Comprehensive Income, Fair Value, and Conservatism: A Conceptual Framework for Reporting Financial Performance

Abstract

The introduction of International Financial Reporting Standards, mandatory for all EU listed companies from 2005 onwards, has proven to be a challenge for preparers and academicians alike, given the Standards’ emphasis on fair value as a means to improve the true and fair representation of the financial position and performance of a firm. The aim of this paper is to provide a conceptual framework for explaining the choices made by the International Accounting Standards Board in setting the rules for measuring firms’ financial performance, with emphasis on the accounting literature and tradition of continental European countries, where the respect of the conservatism principle is generally considered paramount. The paper, after describing the theoretical background of both historical cost and current value accounting, and their traditional contraposition, will examine the problems arising from the introduction of a mixed model of accounting (endorsed by the IASB) in a cultural and legal framework strongly oriented towards conservatism. We suggest that some aspects of the current IASB model denote internal inconsistency and we therefore advocate for the introduction of comprehensive income in the IASB reporting framework.