William G. Shenkir NEW YORK UNIVERSITY (VISITING PROFESSOR)
A PERSPECTIVE ON THE MEASUREMENT OF EARNINGS AND FASB POLICYMAKING
An issue in the measurement of earnings is: Should the determi-nation of financial position—that is, the measurement of assets and liabilities—determine income? That can be called a balance sheet or asset and liability perspective. Or should the measurement of in-come—that is, the process of matching costs and revenues—deter-mine the balances that are necessarily carried forward in the bal-ance sheet? That can be called an income statement or revenue and expense perspective. In stating the issue in that way, it is ex-tremely important to recognize that the issue is not whether the bal-ance sheet or income statement is the more important statement to users. The question of statement importance is not relevant to the debate. Rather the issue is whether the focus of income determina-tion should be based on a systematic matching of costs and reve-nues or on a measurement of the change in net assets. According to the income statement approach, matching costs and revenues is the center of attention in accounting, and the identification of assets and liabilities is partly dependent on the matching process. If it becomes necessary to defer certain items to avoid "distorting" in-come, then it is generally sanctioned by that perspective. Under the balance sheet perspective, the focus is on the measurement of as-sets and liabilities; revenues and expenses are dependent on those measurements.1
At a policymaking level, critical questions in the resolution of spe-cific accounting issues may vary depending on which perspective is preeminent. For example, under an asset and liability perspective, questions of priority include:
Is the item (under discussion) an asset?
Is an asset impaired?
Is a liability incurred? Under a revenue and expense perspective, questions such as the following are important:
Is revenue realized?