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An accounting history of capital maintenance: Legal precedents for managerial autonomy in the United Kingdom
Abstract
The effectiveness of the capital maintenance concept that became enshrined in British companies legislation during the 19th century was almost immediately undermined when companies were permitted to pay dividends from 'circulating' capital surpluses, even though overall there were losses of total invested capital. It is generally accepted that the British courts were conscious not to limit management's capacity to innovate and operate their businesses in good faith, and to maximize the capacity of their entities to distribute dividends to shareholders now and in the future. Nevertheless, it is unclear why at the time some accounting methods were accepted as being satisfactory in certain situations but not in others. It is argued here that the British judges adhered to a number of complementary guiding principles when assessing the validity of particular accounting procedures. Central to these principles is the notion that individual firms have different planning horizons and associated particulars of risk assessment. These cannot be captured by the general use of surplus methods of profit determination using current market prices. Consequently, the courts resisted imposing uniform accounting and reporting requirements because traditionally they respected separation of ownership and control.
... The next section of this paper reviews several dimensions of their inquiry to see if S&T's claims hold up. 4 We decided to categorize the main articles that appeared in three peer-reviewed journals that specialize in accounting history: Accounting Historians Journal (AHJ), Accounting History (AH), and Accounting, Business and Financial History (ABFH). 5 We limited our initial review to the most recent three-year period, 2003-2005 and acknowledge that earlier or longer periods could provide different results. 6 We included "Interface" articles in AHJ and Special Issue articles that appeared in all three journals. ...
... 1600-1800) [ 10 articles -2, 9, 15, 31, 46, 50, 51, 55, 91, 106] e) Ancient/Medieval (pre 1600) [8 articles -14, 45, 65, 68, 71, 74, 105, 113] f) No time focus [5 articles -13, 60, 81, 87, 111] 4) Geographic focus of the study a) UK [28 articles -3, 5, 11, 19, 20, 21, 22, 25, 29, 30, 35, 47, 54, 61, 64, 67, 70, 71, 72, 76, 77, 79, 80, 83, 85, 90, 99, 102 ] b) US/Canada [17 articles -4, 15, 28, 34, 40, 42, 43, 44, 53, 55, 75, 93, 96, 100, 106, 107, 110] c) Europe [17 articles -2, 10, 14, 33, 36, 37, 46, 50, 51, 59b, 62, 63, 84, 88, 91, 92 , 105] d) Multiple settings [14 articles -9, 13, 23,26, 38, 41, 52, 66, 69, 73, 82, 108, 109, 114] e) Asia/Africa, South Pacific [12 articles -6, 16, 32, 45, 49, 58, 62b, 65, 68, 74, 101, 112, 113] f) Australia, New Zealand [8 articles -1, 12, 27, 31, 56, 57, 78, 86] g) No geographical focus [4 articles -60, 81, 87, 111] h) Caribbean, Central & South America [3 articles 39, 48, 104] 5) Eclecticism a) Percentage of non-accounting to total citations (based on 100 articles) i. Greater than 75 percent (21%) [14,22,28,30,31,44,47,54,55,56,57,58,65,71,72,79,80,91,98,99,104] ii. 50 to 75 percent (25%) [6,10,11,15,32,34,37,48,61,63,67,73,74,75,81,83,87,90,92,96,101,102,107,111,112 ] iii. 25 to 50 percent (30%) [1,2,5,12,13,16,19,21,23,27,29,33,39,40,43,46,49,50,51,60,62,64,70,77,82,85,93,100,106,113] iv. less than 25 percent (24%) [3, 4, 9, 20, 25, 26, 35, 38, 41, 42, 45, 52, 53, 59b, 62b, 66, 69, 76, 78, 86, 108, 109, 110, 114] b) Percentage of non-US-affiliated authored or co-authored art icles to total articles: 57.7% (60 of 104) c) Percentage of female authored or co-authored articles to total articles: 38.5% (40 of 104 ) Accounting History Articles, 2003-2005 11 ...
... The analysis phase of this project is preliminary since only one of the authors has classified the articles to date. We expect the final analysis will change to some degree after the other author has independently reviewed the abstracts.5 We recognize that other journals publish articles on accounting history (AAAJ, Abacus, ABR, etc.) but these journals do not specialize in accounting history. ...
In a recent Accounting History article, Sy and Tinker (S&T) [2005] critique accounting history for its support of “archivalism” and empiricism in light of irrefutable arguments against these “antiquarian epistemes.” While tempted to lambaste S&T’s article as unfettered social activism rather than evidence-based historical inquiry, we focus instead on the more substantive questions S&T raise. We initially summarize their essential arguments, although some of the statements they make are contradictory in nature. We then discuss fundamental issues and genuine challenges to accounting history posed by the post-Kuhnian critique that S&T and others represent, as well as the nature and purpose of historical enquiry. We reviewed the accounting history journal articles published between 2001 and 2005 and use our findings to evaluate the broad assertions that S&T make about accounting history. We conclude that S&T’s critique is unwarranted and unjust, especially when the subject matter of the most recent accounting history articles is considered.
... Los primeros acercamientos al análisis de la depreciación desde otras disciplinas 15 Previamente, el tratamiento contable de la obsolescencia (Meade, 1913) fue asociado con la medida de la depreciaciòn al incorporarse como preocupación (Saliers, E, 1922a, 474) (Bowker, 1927,3), el establecimiento de una provisión formando parte de cuentas de resultado (Adams, E, 1922,387) así como la posibilidad de capitalización dentro del patrimonio (Saliers, E, 1922, 13). ...
... Por supuesto, en algunas circunstancias, es obvio que no será! Por lo tanto, es importante identificar las circunstancias en que el proxy SL es adecuado y, por tanto, defendible en función de la lógica de la EEI.15 Siempre en debate por parte de los contadores, los acercamientos a la ley, la economía y las demás disciplinas, van a configurar el enfoque de Programas de Investigación en la Contabilidad que se debe a Cañibano, 1974. Por ejemplo, el programa Legalista no es aceptado por Jhonson, 1988.16 ...
Abstract
La depreciación contable se ha constituido en un concepto significativo en la discusión sobre la valuación de activos durante las últimas dos centurias. La intención principal en este documento es examinar los orígenes del pensamiento contable sobre la depreciación desde una perspectiva interdisciplinar. La investigación se desarrolla realizando una revisión analítica de las contribuciones de los autores elegidos, en relación con las disciplinas donde han sido formados, para rastrear las influencias respectivas sobre los académicos y profesionales de la contaduría en la construcción del concepto y teorías sobre depreciación. Adicionalmente, y a manera ilustrativa, se discute la literatura que ha estudiado la depreciación para organizaciones en el sector público, utilizando como recurso metodológico las genealogías foucaultianas.
... From an investor prospective, accounting information is used for two purposes, firstly, the use of financial reporting to value the company and secondly, the use of financial reporting to assess the management's stewardship of the company (Penman 2007; Ardern and Aiken 2005). The former obviously relates to the valuation of net assets and under this view the focus lies on the balance sheet as the min statement with useful information and a focus on current values. ...
... In the literature, two approaches which investors can exercise when using accounting information are commonly discussed, either to the use of financial reporting to value the company or the use of financial reporting to assess the management's stewardship of the company (Penman 2007; Ardern and Aiken 2005). ...
There are two approaches which investors can exercise when using accounting information, either to use financial reporting to value or to assess the management's stewardship of the company. Despite the fact that US GAAP, IFRS, and UK GAAP are all market oriented sets of accounting standards, both FASB and IASB are more inclined to require fair value accounting with regards to assets and liabilities compared to UK GAAP, which tend to encourage a stewardship approach. We examine whether investors' shift their focus from earnings to book value of shareholders' equity after the adoption of IFRS in the United Kingdom. As predicted we find that indeed investors seem to rely more on the book value of shareholders' equity and less on earnings information after the adoption of IFRS. We predicted and found no change in the overall increase accounting information's ability to predict future equity values.
... Although the Joint Stock Companies Registration and Regulation Act, 1844 and subsequent Companies Acts required that companies only paid dividends out of profits: "it was not until the Companies Act, 1980 that a definition of distributable profits was incorporated into legislation. This absence appears to have significantly constrained the British judiciary" (Ardern and Aiken (2005) p. 24). The one clear exception was that: "dividend payments could not be made to shareholders where there are no 'profits' reported" (Ardern and Aiken (2005) p. 44). ...
... This absence appears to have significantly constrained the British judiciary" (Ardern and Aiken (2005) p. 24). The one clear exception was that: "dividend payments could not be made to shareholders where there are no 'profits' reported" (Ardern and Aiken (2005) p. 44). ...
We examine the e¤ects of dividend policies on 469 British firms between 1895 and 1905. These firms operated in an environment of very low taxation and an absence of institutional constraints. We find strong support for asymmetric information/signaling theories of dividend policy, and little support for agency models. Our results suggest that dividends can signal information from managers to shareholders, even if dividend payments incur only very low taxes. However, taxes appear to be necessary to allow dividend policies to resolve agency problems between managers and investors.
... It is not assets per se that are measurable, rather, their function, in particular, in creating income (criterion k, below), and whether the measurement of that income leads to an increase or decrease in the capital of a business. The interrelated nature of the two means that measurable income depends on one's view of how capital is to be maintained (see Hicks, 1939;Pigou 1935;Gynther, 1970;Revsine, 1981;Tweedie and Whittington, 1984;Guttierrez and Whittington, 1997;Arden, 2005). Two views are pertinent and they are briefly explored, next, before introducing more criteria in this section of the paper that are conditioned by the second viewpoint. ...
The International Accounting Standards Board is currently reviewing its conceptual framework and, as regards assets, the epistemological focus is upon revisions to the definition of an asset. The criteria presented in this paper break free from this narrow definitional perspective to offer an alternative view based on the recognition of artefacts and the related notion of separability. The transactions-based initial asset recognition trigger is inappropriate for the recognition of non-transactions-based intangible assets, which we instead address here through the medium of artefact-based asset recognition criteria. As primacy now appears to be given to balance sheet values and to the notion of recording comprehensive income, it may now be time to consider a broader artefact basis for the accounting recognition of assets.
... This absence appears to have signi…cantly constrained the British judiciary " (Ardern and Aiken (2005) p. 24). Therefore, payout policy (via adjustable dividends) a hundred years ago had the ‡exibility of payout policy today (via share repurchases). ...
Miller and Modigliani (1961) show that in perfect and complete financial markets a firm's value is unaffected by its dividend policy. Much of the more recent research has demonstrated that dividend policy becomes important in the presence of taxation, asymmetric information, incomplete contracts, institutional constraints, and transaction costs. By examining the effects of dividend policies on 475 British firms existing between 1895 and 1905, and consequently operating in an environment of very low taxation with an absence of institutional constraints, we find strong support for asymmetric information theories of dividend policy, and little support for agency models. The Author 2011. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oup.com., Oxford University Press.
Incorporation with limited liability enabled companies to ‘lock-in’ their financial capital’ and then invest in the long-term, highly specific investments on which the modern industrial economy would be based. The level of benefit varied from country to country, according to the way that the concept of capital lock-in, or maintenance, was defined in the legal systems concerned.
In the UK, the concept was not well defined in early company legislation and challenges were raised through the courts during the late nineteenth century. Some of these, the ‘dividend cases’, have been quite widely considered in the literature but direct reductions of share capital, or capital reduction schemes, have received far less attention, even though they raised fundamental issues concerning long-term dividend positions, the accounting treatment of accumulated losses, depreciation and asset values and had important effects on the development of the capital maintenance doctrine and on shareholder class rights.
The purpose of this paper is to question whether this literature adequately captures judicial influences on the development of the capital maintenance doctrine in England during the latter part of the nineteenth century, given the limited attention that has been paid to date to the leading capital reduction cases.
Why do firms pay dividends? To answer this question, we use a hand-collected data set of companies traded on the London stock market between 1825 and 1870. As tax rates were effectively zero, the capital market was unregulated, and there were no institutional stockholders, we can rule out these potential determinants ex ante. We find that, even though they were legal, share repurchases were not used by firms to return cash to shareholders. Instead, our evidence provides support for the information-communication explanation for dividends, while providing little support for agency, illiquidity, catering, or behavioral explanations.
Purpose
– This paper aims to analyze early financial reporting practices and discuss the influence of fundraising infeasibility on accounting changes, focusing primarily on depreciation accounting practices.
Design/methodology/approach
– London and Birmingham Railway Company (L&BR) is a representative railway company whose practices laid the foundation for nineteenth century British railway accounting. All reports prepared by L&BR after each annual general meeting were analyzed using text mining. Keywords were extracted and the changes were observed, thus facilitating the prediction of accounting issues. Furthermore, the keyword contexts were confirmed using a search engine.
Findings
– This paper suggests that fundraising infeasibility might have influenced changes to the depreciation accounting practices at L&BR.
Research limitations/implications
– Being a historical study, it necessitates investigations into practices of other companies.
Practical implications
– The findings suggest that not only the negative operating results that previous studies claim but also the infeasibility of raising funds by issuing new shares might have influenced changes to the accounting concepts and accounting practices in the early-nineteenth century British railway companies.
Originality/value
– The accounting changes at L&BR could be important because they indicate that the management had reached the point at which it did not need to depend on fundraising via the issuance of new shares. This was an early sign of the development of self-financing.
This paper proposes a framework for the historical analysis of judicial decisions in financial reporting that may provide a basis for comparative research in the historical relation between the law and accounting. It is suggested that contract law may have been the dominant legal domain in which such judicial decisions were taken. To illustrate the approach, an analysis is presented of the development of judicial decisions on financial reporting in the Netherlands from the late nineteenth century to the second half of the twentieth century. It is found that contract law provided the dominant frame of reference for financial reporting cases. The overall development of contract law explains why, in substance, it was difficult for interested parties to challenge accounting policy choice in court. A tentative comparative conclusion is that this substantive position was quite comparable to that arrived at in the UK, despite the different legal setting. Further research should investigate whether the predominance of a contract-law view of financial reporting led to greater similarities in the legal understanding of financial reporting across the civil-law/common-law divide than is commonly supposed.
Purpose
– The purpose of this paper is to present asset recognition criteria based on the idea that an asset should be functional, separable and measurable and that financial recognition should be triggered by the recognition of an artefact.
Design/methodology/approach
– Criteria is applied to four organisational assets, that is, those intangible assets that are unlikely to be reported in the accounting domain.
Findings
– The criteria is applied in order to show how one may expand the basis on which assets can be reported financially to elements of intellectual capital as well as financial capital.
Originality/value
– Artefact‐based asset recognition criteria could be a conduit through which intellectual capital could enter the accounting domain, a domain dominated by the maintenance of financial capital, not intellectual capital.
The asset recognition criteria presented in this paper break free from the narrow definitional and rule based perspective of accounting epistemology to offer an alternative view based on the recognition of artefacts and the related notion of separability. The purpose is to explore the nature of a trademarked brand "asset" currently excluded from disclosure in the accounting domain but included in the marketing domain usually as a constituent part of brand equity. That exclusion is based on the 'uniqueness' of a brand and an inability to separate brand assets from the other assets of a business. However, we show that it is actually 'additivity', or the lack thereof, which is the principle reason for the exclusion of brand assets from financial statements. Whilst the paper is inevitably accounting biased, the subject matter is nevertheless of interest to those marketers who view brands as assets.
The late-Victorian era was characteristed by especially close links between politicians and firms in the UK. Roughly half of all members of Parliament served as company directors, many as directors of multiple firms. We analyze 467 British companies over the period 1895 to 1904 to investigate the interaction of firms and politicians. We find that new-technology firms with politicians serving on their boards were more likely to issue equity finance and had higher Tobin's Q. Our evidence suggests that causality runs from director-politicians to a firm's performance, rather than in the opposite direction.
The late-Victorian era was characterized by especially close links between politicians and firms in the U.K., with up to half of all members of Parliament serving as company directors. We analyze the performance of 467 British companies over the period 1895 to 1904. An analysis of election results shows that the election of a new-tech director is associated with a 2% to 2.5% increase in that firm's share price, whereas old-tech firms were unaffected by the electoral fortunes of their directors. New-technology firms with political directors were more likely to undertake seasoned issues of both equity and debt..
Abstract not available
This bibliography covers publications that appeared during 2005 and 2004 when they were not known before the deadline of last year's bibliography. In that case the year of publication is mentioned in the citation.
This paper examines and contrasts nineteenth century case law in Great Britain and the United States in which courts had to decide whether to accept accounting concepts having to do with making provisions for depreciation, amortization and depletion. It should be emphasized that the courts were not arguing about accounting theory, per se; they were deciding particular disputes, which depended on the meaning in each case of profits. By 1889, when Lee v. Neuchatel Asphalte Company was decided, British courts had rejected accepted fixed asset accounting con-ventions in determining profits in tax, dividend, and other cases while United States courts accepted these conventions, except in the case of wasting asset companies. This historical contrast is of particular interest because a recent reversal of these countries legal stances has occurred through legislation. In the United States, the Revised Model Business Corporation Act and the legislatures of several states have now rejected accounting con-cepts of profit as the legal test for dividends and other shareholder distributions. The reasons for this rejection appear to be similar to those used by the British Court of Appeal nearly 100 years ago. In Great Britain, on the other hand, the 1980 Companies Act reverses much of the Lee case and places on accountants new respon-sibilities for determining whether company distributions to shareholders would violate the capital maintenance provisions of the act.