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The FASB and the Allocation Fallacy

The FASB and the Allocation Fallacy. By Arthur L. Thomas 1975 Presented By Kevin Greiner. Purpose. To describe the FASB’s agenda and how each topic involves allocation To illustrate a simple example of the issues with allocation

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The FASB and the Allocation Fallacy

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  1. The FASB and the Allocation Fallacy By Arthur L. Thomas 1975 Presented By Kevin Greiner

  2. Purpose • To describe the FASB’s agenda and how each topic involves allocation • To illustrate a simple example of the issues with allocation • To make suggestions for the FASBs future decisions involving allocations

  3. Audience • Accounting practitioners • Accounting researchers • The FASB and other standard setting bodies

  4. Allocation • Assigning a total amount to multiple categories or inputs • Research suggests that all allocations are incorrigible, meaning the cannot be refuted or verified • Matching theory requires us to know the amount each individual input contributes to the final product • When inputs interact to create the output, our attempt to match the costs with revenues are meaningless

  5. Simple Allocation Example • Prospector makes bread using flour, sugar, soda, a crock, a pot, a shovel and his labor • A portion leaven used in creating one loaf of bread is saved for the next loaf he makes • Each input is vital to the production of the bread • Any matching calculation is just as good as another and cannot be refuted or verified

  6. “If we cannot solve the simplified cases, then we can be fairly certain that we also cannot solve the complex cases.” – Robert R. Sterling “They are mere rituals – solemn nonsense – and our beliefs in them are fallacies.” – Arthur L. Thomas

  7. Suggestions for the FASB • Change current allocation policies to allocation-free ones • Do not issue new accounting procedures based off of allocations and eliminate the obvious incorrigible allocations

  8. Conclusion • This is a major issue for accounting practitioners. • Allocations can take away from the usefulness of financial statements. • The FASB has addressed some issues with allocation using current value reporting

  9. Sterling, R. 1975. Relevant Financial Reporting in an Age of Price Changes. Journal of Accountancy (February): 42 Thomas, A. 1975. The FASB and the Allocation Fallacy. Journal of Accountancy (November): 65-68.

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