Double
entry accounting is more than 500 years old and still forms the backbone of the
financial statements structure. Early in the 20th century, the focus of financial
accounting was on measurement of assets, liabilities, equity and earnings (i.e.,
Economic Income Measurement Perspective), whereas, in late 1960s, there has been
a financial reporting revolution, i.e., the perspective shifted to an `informational'
approach, wherein the information contained in the financial statements
would cater to the different needs of the diversified group of users. This change
in the perspective, calls for disclosure of non-financial data, forward-looking
data, and fair market data of the equity. This shift in approach is also reflected
in financial accounting research in information economics, security prices, and
behavioral science.
The
past 40 years have experienced a rapid growth in the quantity and complexity of
financial reporting requirements mandated by the Financial Accounting Standards
Board (FASB) and the Securities and Exchange Commission (SEC). Private sector
FASB and public sector SEC are the two primary regulators of financial reporting.
Even though the FASB has adopted an informational perspective, it has indicated
that the prime focus of financial reporting is information about earnings and
its components, which is of potential value to the investors in conducting security
analysis. No other figure in the financial statements receives more attention
by the investment community than earnings per share. Security prices play a very
important role in the financial reporting environment and a considerable amount
of empirical research has been conducted on the relationship between accounting
numbers and security prices. These evidences indicate that the security price
behaves, as if earnings are an important and the only source of information.
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