Two Significant Boundaries Characterizing Various Forms

2336 Firstly, the Boundary α dividing Flow and Stock focuses on the difference between prospective method [Form 1] with the characteristics of flow and catch - up method [Form 2] with the characteristics of stock as well as flow. Main difference is whether an economic profit-making opportunity is built in its income calculation system or not. In catch-up method, normal economic opportunity for the company is assumed since recapture of the book value with normal return is intended. This is the reason for immediate adjustment of stock, if profitability falls as compared to normal economic opportunities. Such a premise is also applicable to the value in use model. Instead of normal return, FASB 1990 This Paper Error Boundaries Examples of Application α β Allocation Basis Cost Allocation approach ［Form 1］ Prospectiv e Approach Flow Internal 1 FAS15 FASB, 1977 Profit allocation approach ［Form 2］ Catch-up Approach S t o c k + F l o w 2 FAS114 FASB, 1993a IAS39 IASB, 2004c JICPA 2005 Revaluatio n Basis Market Value Approach with the Restriction of Cost ［Form 3］ Value in Use Model 3 IAS36 IASB, 2006b BADC 2002 Fair Value Model Externa l 4 FAS144 FASB, 2001 Fair Value approach ［Form 4］ Reflected constantly Stock 5 FAS115 FASB, 1993b IAS39 IASB, 2004c ASBJ 2006a 2337 recapture of the book value with market return normal plusminus excess return comes to be intended in the fair value model. This approach presupposes market external opportunity for investors instead of normal internal opportunity for the company itself. In economics, profit -making ability is naturally expected. If it cannot be expected, loss is deemed t o have accrued and stock is immediately adjusted. Form 2 and Form 3 are actually based on such an economic profit-making opportunity. Next, the Boundary β relating to internal and external relates to the difference between the catch-up method [Form 2] which applies to impairment for a loan and the market value approach with the restriction of cost [Form 3] which applies to impairment for long-lived assets. As to a loan, the combination of the future cash flow on which it has agreed among the affected parties and the effective interest rate is used for the measurement of impairment loss. Both are based on the assumption of company itself internal. 2338 On the other, in the selection of future cash flow and interest rate for impaired long-lived assets, market external based assumption is relatively important in U.S.GAAP, while company internal based assumption is relatively important in IFRS and J-GAAP. In FAS No.144 FASB 2001, present value technique is used for the objective of measuring fair value. While in IAS No.36 IASB 2004b, value in use is applied and management‘s best estimate andor the best recent financial budgetsforecasts are used. In J-GAAPBADC 2002; ASBJ,2003, future cash flow shall be reflected a situation peculiar to the company, and in case the risk is reflected in the discount rate, the following rates shall be used. i. Rate of return which reflects a specific risk to the assets or assets group of the company ii. Weighted average cost of capital which is required to the company iii. Market average rate of return which rationally reflects a similar risk to the assets or assets group of the company 2339 iv. Rational borrowing rate when financing against the assets or assets group of the company so-called nonrecourse loan Direct measurement fresh-start measurement has developed with criticizing traditional accounting. In the early debate of 1960s, researchers who supported direct measurement which is consistent with market external rate and opportunity, economic present value economic income and opportunity value theory criticized traditional accounting concepts See Bodenhorn 1961, 583; Philips 1963, 17-18; Wright 1964, 90. It seems to be difficult to focus on traditional accounting concepts and the external rate at the same time. Moreover, internal rate and external rate are based on quite different logic. Thomas once explained as follows. ―Net-revenue contributions Present value using internal rates …… are highly relevant for managerial profit-maximizing purposes. But there is no reason to believe that these figures also relevant to the decision processes of readers of financial state ments.‖ Thomas 1976, 9-10. Parentheses added by authors 2340 There is no clear evidence whether the application of external rate is useful for decision making for investors and prevention of company fraud. Rather, the application of external rate to the internal rate applicable situation seems to indicate the paradigm change from historical cost accounting toward fair value accounting.

6. Recent Trend of Present Value

As discussed above, catch-up method has superseded prospective method as of impairment for a loan. The market value approach with the restriction of cost fair value model and value in use model has taken place of prospective method and catch-up method as of impairment for long-lived assets. After all, the direction from internal management or entity discipline toward external proprietary or market discipline is the recent trend. It is also the d irection from flow revenue and expense view toward stock asset and liability view. Economic profit-making opportunity is taken into consideration with catch-up approach and market value approach. These approaches intend to allocate create artificial future profit, and have greater importance to economic 2341 concepts efficiency, future, ex ante than accounting concepts a llocation, past, ex post. If we rely on economic opportunity, accounting allocation might be replaced by the fair value approach [Form 4]. In fact, as for a loan, the comprehensive fair value model is proposed to substitute catch-up method IASC Discussion Paper 1997; JWG Draft Standard 2000. Besides as for long-lived assets, the performance report project has been promoted in a form which is difficult to understand unless comprehensive fair value measurement revaluation for all accounts is assumed. The Matrix format of performance report issued by IASB 2002 is a typical example of such proposal. If such a tendency progresses, the concepts of cost, allocation, realization and matching must be retreated. The nominal capital maintenance will be replaced by a new capital maintenance, which assumes maintenance of economic opportunities and defines capital in terms of capacity to earn the current market rate of return. IASC Discussion Paper 1997, Chap. 6, paras. 2.4-2.7