A social science of contemporary value-based accounting: economic foundations of accounting for financial instruments

In this paper, firstly the present-day fair value accounting for financial instruments is placed in a proper historical perspective by outlining various specific forms of what may generally be regarded as “value-based accounting.” This is followed by an argument to distinguish between inherently different concepts of capital in economic theory, i.e. real capital and loan/fictitious capital, in order to identify the economic foundations of the contemporary form of value-based accounting. The paper goes on to explain that the contemporary accounting problems concerning financial instruments/derivatives are but a manifestation of the failure of the traditional framework of corporate accounting to adapt to the accelerating development of fictitious capital. It is then argued that the existing framework for accounting recognition and measurement or any simple extension of the framework, such as the “realizability” criteria advocated by the FASB, cannot be expected to provide the theoretical basis for the contemporary accounting for financial instruments. This argument would lead us to study the possibility of coexistence or hybridization of the different frameworks of capital/income determination reflecting the difference in their economic foundations. And finally, the paper underlines the importance of economic and historical perspectives in addressing the issues of contemporary value-based accounting as a social science of accounting. Supplementary discussions are provided in Appendix A on the need for another framework of accounting where financial assets/liabilities are concerned, and in Appendix B on a choice of economic theories and the respective accounting perspectives which they offer.