Reporting financial performance : a conceptual analysis

Reporting financial performance is among the most difficult and vexing questions faced by accounting standard-setters around the world. The group of international accounting standard setters, known as G4+ 1, has released two special reports on reporting financial performance over the last three years: Reporting Financial Performance-Current Development and Future Directions written by Todd Johnson and Andrew Lennard (Johnson and Lennard, 1998) and Reporting Financial Performance-A Proposed Approach written by Kathryn Cearns (Cearns, 1999). Given the current importance of G4+ 1 in the international accounting standards setting process, the proposals made in these two reports have important implications for future accounting practices in respect of reporting financial performance. Therefore it is important to understand and examine the conceptual basis of the proposals made in the two reports for its consistency and validity. The purpose of this research is to examine the income concepts underlying the proposals. It is conducted by a way of literature review. Several theoretical concepts of income have been identified and compared with the details of the proposals made in the reports. The four concepts of income identified are: the concept of service value income, the concept of business venture income, the concept of comprehensive income and the concept of value added income. The results of the examination show that, at the overall level, both reports have adopted an approach to reporting financial performance that is consistent with the concept of comprehensive income. At the detailed level, it seems that the concept of service value income has been adopted for developing the proposed performance statement. Based on this finding, this research discusses the inconsistencies between the underlying income concepts identified and the appropriateness of adopting the concepts. To the extent that the inconsistencies are concerned, this research paper also provides suggestions for possible resolutions