstrates, the fundamental shift then underway was first observed in
1
Examples from the financial and professional press include: ‘‘Accountants of the world uniting in IFRS revolution’’, Financial Times, 21/06/2007: 26;
‘‘Fair-Value Revolution: Historical cost accounting is fading as Corporate America marches into a new era’’, CFO, September 2008, www.cfo.com/article.cfm/
11957243/c_11991481?f=magazine_coverstory [accessed 12.07.11].
J. Müller / Critical Perspectives on Accounting 25 (2014) 539–557 541
academic accounting. In the US, some accounting academics already tried in the early 1960s to convince the profession to
introduce certain elements of fair value accounting (Zeff, 1999, pp. 93–95). They failed then because of resistance from
practitioners, not least preparers and the SEC, but their ideas have now come to fruition. From the late 1990s onwards, articles
start to refer to theory as well as standards, which indicates that the ‘revolutionary’ ideas had migrated from the ivory tower to
the still academically minded, but also more practically oriented standard-setting bodies (FASB and IASB). Moreover, these later
articles are written by people who are involved in both academia and standard-setting bodies (such as Chris Nobes and Richard
Barker), or who are financial professionals actively involved in standard-setting (David Damant), or who at least have an interest
in it (e.g. King, 2003, p. 57). Only later did the financial and professional press wake up to the sweeping change.
This is not to say that the accounting revolution can solely be attributed to an academic and theoretical re-orientation that
prompted corresponding changes in standards. Theoretical shifts must themselves be understood in terms of ongoing social
and economic changes (Section 4). This context does not necessarily explain the emergence of a particular accounting theory
or system, but it explains its success and wider endorsement by businesspeople, regulators, practitioners, etc. (even if in a
‘watered-down’ form). Regarding the formation and social adoption of ideological systems more generally, Cohen (2001, p.
291) observes that the latter are ‘‘produced in comparative independence from social constraint, but persist and gain social
life following a filtration process which selects those well adapted for ideological service’’. There is therefore what Cohen
calls an ‘‘’ideological pool’’’. Which of the thought systems on offer is eventually adopted is not a foregone conclusion. After
WWII, for instance, no-one would have anticipated that the ideas of von Hayek or Mises would become so influential in the
more propitious 1970s and 1980s. Similarly, a certain set of circumstances led practitioners to endorse (elements of) an
accounting system that was developed quite independently by ivory tower accountants such as R.J. Chambers in the 1960s.
That certain ideas ‘trickled down’ to become socially accepted does not mean that this was somehow pre-ordained.
Nonetheless: the production of ideas, while not reducible to a reflection of material conditions, is also not unconnected to
them. Variation in this context does not mean that ideas simply pop up at random without regard to social structures.
Sometimes there is a material basis in certain general features of capitalist forms and social formations (cf. Jessop, 2002, pp.
217–224). As Marx argued in Capital II, capital in its metamorphosis assumes different forms – those of money, productive
and commodity capital – each of which goes through a peculiar circuit and generates differing perspectives on capital as a
whole. These circuits and their corresponding perspectives are, as I will argue below, connected to HCA and FVA. In other
words, different accounting systems may translate those different perspectives into the language of financial reporting.
When the defining features of the political-economic environment since the 1970s – neoliberalism, globalisation and
financialisation – are added to this mix, our accounting revolution can be plausibly explained as the combined result of the
emergence of particular intellectual accounting systems, certain immutable features of the circuits of industrial capital, and
an economic and political environment that fostered the dominance of money capital.
I propose that the accounting systems or paradigms in question are best understood in terms of ideal types. As defined by
Weber, 1988:(190–212), ideal types must not be directly equated with empirical reality. They are heuristic artefacts that
describe the characteristic aspects of a wide range of similar social phenomena in a purified way so as to render them
intelligible to the scientific observer. Therefore, one should not expect accounting practice to adhere to each and every aspect
of the pure type. When using ideal types one fully expects reality to diverge from them, and this divergence raises further
research questions. Furthermore, practising accountants need not even be aware of the existence of a set of principles that
inform their practice, although academically minded practitioners and accounting scholars may well be and frequently play
an important role in codifying and purifying them. This is why it makes sense to draw on influential accounting scholars
when constructing those ideal types.
For Ideal Type I, I have drawn mainly on two influential works by eminent scholars – one German, two American – that
date from the first half of the 20th century, at or around the time of the economic crisis of the 1930s: Eugen Schmalenbach’s
Dynamische Bilanz (‘Dynamic Accounting’; (1962)), and Paton’s and Littleton’s Introduction to Corporate Accounting Standards
(1957). These men did not invent an accounting system but tried to distill and codify the guiding principles that informed
empirical practice. While these texts did not present sociological ideal types, their concern with codification provides
important tools to enable such types to be constructed.
There is a difference between Germany and English-speaking countries that influences how much actual accounting thought
and, a fortiori, accounting standards conform to the ideal type. In the latter, accounting standardisation was left mainly to the
accounting profession itself, whereas courts, lawyers and statute law were central to regulation in Germany. So, unlike Paton
and Littleton, Schmalenbach could not ignore existing legal rules and opinions if his accounting system was to be practically
relevant. Lawyers and judges are not concerned much with conceptual purity or logic (unless we are talking about legal
concepts), so, from the viewpoint of the ideal type, this must be assumed to have introduced some ‘impurities’ into
Schmalenbach’s system (cf. Forrester, 1977, pp. 42–45). In particular, German accounting laws have emphasised prudence.
In the construction of Ideal Type II I rely mostly on the work of the IASB and, to some degree, the FASB. These standard
setters have continuously tried to systematise financial accounting through the development of a conceptual framework on
which to base individual standards. Thus, their work has a distinctly scholarly tone. In their case, ‘dilution’ may stem from the
fact that, as standard setters, they must pay attention to actual accounting practices that cannot be changed overnight (i.e.
not in a revolutionary fashion). Moreover, due process rules require them to conduct standard-setting in public, though this
is mostly a professionally or commercially interested public rather than an open public forum. Therefore, the IASB and FASB
must take into account – at least on some symbolic level – the concerns of a wide range of businesses from around the world.
In the wake of the financial crisis, even high-ranking politicians joined the discussion, criticising in particular the use of fair
value for financial instruments. Overall, there is probably more potential for divergence from the logic of Ideal Type II than in
the case of Schmalenbach, Paton and Littleton and Ideal Type I.
IFRS are a work-in-progress. Presently, they are not so much a systematic body of internally consistent standards –
although the Boards are working on it – but a hodgepodge of older standards bequeathed by the IASC (this includes parts of
the Conceptual Framework) and more recent standards that are frequently the joint of work of IASB and FASB. In the older
standards, codification of existing accounting practices was still an important element, whereas recent ones are more
prescriptive and consciously follow a theoretically guided approach that imposes – within the limits just mentioned –
coherence among individual standards. Moreover, there is constant movement as existing standards, old and recent, are
continuously revised, superseded, or because new ones are added. Hence, it would be erroneous to merely focus on the status
quo of IFRS at a particular moment. It is also important to get a sense of the general direction of standard-setting.
The work of the FASB and IASB does not take place in a vacuum; it has intellectual precursors in academic accounting
theory, and a genealogy of Ideal Type II would have to take them into account. Such a genealogy is not provided here because
it is not necessary to the construction of the ideal type. It is, however, interesting in its own right, and in the excursus on
Chambers, one of the more important forerunners of fair value accounting, I will make a contribution to it that may serve as
model for further genealogical research.
3. HCA and FVA as ideal-typical accounting models
I will focus on recent and current developments and the accounting principles inherent in them in order to construct Ideal
Type II. Ideal Type I is then introduced by way of contrast. In the construction of ideal types, I employ three binary
dimensions or variables, around which they vary. There is a logical connection between the dimensions because choosing a
value for one of them will strongly determine the values chosen in the other two.
3.1. Dimension 1: asset measurement
Various measurement bases have been used in financial reporting, but they can be reduced to the alternative already
discussed by Littleton (1935): value or cost. Should assets be recorded and carried at historical cost, or should some form of
current value be used?
In the past, historical cost was most common, although current value accounting was also applied in certain limited cases,
specifically where prudence demanded valuation according to the ‘lower of cost or market’ rule. Since the 1990s, and thanks
to the agency of the IASB and FASB, current value accounting has gained much ground through the expansion of fair value
measurement to various asset classes, financial and non-financial alike. (Among the standards that require or permit the use
of fair values are: IAS 16 Property, Plant and Equipment, IAS 26 Accounting and Reporting by Retirement Benefit Plans, IAS 38
Intangible Assets, IAS 39 and IFRS 9 Financial Instruments, IAS 40 Investment Property, IAS 41 Agriculture, IFRS 2 Share-based
Payment, IFRS 3 Business Combinations.)
So what is fair value and how does it differ from other types of current-value accounting? The IASB defines it as: ‘‘The
amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s
length transaction.’’2 Ideally, fair values are based on market prices but this raises problems of operationalisation. First,
which of the possible market prices for an asset should be used? There are, for example, 24 possibilities for a part-finished
commodity, depending on variables such as time of valuation or whether entry or exit prices are used (Bryer, 2004, pp. 8–9;
cf. King, 2003). By now, the IASB, like the FASB, 2006 (para. 7), has clearly opted for current exit prices. The Exposure Draft: Fair
Value Measurement published in May 2009 confirms that fair value is, indeed, ‘‘the price that would be received to sell an asset
or paid to transfer a liability’’ (IASB, 2009a,b, para. 1; emphasis added).
Problems also arise when there is no market for the asset in question or when the market is illiquid or otherwise
‘distorted’. In these cases, IASB and FASB allow surrogate measures. (See IFRS 13 Fair Value Measurement, paras. 61–89; IFRS 2
Share-based Payment, paras. 16–17, Appendix B.) For present purposes, I will assume the benchmark treatment of fair value,
i.e. marking to market prices.
Paton and Littleton, on the other hand, based their accounting system clearly on historical cost. The proper tracing and
allocation of cost with the purpose of accurately measuring income is the organising principle of their entire book. ‘‘Price-
aggregates’’ – a term that is ‘‘substantially the equivalent’’ of ‘cost’ – ‘‘constitute the basic subject matter of accounting’’
(1957, pp. 7, 25). The accountant’s job is to ‘follow’ costs from their points of entry through their various regroupings until the
point of exit:
‘‘. . . accounting for costs involves three stages: (1) ascertaining and recording costs as incurred, appropriately
classified; (2) tracing and reclassifying costs in terms of operating activity; (3) assigning [i.e. matching] costs to
revenues. The third stage is crucial from the point of periodic income measurement.’’ (1957, p. 69)
2
IFRS 9 Financial Instruments, Appendix A. Extant international accounting rules are not listed in the bibliography but referenced in the text with their
acronyms and paragraph numbers as at the time of writing (November 2012). All other IASB materials, such as discussion papers, exposure drafts or staff
papers, are treated like any other source. Standards and other materials by the FASB are also treated like regular sources.
Schmalenbach said little about asset measurement in general, but he treats historical cost as default measurement
(Schmalenbach, 1962, p. 224) and his name is clearly associated with a vigorous defence of cost-based accounting (Richard,
2005, pp. 842–844). In Dynamic Accounting, however, this appears to be based not so much on principled considerations and
more on commonly accepted accounting practice. Schmalenbach is also comparatively generous when it comes to deviating
from cost. There are many exceptions that allow some consideration of current values; most of these result from his strong
conservatism and are therefore essentially applications or variations of the lower-of-cost-or-market rule. On this particular
question, Schmalenbach did not so much codify and systematise existing practice as follow it.
3.2. Dimension 2: income determination
The switch to fair value for asset measurement is significant in its own right, but its transformative significance depends
on the approach to income determination of which there are two: the asset-liability- and revenue-expense-approach. The
former defines income (or corporate performance more generally) in terms of total assets and liabilities, the latter as the
balance between revenues and expenses. Opting for fair value is logically consistent with the asset-liability approach,
whereas historical cost is linked to the revenue-expense approach. This choice is further connected to different ideas about
the purpose of financial statements and the nature of profit. When primacy is given to the objective of providing information
about wealth as a company’s financial position, the asset-liability view follows; when primacy is given to information about
the company’s comparative periodic performance, in the sense of efficiency in its operating business, the revenue-expense
view follows. Different views of profit follow, because in the former performance is a net-worth concept and everything that
increases wealth is counted as profit. In the revenue-expense view, it is the difference between periodic efforts (i.e. expenses)
and achievements (revenues) that constitutes profit (or loss) (Wüstemann and Kierzek, 2005, pp. 77–78).
A traditional income statement is concerned with monetary flows from economic transactions over a particular period,
whereas the balance sheet presents stock at a cut-off date. Adding up those flows yields net profit for the past accounting
period. This is how business performance has been measured for most of the last century.3 Operating income takes centre
stage in such an income statement because it focuses on the inflow of money from goods sold or services provided by the
reporting entity, which are contrasted with the expenses incurred in producing and selling them. Thus, profit or loss is
understood as the result of a company’s more or less successful operations. Under the asset-liability view, profit and loss are
defined in terms of changes in the values of assets and liabilities; revenues and expenses are not accorded a conceptually
independent status. They are defined as ‘‘a residual from recognizing and measuring increases in assets and decreases in
liabilities’’ (IASB, 2007a,b, para. 14, emphasis added). A conceptual hierarchy between the elements of financial statements is
established in which assets are defined first and everything else is then defined depending on that (Barker, 2003, p. 22; cf.
Bullen and Crook, 2005, pp. 7–10; Dichev, 2008). The Framework defines income accordingly as:
‘‘increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or
decreases of liabilities that result in increases in equity, other than those relating to contributions from equity
participants’’ – and expenses accordingly as: ‘‘decreases in economic benefits during the accounting period in the form
of outflows or depletions of assets or incurrences of liabilities that result in decreases in equity, other than those
relating to distributions to equity participants’’ (Framework, para. 4.25).
The asset-liability approach ‘‘generally has a broader income (revenue) and expense definition’’ (Wüstemann and
Kierzek, 2005, p. 78) and includes elements in income that would not be recognised under the revenue-expense view.
Indeed, the Framework adds that its definition of income incorporates operating income, non-recurrent gains (or losses) that
may or may not stem from operations, and, crucially, unrealised gains and losses arising from the revaluation of assets and
liabilities (Framework, paras. 4.29–4.35). This is where the connection to the increasing use of fair value becomes relevant; it
is also the area that attracted serious political attention during the financial crisis because fair value accounting for financial
instruments was seen by some to exacerbate the financial sector’s downturn.
The inherent connection between (a) fair value measurement and the asset-liability view and (b) historical cost and the
revenue-expense view (Dichev, 2008; Krumwiede, 2008, p. 34; van Mourik, 2010, pp. 197, 207)4 is further reinforced by the
fact that they imply different relationships and hierarchies between income statement and balance sheet. Under historical
cost, the balance sheet is a rather passive or auxiliary document because it merely records and ‘stores’ the results of past
transactions and activities that await their release into the income statement. It is subordinate to the latter because that is
where the attention is. Most assets can be seen as deferred costs, that is, as costs that are spread out over more than one
accounting period, relegating the balance sheet to a parking space for suspended items awaiting release into income
(Schmalenbach, 1962, pp. 66–75; cf. Paton and Littleton, 1957, p. 25).
With current value accounting, the balance sheet becomes more active and ceases to be a parking lot for the results of past
transactions because it records more forward-looking current market prices and/or cash-flow estimates for a company’s
assets and liabilities. This also makes it more volatile; more relevant stuff now happens in the balance sheet. The hierarchy
3
For the UK, Edwards (1989, p. 138) states: ‘‘During the inter-war years [. . .] the profit and loss account replaced the balance sheet as the principal
statement used to assess the progress and prospects of a firm.’’
4
See Wüstemann and Kierzek (2005) for a diverging view.
between it and the income statement is reversed when – according to the notion of profit as change in net worth – the
income statement is required to follow the revaluations that are recognised in the balance sheet. Consequently, many
standards that require fair value also require that changes in fair values be recorded in income (e.g. IAS 40, para. 35; IAS 41,
paras. 26, 28). This alters the basic idea of the source of accounting profit because the focus shifts away from operational
results (Bignon et al., 2004, p. 22; cf. Biondi and Suzuki, 2007, p. 590).5
Allowing or requiring the recognition of unrealised gains and losses has attracted much criticism from scholars and
professionals alike, above all for introducing what is seen as artificial volatility into earnings.6 Because of the increased use of
fair values and to address the problem of volatility, standard-setters and proponents of fair value suggested a new concept of
income (comprehensive income) along with a new format for the income statement (Camfferman and Zeff, 2006, p. 392;
Whittington, 2005, pp. 147–148). In accordance with the broad concept of profit under the asset-liability approach it
mandates that all earnings and losses that may arise in a fair value accounting system be reported. While it still distinguishes
between them, none is regarded as more important to overall corporate performance. There is thus a tendency to abandon
the centrality of operating income, a possibility that was latent in the asset-liability approach set out in the Framework.
Proponents of comprehensive income are explicit on this last point, rejecting what they see as ‘‘artificial distinctions’’
(Damant, 2003b:10; cf. Barker, 2003, pp. 19–20), or claiming that FVA does not justify redefining operating income as ‘core
earnings’ in order to maintain its privileged position in financial reporting (Barth and Landsman, 1995, p. 104). Presently, IAS
1 Presentation of Financial Statements requires presentation of comprehensive income, but leaves an option to present all
items of income in one single comprehensive statement or in the form of one statement of profit or loss and another of ‘other
comprehensive income’ (para. 81). An Exposure Draft published in May 2010 (IASB, 2010a,b) had suggested mandating the
single statement approach, but this was rejected.
So much for the IASB (and FASB). In contrast to them, Schmalenbach unambiguously opts for a revenue-expense
approach. The purpose of financial accounts is to measure business success, not wealth. The choice of asset measurement
method must follow from this (Schmalenbach, 1962, pp. 28–29). The income statement is primarily an operating profit or
loss account. Its ultimate purpose – together with a mostly cost-based balance sheet – is to facilitate steering of the business
by allowing for inter-period comparability of results. Therefore, relative accuracy of reported earnings over time is more
important than absolute accuracy (50–51; 80–81). As for the hierarchy between the two primary financial statements:
‘‘If we have said that it is an important duty of a business man to ascertain the operating results of his business, it is
clear that he must also be able to determine the components of these results, his revenue and his expenditure. And
since these components are presented, not in the balance sheet but in the profit and loss account, we have the
following rule: The profit and loss account and not the balance sheet should be assigned precedence in the annual
accounts. The profit and loss account should determine the contents of the balance sheet, and not vice versa.’’
(Schmalenbach, 1962, p. 51)7
This is very similar to Paton and Littleton:
‘‘The fundamental problem of accounting [. . .] is the division of the stream of costs incurred between the present and
the future in the process of measuring periodic income. [. . .] The income statement reports the assignment to the
current period; the balance sheet exhibits the costs incurred which are reasonably applicable to the years to come. The
balance sheet thus serves as a means of carrying forward unamortized acquisition prices, the not-yet-deducted costs;
it stands as a connecting link joining successive income statements into a composite picture of the income stream.’’
(Paton and Littleton, 1957, p. 67)
Therefore, they consider the income statement ‘‘the most important accounting report’’ (1975, p. 10). However, their
position is somewhat ambiguous. They emphasise the centrality of matching revenues and expenses and accordingly
understand income as the balance of two flows: ‘‘the stream of realised enterprise revenue and the amount of costs incurred
applicable thereto’’ (37). On the other hand, ‘‘the concepts of revenue and expense’’ should be explained ‘‘in terms of
enterprise asset changes’’ (9; cf. 47). Hence, the income statement should include all realised gains and losses, including
those that are non-recurrent and non-operational, on the grounds that they modify total assets (17–18). Accordingly, the
authors demand ‘‘complete income reporting’’ (98–103), albeit with different sections for recurrent and non-recurrent
items. This is also justified from the viewpoint of users for whom, allegedly, the exact nature and origin of a change in assets
matters less than the fact that a change has occurred. All this has elements of asset-liability thinking. In the last instance,
however, it is the authors’ strict adherence to historical cost and the concomitant interpretation of assets as ‘‘balances of
unamortized costs’’ (11) that makes their position essentially equivalent to Schmalenbach’s and another example of a
revenue-expense approach. For example: appreciation of securities, properties, etc. is not to be recognised as income, and the
5
This is confirmed by concerns from preparers of financial statements who oppose the introduction of a single statement of comprehensive income on the
grounds that it would dilute the centrality of p&l by turning it into a subtotal (IASB, 2010a, para. BC11; IASB, 2010b, p. 9).
6
Aglietta and Rebérioux (2005, p. 127), Bignon et al. (2004, pp. 19–20), Bryer (2004, p. 21; 1999, pp. 535–537), Chiapello (2005, p. 366), Elad (2007, pp.
759–60), Ernst and Young (2005), King (2003) and Rayman (2008).
7
References are to the 1962 German edition of Dynamische Bilanz, but the translation here is taken from the only existing English language edition
(Schmalenbach, 1959, pp. 32–33). There have been numerous editions of Dynamische Bilanz, and the one that the English translators have used was less
comprehensive than the 1962 edition – which is why I normally use the latter.
balance sheet, too, should stick to cost, although market values may be disclosed separately (62–63). In these and similar
cases, the overarching purpose of measuring periodic income determines what is shown in the balance sheet, so that the
latter still remains an adjunct to the income statement.
3.3. Dimension 3: theory of the firm
The third, and perhaps most fundamental, dimension underlying the different accounting models is the view of the firm.
There are basically two options on offer: proprietary theory and entity theory (Edwards, 1989, pp. 72–74; Gynther, 1967;
Zambon and Zan, 2000, pp. 808–810). The former assumes that the reporting entity is essentially an investment of the
owner(s) and not really separate from him/her/them. Accordingly, accounts are prepared from the owner’s viewpoint. The
entity theory, on the other hand, assumes that the reporting firm is separate from its proprietors and that all assets
(liabilities) are owned (owed) by itself, as is the income (or loss) generated by their use. Financial statements therefore are
prepared from the reporting entity’s own perspective as a going concern. Two different versions of the accounting equation
correspond to this (cf. van Mourik, 2010):
Entity theory : assets ¼ equity þ liabilities

Proprietary theory : equity ¼ assets liabilities
‘Equity’ and ‘liabilities’ are not interpreted identically in these two versions, but they show the viewpoint from which a
balance sheet is constructed. In the entity theory, we look from the asset side to the right hand side, which indicates the
sources of funds.8 From this viewpoint, there is no major difference, if any, between equity and liabilities as both are
essentially external claims on the reporting entity. Therefore, the accounting equation can be simplified to: assets = liabilities
(i.e. outside claims). The proprietary view looks from one section on the right hand side onto the balance sheet as a difference
between assets and liabilities to discover its own (residual) amount. Each theory has variants that differ considerably, and
some have formulated a third, intermediate theory (e.g. Rosenfield, 2005). Nonetheless, the entity and proprietary theories
are clearly the main contenders.
The choice between entity and proprietary theory is logically connected to the choices made in other dimensions of
accounting theory. First, they suggest different approaches to income determination. From a proprietary perspective,
determination of the owner’s net worth is the prime objective; it is therefore asset-centred and related to the asset-liability
approach for which performance is change in net worth. Therefore, the ‘‘proprietary theory also forms the basis for the
comprehensive income concept’’ (van Mourik, 2010, p. 197). From the entity view, what counts is the continuous generation
of revenues from which to meet the claims of various outsider/stakeholder groups, from capital providers to tax authorities.
Therefore, it is income-centred and focused on the profit or loss-account. Accounting from the proprietary perspective
evidently privileges one user group and has an affinity to modern doctrines of shareholder-value, which assume that a
corporation’s primary objective is to create value for common equity investors (cf. Gynther, 1967, pp. 279, 282). The entity
theory privileges no particular user group and is therefore better suited for communication with a wide range of
stakeholders.
There is also a connection between entity theory and historical cost because the reporting entity is less interested in
accounting for valuation purposes and more interested in determining efficiency through the matching of proceeds from
operating activities with related efforts.
‘‘The entity, as such, is not concerned with economic measures of valuation but rather symbolizes in terms of money
various transactions reflecting a charge and discharge relationship between entity and proprietor. [. . .] From the entity
viewpoint valuation at cost is natural.’’9
Historically, too, a link can be seen. In the development of UK accounting from 1850 to 1900, the ‘‘widespread adoption of
the going concern (and historical cost) [. . .] reflected the transition from the proprietor to the entity as the main focus for
financial statements’’ (Edwards, 1989, p. 125).
As for the proprietary theory: when net worth is the benchmark of company performance, the exact and current
measurement of assets and liabilities is of supreme importance, particularly if the proprietors in question have a short-term
orientation.
‘‘A proprietary view supports a view of income as being the net change in assets and liabilities over the period. Taken to
its logical conclusion this could mean that all assets and liabilities should be measured at current value, and the profit
for the year would include value changes as well as transactions and non-recurrent items.’’ (van Mourik, 2010: 207)
8
From the viewpoint of the entity and its management it is not very interesting whether resources are financed by debt or equity: ‘‘To management the
cost of operating the undertaking is not affected by the form of capital structure employed [. . .]. To management the bondholders’ dollars and the money
furnished by the stockholders become amalgamated in the body of resources subject to administration [. . .].’’ (Paton and Littleton, 1957, p. 43).
9
Stephen Gilman (1939): Accounting Concepts of Profit, New York: The Ronald Press Company: 55, as cited in: Lorig (1964, p. 572; cf. van Mourik, 2010, p.
204). There is also an inherent connection between the entity/proprietary view in accounting theory and economic theories of the firm that emphasise
either the owner (e.g. transaction cost theory) or the entity (Biondi, 2007).
One would expect IASB (and FASB) to embrace some variant of the proprietary theory, but extant standards and ongoing
discussions at the IASB seem inconclusive. In the context of their joint Conceptual Framework Project, the IASB and FASB had
both expressed a preference for the entity theory (IASB, 2008: paras. OB5, BC1.11–1.16).10 This is apparently to
accommodate the needs of a wider range of users than just providers of equity capital (in spite of the boards’ focus on
investors). Interestingly, some proponents of the proprietary theory had previously argued that it would be more consistent
with the IASB’s focus on capital providers than the entity theory (IASB, 2007b: para. 19).11 The relevant section of the revised
conceptual framework that emerged from these discussions, on the other hand, omits any explicit reference to the entity or
proprietary theories (Framework, paras. OB1-21) and it seems that the discussion has been postponed. Nonetheless, the
‘Basis for Conclusions’ in the corresponding FASB concepts statement seems to reiterate the preference for the entity view
(FASB, 2010: para. BC1.8).
The standard-setters’ explicit statements on this issue may be ambiguous, but their ‘revealed preferences’ are
more clearly in line with a proprietary view. Depending on which view is adopted, different answers will be given
to several concrete accounting issues (Lorig, 1964, pp. 570–572). One such issue is earnings per share. From the
entity perspective, prior to their distribution as dividends, all earnings belong to the entity, not shareholders. EPS is
therefore relatively meaningless. IAS 33 Earnings per Share seems to follow the proprietary perspective more than the
entity perspective. Not only because it requires presentation of EPS (para. 66), but also because it states that the
‘‘objective of basic [as well as diluted] earnings per share information is to provide a measure of the interests of each
ordinary share of a parent entity in the performance of the entity’’ (paras. 11, 32). In the entity perspective, there
is no such thing as ‘interest of each ordinary share in the performance of the entity’ prior to the distribution of
dividends. More such tests would be possible, but the available evidence and the fact that both standard-setters have
embraced the asset-liability approach indicate that they have been ‘‘more proprietary than entity in orientation’’ (van
Mourik, 2010, p. 207).
In contrast, one would expect Paton and Littleton and Schmalenbach to espouse the entity theory. Indeed, Paton’s and
Littleton’s conceptual departure point is the business ‘‘as an entity in its own right, separate and distinct from the parties
who furnish the funds’’; therefore, accounts as well as earnings prior to distribution are its own (Paton and Littleton,
1957, p. 8). Their entity orientation is also manifested, for example, in their insistence that interest charges should not be
treated as expense – as they would from a proprietary view – but as ‘‘a distribution of income, somewhat akin to
dividends’’ (44; cf. 48). (An unflinching defense of an entity-based accounting system is provided in Paton’s Accounting
Theory (1973).)
Schmalenbach’s conceptual point of departure is the objective of accurately measuring periodic operating performance.
Hence, he starts from the revenue-expense approach, but reaches a conclusion that is similar to the entity theory (cf.
Schmalenbach, 1959, p. 6), albeit through the idea of ‘‘social accountability’’ (Forrester, 1977, pp. 35–37). This social view of
the enterprise is one variant of the entity theory (van Mourik, 2010; Gynther, 1967, p. 278). For Schmalenbach the business
enterprise is an entity that is not just legally, but substantially separate from whoever happens to own it. He then
distinguishes between success or performance (Erfolg) and income/revenue (not in an accounting, but an economic sense, i.e.
as the regular income accruing to different groups of people – Einkommen). The latter is attributed to individuals whereas
success belongs to the business; the purpose of financial accounting is to measure success, not income (Schmalenbach, 1962,
p. 57). These arguments are based on what can be called a socially embedded view of the business as an economic unit that
processes and contributes to a society’s economic resources. Its duty is to use these resources efficiently, i.e. to contribute
more than it takes from society to which it has a duty of accountability. This view, so unfashionable today, deserves to be
quoted at length:
‘‘A business is a part of the totality of economic life which is called upon to take over a share of the tasks of the economy
as a whole. As a part of the economy it receives raw materials and services of various kinds, and gives back to the
economy its manufactures or other services. In the process it must produce a surplus value, otherwise the business is
not contributing to the economy as a whole, but is diminishing it.
That which is taken out of the total economy is expense of the business. That which is contributed to the total economy
in goods, services or other acts, is revenue of the business.
The result is the difference between revenue and expenditure. Its determination is the task of business accounting.’’
(Schmalenbach, 1962, p. 58, cf. 49; translation: Schmalenbach, 1959, p. 39)
Traces of this socially embedded view can be found in Paton and Littleton too when they emphasise the ‘‘quasi-public’’
nature of large corporations and describe them as ‘‘mechanisms for social cooperation in the conduct of large-scale business
enterprise’’ (1957, p. 2). They also recognise the wide range of social groups affected by a corporation’s behaviour to which it
therefore has duties and responsibilities. On the other hand, a certain priority still seems to be given to the interests and
viewpoint of absentee investors (1–4), hence Paton and Littleton are somehow half-way between the fully embedded and
the investor-oriented view.
10
See also IASB (2009b: paras. 3-5, 27-9).
11
See also IASB (2007b: paras. 17-33) for more background on the debate over the entity theory and the primary user group.
Table 1
Accounting ideal types.
Ideal Type I (HCA) Ideal Type II (FVA)
Asset measurement Historical cost Current value (as exit price)

Income determination Revenue-expense approach Asset-liability approach
Theory of the firm Entity theory Proprietary theory
3.4. The ideal types
We can summarise this accounting-theoretical discussion in the form of two ideal-typical accounting models – Historical
Cost Accounting (HCA) and Fair Value Accounting (FVA) – which are characterised by a unique combination of values in the
three dimensions (Table 1).
The accounting revolution can now be interpreted as a shift from an accounting system corresponding to Ideal Type I to
another corresponding to Ideal Type II. The former was prevalent in accounting for listed companies from the 1900s to the
1990s. The latter has been on the rise since then and is now rapidly becoming the global standard thanks to IASB and FASB as
well as political and economic conditions that have reinvigorated money capital. To be sure, IFRS are not a pure FVA system;
they are still a hybrid but with a tendency towards strengthening FVA elements. The next section will argue that these
accounting ideal types can be related to the perspectives of money capital and productive capital respectively.
Before that, however, some minor conceptual clarifications are in order. By using the terms ‘historical cost accounting’
and ‘fair value accounting’ I do not mean to imply that the asset valuation dimension has logical primacy in the sense that it is
the initial conceptual decision from which decisions about the two other dimensions are derived. Whether a primary
dimension exists or whether they simply comprise a set of mutually consistent conceptual decisions would clearly merit
further consideration. Drawing on Schmalenbach, Aglietta and Rebérioux (2005, pp. 115–116), for example, claim that the
fundamental difference in financial accounting is between the static and the dynamic approach and that these approaches
follow from different views concerning the nature of the firm and its assets, the question being whether assets are to be
independently valued or form an inseparable operating whole.
Nor is it claimed here that the dimensions of asset measurement, income determination, and theory of the firm are the
only ones relevant in this context. For example, Gynther (1967, p. 286) relates the entity and the proprietary theories to
different capital maintenance concepts: the entity theorist would adopt a physical or operating capacity concept of capital
maintenance, while the proprietary theorist would opt for financial capital maintenance. Finally, my two ideal types are not
the only binary typology of accounting systems. For Aglietta and Rebérioux (2005) the static and dynamic approaches are
polar opposites and thus mutually exclusive. Gynther (1967, p. 289) stresses that a ‘‘general theory of accounting’’ would
force one to make a fundamentally arbitrary decision between basing it on either the entity theory or the proprietary theory.
In fact, one may trace the binary nature of the choices faced by accountants back to Littleton’s ‘‘Value or Cost’’ (1935) in
which asset measurement seems to assume conceptual primacy. Apparently, one can logically reach the same result – that
one must choose between two, and only two, accounting systems – from different conceptual starting points, be it the theory
of the firm, asset measurement or the purpose of financial accounting. Finally, a more or less clear understanding of this fact
also transpires from the texts of those who talk about a revolution or paradigm shift in accounting. Therefore, the originality
of my typology does not lie in identifying such a shift and attributing it to a move from one system to another. Rather, it lies in
its consciously methodological, heuristic character as well as in its systematic combination of various dimensions of
accounting theory. Some conceptual loose ends remain, but there is a strong case for a binary typology of ideal-typical
accounting systems.
4. Accounting standards in a financialised world
4.1. Circuits of capital as key to financialisation and the periodisation of capitalism
At the most general level, financialisation can be described as the unshackling of the money form of capital and its return
to dominance. This holds both at the aggregate level as well as for households and firms. The savings of the latter are
channelled less into fixed capital formation in the corporate sector and more into financial assets and/or into the pockets of
financial investors (Froud et al., 2002). At the aggregate level we see things like higher rates of stock market capitalisation to
GDP or a growing share of profits that is appropriated by the financial sector. With regard to the UK and US ‘national business
model(s)’ for example, financialisation has been described as ‘the accumulation of balance sheet capitalization (debt and
equity) ahead of surplus generating capacity’ (Andersson et al., 2012, p. 12). But it is not just the growth of securities markets
that is relevant to financialisation, it is also their acceleration. The existing stock of securities is turned over a lot faster
because institutional investors, which have grown in number and prominence (Crotty, 2005: 91–92; Aglietta and Rebérioux,
2005: 172–181; Windolf, 2005: 25–40), reshuffle their portfolios frequently, reducing average holding times (Huffschmid,
2002, pp. 39–41). This contrasts with the status quo ante in both bank- and market-centred financial systems, where ‘patient
investors’ were dominant. In the former – of which Germany and Japan are classic examples – shares are held by
blockholders, such as financial groups or founding families, with a long-term strategic commitment. In the market-centred
system of the US or UK, share ownership was widely dispersed among very small share owners, such as households, who
tended to hold their investments, rather than actively manage them.
In the context of accounting, however, financialisation at the firm level is more interesting (especially the non-financial
corporation or NFC). Here we see some quantitative changes, but also a qualitative shift in how the business is seen, whom it
is supposed to serve and who controls it. The qualitative aspect has been labelled control financialisation by Nölke and Perry
(2007) and was already described by Fligstein in his study on the Transformation of Corporate Control (1990). Capital markets
have become more important to listed companies, both as opportunity and a source of pressures. This ‘‘intrusion of the
capital market’’ (Froud et al., 2006, p. 36) means that corporations no longer just compete on product markets against rivals
in their own sector, but also on stock and bond markets. This shift has distributional consequences – higher ratios of payouts
to capital providers – but it also changes the behaviour and strategies of firms, for instance by redirecting their cash flow
towards financial rather than productive investment. This strategic re-orientation has become known under the name of
shareholder value.
According to the doctrine of shareholder value, the primary purpose of the joint stock company, and thus the primary goal
for its managers, is to increase gains for shareholders. Other social groups are not considered or it is assumed that their best
interests, too, are served by attending to shareholders’ interests (Aglietta and Rebérioux, 2005, pp. 22–48; Froud et al., 2000,
p. 108). The clearly proprietary orientation notwithstanding, shareholder value remains a somewhat fuzzy concept (Froud
et al., 2006, pp. 36–49) that is often used vaguely in the business community. Nonetheless, a ‘‘general guiding principle of
business management in accordance with financial markets’’ (Kadtler, 2009, p. 13) emerged in the 1990s: that a company
has not created value for owners/shareholders unless return on investment exceeds the cost of capital. This takes the
proprietary viewpoint according to which there is an opportunity cost to any investment, given by the risk-free interest rate.
Other, riskier investments must earn returns above their opportunity cost. This simple notion is at the heart of different ways
of operationalising shareholder-value as a performance metric, the best-known of which is Economic Value Added (Aglietta
and Rebérioux, 2005, pp. 7–13; Froud et al., 2000). This impresses on managers an awareness of the opportunity cost of the
capital they are working with.
The reinforced focus on profitability does not stop at the group level. To increase shareholder value, firms are encouraged
to disaggregate the group and separately assess the performance of each subsidiary. If one is found wanting, it is to engage
either in cost-cutting (often through firing people) to meet the required return or be sold (for US see Lazonick and O’Sullivan,
2000, pp. 19–21). This is what Crotty (2005, pp. 89–91) termed the financial or portfolio conception of the (non-financial) firm.
Subsidiaries are treated as liquid assets to which the parent has no long-term commitment and that can be disposed of when
seen as underperforming. Managers in HQ do not act like specialists with a background or interest in a particular industry,
but rather like financial managers reshuffling an asset portfolio. This is often accompanied by a reinforcement of centralised
control which is typically exercised through extended use of cost- and return targets and other management accounting
tools (Dörre, 2012; Ezzamel et al., 2008; Gleadle and Cornelius, 2008). This frequently corresponds to a shift in the internal
balance of power that disadvantages technical and operational specialists whose ‘productivist’ culture, which focuses on
technical efficiency and physical performance indicators, is marginalised.
There is also financialisation of strategy. In addition to making money from selling goods or services, corporations can or
must increasingly position themselves on capital markets, thus ‘‘rework[ing] the balance between productive, market and
financial goals within many firms’’ (Froud et al., 2000, p. 108; cf. Andersson et al., 2008; Froud et al., 2006; Serfati, 2012). This
includes using cash resources to attain capital market-oriented goals, e.g. share buybacks that improve earnings per share or
unceasing M&A and restructuring activities which make analysts and investors believe that the company in question is
constantly working to maximise shareholder value. Corporations also become directly invested in capital market circuits.
They may, for example, repurchase their own shares and hold them as treasury stock in the hope of generating realisable
holding gains (Andersson et al., 2012, pp. 10–11).
This is related to what might be called cash flow financialisation. A growing share of the incoming cash flow generated by
NFCs now stems from financial investments and therefore takes the form of dividends, interest or realised capital gains,
while a growing part of outflowing cash goes into financial assets or to providers of debt and equity capital. Accordingly, the
share of financial assets on NFC balance sheets tends to increase, as does the ratio of payouts (dividends, interest and share
buybacks) to corporate profits. This is in keeping with the shareholder value doctrine that requires companies to ‘return’ a
larger proportion of their cash to investors. As a result, a shift has occurred in the strategic orientation of especially larger
listed companies: rather than retain and reinvest cash in the business, the tendency in financially dominated capitalism is to
downsize and distribute (Lazonick and O’Sullivan, 2000).
A final consequence is the tendency for short-termism among capital market actors, where patient investors have given
way to portfolio investors with short time horizons, as well as corporate management where tighter coupling to short-term
finance can come into conflict with the temporality of productive activity (Aglietta and Rebérioux, 2005, p. 127; Huffschmid,
2002, pp. 38–39) and its necessarily higher tolerance for uncertainty.
As a result, the relationship between capital markets and listed companies has changed: the latter are now much more
tightly coupled to the former than during les trente glorieuses that followed WWII. This was precisely the aim of the
shareholder-value movement and was postulated early by proponents of the principal-agent approach who were concerned
that managers had become too independent from owners (Lazonick and O’Sullivan, 2000, p. 16). Ultimately, these and other
phenomena that are being discussed under the rubric of financialisation can be traced back to the dominance of the circuit of
money capital.
However, one must not overstate these trends. There is no doubt that very significant changes have occurred, but there is
also a tendency in the financialisation literature to let ‘‘conjecture run ahead of evidence’’ (Froud et al., 2006, p. 69) and
disregard countertendencies. Capitalist businesses (let alone capitalist economies) can never be fully financialised. As I will
argue below, the capitalist firm is the locus of intersection between three different circuits/forms of capital and their
corresponding economies. One of those is usually dominant (currently, this would be money capital), but the others do not
go away. The logic of production in particular makes itself felt, e.g. as ‘‘resilience of operations’’ (Kädtler and Sperling, 2002).
This means that management tactics that aim to improve shareholder value may often fail to reorganise operational
procedures in a positive way, i.e. go beyond mere cost reduction. The financialisation of listed companies must not be
understood as absolute, but as a dominant trend to which countertendencies do exist. Just like in the case of financial
accounting standards where, as we have seen, there is a dominant trend, but where older, more production-oriented
practices persist.
In Capital II, Marx argues that the ‘metamorphosis’ of industrial capital comprises three stages, each starting from one of
its distinct forms: the circuit of money capital, productive capital and commodity capital respectively (1978, p. 109). These
circuits not only represent successive stages in the metamorphosis of an individual capital; they also underpin differing
perspectives on capital and its overall metamorphosis. Thus, there is a money perspective on capital (or the perspective of
capital as money) as well as a productive perspective on capital (or the perspective of capital as productive unit). These
differing perspectives exist because each circuit is based on one of the three forms assumed in the metamorphosis of
industrial capital.
The formula for the circuit of money capital is M-C. . .P. . .C0 -M0 (Marx, 1978, p. 109). (‘M’ is money, ‘P’ denotes the stage of
production, ‘C’ the commodity form of capital. Apostrophes indicate a quantitative increment at the end of a full circuit. Here
they indicate that the value of commodity outputs exceeds that of commodity inputs and that revenues exceed money
invested at the beginning.) Here, production appears as mere mediation or transitory interruption. In the circuit of money
capital.
‘‘. . . it is the exchange-value, not the use-value, that is the decisive inherent purpose of the movement. It is precisely
because the money form of value is its independent and palpable form of appearance that the circulation form M. . .M0 ,
which starts and finishes with actual money, expresses money-making, the driving motive of capitalist production,
most palpably. The production process appears simply as an unavoidable middle term, a necessary evil for the purpose
of moneymaking.’’ (Marx, 1978, p. 137)
The circuit of money capital could also be called the liquidity- or exit-form of capital, because it is only in its money form
that it can be withdrawn and invested in another industry (Marx, 1978, pp. 140, 171–172). With regard to the organisation,
strategic orientation and internal balance of power in listed companies, the social content of financialisation and shareholder
value therefore consists in strengthening the prevalence of the circuit of money capital, i.e. a financial view.
The circuit of productive capital is P. . .C0 -M0 -C. . .P (Marx, 1978, p. 144). It starts from production, which is the
intermediate stage in the circuit of money capital. The final stage in the circuit of money capital, i.e. circulation stage where
the values that are embodied in the commodities that were produced are realised, is the intermediate stage for productive
capital. That is why the first ‘C’ in this circuit comes with an apostrophe; it indicates the value increment. In contrast to the
circuit of money capital.
‘‘. . .the entire circulation process of industrial capital, its whole movement within the circulation phase, merely forms
an interruption, and hence a mediation, between the productive capital that opens the circuit as the first extreme and
closes it in the same form as the last extreme, i.e. in the form of its new beginning.’’ (Marx, 1978, p. 144)
‘‘The general form of the movement P. . .P is the form of reproduction, and does not indicate, as does M. . .M0 , that valorization
is the purpose of the process.’’ (op. cit.: 172)12
Marx provides no equivalent formulation for commodity capital. Like the circuit of productive capital, the circuit of
commodity capital points to the necessity of reproduction; but unlike the former it also takes into account the integration of
each individual business into product markets and the social division of labour (op. cit.: 173–177). Nonetheless, one
commonality across all three circuits is important in the present context: they offer a peculiar vantage point from which to
approach the total circuit of individual capital: as investment of money that starts from expense and ends in revenues; as a
productive labour process; and as a buyer and seller of inputs and outputs. The circuits of capital are not mere analytical
distinctions made by a scientific observer: they correspond to real phases and organisational problems in the cycle of
industrial capital; the necessity to manage them separately, yet simultaneously, affords peculiar perspectives, goals and
criteria of success and is also the basis for the functional differentiation of organisational roles and departments.
To sum up, financialisation at the level of the individual NFC should be understood as dominance of the circuit of money
capital. The portfolio view of the firm reduces it (or its subsidiaries) notionally and practically to monetary investment that
competes with other investments. Hence, there is no reason not to move into financial investment proper when this seems
more lucrative than fixed investment or attempts to improve returns through product or process innovation or fighting for
12
I have omitted an apostrophe that was erroneously inserted in the Penguin edition of Capital where it reads ‘‘‘P. . .P’’’. There is no apostrophe in the
German original, presumably because productive capacity does not expand in the same way as stocks of money or commodities.
greater market share. Moreover, NFCs can pursue strategies related to capital markets; thus they become directly engaged in
financial circuits, in addition to their core business of generating returns from productive circuits.
These forms and circuits of capital also provide us with a key to the periodisation of capitalism and thus to the question of
how to characterise the current stage. The forms of capital are not just the basis of the internal differentiation of capital in
functional terms, they are also related to various ‘comprehensive concepts of control’ that are in turn intrinsically connected
to different stages of capitalist development (van der Pijl, 1998, pp. 49–64). Productive capital was the dominant and most
dynamic form during the ‘golden age’ of Fordism, whereas the dynamic potential of money capital and financial
accumulation, so obvious to us today, was put in a straitjacket of politically mandated limits and regulations. None other
than Keynes summed up this development, albeit in advance rather than retrospect, when he foresaw the ‘euthanasia of the
rentier’ (1936, pp. 375–376). The tables have been turned in the post-Fordist, neoliberal stage where money capital has
become the dominant form.
It may seem tempting to draw parallels to the era of ‘finance capital’ described by the likes of Lenin and Hilferding, but
verbal similarities mask a fundamental structural difference. In Finanzkapital (Hilferding, 1968), Hilferding analysed the
processes that ended the era of competitive liberal capitalism in Germany and the US from the second half of the 1990s and
led to a more organised capitalism. Vertical integration, M&A and the formation of trusts created gigantic oligopolistic
corporations that controlled entire industries in the manufacturing sector. The financial sector, too, saw the emergence of a
few very large banks that maintained close relationships with industrial capital, partly because the latter were dependent on
long-term loans to finance fixed investment and partly through a web of interlocking directorates and cross-shareholdings.
Hilferding called this constellation ‘finance capital’. Markets played a minor role as coordination mechanisms of economic
activity; the system was dominated by large banks which also exercised a coordination function.
Financialisation increases the importance of a financial logic, but this does not mean that we are dealing with a new era of
finance capital in the Hilferdingian sense. Financialisation does not entail closer institutional interconnections between
banks and industry, but rather their dissolution and a widening of the distance between them. This is exactly what happened
to ‘Germany inc.’ (Deutschland AG), the name given to the once tightly knit and very stable network of large financial
institutions, such as Allianz or Deutsche Bank, and large industrial conglomerates in which a common strategy was forged
through creditor-debtor relations, cross-shareholdings and interlocking directorates (Beyer, 2003; Höpner and Krempel,
2006). Moreover, across the highly developed capitalist economies the general tendency is to reduce the share of bank loans
in fixed investment financing and to rely more on retained earnings and bond emissions. This spells the end for banks as
agents of coordination and integration.
What has changed is the specific mode of articulation between finance and industry (cf. Candeias, 2004: 145–6); there is now
a trend towards market-based financial systems. Contrary to what Hilferding and Lenin witnessed–among other things, Lenin
observed a ‘‘decline in the importance of the stock exchange’’ (1975: 37–8)–the focus is now again on the industry-capital
market relationship, and not so much on the role of banks. Financialised capitalism is marked less by direct institutional ties and
more by anonymous structural imperatives. It is, therefore, not a contradiction to state that the immediate influence of the
financial sector in industry has shrunk, but that a financial logic–which ultimately boils down to the logic of money capital–has
gained influence through the tighter coupling of listed companies to capital markets. Despite the preponderance of banks,
Hilferding’s finance capital was, in fact, marked by the dominance of the circuit of productive capital insofar as bank loans and
ties with particular businesses were of a strategic, long-term nature. Banks were less interested in maximising profits and more
in having their loans repaid when they matured. Therefore, they were interested in the long-term commercial success of their
debtors. Some bank staff even adopted a fairly productivist perspective by becoming experts for particular industries (Lenin,
1975, p. 41). Rather than implying the dominance of a financial logic, this particular type of relationship guaranteed the
dominance of productive capital (Kädtler, 2010, p. 621) because short-term profits were not crucial. This led to intra-
organisational dominance of the engineer, the relegation of finance to bean-counting and a preference for the retention and
reinvestment rather than the distribution of profits. In contrast, financialisation implies a strengthening of financial discipline
in spite of much loosened institutional ties between finance and industry.
My take on financialisation also differs from David Harvey’s influential account of spatio-temporal fixes and the ‘new
imperialism’ (Harvey, 2003). In his view, financialisation is another example of a well-known pattern, namely the rekindling
of capitalist accumulation after a crisis through the opening up of previously inaccessible areas of investment or sources of
demand. The forms in which this takes place vary greatly over time and place, ranging from old-fashioned colonialism and
violent land-grabbing to privatisation of state-owned assets to relatively benevolent forms such as capital investment in
public infrastructures. All of these are essentially forms of finding outlets for overaccumulated capital. The ‘logic of capital’, in
this view, is essentially a unitary one, and there is little regard for differences between forms and circuits of capital and their
changing patterns of super- and subordination. Moreover, if we take accumulation to mean not just profit-making but
expansion of productive capacity through reinvestment of retained earnings, then financialisation is hardly a case in point. It
may guarantee the incomes of financial investors, but it definitely does not lead to a reinvigoration of industrial investment
and may even actively hamper it.
4.2. Accounting systems and circuits of capital
Sections 2 and 3 have described the shift in the substance of accounting regulation as a, more or less ‘revolutionary’,
movement from one accounting system to another. But why does this shift occur? Contrary to what proponents of FVA claim
(e.g. Barlev and Haddad, 2003), an alleged technical superiority of FVA over HCA is not the reason. This section advances the
political-economic argument that the two accounting systems have clear affinities to the perspectives of money and
productive capital respectively, privileging different perspectives on the capitalist firm and differing information needs.
Neither cash flows, which can be objectively determined, nor the nature of the operating firm, nor the circuits of capital
fully determine how to account for an enterprise’s operations and transactions within a limited period of time (Aglietta and
Rebérioux, 2005, pp. 118–119, 127). Only over the full life-time of a firm, from inception to unwinding, should total cash
flows equal accounting numbers. In other words: financial accounting is underdetermined by real economic transactions.
Therefore, there is space for different personal opinions between accounting professionals, but also, and more importantly,
for different accounting systems that draw on conflicting assumptions about the nature of the firm as well as the purpose and
primary users of accounts. These different systems are not reducible to each other and not reconcilable; they are,
theoretically speaking, on the same level and both are equally right. As Marx said: ‘‘Between equal rights, force decides.’’
(1976, p. 344)
For Aglietta and Rebérioux this is where the dominance of financial markets and the doctrine of shareholder value in
particular come in. This is true, but it does not explain why this affinity between shareholder value and FVA exists. The
missing link can be provided by returning to the different circuits of capital. This argument builds on, but also diverges from,
Bryer (1999, pp. 553–558) who suggested that accounting should essentially be accounting for the circuit of industrial
capital and accused the FASB of seeing this circuit merely as the circuit of money capital, i.e. the investment of money to
make more money.
So what is the basis of the affinity between HCA and the circuit/perspective of productive capital on the one hand, and
between FVA and money capital on the other? There is, first, an elective affinity (Weber, 2001, pp. 49–50, 88; 1978, pp. 341,
1180–1181) between them. The accounting cannot be derived in a straightforward manner from the circuit, but they have
relations of congeniality or adequacy that make their correlation likely. Second, differences in how the social embeddedness
of economic activity is reflected in the two accounting models are related to the differing degrees of embeddedness of the
circuits of capital.
Regarding the first point, recall that in the circuit of money capital ‘‘it is the exchange-value, not the use value, that is the
decisive inherent purpose of the movement’’, and that the process of production that stands between M. . .M0 is reduced to ‘‘a
necessary evil for the purpose of moneymaking’’ (Marx, 1978, p. 137). This boils down to investing money to make more
money, and therefore the only difference between investment in the production of goods or services and any other
investment is quantitative, i.e. in terms of the (risk-adjusted) rate of return. This is the perspective of the FASB. Its conceptual
framework defines assets in terms of expected future cash flows and disregards the peculiarity of productive capital, i.e.
capital in the form of use-values to the enterprise in question (Bryer, 1999, p. 558; cf. FASB, 1985: para. 26). This position
found its way into the IASB as can be seen from a 2005 Discussion Paper which quotes approvingly from an FASB accounting
standard:
‘‘People engage in investing, lending, and similar activities primarily to increase their cash resources. The ultimate test
of success (or failure) of those activities is the extent to which they return more (or less) cash than they cost.’’
‘‘Business enterprises, like investors and creditors, invest cash in noncash resources to earn more cash.’’ (IASB, 2005:
para. 47)13
The perspective of M. . .M0 has an elective affinity with that of the investor/proprietor who is interested in his/her net
worth. The asset-liability approach expresses this most adequately. The interests investors are also central to the
shareholder value doctrine and associated performance metrics, such as Economic Value Added (EVA). There is an important
conceptual similarity between fair value and EVA (and similar metrics): the latter essentially adjusts traditional accounting
earnings, which are still partly based on historical cost, by multiplying them with a more market-based coefficient, such as
the weighted average cost of capital. This kind of performance measure is more forward-looking because it incorporates the
expectations of market participants. This is supposed to make it more relevant to management decision-making. Similarly,
FVA leads to financial statements that incorporate operating revenues and expenses at cost with gains and losses from the
market valuation of assets and liabilities, allegedly enhancing their decision-usefulness for investors (Nölke and Perry, 2007,
p. 9–10; cf. Andersson et al., 2008).
‘‘Fair value is in some sense the older brother of EVA, born of the same father (the shareholder renaissance) and the
same mother (an ‘anti-accounting’ rhetoric, hence anti-historical cost). (Aglietta and Rebérioux, 2005, p. 122)’’
Another aspect of the affinity between the circuit of money capital and the FVA accounting system is their inherent
connection to a portfolio conception of investment and the firm in particular. In a pure FVA accounting system–which, to be
sure, IFRS are not–assets and liabilities are, where possible, continuously valued individually and gains and losses from
revaluation are reported in income. This amounts to a view of the firm as a collection of disconnected generic assets, each
capable of yielding its own cash flow, rather than as a more ‘organic’ unit that combines entity-specific assets and labour for
productive purpose (Boyer, 2007, p. 796; Aglietta and Rebérioux, 2005, p. 116). In the former view, assets are seen as
individual cash generators, in the latter as elements in a unique cooperative production organisation that cannot be valued
13
These are taken from FASB (1978: paras. 38, 39). Cf. Biondi (2011, p. 14).
individually. The disaggregated view is connected to the approach of financial economics (Biondi, 2011, pp. 9–16). The
economy of the business enterprise is not the same as that of the market price system. HCA, then, is an expression or
representation of this economy in financial accounting, whereas FVA expresses ‘‘the colonisation of financial reporting by
financial economics’’ (Biondi, 2011: 15) which sees a firm as just another kind of portfolio. It applies a financial market
rationality (Kadtler, 2009) to accounting while HCA is more sensitive to the business as a production unit that is embedded
into a socio-economic environment with multiple stakeholders. It is interesting that Paton and Littleton describe the purpose
of accounting as tracing the passage of costs through the enterprise in a way that mirrors actual organisational and labour
processes over time rather than a particular moment in time:
‘‘The economic activity of a business enterprise consists in uniting materials, labour, and various services to form new
combinations having new utilities. This it does without regard to accounts. Accounts, however, are useful adjuncts to
the economic process, since they trace the shifting movements and conversions that are constantly occurring within
the enterprise, as well as record the changing relations of the enterprise with the outside world. Whereas production
activity uses material things and varied services, accounting employs the price-aggregates of exchange transactions to
represent objects and services. When production activity effects a change in the form of raw materials by the
consumption of labor and machine power, accounting keeps step by classifying and summarizing appropriate portions
of materials cost, labor cost, and machine cost so that together they become product-costs. In other words, it is a basic
concept of accounting that costs can be marshalled into new groups that possess real significance.’’ (Paton and
Littleton, 1957, p. 13)14
This is basically the process of management/cost accounting, from which financial accounting should not stray too far. It
demonstrates the congeniality between HCA and the productive capital perspective. Moreover, the circuit of productive
capital in itself points to the continuation of economic activity: it ‘‘is the form of reproduction, and does not indicate, as does
M. . .M0 , that valorisation is the purpose of the process’’ (Marx, 1978, p. 172). One ends up with production capacity fit for no
other purpose than to repeat the same process. M. . .M0 , however, ends up with money, something that is in principle liquid.
Its end point is the restoration of liquidity and thus the option of exit from the circuit of industrial capital (at least notionally).
This corresponds to the continuous revaluation and reporting of valuation movements under FVA. Contrary to what is
sometimes alleged (e.g. Boyer, 2007), fair values are not liquidation values, i.e. the prices a company would get for its assets in
a fire sale. However, when assets and liabilities are measured by their selling prices, they are treated as if they were
immediately liquid. In contrast, HCA reflects the continuation of economic activity inasmuch as it spreads costs over time to
match effort with accomplishment.15
The second point of convergence between accounting systems and circuits of capital is the way in which they reflect the
embeddedness of economic activity. Managing the circuit of productive capital is essentially operations management, the
transformation of physical and informational inputs into use-values by means of skills, tools/machinery, money and
organisation. Compared to financial management, which is primarily concerned with return on investment, operations
management requires attention to the physical, use-value side of things and to the social embeddedness of production as a
process with many stakeholders. Insofar as it follows the processes of production, HCA pays more attention to the use-value
aspect of capitalist production. It also takes into account the socio-economic aspect of production because the entity theory
of the firm, which is one of the elements of HCA, is suited for communication with a wide range of user groups. It takes into
account the firm’s integration into multiple social and economic relations, such as labour relations and corporatist
arrangements, long-term relations to suppliers, customers, creditors, etc. As we have seen, this socially embedded
perspective is clearly expressed by Schmalenbach (and somewhat less clearly by Paton and Littleton). In accordance with the
proprietary orientation of FVA, the IASB’s Conceptual Framework states that financial reports are only meant for equity or
debt investors (paras. OB2-10). The existence of other users is acknowledged, but only to clarify that reports are not prepared
for them.16
4.2.1. Excursus: Chambers’ CoCoA and the genealogy of FVA

Ideal Types I and II were constructed on the basis of different types of literature: the works of titans of accounting theory
in one case, practical accounting standards in the other. This methodological asymmetry is defensible, not least because the
point of the exercise was not to analyse the texts themselves, but to use them as material for the (re)construction of ideal-
typical accounting systems. However, that does not mean that Ideal Type II could not also be constructed on the basis of
14
Schmalenbach is less explicit about this point, but his discussion of accounting for production-related expenses points in a similar direction
(Schmalenbach, 1962, pp. 82–97).
15
Admittedly, only an accounting system based on replacement cost, a type of current value, though very different from fair value, could truly guarantee
continuation of production.
16
Non-investor groups are thus given even shorter shrift now than in a previous version of the Framework, the Framework for the Preparation and
Presentation of Financial Statements from 1989. It presented a long list of non-investor interest groups and their peculiar information needs were
acknowledged, though in the end it was claimed that their interests would also be served by financial statements that are tailored to investors (paras. 9–10).
(See also Zhang, 2011, pp. 8–10.)
academic accounting theory. The work of the IASB and FASB, after all, did not emerge in an intellectual vacuum. There is no
single author who is as closely associated with FVA as Paton and Littleton and Schmalenbach are with historical cost, but one
name comes up repeatedly17: that of Raymond J. Chambers and his system of Continuously Contemporary Accounting (CoCoA)
which he set out in a range of articles and a monograph entitled Accounting, Evaluation and Economic Behaviour (Chambers,
1966, 1970, 1976). This excursus does not attempt a comprehensive genealogy of FVA, but it contributes to it by discussing
the fit between CoCoA and FVA and by relating CoCoA to the circuit of money capital.18 Future research could do the same
with other relevant authors, ideally from different national backgrounds.
To be sure, Chambers’ system diverges from IFRS in some important regards, but only so as to be more faithful to FVA. He
is, for example, much more consistent than a standard setting organisation could ever be in his rejection of historical cost,
requiring exit prices (‘‘current cash equivalents’’) even for fixed assets like PPE (Chambers, 1966, pp. 238–250). And contrary
to IASB and FASB, his accounting system is–at least in his mind–not tailored to investors or any other group in particular. Its
only purpose is to discover the objective truth about an entity’s financial position and thus to serve the public interest (op.
cit.: 373–376). I will argue below that Chambers’ definition of the nature and purpose of the reporting entity allows him to –
wrongly – equate the public interest with a particular viewpoint, namely that of money capital.
Regarding asset-measurement there can be no doubt about Chambers’ commitment to accounting based on current
values in the sense of exit prices; they make his system continuously contemporary. Current values could be understood as
entry prices (or replacement costs), but this option is rejected on the grounds that the (notional) restoration of liquidity,
rather than continuation of a particular productive activity is relevant to businesses (1966, pp. 91–92). (This idea of notional
restoration of liquidity shines through in many elements of Chambers’ thinking, and it is the clearest manifestation of a
money concept of capital.) Inflation was among Chambers’ main concerns and an important reason for using current selling
prices rather can cost. Inflation is less of a concern nowadays, therefore fair value is more concerned with variations in
market prices for individual assets, i.e. relative prices. Changes in relative prices may not have been so urgent for Chambers,
but in his accounting system he accorded them the same importance as general price level changes.
Regarding the second dimension of accounting ideal types – income determination – Chambers’ thinking points clearly
towards the asset-liability approach and comprehensive income. The principal purpose of his accounting system is to
‘discover’ an entity’s financial position in terms of assets and equities, by which he means liabilities and the ‘residual equity’
attributable to proprietors. He sees business organisations as homeostatic systems that constantly need to adapt to a fluid
market environment (1996, p. 317), and their capacity for adaptation is determined by their current composition and
magnitudes of assets and equities. This is also the reason for his choice of asset measurement: past acquisition prices have no
bearing on the current capacity for adaptation, and current entry prices are irrelevant because adaptation in a market
environment requires restoration of liquidity to replace outdated equipment or to change the line of business altogether if
another one becomes more profitable. To adapt one needs cash and/or know how much cash one could raise through selling
off assets. Hence the necessity to state all balance sheet items in terms of ‘current cash equivalents’.
Accordingly, Chambers understands income as derived from changes in residual equity. Everything that makes a
difference to equity is to be recognised in income, be it increments to the cash or receivables account from the sale of goods or
services (or decrements from cost of goods sold), windfall gains or losses, or unrealised gains/losses from fluctuations in the
general price level as well as relative prices (Chambers, 1966, pp. 226–227, 233–236, 257–258). These items are separated in
the income statement for pragmatic reasons (1966, pp. 117–119), but there is no difference in principle between them, none
is more important to the business than the other. There is no place for a concept of core earnings or priority given to operating
income, so Chambers effectively advocated a comprehensive income concept, well before that term was coined. Accordingly
the hierarchy between income statement and balance sheet (or ‘statement of financial position’) is characteristic of the asset-
liability approach insofar as the former derives from the latter. An ‘‘income statement is a description of the changes in
residual equity’’ which could also be obtained ‘‘from two statements of financial position’’ at two consecutive balancing dates
(1966, p. 113; cf. 118).
If there is a logical connection between the three accounting-theoretical dimensions, one would expect Chambers to opt
for the proprietary rather than the entity concept of the firm. Admittedly, his actual views are more difficult to pin down
exactly, though elements of proprietary thinking outweigh those that resemble the entity view. On the one hand, Chambers
assures us that his accounting system is not geared to any particular user group; it is committed to the truth only, which is in
the public rather than any particular interest (1966, pp. 280–285). Moreover, the capacity for adaptation indicated by
financial position is defined as that of the entity, not those providing funds to it. This is indicated by Chambers’ basic
definition of financial position as (1966, pp. 109–111, 122):
Assets ¼ liabilities þ ðresidualÞ equity
17
Alongside a few others, such as that of Robert R. Sterling. See Wells (1976, p. 478), Barlev and Haddad (2003, p. 390), Bryer (2004, p. 17), IASB (2005, para.
132), Whittington (2008, p. 164).
18
Chambers, who spent considerable energy fighting the ‘‘cost doctrine’’ (e.g. 1966, pp. 352–356), may also be the first author to talk of revolution in
accounting (1966, pp. 373–376), liking his own system to Copernicus’ rejection of the geocentric world view and referring directly to the work of Thomas
Kuhn.
On the other hand, the fact that determination of financial position and changes to residual equity with a view
to restoration of liquidity, rather than of periodic performance measurement, are the primary concern (e.g. 1966, pp. 81,
124–128) points in a proprietary direction. Chambers’ proprietary perspective is most evident in his definition of the nature
and purpose of the firm. It is created by one or more individuals and has no functions other than those assigned to it by its
constituents (as Chambers calls investors); the firm is essentially their instrument to earn a profit on their investment (1966,
p. 187). This satisfies the requirements of the proprietary view of the firm, but Chambers goes one step further by assuming a
(notionally) mobile constituent or investor who is not merely interested in earning a profit in absolute terms, but in
maximising the comparative return on his/her investment through judicious investment and divestment. To enable him/her
to make the right decisions a measure of relative financial efficiency is required. That measure is annual return on capital,
which, in Chambers’ definition, is equivalent to the well-known – and clearly proprietary – return on equity (ROE) (1966, pp.
188–190). Moreover, ROE does not just guide the decisions of investors, but also those of managers: as ‘‘the relative
attractiveness to constituents of alternatives changes’’, managers ‘‘will be held accountable by constituents for shifts in the
attractiveness of the firms they manage’’ (1966, p. 191). In other words: managers’ primarily responsibility is not operational
efficiency in a given business through the competent employment of a firm’s resources. Instead they must safeguard the
financial efficiency of money invested. This shares many elements of the shareholder value doctrine with its focus on
disciplining management to act in the interest of investors; the only thing missing is to hold managers responsible not just
for ROE, but also for share price movements.
While Chambers’ allegiance to proprietary accounting may not be perfect, there can be no doubt about his allegiance to
what has been described above as a money capital perspective. This is most obvious in how he justifies his decision to define
capital maintenance in financial, not physical terms (1966, pp. 114–115). For him, capital maintenance does not refer to a
particular class or subset of assets, it is not about restoration of productive capacity. It refers instead to the monetary value of
the entirety of an entity’s assets, regardless of their peculiar type or composition. The continuation of a particular productive
activity is not an end in itself and must be abandoned as soon as that activity ceases to be financially worthwhile, i.e. as soon
as another, more profitable investment exists. This also guides Chambers’ treatment of fixed assets (PPE) (1966, pp. 197–
209). Investment into such assets is seen as revocable at any time through their resale.
In fact, it is only because he defines the entity in a way that implicitly assumes a money perspective of industrial capital
that he is then able to claim impartiality for his accounting system – falsely, as it now emerges! The money concept of capital
is more abstract than, but still closest to, a proprietary perspective. Chambers defines the business as the creature of utility-
maximising, atomistic homines oeconomici, but if the entity is defined like that it is possible to claim that one is only
accounting for the entity while actually producing something that is much closer to proprietary accounting.
To conclude this discussion of Chambers’ thoughts on financial accounting and the nature of the firm it will be instructive
to locate them in the context of his general world view, which is set out in the first few chapters of Accounting, Evaluation and
Economic Behaviour. There we find a well-organised, yet shockingly banal and tedious, exposition of something that can only
be described as bourgeois common-sense thinking about economic action, individual motives, law, government and money,
the nature of science and truth, and so forth. This kind of thinking is individualist, utilitarian (in the homo oeconomicus sense),
atomistic, empiricist. The individual and his/her preferences are supposed as given; all actions and social institutions are
then understood as the result of individual decisions, which are instrumentally rational in the sense of maximising
individual utility.
We find here the reflection of the disembedding characteristics of money capital which, in the realm of social thought,
assumes the form of the viewpoint of the moneyed individual.19 Adam Smith was aware of the social embeddedness of
economic activity, writing not just about the Wealth of Nations, but also a Theory of Moral Sentiments. Even the utilitarianism
of Jeremy Bentham and John Stuart Mill retained some notion of it by proclaiming the primary goal of moral action not to be
individual happiness, but the greatest happiness of the greatest number. It was up to lesser bourgeois thinkers to trivialise
these doctrines in the form of the utility-maximising homo oeconomicus and to develop the notion of completely
disembedded economic action. In so doing, however, they developed and operationalised in a consistent and purified fashion
the calculative potential that is inherent in the circuit of money capital, which finds its most adequate institutional
expression in the securities markets. To quote once more from Chambers:
‘‘To impose uniform accounting rules upon all such [publicly listed] corporations may seem, in view of the diversity of
corporations, to force them into one Procrustean bed. Business firms are not the same; the operations and the markets
of retailers, wholesalers, and manufacturers differ; a steel manufacturer is vastly different from a manufacturer of
plastic toys. But from the viewpoint of the securities market, what is produced by firms in all these fields is money;
dividends, or interest payments, or gains on the sale of securities.’’ (Chambers, 1966, p. 279; emphasis added)
19
Try this simple test of neutrality: would workers be very interested in adaptability in the sense of a company’s ability to go into another line of business?
Hardly, as they would probably lose their jobs. Proprietors, on the other hand, have no such issues provided the move results in higher returns.
5. Conclusion
By relating FVA to the circuit and the perspective of money capital we can make sense of its rise to prominence. In the
context of financially dominated capitalism, which has seen the expansion of financial markets and financial investment into
non-financial sectors, FVA is the manifestation of this trend in the field of financial accounting. It is, in other words, the
financialisation of accounting (Chane-Alune, 2006, p. 28). However, that does not mean that financial accounting will ever
become completely financialised and converge fully with pure FVA. The revolution cannot ever be complete because the
circuit of productive capital cannot disappear, and neither can the peculiar perspective and temporality to which it gives rise
and which are the material basis for HCA. This is the deeper reason why IFRS are and will remain a ‘mixed bag’ combining
elements from both accounting systems: the circuits of money and productive capital will continue to inform financial
accounting, albeit to varying degrees depending on the political-economic conjuncture and the balance of forces. This also
provides a cautionary tale for the financialisation literature more generally where there is a tendency to assume that
financialisation is always victorious and where countertendencies are too often disregarded.
Furthermore, analysing accounting change through the lens of ideal-typical accounting systems explains why so many
observers talk about ‘revolutionary’ change even though the actual pace of change is slow and forever incomplete. What they
sense is the qualitative, systemic shift that the gradual switch from historical cost to exit prices or from the p&l to
comprehensive income implies. The methodology of ideal types also opens the field for further research, exactly because
reality diverges from the ideal type. If IFRS will not ever be a fully investor-oriented accounting system, even though its
creators have clearly stated their intention to achieve this, we can ask why this is the case. In particular, one could examine
individual standards or accounting concepts in the Framework with regard to how much they follow or diverge from FVA. The
divergences are the explananda and may be analysed, for example, as the result of a clash of accounting cultures at the level of
the Board; in terms of a (re-)politicisation of standard setting in the wake of financial crisis (Bengtsson, 2011); or perhaps as
the effect of successful lobbying from industries whose business models and operational processes do not lend themselves to
being accounted for in an FVA system. Rather than having to view such inconsistencies as inexplicable logical flaws that can
and should be resolved (e.g. Barker, 2010), they are understood for what they are: the effects of a complex, conflictual and
contradictory socio-economic structure from which the setting of accounting standards cannot ever be divorced – whatever
accounting technocrats may think.
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Critical Perspectives on Accounting 25 (2014) 539–557

Contents lists available at ScienceDirect

Critical Perspectives on Accounting

An accounting revolution? The ﬁnancialisation of standard

3. HCA and FVA as ideal-typical accounting models

3.1. Dimension 1: asset measurement

3.2. Dimension 2: income determination

3.3. Dimension 3: theory of the ﬁrm

Entity theory : assets ¼ equity þ liabilities

Ideal Type I (HCA) Ideal Type II (FVA)

Asset measurement Historical cost Current value (as exit price)

3.4. The ideal types

4. Accounting standards in a ﬁnancialised world

4.1. Circuits of capital as key to ﬁnancialisation and the periodisation of capitalism

4.2. Accounting systems and circuits of capital

4.2.1. Excursus: Chambers’ CoCoA and the genealogy of FVA

Assets ¼ liabilities þ ðresidualÞ equity

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