The theory of the firm is an important field of study in economics. It helps us to answer questions such as why firms exist, why market prices exist for some items and not for others, and why there is a demand for accounting information.

The report argues that an approach to financial reporting measurement that reflects firms’ business models is both consistent with what the theory of the firm teaches us and desirable in its own right.

It also suggests that:

• Where the firm’s business model is to transform inputs so as to create new assets or services as outputs, we would expect that historical cost would generally be the most useful basis of measurement.
• Where the firm’s business model is not to transform inputs, but to buy and sell assets in the same market with the intention of profiting from changes in market prices, we would expect that fair value would generally be the most useful basis of measurement.

Further information

For further information on Business Models in Accounting or for printed copies of the report, email bettermarkets@icaew.com