WHAT REALLY MATTERS FOR INCOME PRESENTATION?
FORMAT VARIATIONS VS COHERENCE CONCERNS
ABSTRACT
Purpose This paper focuses on the incoherence concerns relating to the reporting of holding gains and losses,
to elucidate how these can be rendered more coherent and meaningful.
Design On the basis of the Coherence Theory of Truth we discuss the incoherence of the IASB system, and
highlight the possible contribution of the more coherent theoretical underpinnings of Economia Aziendale.
Findings The IASB and Economia Aziendale share a common focus on desiring clean surplus accounting
and maintenance of the long-run operating capability. If the IASB would include in its system the founding
notions of Economia Aziendale it could fully realise clean surplus accounting, better satisfying the needs of
different users.
Value Economia Aziendale could contribute to the improvement of the current IASB accounting system,
relevant for academicians and practitioners, and in general for policy makers, local standard setters and
countries presenting similar characteristics to Italy.
Article classification: Conceptual paper
Keywords: Coherence, Economia Aziendale, Conceptual Framework, IFRS.
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1. INTRODUCTION
The International Accounting Standards Board (IASB) has long been involved in reviewing the reporting
format of performance, since 1996, when the former International Accounting Standard Committee (IASC)
issued ED 53 Proposed International Accounting Standard – Presentation of Financial Statements. One of
the aims of this ED was to focus attention on the issues relating to the appropriate reporting for holding gains
and losses. However, seventeen years have passed, there have been a number of amendments to the reporting
format of performance, but agreement has not yet been reached, thus leading to still on-going projects and
related debate to attain a ‘conceptually robust’ accounting standard on the presentation of financial
statements. The result is that holding gains and losses are still being treated inconsistently in the financial
statements and the IASB is still looking for an appropriate place for them.
Yet in 2003 Newberry suggested that such conceptual robustness was difficult to accomplish because of the
incoherence of the Conceptual Framework (CF), which is also related to the long-standing and still unsettled
battle over concepts of income (Barker, 2004). More recently, Cooper (2007) stressed that there is little
conceptual logic behind most of the current classifications and methods of presentation, and that this has an
undeniable impact also on other projects of the IASB, because it is difficult to solve the other accounting
problems without a suitable means to meaningfully present the related gains and losses. Also, other parties
(e.g. companies, auditors, regulators, domestic standard setters) in response to the ED Presentation of
Financial Statements: a Revised Presentation (2006) and ED Presentation of Items of Other Comprehensive
Income (2010) have emphasised the need for a stronger theoretical foundation for the concept of
comprehensive income, currently lacking within the CF. In this regard, Hans Hoogervorst, Chairman of the
IASB, has recently recognised (2012) the need for clarifying the basis upon which different gains and losses
are reported in different ways, and that in the on-going review of the CF the IASB will try to make income
presentation more meaningful.
It is worth noting that the current IASB’s Conceptual Framework (2010) is capital-providers based and thus
oriented towards a decision-usefulness approach. However, the IASB itself recognises that there are also
particular subsets of primary users of financial reports other than capital-providers. Hence, the decisionusefulness of financial information should attain the needs of different kinds of users. As Whittington (2008)
states essential characteristics of information to ensure decision-usefulness are the relevance and the faithful
representation of the real-world economic phenomena that it purports to represent. In this respect, Alexander
and Archer (2003) specify that the proper understanding of representational faithfulness is related to the
preliminary comprehension of the concepts of reality and truth in the context of financial reporting and
emphasise the possible relevance of a Coherence Theory of Truth (CT) in explicating the relationship
between accounting and its objects. Drawing on Alexander and Archer (2003), in this research we assume
that a conditio sine qua non for the fulfilment of decision-usefulness is the coherence of the information
provided in financial reports. Coherence, in turn, implies that accounting standards have to be consistent with
the Conceptual Framework and the Conceptual Framework has to be consistent with itself. Accordingly, this
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paper examines the reporting of holding gains and losses, by focusing on the claimed incoherence concerns
related to the lack of conceptual bases.
In particular, for the purposes of this research, and in line with Newberry (2003), we refer to a traditional
accounting theoretical approach. Specifically, we use the traditional Italian normative entity theory
(Economia Aziendale, see e.g., Viganò, 1998; Zambon and Zan, 2000; Capalbo and Clarke, 2006; Viganò
and Mattessich, 2007). Economia Aziendale is characterised by the importance of a unitary and coordinated
view of the entity, which should be analysed from the three perspectives of management, organization and
accounting to take into account the interdependences between all the operations. The main Economia
Aziendale principles allow the provision of coherent theoretical underpinnings, which subsequently are
helpful to provide coherent information in financial statements, that is useful for different kinds of users with
various information needs. In this regard, what should be clarified is that we mainly refer to the theoretical
accounting conceptions pursued by Economia Aziendale, rather than focusing on the Italian accounting
practices. Indeed, although the theory has influenced in many ways the accounting practices, as Alexander
and Servalli (2011) argue, these over the years have been affected also by other variables (e.g. law,
regulation, taxation, legal profession practices).
A further essential element that justifies the reference to Economia Aziendale is related to the awareness that
IFRS are widely used around the world, by countries presenting similar characteristics to Italy. These
countries are indeed characterised by a manufacturing, retail and service tradition, with a vast majority of
entities that are business-oriented rather than financial market-oriented (Hoogervorst, 2012). This clearly
results in an increasing need for taking into account the real productive nature of such entities, rather than
focusing only on financial orientation.
The remainder of the paper is structured as follows. Section 2 briefly examines the conception of coherence
that we refer to. Section 3 discusses the issues of incoherence in the IASB treatment of comprehensive
income. Section 4 describes the main characteristics of the coherent approach of Economia Aziendale.
Section 5 highlights a possible way forward through the contribution of the Economia Aziendale. Section 6
analyses recent developments from IASB and EFRAG on the CF revision project, and Section 7 provides
concluding remarks.
2. THE COHERENCE THEORY OF TRUTH IN ACCOUNTING
In this section we attempt to depict the conception of coherence that we refer to, in view of the fact that this
represents a conditio sine qua non for the fulfilment of the information usefulness of financial reporting.
Alexander and Archer (2003) emphasise that to be useful information must be relevant and faithfully
represent what it purports to present, also suggesting that the proper understanding of representational
faithfulness is related to the preliminary comprehension of the concepts of reality and truth in the context of
financial reporting. In focusing on the concept of truth, the authors have devoted attention to the contrast
between two different ‘definitions of truth’ in financial reporting. More precisely, they highlight that a
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particular view of truth, which they term Correspondence Theory of Truth (CTT), has been assumed by
accounting standard setters. However, they contend that CTT is problematic in the context of accounting,
thus proposing alternative theories of truth more helpful in explicating the relationship between accounting
and its objects. Hence, they emphasise the possible relevance of a Coherence Theory of Truth (CT).
The coherence theory differs from its principal competitor, the correspondence theory of truth, in two
essential respects, in that the competing theories give conflicting accounts of the relation between
propositions and their truth conditions. The former states that the relation between propositions is coherence;
on the contrary according to the latter the relation is correspondence. Moreover, according to the CT, the
truth conditions of propositions consist in other propositions. The CTT, in contrast, states that the truth
conditions of propositions are not (in general) propositions, but rather objective features of the world.
Consequently, the criticism against CTT arises with regard to the fact that a belief cannot be true because it
corresponds to something which is not a belief. Instead, the truth of a belief can only consist in its coherence
with other beliefs, i.e. a belief is ‘true’ only to the degree that it coheres with other beliefs.
Given the above discussion, the argument which supports Alexander and Archer’s (2003) view is that CTT
implies an objectified conception of economic reality, termed external realism (ER), based on the notion of
the world as constituted of some fixed totality of mind-independent objects. However, the authors, in line
with Searle (1995), reject ER as a valuable ontological basis for accounting, in favor of an internalist
perspective, termed internal realism (IR). In fact, according to the latter, accounting objects do not exist
independently of a conceptual scheme that relates accounting concepts to each other and to their empirical
referents (Alexander and Archer, 2003). Consequently, switching from ER to IR (incompatible with CTT)
forces the adoption of a different theory of truth, such as CT.
In this regard, it is also worth noting that the aversion against the CTT in favor of CT, although with various
nuances and in several cases not explicit, is common also to other authors such as Shapiro (1997), Mattessich
(2003) and Lee (2006). Subsequently, in accordance with these views, we provide here a basic and general
formulation of the CT, by also discussing its implications for accounting in general. In particular, drawing on
Dorsey (2006), who describes the CT in ethics, we summarise the main characteristics of his formal model.
In the following sections this will be recalled as a guideline to run our discussion on the incoherence of the
IASB accounting system, and to highlight the possible contribution of the Economia Aziendale, as a coherent
accounting framework.
In his study Dorsey gradually examines the concepts of truth and coherence, providing a progressive
formulation of these two by discussing the main implications of the related choices, and also examining the
possible objections that arise against the model. The author addresses the examination of the concepts
starting from a preliminary definition of truth, as follows:
T1: a normative sentence x is true if and only if it is part of a normative system and that system is coherent.
He clarifies that this formulation is not satisfactory, and emphasises that there is the need for relativizing
truth to a system as follows:
T2: A normative sentence x is true in a normative system L if and only if x is part of L and L is coherent.
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Also this formulation is not completely satisfactory given that it implies that the relativization of truth is
necessary, but not sufficient. Indeed, if we accept T2 when the normative system is incoherent, any
normative sentence is false. However, this problem can be avoided because even though a system is not
coherent, if it is reasonable to think that a sentence x would be part of a system adjusted, expanded and rid of
incoherence - through the Quinean doctrine of minimal mutilation - then it is true. Hence, Dorsey specifies
that if there are a number of sentences held with confidence, these are regarded as the center of the web of
belief and incoherent systems are revised in the light of these sentences in so far as is possible. Accordingly:
T3: A normative sentence x is true in a system L if and only if either x is a member of L and L is coherent, or
x is a member of L* where L made coherent according to the Quinean doctrine of minimal mutilation yields
L*.
At this point of his analysis Dorsey specifies that, although T3 is a good starting point, there is the need for
enhancing the model by clearly characterizing coherence. Thus, drawing on Kirkham (1992), preliminary
coherence is defined as follows:
«The term “coherence” as used by coherence theories has never been very precisely defined. The most we
can say by way of general definition is that a set of two or more beliefs are said to cohere if and only if (1)
each member of the set is consistent with any subset of the others and (2) each is implied (inductively if not
deductively) by all of the others taken as premises or, according to some coherence theories, each is implied
by each of the others individually».
In this regard, Dorsey further specifies that coherence alone is not sufficient because some relationships of
mutual implication between the sentences are required. Therefore a second constraint to satisfy is the
derivability (which also requires the use of non-normative sentences and that is satisfied if a sentence is
derivable from all other sentences taken together).
Accordingly coherence can be formalised as follows:
C1: A normative system L is coherent if and only if, for all normative sentences x, if x is a member of L, x is
consistent with all other sentences of L and is derivable by a system of deductive logic with all other
sentences of L and any requisite non-normative sentences available as premises.
Furthermore, at this stage it is worth clarifying that a number of general normative principles are not always
derivable via a system of deductive logic, thus an account of inductive generalization should be included.
Also, there is the need to clarify clearly which is the relevant set of implications. Consequently:
C2: A normative system L is coherent if and only if, for all normative sentences x, if x is a member of L, x is
consistent with all other members of L and their normative implications and is derivable by a system of
deductive logic or inductive generalization with all other sentences of L and any requisite non-normative
principles available as premises.
So, finally, the author takes T3 as the relevant truth predicate, wherein coherence is defined as above (C2).
At this point a clarification is due: indeed, along his study Dorsey highlights that at a first glance three main
objections related to derivability, circularity and mixed inferences can be moved against the model designed.
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However, he also contends that such objections are in reality problems without strong foundation, or at least
eliminable, thus corroborating the correctness and usefulness of the proposed model.
Accordingly, in the next sections we employ Dorsey’s model as a guideline for the discussion, assuming T3
as the relevant truth predicate, wherein coherence is defined as above (C2).
3. THE “INCOHERENCIES” INSIDE THE CONCEPTUAL FRAMEWORK AND BETWEEN THE
CONCEPTUAL FRAMEWORK AND IFRS IN RELATION TO THE REPORTING OF HOLDING
GAINS AND LOSSES
This section aims at clarifying what are the elements of incoherence inside the IASB CF and between IFRS
and the CF in relation to the reporting of holding gains and losses, through the lens of the model shown in
the previous section. The issues related to the reporting of holding gains and losses involve the consideration
of the matters associated with the measurement of profit (or loss). Hence, we will start our reasoning by
mainly referring to the concept of profit, which is explicated in the CF, as follows:
“Profit is frequently used as a measure of performance or as the basis for other measures, such as return on
investment or earnings per share. The elements directly related to the measurement of profit are income and
expenses. The recognition and measurement of income and expenses, and hence profit, depends in part on
the concepts of capital and capital maintenance used by the entity in preparing its financial statements” (CF,
§ 4.24, 2010).
The IASB clarifies that the key elements to take into account for measuring profit are: the criteria for the
recognition of income and expenses and the concepts of capital and capital maintenance. Thus, for the
purpose of clarity, in the subsequent table we briefly summarise the main aspects of these concepts, but to
develop our discussion we will also refer to the extensive explanation of these within the CF.
Table 1 – Key elements for measuring profit under the IASB Conceptual Framework
Recognition of the
elements of financial
statements (§ 4.38)
Capital (§ 4.57)
Capital
maintenance
(§ 4.59)
An item that meets the definition of an element should be recognised if:
(a) it is probable that any future economic benefit associated with the item will flow to or
from the entity; and
(b) the item has a cost or value that can be measured with reliability.
Under a financial concept of capital, such as invested money or invested purchasing power,
capital is synonymous with the net assets or equity of the entity.
Under a physical concept of capital, such as operating capability, capital is regarded as the
productive capacity of the entity based on, for example, units of output per day.
Financial capital maintenance. Profit is earned only if the financial (or money) amount of
the net assets at the end of the period exceeds the financial (or money) amount of net assets
at the beginning of the period, after excluding any distributions to, and contributions from,
owners during the period.
Physical capital maintenance. Profit is earned only if the physical productive capacity (or
operating capability) of the entity (or the resources or funds needed to achieve that capacity)
at the end of the period exceeds the physical productive capacity at the beginning of the
period, after excluding any distributions to, and contributions from, owners during the
period.
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At this stage, we verify if the concept of profit of the CF respects the formulations of truth (T3) and
coherence (C2), as they stand in section 2. Hence, the concept of profit in IASB CF is regarded as the
sentence x. Moreover, the system L is represented by the whole IASB system in terms of CF plus all the
individual standards.
T3
The IASB concept of profit is true in the IASB system if and only if either the concept of profit is a
member of the IASB system and the IASB system is coherent, or the concept of profit is a member of IASB
CF* where the IASB system made coherent according to the Quinean doctrine of minimal mutilation yields
the IASB system *.
Given that the concept of profit is included in IASB CF, the first of the two conditions of T3 is respected.
However, there is the need to prove the coherence of the IASB system through the reference to the
formulation C2.
C2
The IASB system is coherent if and only if, for all normative sentences related to the concept of
profit, if the concept of profit is a member of the IASB system, the concept of profit is consistent with all
other members of the IASB system and their normative implications and is derivable by a system of deductive
logic or inductive generalization with all other sentences of the IASB system and any requisite nonnormative principles available as premises.
For the purpose of assessing the coherence of IASB system we analyse the elements of measuring profit
cited in Table 1, by referring to some explicative cases, in terms of incoherencies inside the conceptual
framework and between the conceptual framework and IFRS.
Incoherencies inside the conceptual framework in relation to the measurement of profit
Concerning the issues related to the measurement of profit, the first anomaly to take into account with
reference to the CF is that, as Barker (2010) argues, the CF provides the definitions of income and expenses
but profit is not explicitly defined. Moreover, the author recognises that the definitions of income and
expenses are based upon the notion of clean surplus, whereby IFRS allows dirty surplus items, namely
capital maintenance adjustments and reclassification adjustments (recycling), with the result that IFRS does
not allow income less expenses to be defined to equal profit. As a result, while all changes in net assets
(other than from transactions with equity holders) are by definition either income or expenses, those
associated with capital maintenance or reclassification adjustments are excluded from the calculation of
profit in the income statement.
In this regard, Barker stresses that the IASB’s answer to the problem of profit not being equal to income less
expenses has not been to redefine income or expenses, but to ‘reinvent’ profit by introducing a term that does
not exist in the CF, i.e. ‘total comprehensive income’, which should be effectively clean surplus profit by
another name. However, according to Barker’s analysis total comprehensive income has, to date, only
increased confusion and complexity because of its lack of conceptual merit.
Incoherencies between the conceptual framework and IFRS in relation to the measurement of profit
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The CF allows both financial and physical capital maintenance: on the one hand, under the concept of
financial capital maintenance, where the capital is defined in terms of nominal monetary units, increases in
the prices of assets held over the period are profits; on the other hand, under the concept of physical capital
maintenance, where the capital is defined in terms of physical productive capacity, all price changes
affecting the assets and liabilities of the entity are viewed as changes in the measurement of the physical
productive capacity of the entity, and they are treated as capital maintenance adjustments.
In relation to the application of the capital maintenance an interesting question pertains to IAS 41, which
provides rules for biological assets. Specially, the IAS 41 requires that changes in the fair value of biological
assets have to be treated as part of the profit or loss of the period. This accounting treatment implies the
application of financial capital maintenance. However, Roberts et al. (1995) argue that for the biological
assets the increase in fair value associated with changing prices should be differenced from changes in fair
value that are due to physical changes. However the capital maintenance implications need more precise
thought. Consider the situation of a farmer using mother cows to regularly breed calves. The mother is a
fixed (non-current) asset, retained over a number of years to support the operating activity of the business,
which is the breeding of calves. Since the mother is a fixed asset, she must be replaced when she wears out,
and it follows that any recorded gains on her, whatever the valuation method used, are not surplus over and
above the maintenance of the long-run operating capacity of the business. Whether these gains are realised
by market transaction (of the mother), or not, is completely irrelevant to this statement.
The situation regarding the calves is entirely different. These are logically ‘work-in-progress’ but the
operation of the farm is to ‘grow’ calves, not to buy and sell them. So it is entirely rational to propose that
gains on the calves are part of the operating performance of the farmer. Again, this statement is logically
entirely unaffected by whether the gains are realised through market transaction of the calves, or not
(realisation may affect distributability, but it does not affect the calculation of the operating performance).
So, applying this logic more specifically to the IASB scenario of fair value and OCI, we can say that fair
value gains on e.g. lambs/calves are definitely operating items, and physical/operating capital maintenance is
fully achieved by retaining the mother animals subject to wear and tear. It follows that unrealised gains on
the young are operating, and economically (not necessarily legally or prudentially) distributable at once. But
if the mothers are fair valued too, the gain on them does need to be retained. Essentially, the proper
application of capital maintenance is that the fair value gain on lambs/calves (or grapes on the vine) goes
immediately into income, and gains on the parents (or the vine itself) go into other comprehensive income
and stay there.
The example is highly topical. World Accounting Report for February 2013 (Walton, 2013) reports as
follows, in relation to the December 2012 meeting of the Board.
“The IASB also started work on the proposed amendment to IAS 41 Agriculture. They had agreed, in
response to a paper from the Malaysian Accounting Standards Board, supported by the Asian and Oceanian
Standard-setters Group (AOSSG), to look at providing different accounting for bearer biological assets.
While IAS 41 generally requires biological assets to be at a form of fair value, the AOSSG has made the case
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that some biological assets are more like property, plant and equipment in that they are used to grow a
consumable crop and not consumed themselves”.
The report goes on to say that the IASB rejected any such suggestion as regards ‘assets that (a) had no
alternative use and (b) were not livestock’. This suggests that they do not understand the logic of capital
maintenance in the real world of business.
A further explicative case is related to the IAS 16, Property, Plant and Equipment, and IAS 38, Intangible
Assets, which allow re-measurement subsequent to initial recognition applying the revaluation model: If a
revaluation results in an increase in value, it should be credited to other comprehensive income and
accumulated in equity under the heading ‘revaluation surplus’ unless it represents the reversal of a
revaluation decrease of the same asset previously recognised as an expense, in which case it should be
recognised as income. When a revalued asset is disposed of, any revaluation surplus may be transferred
directly to retained earnings, or it may be left in equity under the heading revaluation surplus. The transfer to
retained earnings should not be made through the income statement. This accounting treatment implies no
recycling through profit or loss. This revaluation model seems to be based on a physical capital maintenance
concept to the extent that the increase of value is recognised in other comprehensive income and it seems to
be based on financial capital maintenance to the extent that the decrease of value is recognised in net
income.
An additional explicative case is related to IAS 39, Financial Instruments: Recognition and Measurement.
The changes in fair value of financial instruments classified as available for sale are recognised directly in
other comprehensive income. This implies a physical capital maintenance concept. However, differently
from the revaluation surplus model of IAS 16 and IAS 38, the cumulative gain or loss recognised in other
comprehensive income is then recognised in profit or loss when an available-for-sale financial asset is
derecognised. This approach implies recycling.
Concluding, the first incoherence that it is possible to identify in relation to the IASB accounting system is
that the CF itself lacks coherence because the extant definitions of income and expenses, which are based on
a clean surplus approach, do not lead to income less expenses equal to profit. This is mainly because IFRS
allows dirty surplus accounting (i.e. capital maintenance adjustments and recycling), and are thus incoherent
with the CF. More in depth, taking into account the above cited examples, it is important to highlight that,
although the CF explicitly requires that an entity choose its concept of capital maintenance from between the
two allowed within CF, the IASB itself allows the co-existence of the two approaches in some individual
IFRS. Moreover, the application of capital maintenance is not always consistent with the expectation of some
items as for example with agriculture products. Further, in relation to recycling, being aware that the
recycling option is not coherent with CF formulation, in any case the IFRS show an inhomogeneous
approach to such issues. Hence, it is possible to conclude that currently the IASB provides an incoherent and
sometimes misleading accounting system.
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4. ECONOMIA AZIENDALE
The Economia Aziendale is an Italian normative entity theory which dates back to 1927, through the work of
Gino Zappa, which studies the conditions of existence and the manifestation of the life of the entity (azienda)
(Zappa, 1927, p.30). In particular, the azienda (a concept that encompasses all types of entities, such as
profit-oriented, public, and non-profit) is defined as an economic institution intended to last for an indefinite
length of time and which, with the aim of meeting human needs, manages the production, procurement or
consumption of resources in continuous coordination (Zappa, 1956, p. 37; Signori and Rusconi, 2009).
The Economia Aziendale states that the azienda should be jointly analysed from three perspectives:
management, organization and accounting. This three-fold view implies the need to take into account the
interdependences between managerial, organizational and accounting aspects, from the point of view of
systematic relationships, to get a more comprehensive framework (Signori and Rusconi, 2009; Zappa, 1927,
p.25). Thus, one of the most distinguishing features of the theory is the unitary view of the azienda, which
leads to a holistic approach (Signori and Rusconi, 2009; Caldarelli et al., 2011; Costa and Ramus, 2012).

Accordingly, the first distinctive point is that the Economia Aziendale is based on the notion of the
azienda as a unitary and durable economic institution, with long-term objectives, that should be jointly
analysed from three perspectives: management, organization and accounting.
As the Italian Society of Accounting Professors (Società Italiana dei Docenti di Ragioneria e di Economia
Aziendale, SIDREA) has recently argued, the main purpose of the azienda is to create value, for the azienda
itself – and not for the single persons within the institution – as well as for the different stakeholders
involved and socially recognised (SIDREA, 2009). Therefore, the Economia Aziendale focuses on the
conditions that the azienda should meet in order to ensure in the long term, either the persistence of the
institution or the accomplishment of the purposes for which it was founded (Sidrea, 2009). In particular, the
azienda should be able to preserve or even improve its level of functionality over time, through the
continuous realization of a positive difference between the benefits obtained and the resources employed (i.e.
economic equilibrium; equilibrio economico) (e.g. Catturi, 2003; Sciarelli, 2007; Cavalieri, 2010), also
paying attention to the asset-liability and cash flow dimensions (i.e. financial equilibriums; equilibrio
finanziario, equilibrio monetario respectively). Moreover, in so doing, it also compounds the attainment of
the strategic equilibrium (i.e. strategic equilibrium; equilibrio strategico) (Cavalieri, 2010).

Accordingly, the second distinctive point is that the azienda is able to survive in the long run if it is
able to create value for itself and the socially recognised stakeholders, by systematically achieving
economic, financial and strategic equilibriums.
Given the above discussion and in order to focus the attention on the accounting perspective, there is the
need to emphasise several aspects. It is worth highlighting that as Capalbo and Clarke (2006) stress, a
relevant underlying assumption of the Economia Aziendale is that no reliable accounting systems to assess
the value creation can be designed without having knowledge of the particular azienda’s operations,
managerial aspects and organizational structure. This is the natural consequence of the theoretical
formulation of the Economia Aziendale that tends to locate the azienda in its time-space setting. Indeed, this
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conception is mainly based on the structure of the Italian economic context at the time of the original
formulation of the theory, characterised by the prevalence of business-oriented, rather than financial-oriented
entities. Thus, originally Italian accounting was free from the constraints related to the need for providing
comparable information for financial markets, and more oriented towards the achievement of a
comprehensive understanding of the value creation processes useful for real entities. In this regard, it is
worth noting that to examine the concrete features of real entities the interdependences and the systemic view
assume a central relevance also for the definition of accounting systems. That is, as Zambon and Zan (2000)
state, within Italian literature it is difficult to identify any accounting conception, position or relevant
statement that does not mirror the basic elements of characterising the theoretical representation of the entity.
Further, although significant changes have occurred in the Italian economic context, agreement still persists,
among Italian accounting scholars, on the notion of azienda as a unitary and highly coordinated system.

Accordingly, the third distinctive point is that the unitary view and the high coordination which have
characterised the notion of the azienda since the very beginning, due to the prevalence of business-oriented
entities (real entities) in the (real) economic context of reference, is still largely agreed despite the
significant changes which have occurred since 1927.
Moreover, since the azienda is perceived as highly coordinated and unitary, conceptually also the income is
unitary and envisaged as a holistic notion. Indeed, in acknowledging that all operations performed within the
entities are related to one another, Economia Aziendale emphasises the need for taking into account such
interdependences, with the subsequent impossibility to distinguish the financial consequences of one activity
from those of another. Hence, with specific reference to accounting, in theory any attempt to measure
periodically the performance of the azienda is improper because it interrupts the coordination. In this regard,
we quote Viganò (1996, pp. 266-7, our translation).
«The concern is unitary; the income1 produced is unitary, in time and space. (…) There are no single or
specific costs to be compared to single or specific revenues. A single cost does not produce a single revenue,
but it contributes without distinction to produce all the revenues; a single revenue does not derive from a
single cost, but from the contribution of all the costs. The concern is a dynamic entity, so what really exists
are costs and revenues as elements of the income itself».
In this respect, it is worth emphasizing that Italian accounting theory in this sense attempts to reflect the
holistic character of the azienda, without rejecting the practical exigencies of measuring performance
periodically, as to this aim the interruption of the coordination for preparing annual reports is tolerated (being
aware of the inevitable conjectures) as a stratagem. That is, coordination still persists despite this
compromise (Capalbo and Clarke, 2006) which is essential to achieve the practical needs related to the
periodical information required for external users, but should be carried out bearing in mind the characters of
unity and coordination over time and space.
Income is here (and henceforth) a literal translation of the Italian term Reddito, which in IASB’s terms is to be
understood as profit or loss.
1
11

Accordingly, the fourth distinctive point is that the Economia Aziendale adopts in essence a clean
surplus accounting that allows the respect of the essential holistic character of the azienda.
Another essential element to take into account is that, given the original conception of financial statements as
an internal instrument to provide an efficiency judgement on management, the relevant measure that the
accounting systems should provide is a measure of consumable (i.e. distributable) income and not one of
achieved (i.e. non distributable) income. Indeed, since the azienda is conceived as a durable institution, the
managers have to reject decisions that might favour short-term profit to the detriment of the long term with a
view to guaranteeing the economic long-term sustainability of the azienda (Amaduzzi 1991). In this regard,
it is worth noting that the notion of consumable income incorporates the concept of economic capital
maintenance as the preservation of the same capacity to produce income in the future, compared to that at the
beginning of the period. In this sense, Zappa (1937) and the following Italian scholars (e.g. Onida, 1951;
Amaduzzi, 1953; Masini, 1955; Amodeo, 1960) have variously highlighted the possible relevance of
different estimation criteria, but always having in mind that to avoid the lessening of capital in operating
terms, income available for distribution must not reduce the initial capital (in quantitative terms), and it must
not damage the capacity of capital to provide future income (from the qualitative perspective). Alexander and
Servalli (2011) discuss this logic in more detail, and see section 6 below.

Accordingly, the fifth distinctive point of the Economia Aziendale is that in order to determine a
reasonable measure of consumable income, it is essential to determine the qualitative-quantitative measure
of capital that preserves future income.
What should be noted is that Italy is characterised by the prevalence of small-medium or family enterprises,
phenomena of thin capitalization, with an under-developed financial market and high usage of financial
resources provided by financial intermediaries. Hence, the notion of economic capital maintenance arguably
serves two different scopes. Indeed, first, the preservation of the capital from the qualitative point of view
ensures the durability from the operating perspective. On the other hand the preservation of the capital from
the quantitative perspective ensures, also in accordance with the legal requirements that are typical of an
insider system such as Italy, the respect of capital providers’ rights.

Accordingly, the sixth distinctive point of the Economia Aziendale is that the notion of economic
capital maintenance fully reflects the real information needs of the azienda as a real entity.
5. IASB ACCOUNTING SYSTEM AND ECONOMIA AZIENDALE: TOWARDS A MORE
MEANINGFUL INCOME PRESENTATION
This section attempts to discuss the incoherencies of the IASB accounting system in contrast with the
coherence of the Economia Aziendale. Hence, we start by summarizing the most important issues addressed
in the third and fourth sections.
In particular, as far as the incoherence of the IASB accounting model is regarded, several aspects ought to be
deepened. As already pointed out in the third section, a number of elements such as the co-existence of clean
surplus accounting (which is at the basis of the CF) and dirty surplus accounting (which is allowed by some
12
individual IFRS in relation to capital maintenance adjustments and recycling); the co-existence, in certain
cases, of different capital maintenance approaches within the same IFRS; and more in general the
inhomogeneous application of the options across the IFRS, lead to an incoherent and misleading accounting
system. Arguably, as Alexander and Archer (2003) contended, this implies that the information provided on
the bases of such a system - which lacks clear conceptual foundations, and thus allows alternative or
conflicting practical approaches - possibly lacks decision usefulness for different kinds of user.
Contrarily, as it has been depicted in the fourth section, the Italian accounting is fully coherent in itself, i.e.
all the accounting concepts are rooted in the theoretical formulation of the Economia Aziendale. In summary,
it is worth emphasizing that the Economia Aziendale clearly states what are the essential characteristics of
the azienda (entity), as a unitary and durable economic institution, with long-term objectives. As far as the
durability is regarded, we stressed that the azienda is able to endure only if it creates value for itself and its
stakeholders. Moreover, since the azienda is perceived as unitary, its value creation processes can be
analysed only regarding simultaneously all the three perspectives of management, organization and
accounting that allow the full comprehension of the coordinated and systematic interdependences between all
the operations. Hence, as stated before, Economia Aziendale adopts in essence a clean surplus accounting,
thus incorporating the fundamental systemic view of the azienda. Moreover, given the long-term objectives
of the azienda, the theory focuses on the need for determining a reasonable measure of consumable income.
Indeed, the azienda is able to endure only if it creates value for itself and for the stakeholders, and it is able
to create value only if it determines the qualitative-quantitative measure of capital that preserves future
income. In this regard, clearly the notion of economic capital maintenance which emerges, fully reflects the
real information needs of the azienda as a real entity and of the different users.
On the basis of the elements of coherence of the Economia Aziendale, we discuss in the following
paragraphs the potential contribution of the theory in achieving a coherent IASB accounting system, able to
provide useful information for the different users.
In this respect, a primary focus should be on the call for reshaping accounting standards, after the financial
crisis, towards a new paradigm of sustainability. Indeed, Trichet (Chairman of the European Central Bank at
that time) emphasised during a seminar at the University Ca’Foscari of Venice in 2009, that during the crisis
the list of areas that proved dysfunctional included the risk management and credit assessment of banks,
accounting standards, audit quality, supervision, and many more elements, thus concluding that no market
segment or financial actor should escape profound rethinking. With specific reference to accounting
standards, the demand for switching from the pre-crisis short-termism towards visions of longer-term, in
conjunction with the widespread diffusion of IFRS around the world, possibly leads to a decisive
transformation of the bases for financial statements preparation. Indeed, the CF clarifies three fundamental
accounting assumptions, i.e. accrual, going concern and decision-usefulness which, given the above-cited
incoherence of the IASB accounting system, seems not completely satisfactory in view of these on-going
changes in the economic context.
13
In this regard, the Economia Aziendale may be helpful in elucidating a possible way forward to enhance
current provisions. Accordingly, if the IASB would enlarge its accounting assumptions, by including
durability, unitary view of the entity and systemic coordination, it could probably be able to provide
conceptual bases more relevant to the new economic challenges. The reliance on such concepts, as the
Economia Aziendale shows, on the one hand might be a good starting point to render accounting able to urge
entities towards long-term sustainability. On the other hand, these elements fit very well with the
characteristics of those countries that are adopting IFRS and that have a manufacturing, retail and service
tradition, with a vast majority of entities that are business-oriented rather than financial market-oriented.
Here such an approach would result in the improved capability of financial statements to deliver useful
information about the real productive nature of entities, rather than focussing only on financial orientation,
but clearly without compromising the information needs of financial-market oriented entities.
As stated above a second controversial issue refers to the fact that the CF adopts a clean surplus accounting
while some individual IFRS allow dirty surplus. In this respect, it is worth remembering that as Van
Cauwenberge and De Beelde (2007) maintained, the introduction of a statement of comprehensive income
mimics clean surplus income and this arguably demonstrates the preference of the IASB for retaining clean
surplus accounting. However, comprehensive income due to its lack of firm theoretical underpinnings
removes only the incoherencies related to capital maintenance adjustments, but the problem of recycling still
remains unanswered. On the contrary, bearing in mind that the Economia Aziendale is a tangible expression
of the strong linkage between the characteristic features of durability, unity and systemic coordination of the
entities, and clean surplus accounting, the introduction of these concepts as assumptions in the IASB
accounting systems might be beneficial also with regard to the misleading co-existence of clean surplus
accounting and dirty surplus accounting relating to recycling. Indeed, the removal of recycling might be able
to render the IASB accounting system less complex, more coherent and thus able to provide more useful
information for different users.
In addition, we have also contended that the IASB accounting system is characterised by incoherence with
reference to the concepts of capital maintenance. Whilst the CF holds both financial and physical capital
maintenance, requiring that entities choose their concept of reference between the two allowed, the IASB
itself allows the co-existence of the two approaches in particular IFRS. In this regard we agree with the IASB
view of the importance of holding the two different approaches to fully meet entities’ information needs.
However, in light of the misleading application of these across the standards, we suggest a different approach
to achieve coherence. In this perspective, the Economia Aziendale notion of economic capital maintenance
represents a good and potentially valuable example of simultaneous and coherent application of the concepts
of financial and physical capital maintenance. The adoption of such an approach ensures the retention of both
concepts, which is an expressed willingness of IASB, and at the same time the achievement of coherence.
Still, it is worth emphasizing that in view of the widespread diffusion of IFRS around the world, in countries
where there is the prevalence of business-oriented entities, a coherent accounting system, which is able to
14
provide information on the preservation of the capital from the qualitative and the quantitative point of view,
fully satisfies the needs of different users including, but certainly not limited to, capital providers.
6. THE BUSINESS MODEL, FAITHFUL REPRESENTATION, COHERENCE AND ECONOMIA
AZIENDALE
We now apply our thinking to current developments relating to the IASB revised Conceptual Framework
(CF) project. EFRAG have recently issued a series of five ‘bulletins’ under the general heading of ‘Getting a
Better Framework’. We refer to two of these here (EFRAG 2013a; 2013b). EFRAG points out that the
already revised sections of the CF (for which further amendments are explicitly not to be considered in the
immediate future) emphasise ‘faithful representation’. They state (EFRAG 2013a: para 16) as follows.
“Information is said to have faithful representation when it ‘faithfully’ represents the phenomena that it
purports to represent”. The CF states that a perfectly faithful representation would be complete, neutral and
free from error, although perfection is seldom, if ever, achievable. The Basis for Conclusions states that
faithful representation ‘encompasses the main characteristics that the previous frameworks included as
aspects of reliability’, although it also mentions that ‘substance over form, prudence (conservatism) and
verifiability, which were aspects of reliability in the previous framework are not considered aspects of
faithful representation’.
This, in the classic English phrase, is as clear as mud. A 2-word phrase is defined in 9 words, which
themselves include the first keyword once and the second keyword twice. This is not good philosophy! We
find no rationale for distinguishing, as the IASB do, ‘faithful representation’, as above, from ‘fair
presentation’, as in IAS 1, although in hierarchical terms they are clearly seen as having different roles, with
fair presentation being superior. We suggest that either faithful representation means nothing, except that the
reporting ‘does what it says on the tin’, whatever the tin actually says, or it should be interpreted
pragmatically as ‘not misleading’. Not misleading to whom, and for what decision-making purpose, remains
to be determined, of course.
This leads on to consideration of the ‘business model’, the subject of EFRAG 2013b. Para 12 states:
“Our assumed meaning of the term ‘business model’ focuses on the value creation process of an entity, i.e.
how the entity generates cash flows. In case of non-financial institutions, it represents the end-to-end value
creation process or processes of an entity within the business and geographical markets it operates”. A
business model is obviously entity specific. This logically rules out the use of fair value as defined in
IFRS13, which is ‘a market-based measurement, not an entity-specific measurement’ (para IN9). The
emphasis on cash flows, confirmed in para 25 of the same EFRAG document, is important. EFRAG 2013b
builds much of its argument on a hypothetical example, given in para 7, which we quote complete.
“Suppose an entity purchases a quantity of cotton for CU100. It still owns the cotton at the reporting date,
when it is worth CU120 (and the entity could readily sell it at that price). If the entity is a shirt manufacturer
and will use the cotton in its operations, current practice would be simply to report the cotton as ‘inventory’
at its cost of CU100. But if the entity is a commodity trader that seeks to make profit from short-term price
15
movements, that accounting may not reflect fairly the entity’s financial position or financial performance:
current practice reflects this view by stating the asset at its current selling price of CU120, with the gain of
CU20 included in profit. However there might be other ways in which the business model might impact the
financial statement: if the transaction is a non-recurring speculation that is outside the normal activities of the
entity, it would probably have to be separately presented, whatever the accounting treatment. Thus the nature
of an entity’s business may affect the measurement of assets, the reporting of profit and presentation”.
At first glance, this perhaps sounds unproblematic. There are certainly issues of presentation, and the precise
business model may indeed impact the necessary reporting mechanisms. But in the broader scheme of things,
this is inadequate, and indeed incoherent in precisely the sense of our paper. By implication, the ‘market
price’ (buying or selling) of the cotton has risen to CU120. What we are looking for is a means of financial
reporting which gives a ‘not misleading’ picture of the effects of the situation, for this entity, on cash flows.
If the business is a cotton trader/speculator, then the ‘gain’ of CU 20 is an unrepeatable ‘oneoff’, and must be
reported as such. To sell a second batch of cotton, the trader must replace the first batch, presumably at
CU120. So the cash flow picture will be -100 (the opening ‘capital’) +120 - 120, the last two items repeated
to infinity, and the ‘gain’ of 20 only physically appearing when ‘infinity’ actually arrives. Those interested
should explore Edwards and Bell (1961) and the distinction between a holding gain and a cost saving.
But in the general case, the entity is a shirt manufacturer. So the cotton is used in production to make shirts,
which are then sold. And what happens next within this business model? More cotton is purchased, to make
more shirts. So in terms of cash flow effects, what is the information content of the knowledge that the price
has risen from 100 to 120? In terms of positive cash flows, the information content is very little. The entity
may well wish to increase the selling price of shirts to recover the extra 20. It may, or may not, be able to do
so, since this is a market and marketing issue, not a cost issue. In addition, note that as a profit maximiser,
the entity would increase the price if it was economically beneficial to do so, even if the cost had never
increased at all!
However in terms of negative cash flows the knowledge is extremely informative. It tells us that according to
all the available information, past negative cash flows of a series of payments of CU100 will be replaced by
future negative cash flows of a series of payments of CU 120. So the informational message from the
‘increase’ from 100 to 120 is that the present value of future expected net cash flows, ceteris paribus, has
reduced. The real reporting issue is not how to show and make transparent the ‘gain’ (the word used in para 7
as quoted), which the EFRAG document considers. It is how to show and make transparent the loss in future
profitability. Only by properly achieving this can we claim to ‘focus on the value creation process of the
entity’ as required in para 12 quoted above. Anything less fails to give a faithful representation of ‘the
phenomena which it purports to represent’. Anything less fails to accord with the business model of the
(specific) entity (‘how the entity generates cash flows’). Anything less fails to be coherent, in the sense of
our C2 in section 3 above, with the objectives of, and the necessary usefulness and relevance of, the IFRS
reporting process as a totality.
The attentive reader, and particularly the attentive Italian reader, may have realised that we have actually
16
undersold our arguments here. What we are really talking about is the importance of considering long-run
operating capital maintenance. This, as we have already mentioned at the end of section 5, is a fundamental
element of Economia Aziendale. So our invitation to read Edwards and Bell is really unnecessary, unless you
are a narrow-minded Anglo-Saxon. Zappa (and indeed by a different route Besta, not to mention Schmidt,
Limberg ...) got there first. Alexander and Servalli (2011: 8), writing in English, quote Zappa to support this
statement: “Income available for consumption, or which is available for levy or distribution, must not only
not reduce the initial capital, but it shouldn’t even damage the capacity of capital to provide an income:
income is essentially a surplus value, whose making leaves unimpaired the value which is the mechanism for
its creation” (Zappa 1946: 267)2. They further (2011: 9) quote Zan to show that Besta had the same
theoretical conclusion: “Zan (1994: 288) also confirms that Zappa's conclusion is by no means
new. Referring to Besta, Zappa’s great predecessor (and his one-time teacher), he states that Besta ‘argues
that elementary accounts should state the true and real value of individual assets, representing their
replacement costs...’.”
Our proposition that Economia Aziendale provides relevant and coherent arguments which would be useful
to the conceptual framework development is directly supported. The same arguments would have increased
the relevance, usefulness and coherence of the newly issued Directive repealing and replacing the Fourth and
Seventh Directives (Directive 2013/34/EU, issued 26 June 2013). This, by silent omission (see Preamble
paragraph 18, and Articles 6,7 and 8), does not permit the use of replacement cost for inventory, and appears,
not necessarily successfully, to intend not to permit its use for fixed assets (sic) either (the obscurities of
Article 7, which we have read in five languages, giving different nuances, are beyond our scope in this
paper).
In summary from the detailed illustrative discussion in this section, Economia Aziendale does indeed have
much to offer current developments, in terms of logical coherence.
7. CONCLUSIONS
This paper attempted to examine the issues relating to the incoherencies in reporting holding gains and losses
in the current IASB accounting system, by focusing on the possible contribution of the Economia Aziendale
theory in removing those elements that produce incoherence. The reference to a traditional accounting
theoretical approach, as it has been suggested by Newberry (2003), and in particular to the traditional Italian
theory, has a twofold reason. Indeed, the Economia Aziendale represents a coherent framework capable to
provide coherent information in financial statements, that is useful for different kinds of users and
information needs. Moreover, an essential element that justifies the reference to the Economia Aziendale is
that such a theory pushes fuller information on the real productive nature of entities, rather than focussing
2
Il reddito devoluto al consumo, o che si può prelevare o distribuire, non solo dunque deve essere tale da non
diminuire il capitale iniziale, ma nemmeno dovrebbe intaccare l’attitudine del capitale a fornire un reddito: il reddito è
essenzialmente un valore eccedente, che nel determinarsi lascia integro il valore che è mezzo di sua rilevazione ”
(Zappa 1946: 267).
17
only on financial orientation, which fits the information needs of the countries that are increasingly adopting
IFRS and are characterised by a business-oriented tradition.
The discussion highlighted that the failure so far of the IASB to complete its reporting comprehensive
income project in a manner fully articulated and leading to a consistent and rationalised approach across the
whole set of Standards, is unfortunate and reprehensible. Indeed, despite the CF focus on clean surplus
accounting, IFRS still allow dirty surplus accounting relating to reclassification adjustments, which have the
effect of deferring the recognition of profit or loss in the income statement to a date subsequent to that of the
initial OCI recognition. As a result, the incoherence still persists, in that profit includes items that are neither
income nor expenses under the CF, because of the recycling into the income statement. Moreover, individual
IFRS sometimes display a lack of theoretical foundation in the concepts of capital maintenance taken as a
reference, so that they are applied in a muddled and ambiguous manner, thus uncovering an additional
element of incoherence.
However, it is worth remarking that the Economia Aziendale and the IASB conceptual framework share a
common focus on clean surplus accounting, on the maintenance of the long-run operating capability of an
entity, ensuring its capacity to replace all consumed resources (capital maintenance) and to continue in
operation (going concern). Therefore, we argued that the Economia Aziendale tradition has a real
contribution to offer towards the achievement of a coherent IASB accounting system. In summary, we
contend that if the IASB would enlarge its accounting assumptions, by including durability, unitary view of
the entity and systemic coordination, it could be able to provide more valuable conceptual bases in relation to
the increasing call for sustainability and the delivering of useful information about the real productive nature
of entities. Also we maintain that these would be advantageous to fully realise clean surplus accounting, also
outside the CF, thus rendering the IASB accounting system coherent, less complex and more useful. Finally,
we advocate the introduction of a comprehensive concept of capital maintenance, i.e. the economic capital
maintenance pursued by the Economia Aziendale, because it allows the provision of information on the
preservation of the capital from both the qualitative and the quantitative point of view, which fully satisfies
the needs of different users as well as capital providers.
Concluding, what should be noted is that the Economia Aziendale, although it is not very well known abroad,
has something to say also into the international accounting arena. Indeed, this theory could provide a
valuable starting point to reasoning on how to improve the current IASB accounting system, both at the level
of the CF and of the IASB standards.
This in our view is relevant not only for academicians and practitioners, but more in general for policy
makers and local standard setters. Moreover, the integration of concepts such as those that the Italian theory
pursues, could potentially encourage the adoption of IFRS in those (doubtful) countries presenting similar
characteristics to Italy. In this regard, our opinion is that we, the IASB and its advisers, have much thinking
still to do.
18
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