Development of Accounting Principles in USA

Overview: 

1900 Various groups in USA had implementing mix approaches in accounting practices have subjected to a constant re-examination & critical analysis.

4 phases identified such as:

1. Management contribution phase (1900-1933)
2. Institution contribution phase (1933-1959)
3. Professional contribution phase (1959-1973)
4. Politicization phase (1973-present)

 Management contribution phase (1900-1933)

The environment: 
management had complete control over the selection of financial information disclosed in annual reports

Reason:
increasing numbers of shareholders & dominant economic role played by industrial corporations after 1900. 

The effects:
Management have complete control over the format & content of accounting disclosures.Adoption of ad hoc (random) solutions to urgent problems & controversies 
The problems arose:

•  Most accounting techniques lacked theoretical support
• Focus on taxable income & minimize tax
•  Focus on income smoothing
• Adopting only on simple solutions but neglected complex solution
• Same problem, different accounting techniques.

Arguing the situation: Z. Ripley & Hoxley and (Adolph A, Berle & Gardier C ) are outspoken in arguing for an improvement in standards of financial reporting


 The main players:

• AIA (American institute of Accountant) established a board of Examiners to create a uniform CPA Examination.
• NYSE (New York Stock Exchange) required all corporations applying for listing to agree to publish annual financial statements.

The events occured:

• interest cost issue
• taxable profit issue

 Interest as a cost (production cost) controversy:

•   FASB traces the background of interest as a cost (production cost) controversy
•  Reason of controversy emergence:
• contribution on incremental amount of overhead
•   the increasing complexity of business
• increasing reliance on machinery &
• Consequent need to invest large amount of capital for long term.
• To develop realistic product cost as basis for establishing selling prices and measuring manufacturing efficiency.
• AIA position states that: no selling cost, interest charges, or administrative expenses are included in the overhead costs. And won the debate.

Accounting theory of taxation of business income:

• Revenue act 1913 provided for the calculation of taxable income on the cash basis.
• The 1918 act was the first to recognize the role of accounting procedures in the determination of taxable income.
• It set the stage of the beginning of a harmonization between tax accounting and financial accounting.

   

      P/S: Next post will be in institutional and professional contribution phase... stay tuned!

    

      source: Previts, Gary John, Parker, Lee D. and Edward N. Coffman, "An Accounting Historiography: Subject Matter and Methodology", Abacus (September, 1990), p.142.