Crisis y Retos de la Información Financiera by Rafael Alonso y PrietoReview by: Oscar J. HolzmannThe Accounting Review, Vol. 59, No. 4 (Oct., 1984), pp. 702-703Published by: American Accounting AssociationStable URL: http://www.jstor.org/stable/247330 .

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THEACCOUNTING REVIEW Vol. LIX, No. 4 October 1984

BOOK REVIEWS

Harvey S. Hendrickson, Editor

EDITOR'S NOTE: Books for review should be sent to Professor Harvey S. Hendrickson, School of Accounting, College of Business Administration, Florida International University, Miami, FL 33199.

(The policy of the Review is to publish only those reviews solicited by the Book Review Editor. Unsolicited reviews will not be accepted.)

RAFAEL ALONSO Y PRIETO, Crisis y Retos de la Informaci6n Financiera (Mexico City: Instituto Mexicano de Contadores Pub- licos, A. C., 1980, pp. 114, Mex. $610).

In this book Alonso y Prieto presents his views on what is wrong with current (i.e., "traditional") financial accounting in Mexico, his homeland, and what should be done to correct the major deficiencies. However, his critical evaluation of current accounting reaches to the U.S. and beyond, making his views valuable outside of Mexico.

In his model the primary quality of financial statements is comparability, based on financial in- formation which should be sufficient, honest, satisfactory, and comprehensible. Comparability based on these related qualities is needed for fair pricing of securities as well as for evaluating man- agement's stewardship of the modern business firm, characterized by many and often distant equity holders. Alonso y Prieto campaigns against conservatism and historical cost-based reporting which he considers to be the two most important barriers to the achievement of greater comparabil- ity. The undesirable effects of these two conven- tions are aggravated by inflation and some struc- tural characteristics of the accounting model (matching and the linking of the income statement and the balance sheet), and the plethora of accounting alternatives available for items such as inventories and depreciation. The resulting tradi- tional financial statements may be misleading to the investing public and damaging to the enter- prise.

Alonso y Prieto's analysis is based on the "things" value of money rather than on the money value of things. This is an unusual approach that provides logical support for his conclusions, which generally coincide with those

of many other writers. The financial statements would be more comparable and useful by valuing assets at replacement cost or net realizable value when the latter is lower. Accumulated depre- ciation and depreciation expense should both be based on the asset's replacement cost. This is a negative reflection on current Mexican practice, which permits asset revaluation but does not require it as the basis for depreciation calcula- tions. Somewhat like the British "gearing" con- cept, Alonso y Prieto's accounting model would relate the gain from revaluation of nonmonetary assets to the relative debt-equity composition of the enterprise's financial structure. The portion of the gain associated with equity would accrue directly to the stockholders and thus should be recorded by a credit to a capital in excess account. This portion is less a gain to the stockholders than a restatement of their original investment, while the portion associated with debt-financing (net monetary liabilities) would more clearly be a gain to stockholders since it does not increase debt. This gain vis-a-vis the creditors must flow through income as a "financial structure" gain that would be the sum of the "monetary" gain and the "holding" gain. The monetary gain would be the difference between the historical cost of the non- monetary assets and their general price-level ad- justed historical cost. The holding gain would be the difference between general price-level ad- justed historical costs and replacement costs of the nonmonetary assets. Thus, Alonso y Prieto's monetary gain is not based on the effect of the purchasing power changes or monetary items.

This book is conceptual, reminiscent of some of the works of Chambers, Sterling, and other lucid writers concerned with asset valuation. Alonso y Prieto is concise, clever, and wonderfully literary in his selection of Alice in Wonderland passsages to highlight some of the current limitations of

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Book Reviews 703

financial reports. The Mexican Institute of Public Accountants granted Alonso y Prieto an award for this book and published it even though it is critical of the official position. He is a distin- guished member of the Mexican profession, having at one time or another served at the highest levels of the Mexican Institute.

If this book were available in English, it would be a valuable addition to a theory or an inter- national accounting class. Latin American ac- countants are fortunate to have a person of Mr. Alonso y Prieto's abilities and interests in their midst; his sophisticated thinking and writing would be a credit to practicing accountants any- where.

OSCAR J. HOLZMANN Associate Professor of Accounting

University of Miami

A. D. BARTON, Objectives and Basic Concepts of Accounting, Accounting Theory Monograph No. 2 (Melbourne: Australian Accounting Research Founda- tion, 1982, pp. iv, 98, Aus. $9.95).

This monograph, in both title and content, broadly parallels the Statements of Financial Ac- counting Concepts of the FASB. It is particularly close to Concepts Statements No. 1, 2, 3 and the forthcoming No. 5. It forms part of a series pub- lished by the Australian Accounting Research Foundation concerned with the conceptual basis for the development of accounting standards.

Although the topical coverage in this mono- graph is similar to much of the material in the FASB concepts series, the approach is different. It approaches the objectives of financial reporting from a clearly utilitarian position of providing information useful in economic decision making, control, and accountability. The utilitarian focus is strengthened by a detailed consideration of the major users of financial information and the types of decisions that they must make. The discussion is not confined to external decision makers using published financial information; managers and their decision needs also are included as an impor- tant segment of information consumers.

The chapter on "Qualitative Characteristics of Information" is brief and standard in its cover- age. It deals with relevance, reliability, compara- bility, and understandability. Similarily, a chapter, "Fundamentals of Accounting and Reporting" deals with what appear to be standard concepts of the entity, transactions, events, double-entry records, measurements, monetary

measurement, continuity and the going concern, accrual accounting, realization, and classifica- tion. It is in this chapter that the unique aspects of the monograph begin to appear. Several of these relate to the author's emphasis on transactions as compared with events and cash flows.

A particularly strong line is drawn between transactions which involve a reciprocal flow of resources with an external party and events which are other matters which affect the firm's wealth, income, or risk. This distinction is made opera- tional in a scheme which dictates that cash flow statements and fund statements be prepared such that they reflect only transactions and not events. In his scheme balance sheets and income state- ments, whether based on historical costs or some form of current prices, can be measured either in number of dollars or adjusted for inflation; yet the cash flow statement or the fund statement apparently cannot be expressed in purchasing power units (p. 46). Since this is clearly possible and I require my students to do it regularly, this exclusion is puzzling.

The message on cash flows is mixed; the income statement is a better predictor of cash flows than the simple cash flow statement (p. 65); past cash flows help predict future cash flows (p. 27); "[a] cash flow statement would be of no additional benefit to investors as all its information is en- compassed in the funds statement" (p. 60).

Some other aspects of this monograph also would generate a lively debate: Lifetime aggregate cash flow from operations on the cash flow state- ment equals lifetime aggregate net income on the income statement (p. 29). "Ex ante and ex post measures are not additive . . ." (p. 39). Monetary items have fixed monetary values and are mea- sured the same way in the historic cost system, the current buying price system, and the current selling price system (pp. 55, 74, 77). Beta can be calculated from the variability of the firm's income stream (p. 28). The financial capital main- tenance concept is used with the current selling price system of measurement (p. 77). The physical capital maintenance concept is used with the cur- rent buying price system of measurement (p. 74).

In summary, this is the kind of monograph that could be assigned in a fourth year accounting theory seminar. It is clearly written, brief, and meaty. It is one person's view and thus tends to be more forthright and explicit than some commit- tee-written statements. While it does contain some anomalies (or errors, depending on one's view) these are the very aspects that would make for lively discussions in a seminar setting. It would be a delight to have senior undergraduates reach the state of being able to discuss in depth the

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