Can you please summarize what this is saying? It is part of the “TheTop 10 reasons to Fix the FASB’s Conceptual Framework”
10. Role for Transactions
Traditionally, great respect has been paid in financial accounting to the entity’s own transactions as reliable sources of information about its assets and liabilities. We speculate that this tradition has roots in the tight rela- tionship between financial reporting and internal control, specifically the fact that an accounting system is the first line of defense against improper transactions. The company’s own transactions may be sparse, even impoverished, sources of useful information. Far more information resides in the multitudes of transactions exe- cuted by other entities.
Can it be wise to constantly look inward and backward at past one-time events that no longer reflect current con- ditions? For example, could investors who bought shares of Wal-Mart in the 1970s or Enron in late 2000 predict current cash flows from these investments using only their original costs? While their original transactions were evi- dence (although incomplete) of probable cash flow poten- tial at the purchase dates, much more information content resides in recent transactions involving other entities. The same applies to all other assets and liabilities as well.
Suppose the goal is to infer the distribution of red and white marbles in an opaque jar by drawing a sample. How useful is a sample of only one marble? And how useless is it to infer the mix in today’s jar based on a past sample of one marble from a jar that existed weeks, months, or years ago? We find no rational justification for acting as if useful information is provided by continuing to report the results of an entity’s historical transactions.
We urge the Boards to break the constraining tie between a company’s financial statements and its unique experiences that may or may not be representative of eco- nomic truth, even at the time they happen.
Who can say an asset’s original purchase price really represented its market value at that date? It was only one event in the population of similar transactions, and there’s no valid reason to believe it was executed exactly at that distribution’s mean. Instead, a sincere search for reliable financial representations leads to considering the much more useful facts inherent in the many transactions engaged in by others.
The consequence has to be more reliable and useful financial reporting.