ABACUS, Vol. 42, No. 1, 2006

doi: 10.1111/j.1468-4497.2006.00191.x

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Blackwell Publishing LtdOxford, UKABAAbacus0001-3072© 2006 Accounting Foundation, Unviersity of Sydney421

ORIGINAL ARTICLE

the italian economia aziendale and chambers’ cocoaABACUS

FRANCESCO CAPALBO AND FRANK CLARKE

The Italian Economia Aziendale and Chambers’ CoCoA

At first glance the Italian accounting tradition of Economia Aziendaleand Chambers’ system of

Co

ntinuously

Co

ntemporary

A

ccounting (CoCoA)appear extreme opposites. The

ex ante

financial calculation of

distributableincome

drawing on the net present values of the aggregative net assets inthe former, and in the latter a system of accounting for an all-inclusiveincome with the separable assets measured in terms of their current cashequivalents, appear irreconcilable, unlikely bedfellows. But the Inter-national Financial Reporting Standards present a system using separableand aggregative assets’ fair values and calculations of their net presentvalues in assessing asset impairment. Whether Economia Aziendale andCoCoA are indeed so opposed deserves renewed examination.

Anglo-American accounting, of which expositions of CoCoA are part,is said to lack a business economics tradition of the kind said to justifyEconomia Aziendale. This stands in stark contrast with European tradi-tions manifested in the Dutch

Bedrijfseconomie

, the German

Betriebs-wirtschaft

, and the Italian

Economia Aziendale

.This article seeks to understand that absence by contrasting—the

Economia Aziendale framework and accounting theory developed in the Anglo-American tradition. The primary elements of space and time coordination—the lynchpins of the pure theory of the azienda (the core of EconomiaAziendale)—are generally regarded as missing in the Anglo-Americantradition. But the original construction of Economia Aziendale leadsto the generalization that any attempt to determine a firm’s value or tomeasure and analyse its performance during its lifetime would result inan unacceptable interruption of the space and time coordination, andyield unreliable results.

Curiously, the analysis here exposes an unexpected complementarityof Chambers’ CoCoA and some postulates of the pure theory of Econo-mia Aziendale. The theory that has been only partially acceptable tothe Anglo-American profession (namely its use of market [fair] values)emerges as highly compatible with the most theoretically extreme in theItalian tradition.

Key words:

Accounting; Chambers; CoCoA; Economia Aziendale; Exitprices; Fair values; Net present values.

Relatively recent Anglo-American literature notes a lack of any relationshipbetween accounting and business economics in the Anglo-American tradition

F

rancesco

C

apalbo

(Francesco.Capalbo@unina2.it) is an Associate Professor of Accounting in theSeconda Università di Napoli, and F

rank

C

larke

Emeritus Professor of Accounting in The Universityof Newcastle and Adjunct Professor of Accounting at The University of Sydney.

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© 2006 Accounting Foundation, The University of Sydney

(Viganò, 1994; Napier, 1996; Zambon and Zan, 2000, p. 800). A research forumpublished in the

European Accounting Review

(1996–98) stressed that claim bycomparing some of the European business economics traditions (Zambon, 1996;Viganò, 1996; Napier, 1996; Nasi and Nasi, 1996; Bouma and Feenstra, 1997; Julve,1998) with perceptions of the underpinnings of the Anglo-American tradition.

Discerning the sense in which ‘accounting and its relation with economics couldbe said to be different in a business economic context’ (Zambon, 1996), the forumstressed that a more intimate relationship between accounting and the theoryof the firm was drawn in European accounting. There, the analysis of the firm goesbeyond the definitions of it being an accounting entity (so often present in theAnglo-American context) in order to set the ‘orientation’ of the accounting process(Zeff, 1978) and its boundaries (Sprague, 1908; Paton, 1922; Vatter, 1947; Staubus,1959; Li, 1960; Meyer, 1973; Ball, 1988).

In some European traditions the characteristics of the firm are believed to haveinfluenced significantly the development of accounting and its conceptual framework,although there has been minimal impact on practice (Zambon, 1996, p. 404). The

coordination

of the Italian azienda the continuity of the Dutch bedrijf and the organicnotion underpinning the German betrieb, are examples of a firm’s perceivedcharacteristics that have highly influenced and substantially oriented accountingthought in those countries. In contrast, it is said that the Anglo-American accountingliterature has paid minimal attention to the connections between the nature of the firmand accounting, and ‘to the possibility of relating the underlying abstract theory toa set of rules and conclusions useful for present-day practice’ (Van Seventer, 1969).

But the

European Accounting Review

forum noted that these conclusions can-not be extended to the entire Anglo-American literature. We concur. Chambers,for example, in his logical and systematic interpretation of accounting depictedthe firm as ‘a datum, the particular features of which must be taken into consider-ation in framing an appropriate information-providing system’ (1955, p. 20). Yet,notwithstanding such similarities, he reached conclusions as to the architecture ofthe accounting model quite distinct from those proposed by academics devisingaccounting systems appropriate for the

Betriebswirtschaft, Bebrijfseconomie

and

Economia Aziendale

.The recently launched R. J. Chambers Collection

1

provides evidence thatChambers studied closely the relevant foreign literature in some depth. Given the

1

While browsing the personal library of the late Raymond John Chambers it is common to findEnglish translations of foreign books illustrating Betriebswirtshaft, Bebrijfseconomie and Econo-mia Aziendale. Of particular interest was his exposure to the last. This was definitely peculiar foran English speaking scholar during the 1950s

−

1970s, as shown by this extract from an

AccountingReview

book review about the Italian Accademia Nazionale di Ragioneria. It explained the pecu-liarities of the Economia Aziendale discipline as: ‘a) of little interest for Americans; b) addingnothing to accounting literature; c) too broad in its object; d) of no use for further research’(Chatfield, 1982). Chambers, instead, was an honourable member of the Accademia Italiana diEconomia Aziendale from 1980 until his death in 1999. The R. J. Chambers Collection and hiscorrespondence files are referred to here as the R. J. Chambers Collection. It is available in hardcopy form from the Archives Unit at The University of Sydney and the website address for thedigitised version of the Collection is: http://chambers@econ.usyd.edu.au. The Collection was officiallylaunched on 15 November, 2004. Footnote 25 provides further details.

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particular intensity of Chambers’ interest in Economia Aziendale,

2

and the amountof personal correspondence he had with Italian scholars and their journal editors,the main similarities and divergences of his CoCoA model (with its recourse toincorporating the effects of changes in the separable assets’ selling prices andprice levels ) and the accounting model developed within Economia Aziendale(with its recourse to the net present value

of the firm

) deserve analysis.

3

The relevance eventually given to Chambers’ perception of an entity’s ‘financialposition’ and the assessment of ‘solvency’ in affecting its capacity to adaptresulted in an accounting model which many regard as being poles apart from thatdeveloped in Economia Aziendale. Yet, arguably, Chambers’ CoCoA is compati-ble with the main characteristics the Italian discipline generally attributes to thefirm, and offers information that complements, rather than contradicts, the purestmodel of Italian accounting. The two systems, both of evident logical soundness andsharing some similar starting postulates, lead to complementary pieces of infor-mation of extreme relevance—from Economia Aziendale, the economic capital ofthe firm; and from CoCoA, the necessary means for the assessment of its solvency.These are embedded in two undoubtedly different financial statement models.

The analysis here offers more support to the proposition that the main limit ofthe accounting lies in an excessive quest for information to be provided in a singleset of financial statements (Sterling, 1979). This is especially so in a commercialworld that increasingly relies on indicators of solvency, using regulatory frame-works that increasingly seek fair value information (see the FASB ‘Fair ValueMeasurement’ project: FASB, 2004).

ACCOUNTING WITHIN ECONOMIA AZIENDALE

Italian accounting, originally free from the urgency to develop practical rulesguaranteeing verifiable and comparable financial statements for use by externalstakeholders, developed as part of a wider discipline intended to capture

all theeconomic aspects

of a particular kind of an economic entity—the azienda. Thediscipline of Economia Aziendale is concerned with the study of the azienda’smanagement, accounting and the organization, underpinned by the belief that noreliable accounting system can be designed without having a sound knowledge ofits operations and the way it is organized and managed. The information obtainedby a proper accounting system is seen to be the means by which to improve thatknowledge.

The azienda is thus a prius, and its definition delimits the boundaries of thediscipline; it is a coordination of economic operations in which individuals and

2

His interest led him to maintain correspondence with the editor of one of the principal Italianaccounting journals and to publish a long debate about financial statements measurements withone of the main Italian scholars of the last decades, Pietro Onida (see Chambers, 1973).

3

Based on his works and achievements, Chambers has been described in the accounting literature as:‘an intellectual giant’, ‘one of the few giants of contemporary accounting thought’, ‘a great thinker’,‘truly a Renaissance man’ (respectively: Mathews, 1982; Barton, 1982; Edwards, 1994; Galassi—privatecorrespondence, 1999).

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wealth are vital components (Zappa, 1927, p. 40), an organization of persons andparts (Viganò, 1998). Importantly, not all the organizations are believed to beazienda, not all are within the focus of Economia Aziendale. The azienda may, ofcourse, assume different forms and perform different processes. Nonetheless, itretains a level of economic generality sufficient to develop a fundamental unitarydiscipline, the postulates and laws of which may be applied to every kind ofazienda—profit-oriented or not, incorporated or unincorporated, publicly orprivately owned, operating in the insurance, banking, manufacturing or whateverother industry (Viganò, 1998, p. 393).

4

As the azienda is to be the object of the stream of accounting information to beproduced by accounting, outlining its distinguishing common features is essentialto the development of consistent general laws (Zambon and Zan, 2000, p. 802).The accounting system to be used inherits the characteristics of its object (Airoldi

et al.

, 1989, p. 344) and being shaped by them is, in turn, properly applicable onlyto those economic entities sharing such common characteristics.

While substantial changes have occurred in the way commerce is conductedsince the origins of Economia Aziendale, the core business features entailing theinterrelated nature of accounting and finance, organization and management persist

.

The evolutionary process of academic thought explains the emergence in theItalian literature of different definitions of the azienda’s distinguishing character-istics.

5

Despite that evolution, general agreement has persisted regarding keydistinguishing features of the azienda, and especially so in respect of those usuallyclaimed to have most influenced Italian accounting, or at least its literature. Theeconomic entity studied by Economia Aziendale is unitary, perceived to under-take its operations in a manner highly coordinated in both time and space; it hasan in-built tendency to continue in the future.

6

This perspective has influenced thenature and the role of Italian accounting,

7

especially its measurement theory.

The Influence of Azienda’s Coordination and Continuity on Italian Accounting, Consumable Income and Economic Value

Being unitary and a going concern, the azienda’s operations are intimately ‘coor-dinated’ in both time and space, to comprise an indivisible flow. Conceptually, an

4

This definition is the outcome of the work of the ‘School of Naples’. Nonetheless other very valu-able opinions exist according to which the azienda is seen as the economic order of the institution,whatever institution it is (Masini, 1970).

5

For a quick list of the definitions of azienda provided in the Italian Literature see http://www.ea2000.it.

6

‘Tendency to continue’ has been preferred to the most used ‘going concern’, for whereas the formeris intended as a qualifying characteristic of the object of accounting, the second is, in the Anglo-American practice, more often intended as an operating hypothesis (Capalbo, 2000). However, forthe sake of simplicity in the following paragraph the two terms will be used interchangeably.

7

A further characteristic is sometimes added: autonomy. This may also be seen as a condition thatenhances this ability to continue over time, rather than a characteristic, as well as a prerequisite, todistinguish an azienda from another. That is, an economic entity to qualify as azienda shouldpresent an ability to last without external systematic support (Airoldi

et al.

, 1989).

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interim result therefore may not be calculated, for that would imply an interrup-tion of time coordination. Any attempt to determine a firm’s value periodically, tomeasure its

periodic

performance at intervals during its lifetime, would result inan unacceptable interruption of the coordination, inevitably yielding abstract orconjectured quantities.

Whereas those principles have remained the essence of Italian accounting theory,practical exigencies have necessitated and induced compromises. Time coordina-tion was broken and an idea of an annual approximation of the firm’s perform-ance was tolerated. The performance of an azienda is intended to be measured interms of income. Its intrinsic value is a function of the ability to generate futureincome.

8

Notwithstanding the empirical choice of the interruption, the azienda isstill naturally coordinated. The end of the year will show an ongoing continuous,unique stream of operations. The expected income flow to be generated by such astream is therefore

unitary

, and its present value is thus a lump-sum value whosevariation over the year can be appreciated in purely

quantitative

terms.Consistent with a systemic and organic vision of the firm, the most compliant

determination of periodic income would be measured as a

quantitative

value bythe difference between the net present value of the firm, known as economiccapital, at the beginning and the end of each period. Frequently an amount isdepicted as the economic concept of income.

9

That this value is theoretically theonly value that proponents of Economia Aziendale consider properly assignable(accounted for) to a firm reveals the strong link with economics. Thus, particularattention on income in Economia Aziendale, rather than capital, is explicable(Poli, 1971).

10

The annual income and capital thus obtained will then be depend-ent on

the future

rather than

on the past

or the

present

, on what is intended ratherthan on what

has

been done (Potito, 1988). In Economia Aziendale what is goingto happen in the future is critical, for this is what gives value to the firm. Anyincome figure assigned to a single year has to be of such an amount as will notimpair, through the distribution process, the firm’s ability to produce a level ofincome in the future such as to guarantee a satisfactory (

normal

) repayment ofthe invested capital as measured by its accounting value.

11

This condition is

8

Several reasons certainly backed this choice, but relatively little effort has been made in theEconomia Aziendale literature to explain its relevance, and especially the reasons to prefer it tothe use of cash flows. It is likely that the impossibility to smooth cash flows is an important factor.

9

Actually, Chambers questioned the identity between the economic concept of income and

ex ante

income. Indeed Chambers (1991, p. 57) provided evidence of the existence also of an

ex post

concept of income in the economics literature (Simons, 1938, p. 49; Meade and Stone, 1941, p. 219;Haig, 1959, p. 59).

10

Consider the following. ‘It seems fine to describe economic income as based on the present valueof future receipts’ (Philips, 1963, p. 59); ‘For the owner of the assets, net income for a period is thedifference between the economic value (sum of the expected net receipts) of the assets owned atthe end of the period [and] their economic value at the beginning of that period . . . [adjusted] forassets added or withdrawn during the period’ (Benston, 1982).

11

Staub (1900) notes this idea of capital maintenance was already quite widespread in the Germanlegal literature at the end of the nineteenth century.

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satisfied whenever the income is determined as the variation in the economiccapital

or any other lower amount

(De Gobbis, 1925; De Minico, 1935; Viganò,1967; Onida, 1974; Capaldo, 1999).

12

An accounting model based on this concept of ‘consumable’ income wouldpresent several practical implementation problems. A ‘one act determination ofthe economic capital would be extremely complex’ (Viganò, 1967, p. 110), whilethe consequential annual reports prepared on that basis would clearly not be ameans for deriving many of the financial characteristics of firms traditionally usedin the periodic evaluation of their wealth and progress. Nor would they give anyidea on how the assigned income was obtained (Rossi, 1965; Provasoli, 1974).

The Use of Net Present Value to Measure Individual Assets and Liabilities of a Coordinated Going Concern

A second compromise has also been necessary. Practical needs pressured retentionof the space coordination. Typically at year end, firms will have a set of integrated,rather than a stream of separate, ongoing operations, each of which is expected toproduce a portion of the expected income that will give value to the firm (Coda,1965, p. 44; Masini, 1970; Onida, 1974, pp. 66–8; Provasoli, 1974, p. 220). Addinga

qualitative

dimension in the expectations of future income produces a

qualitative

expression of the capital of the firm. Whereas operations completed in the yearhave resulted in monetary assets and liabilities, assessment of the ongoing opera-tion’s costs and revenues is expected to generate results in reported balances ofnon-monetary assets and liabilities. Indeed, the same logic supporting the deter-mination of the economic capital leads one to attribute a net present value to non-monetary items resulting from the observed ongoing operations so determined.This is ‘to leave the future years with a positive margin such as to cover furthercost to be incurred up to the definitive realization and to adequately repay theinvested capital’ (Onida, 1974).

13

Notwithstanding the practical convenience of this solution, it would lead tothe same concept of income described above, were it possible that the economiccapital of the firm could be spread properly over the single items constitutingits accounting capital. In the functioning of the modern firm, unravelling such aspread is generally considered an impossibility. This is particularly the case withnon-monetary assets and liabilities, for the attribute being measured—the net

12

The economic capital is obtained by discounting the future expected income flow at an interestrate expressing the cost of capital; it can be considered satisfactory or, as usually depicted inEconomia Aziendale literature, ‘normal’. Given the built-in tendency of the firm to continue in thefuture: (1)

Economic Value = Future Expected Income/Normal Rate.

Therefore, future expectedincome will be up to a satisfactory percentage of the accounting value, just as long as the latterdoes not exceed Economic Value. Indeed when Economic Value = Accounting Value, substitutingfrom the (1) we have (2)

Future Expected Income = Satisfactory Rate*Accounting Capital

. Thisidea of capital maintenance was already in Besta (1891).

13

Again, analogies with some economics perspectives are evident. Consider this quotation fromAlexander: ‘The very basis of economic income is present value of future receipts . . . [which]although unknown are the most important measure of the value of an asset, and so the mostappropriate basis for the determination of income’ (1950, p. 59).

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present value of a single capital item (a particular expected net income flow froma specific asset)—is generally not an outcome exclusive to it. Invariably assets areused in conjunction with one another, in

sets

(networks) rather than by them-selves, to produce net cash inflows. The measurement function is not properlyapplied, nor does the accounting model that operates in practice properly reflectany more the theory of the firm of Economia Aziendale or, at least, one of itsmain postulates, the element of ‘coordination’. The logical consequence is theabsolute inability of any summation of net amounts attributed to separate assetsto express the firm’s economic capital.

Thus, in the Italian accounting literature there was acceptance of those singleaccounting figures so long as their total sum did not exceed the amount of the eco-nomic capital (De Minico, 1946; Masini, 1955; Amodeo, 1955, 1964; Amaduzzi, 1955;Cattaneo, 1965; Ferrero, 1968).

14

If not, appropriate corrections were required. Thegreatest concern was to avoid accounting capital exceeding economic capital. Anyexcess, not finding a confirmation in the expected income, cannot be considered as avalue at all, but rather, was referred to as effectively just ‘water’ (Amodeo, 1964).Less serious consequences normally pertained when the aggregated accounting valueswere significantly lower than the economic capital. And as such a condition wasintended to protect against the distribution of unrealized earnings, it was even advo-cated to achieve that end by the making of adjustments to discretionary items. None-theless, both under-valuations and over-valuations would produce misconceptionsregarding the relationship between the accounting values and the economic capital.

For some authors the predominance of an organic approach in EconomiaAziendale was stressed in order that the ‘corrections’ did not need to be disclosed,but could directly affect the separate values assigned to individual assets andliabilities. A commonly shared belief of academics was that amortizations andprovisions should be inflated in the prosperous years to facilitate deflation in theleaner years. An income smoothing (earnings management-type) policy in imple-menting the amortization process was strongly advocated, so long as it resulted ina ‘better’ protection of future income. The so-called ‘irregular methods’ of amor-tization were strongly recommended (Amodeo, 1964). As the azienda, by its ownnature, is intended to continue over time, its performance can be comprehended,provided the measurement process is not rigidly linked to the elapsed time lagfrom the beginning to the end of a given year. It is the concept of time itself thathas to be adapted to the natural length of an azienda’s income generating process,rather than the measurement of the results of this process to be set over the legalduration of the year (Onida, 1974). Borrowing the terminology from the interimfinancial statements debate, use of an

integral

rather than a

discrete

approach hasbeen strongly advocated.

Even where tolerated, the separate measurement of individual assets and liabil-ities, has not been given much importance—rather, it has been suggested that

14

An interesting, and in many respects similar, discussion of the difference between the capital valuedetermined as a whole and the one determined on an aggregate basis may be found in other Europeanaccounting literature, particularly the Danish (Kristensen, 1944, p. 16; Hansen, 1962, pp. 39–43).

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mobile

figures had significance, only insofar as components of a

whole system

arethe critical focus (Viganò, 1981). The financial statements that Italian accountingscholars had in mind were indeed

internal documents

, which

independently fromany particular user’s needs

sought to express the ability of the azienda to continuein its autonomy over the long term in a

variable

environment (Airoldi

et al.

, 1989).Such an ability is normally presumed to exist, so long as the firm is expected toproduce a level of income able to repay both the risk and the cost of capitalinvested.

15

With that intention, financial statements could not be tied to strict accountingstandards. Of necessity they had to rely especially on estimations and expectations(Zappa, 1950; Onida, 1974). This, of course, lessened attention on prescribingdetailed measurement criteria. Such an approach could survive unhindered aslong as the demand in Italy for externally imposed accounting standards did notarise (Poli, 1971). In more recent times with a global economy dominant, general-purpose financial statements of most large companies

are

being used by outsidersand insiders. Hence, the statements have to be neutral, verifiable and comparablein both intra-firm and inter-firm settings.

16

Accordingly, values assigned to the single capital items have gradually acquiredprominence in the Economia Aziendale literature. A compromise solution hasemerged. It entailed using equity reserves to ‘park’ accumulations of all the adjust-ments that the organic nature of the firm would require (Ferrero, 1968; Dezzani,1981; Capaldo, 1981). This would preserve the notion of reported income basedon accepted measurement criteria. It would produce a distributable income metriccapturing all the adjustments deemed necessary to guarantee the maintenance ofcapital,

17

in Economia Aziendale terms. The European and now internationalpressures for standardization and harmonization have facilitated the dominanceof this perspective (Zambon and Saccon, 1993; Viganò, 1998).

It is suggested that a net present value accounting model of the Danish PalleHansen (1962) variety would thus offer the most reasonable approximation to thedirect determination of economic capital. This is because it applies the same con-cept of value based on discounted expected income to individual assets and liabil-ities. But as the income is deemed to be realized just at the moment of exchangein the market (Zappa, 1950), net present value is used properly as an upper limit

15

When this happens the income, being a residual, implies the satisfaction of all other stakeholdersand, therefore, reliable expectancy of duration. It is of course possible that in some kinds ofazienda—namely those not oriented to profit, to the repayment of risk and cost of capital, andoften of the workforce as well—income cannot be expressed in terms of monetary income. Herethis will only create a problem in terms of measurement rather than a rethinking of the theory.

16

This would appear to be the

raison d’être

of those advocating IFRSs.

17

Perhaps surprisingly, a similarity again is to be found in the Danish accounting literature. Indeed,Hansen (1962, p. 43) suggested including in the balance sheet an item, ‘adjustment of the networth, which bridges the gap between the two valuation principles [capital value determined as awhole and capital value determined on an aggregate basis]’. And the Dutch and German inflationcapital adjustment reserves had been proposed in the 1920s to account for the effects of thehyperinflation (see Clarke and Dean, 1986).

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for assets (or lower limit for liabilities), rather than an unequivocal criterion, mak-ing the approximation even rougher, and the potential difference between theaccounting and the economic capital of the firm even greater. The purchase priceof an asset is arguably lower than the purchaser’s estimate of its net present valueat the time of the exchange. Stating assets at their cost in the historical cost modelexposes the predilection in extant accounting to not record such an estimate. Fur-ther, as there is most likely an indeterminate cluster of assets contributing to eachincome stream (and therefore responsible for the economic capital of the firm), self-generated assets (intangibles—such as know-how, intellectual capital, for example)and assets acquired through non-reciprocal transactions do not incur an identifiablepurchased cost and generally remain apart from the financial statements data.

18

Compromise to the

pure

theory of Economia Aziendale has established asacrifice of theoretical postulates in order to satisfy the need of information thatis serviceable in practical day-to-day operations. This produced an arrange-ment of data that neither satisfies the objectives of the pure aziendale theory northe day-to-day practical information requirements of firms operating in a moderneconomy. It appears that the ‘fair value’ thrust in many local standards and in theInternational Financial Reporting Standards is a possible means to bridge thatgap. And, arguably, that some of those standards may have had their genesis inthe idea of value reflecting

coordination

to amend the data reported in the balancesheet. Accounting for the impairment of long-lived assets included in a Cash(Income) Generating Unit (IAS 36, FRS 11), where the ‘value in use’ of thereporting unit rather than of the single asset is used to determine the existence ofimpairment,

19

is a case in point. This invites consideration of the possibilities of:

1. Rethinking of the actual information potential of financial statements withinthe wider decision making process (Chambers, 1966; Sterling, 1979; Viganò,1972; Capaldo, 1981); and

2. Reconsidering the opportunity of sacrificing the theoretical postulates, by set-ting a new information system properly reflecting the characteristics of the firm,even if this may mean either breaking some well established beliefs embeddedin a rich tradition or transcending the boundaries of the traditional ‘accounting’financial statements.

The Solvency IssueIn order to defend the normality of future income, net present value calculationsrelating to the firm’s operations do not entail assigning capital values to individual

18 Against that background, it should again be kept in mind that both under-valuations andover-valuations would produce misconceptions regarding the relationship between the accountingvalues and the economic capital.

19 As the income generating unit tends often to coincide with the business itself the ‘the impairmentreview required by FRS 11 . . . has the effect of making the review a business value test’ (Patersonet al., 1999, p. 789). In other words we have something not very far from the use of economic capitalas an upper limit to the accounting value of capital that we have seen typical from the Italianaccounting literature.

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75© 2006 Accounting Foundation, The University of Sydney

non-monetary assets and liabilities. This obscures a presentation of their separatefinancial characteristics (Onida, 1974). While most Economia Aziendale scholarshave concentrated more on the economic dimension of the firm, some have stud-ied the financial information relevant to the assessment of its financial character-istics at single points in time and the evaluation of its sustainability over time.Even then, however, traditionally in most cases they have undergone revisionsand reclassifications of financial statement data.

Solvency, a major focus in the analysis by lenders and investors of conventionalAnglo-American financial statements, is a condition precedent for continuouslong-term economic perspectives.

The azienda, being (by definition) a going concern, implies its continuedsolvency. Economia Aziendale, perhaps, has been presumed to have alreadysorted out the solvency problem. That is, to survive in the long term necessitatesthat the azienda has paid its way in the past, and would have maintained its capac-ity to pay its debts in the future as, and when, they fell due. But such an impliedsustenance of solvency within Economia Aziendale calculations may have thepotential to divorce Italian academic accounting thought and related theory fromfirms’ practical day-to-day needs. Although the link between short-term solvency andgoing concern was not ignored in the Italian literature, analysis of the former and ofits relation with profitability has not received sufficient attention (Coda, 1987).20

Even where that omission is consistent with the relative absence of demandingusers in the Italian accounting environment,21 a contributing factor may be theperceived impossibility of giving a rational answer to such a problem in a single setof financial statements already overwhelmed with myriad roles and functions.Coda (1987) observed that, irrespective of reliability of data within the financialstatements, the assessment of the solvency of a firm cannot ever be based solelyon those data. A single set of ‘accounting’ financial statements does not containall the information relevant to solvency assessment, especially when the capitalvalues are assigned in order to defend the normality of future income. Rather,solvency is determined by an organic analysis of both numerical and qualitativeinformation over the economical, financial and dimensional aspects of the firm. InBritish insolvency law this has manifested itself in debates and the relative meritsof ‘balance sheet’ and ‘cash flow’ tests of solvency. In the latter test, predicting fromthe evidence of a statement of financial position at a point in time, to capture cashflow implications of expected future operations, is obviously (though not exclusively)Economia Aziendale territory.

Against that background there is the nagging implication of positive economicvaluations implying a firm’s continuous solvency—that embedded in the EconomiaAziendale valuations are assumed collections of resources (monetary and

20 Interest over assessment of solvency has increased in Italy and in Europe as well. The High LevelGroup of Company Law Experts (2002) issued a document advising the use of the solvency test toprovide the creditors with a better protection than the one they currently obtain through the legal capital.

21 A similar limit is said to apply to American accounting thought (Heath and Rosenfield, 1979),where demanding financial statements users certainly exist.

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non-monetary) from time to time that may be applied not only to the productionof future net income streams, but also to produce the cash flow with which to dis-charge debts. Arguably, data representing the potential of the individual assets tocontribute to the discharge of debts are complementary to the Economia Aziendalevaluations. Without it, managers would have no guide as to which assets to retainto maintain the income stream and which to use to discharge debt.

CHAMBERS’ CoCoA

In contrast with the economic income focus that underpins the accounting withinthe framework of Economia Aziendale, Chambers’ CoCoA aims to provide financialdata indicative of an entity’s dated financial wealth and periodic financial progress.These data provide an indication of an entity’s capacity to adapt. Their formulationis in response to the observable uses made of the data drawn from financial state-ments and the agreed characteristics of the financial indicators habitually derivedfor the purpose of assessing and evaluating entities’ salient financial features.

CoCoA seeks to reveal financial information that is generally relevant to themyriad parties interested in the financial affairs of business entities.22 To that end,it was devised to facilitate the disclosure of, in particular, financial position at datedpoints in time; income earned between, and resulting in, successive establisheddated financial positions; the nature, composition, and the contemporary money’sworth of a firm’s separable assets and the amount of its individual liabilities.Through the injection of an adjustment for changes in the general purchasingpower of money, the calculated periodic income or loss is thus an explicit amountof current general purchasing power (Clarke and Dean, 1996).

Solvency and Going Concern AssessmentsChambers explained in numerous places his observations of the manner in whichthe data in financial statements were the basis of financial instrumentation. Theywere used to determine the financial characteristics of firms—their periodic profitand losses, financial position at specific dated times, rate of return, capital gearing,asset backing, solvency, liquidity, gearing, debt to equity and the like.23 His obser-vation was that these financial characteristics of the wealth and progress of firmswere used invariably to assess whether particular firms were likely to remaingoing concerns, and indeed (it might be said) were they likely to meet one of theprimary Economia Aziendale criteria, and if so what their individual capacitieswere for adapting to changing economic conditions, changing investment oppor-tunities, and changing financing opportunities.

There is little room for dispute that the data in the general-purpose financialstatements of firms are used in that fashion. Nor that they are somewhat dictated

22 Consider the debate between Demski (1973) and Chambers (1976) about the (im)possibility of anormative accounting standard.

23 Consider Chambers et al. (1987, p. 17), especially the diagrammatic illustration of the meshing ofthese indicators.

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in the Anglo-American tradition by the nature and financial reporting require-ments of companies legislation, and more recently in the ‘fair value’ prescriptionswithin many professionally endorsed accounting standards. In various forms andcombinations, dated balance sheets (statements of financial position) and incomestatements (statements of financial performance) have been specified as the mini-mum financial disclosures by companies as part of the quid pro quo for receivingincorporation, since the U.K. Companies Act of 1844.24

The habitual use of the companies’ published data to determine their individualfinancial wealth and progress (or regress), or for deriving their salient financialcharacteristics, is undeniable. The financial press is replete with references to suchthings, the intra- and inter-firm comparisons in which they are employed, com-mercial agencies and the stock exchanges produce and sell their calculation of thevarious financial indicators, and many companies include decade-long summariesof the same in their annual reports. It is a well-established part of the disclosuresmade and the external evaluation process of companies’ affairs.

Whereas the product of that general-purpose use is different in form and struc-ture from the product of the ‘pure’ Economia Aziendale accounting, it is not inconflict with the overall objective of Economia Aziendale. Difference neither impliesnor necessitates contradiction. Rather, it implies the possibility of complementarity.A frequent complaint levelled at Anglo-American type financial statements isthat they do not show the value of the firm.

CoCoA addresses micro-features of the azienda relevant to the day-to-day, period-to-period, assessments of the financial structure and progress of a firm made byvarious users (creditors, other investors and regulators in particular)—financialfeatures, that are critical to their evaluation of the reasonableness of the informa-tion that accounting in the Economia Aziendale tradition would produce. Wewould also argue that the overall economic capital of the firm calculated in theEconomia Aziendale tradition is a function of its periodic financial position calcu-lated in the CoCoA fashion, for without an understanding of the firm’s financialposition at a particular point in time, the financial resources and obligations it has,assessment of likely changes therein is impossible.

Such complementarity is illustrated by the relevance of the CoCoA-generateddata to assessments of solvency and the obvious link between solvency and goingconcern.

Solvency and Going ConcernIn the final analysis, virtually all the conventional components of financial ratioanalysis are directed to identifying those features of a firm’s financial structure thatenhance or threaten its capacity to continue in business. Critical to a firm continuingin business is its ongoing capacity to pay its debts as they fall due. In that setting,solvency assessments are, arguably, the most critical of financial indicators. Whilethere have been instances of companies embarking upon borrowing campaignsand using the proceeds of successive rounds to meet the repayment of earlier

24 7& 8 Vict. 1844.

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rounds, that so-called Ponzi-type process eventually comes to an end (Clarkeet al., 2003). Indeed, borrowing covenants are intended to ensure that it does. It isthus no accident that in the investigations into major company failures (for exam-ple, multi-billion dollars collapses of Parmalat in Europe, HIH in Australia, and[say] Enron and WorldCom in the United States), a matter of critical importancehas been identifying the precise times at which those companies had lost theircapacity to meet their debts when they became due, who knew or should haveknown of it and when. That has always been the case (Clarke et al., 2003). With-out a determination of solvency, evaluation of whether a company is likely to bea going concern in the future is impossible—judgment on the matter absolutelyuninformed!

No assessment of solvency can be determined other than by comparing thecompanies’ financial resources with their debts, taking into account the reasonableunderstanding of how those resources might change in parallel with the time whensome of the debts become due for payment. As the example below demonstrates,many of the data produced under the conventional historical cost system areclearly inadequate for that purpose. Neither price paid in the past for physical assetsnor those amounts arbitrarily amortized are indicative of debt-paying capacity.Nor are the artefacts of that extant system. The reported deferred tax debits fromemploying various tax-effect accounting regimes are not necessarily money thecompany has, had or ever will have; capitalized expenses refers to money oftenlong gone, as do deferred costs; and goodwill and like intangibles refer tomoney never had in respect of the former, and money often expended in respectof the latter.

Arguably, going concern assessments and other financial decisions based ondata emerging from the conventional historical cost system are at best contestable,and at worst impossible, for they have to draw upon an assumed relationshipbetween the written down value of an asset and its likely market price, the expen-ditures otherwise incurred and the current market price for the rights or privilegespurchased, and the like.

The following example (undated) penned by Chambers was unearthed as thecurrent writers examined materials in the R. J. Chambers Collection.25 The examplesought to capture the links between what Chambers described as the ‘Real—theInduced—the Theoretical’ aspects of accounting, and to assist readers in betterunderstanding Chambers’ views on the going concern notion and the role ofaccounting in decision making.

Now some will say, ‘Oh, but a going concern is not interested in the cash (resale) valueof the assets it is using’. We may explore this a little, for it leads to a reductio adabsurdum. Suppose it were sufficient to show the trucks at the balance produced by theaccountant’s assumption of a five-year-life for each of the trucks; that is what thetraditional notion of a going concern entails. Now, if the balances of cash and truckaccounts are to have the same kind of meaning, so that the two figures can be added, we

25 The R. J. Chambers Collection is a set of correspondence entailing approximately 20,000 pieces ofcorrespondence written or received by Ray Chambers from 1947 to 1999. The example datessuggest this example was written in the late 1960s.

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should be entitled to require the accountant to say what the balance of cash should benow on the basis of certain assumptions about the future. And we would not require anyexternal proof that the figure for cash actually tallied with the cash held or not. Which,of course, any accountant would claim to be absurd.

Let us take the example one step further. You will have noticed that the balance ofassets at 1 January 1967 was $22,000 and that at 31 December 1969 it was also $22,000.Suppose that the resale prices of the trucks were actually $7600; we may introduce thestatement ‘it is true that the resale price of the trucks aggregated $7600 at 31 December1969’. We may now say, by inference from PQRSTUVW,26 that the company is as welloff as it was at 1 January 1969. Now following our principle, that in experienced matterswe may check the inference with the facts independently, we may try to put this to thetest. How will we check whether $22,000 in early 1967 is equivalent to $22,000 in late1969? Anyone with experience of financial matters will know that this statement is nottrue. And he will say it is not true [given X in the example] to the extent of about 10 percent. Here again we have a case of the deduced conclusion being at odds with the factsf(PQRSTUVW) does not equal F(PQRSTUVW). The only way to make the two equalis to introduce another statement X ‘it is true that the $67 was able to buy 10% morethings generally than the $69’. And if this, or its effects, are woven into the accountingfor Company A it will be true that f(PQRSTUVWX) does equal F(PQRSTUVWX). Andit will consequently appear that Company A is worse off than it was in 1967 by $2200;it will have disclosed and paid its taxes on more than it really earned.

My object has been to show that accounting may seem to be a logical process since ithas a formal way of dealing with a variety of matters, and it yields figures whichthemselves correspond: debits equal credits. But like any purely deductive process, theconclusions tell us no more than the statements with which we began. If we leave out anypremise, we will necessarily reach a different conclusion. But as we are concerned, notwith statements only, but with statements which are to be used in real world affairs—decisions—the conclusions we draw are testable and should be tested by reference to theconsequential facts. If they do not tally we have omitted something. In traditionalaccounting, the simple illustration we have used shows that failure to check the deducedconsequences (the balances of accounts) with the actual state of things leads to error—error which those having no knowledge of the internal modes of accounting (its purelydeductive processes) are ignorant of. The example has been limited to simple things. Butthe conclusions are universal, for the same analysis by reference to logical processes canbe applied to all assets and equities.

In short, no system of accounting is an adequate basis for the choices and judgementsof those at a distance, if it depends only or largely on its deductive apparatus. It can onlybe relied on if the products of the process tally with the independently observableconsequences of the events it records. The more we put into it fictional premises, and themore we leave out of it statements which should be premises, the less useful it will be.On these tests traditional accounting in this decade fails badly.

CoCoA and the Economia Aziendale Paradigm, Complementary Rather Than ContradictoryThe uneasy relationship between Economia Aziendale accounting and thedemand in modern markets for periodic financial information about companies’financial affairs was explained above. Compromises forced by the demand for

26 Where: P = A bought a truck for $6,700 in Jan 2 1967; Q = A bought a truck for $7,000 in Jan 21969; R = A owns both trucks at Dec 31 1969; S = A had access to cash of $22,000 on Jan 2 1967;T = Cash payments = cash receipts minus $4,400 1967–1969; U = Accountants wrote off deprecia-tion of $1,000 in each 1967–1969; V = Accountants used ordinary accounting procedures; W =Resale price of trucks in 1969 was $7,600; X = $67 = $69(1.1).

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period-based information were noted. If we accept that the demand is for infor-mation about the wealth and progress to date of firms, a curious and unexpectedcomplementarity between Economia Aziendale accounting and CoCoA can bedemonstrated.

First, we should note that financial calculations within the Economia Aziendaleparadigm and CoCoA are uniquely (though within competing accounting systems)directed toward unequivocal monetary measures. When the azienda ceases oper-ations (unless there is a deficiency of assets relative to liabilities), an amount of freecash will remain—the ultimate outcome which successive Economia Aziendaleaccounting calculations had been directed towards. With CoCoA, at each time ofperiodic reporting the statement of financial position depicts in contemporaryterms an approximation of the aggregative monetary resources attributable to theshareholders at that time. This is because all the assets and equities of the firm arestated in terms of their money amounts or money’s worth (monetary equivalents)at that time, as best indicated by their current selling prices. At the end of thefirm’s operations the residual after the discharge of debts will be a sum equal tothat emerging under the Economia Aziendale system.

Of course, irrespective of the accounting system employed, that will be the out-come at the end of the entity’s life (see Sterling, 1981). The firm commences withcash and terminates with a cash residual. But only a CoCoA-type market pricesystem (see also Sterling, 1979) is designed to provide periodic estimates of theprogress towards that residual in terms of contemporary money or its equivalent.In this sense CoCoA entails a periodic simulation of the ultimate cash to cashoperation that all business entails.

The period-by-period difference between the amount of the net assets calculatedunder CoCoA and the Economia Aziendale value of the firm is a quantification ofthe all-inclusive income or loss for tn−1 to tn captured in the value of the firm attn−1, were tn−1 the current date and were tn some indeterminate date.

Were tn−1 to be the balance sheet date and the business to have ceased at thattime, the collection of assets and liabilities would be terminal, and the amount fornet assets under CoCoA and the value of the firm under Economia Aziendalewould be equal.

That cannot be claimed of historical cost accounting, for (apart from an entirelycash operation, even in its most liberal form) it does not result in contemporarymonetary values being assigned to all physical assets. Replacement price mech-anisms of the Betriebswirtschaft and Bedrijfseconomie varieties also do not, fortheir focus on replacement prices and replacement costs is a focus on moneyneeded to acquire what they already have, not money or its equivalent in possession.Likewise, the Italian Economia Aziendale accounting by engaging in periodic dis-counting is simulating a cash-to-cash operation, for that is the specific rationaleunderpinning the discounting mechanism.

Second, Chambers was quite explicit in his depiction of the firm, particularlycorporations, as a coalition of forces (albeit often competing forces—see Coase,1937; Cyert and March, 1963; and Chambers, 1986, especially Chapter 7; 1993). Thus,his concept of the firm differs little from that attributed to Economia Aziendale

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above. Zappa’s depiction of the coordination of economic operations, where personsand parts are vital components, is compatible with Chambers’ depiction of theentity underpinning CoCoA. Likewise the irrelevance of the nature or objectivesof the organization, public or private, profit-oriented or not, also underpinsCoCoA. The current money’s worth of physical assets is invariant between theassets being held by a charity and otherwise being held by a profit-seeking enter-prise. Assessments of solvency, liquidity, rate of return, assets backing, debt toequity and the like are also invariant in respect of the manner in which they aremade and the underlying understanding of the significance of the indicator. Ofcourse, the importance placed upon them by individuals may well differ.

Third, CoCoA does not entail any abandonment of the time and space coordi-nation embedded in the Economia Aziendale paradigm. It is to be noted thatincome under CoCoA captures not only the cash or cash equivalents consequencesof past transactions, but also the cash and cash equivalents consequences of alleconomic events up to the present. By injecting the calculations with the impactof changing market prices for physical assets, expectations held within the marketregarding the future income producing potential of those assets are an integralpart of the data. We might presume that those market prices capture NPV calcu-lations, albeit those made external to the firm by potential buyers, in contrast withsimilar internal calculations made in the Economia Aziendale system. In the caseof a one-asset firm, or a multi-asset firm in which the separate assets are lumped(as in, say, a network of integrated assets) as if one unit, were there to be perfectforesight the value attributed to the firm and the income calculated would be verysimilar under CoCoA to that calculated in accord with Economia Aziendale.

Fourth, Poli’s (1971) explanation that Economia Aziendale has a strong focuson income rather than capital does not distance Economia Aziendale fromCoCoA. What might be in dispute between devotees of each system of accountingis whether income or capital should be regarded the dominant focus. The issue issomewhat irrelevant, for Economia Aziendale income is a function of the capitalvalue of the firm at two points in time, and under CoCoA capital and revenueenjoy an equal focus. Articulation is evident in CoCoA. Indeed, to the extent thatit is not distributed, the income attributed to one period is automatically recog-nized as part of the capital of the next by the mechanics of the capital mainte-nance mechanism employed in the calculation of periodic income. CoCoA thusemploys a capital maintenance mechanism that complies with the EconomiaAziendale principle that the firm’s capacity to produce income in the future has tobe maintained.

Fifth, at a superficial level a considerable gap appears to exist between Econo-mia Aziendale and CoCoA by virtue of the assignment under the latter of separatemoney’s worths for the individual assets. Arguably, that is more apparent thanreal. The money’s worths assigned to non-monetary assets under CoCoA (usuallytheir current selling prices, we have noted, probably entails recourse to presentvalue calculations) are according to the manner in which those assets are dealt within the ordinary course of business (Chambers, 1966). Assets used in conjunctionwith others might well be lumped as a single item, and if they are sensibly and

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economically severable they would be treated as separate assets. Now, underEconomia Aziendale, treating the firm as the income earning potential unit ismerely to employ the firm as a surrogate for the separate income earning poten-tials of the separate groupings of, and the individual, assets and the financing thatattaches to them.

With a shared perfect foresight and information symmetry the income deter-mined by the calculations made by persons external to the firm under CoCoAwould equate those made internally by the managers of the firm under EconomiaAziendale.

Sixth, there is no dispute that period by period the aggregate of the valuationsassessed under CoCoA is most unlikely to equal the economic capital of the firmwere it to be assessed under Economia Aziendale. But again, that does not meana loss or diminution of complementarity between the two. The complementarityderives not from equality but from a compatibility between the foci and the incre-mental nature of the information provided, one to the other. Accounting underthe Economia Aziendale paradigm has to assume a time horizon to employ thediscounting mechanism, notwithstanding the assumption of continuity. CoCoAaddresses financial outcomes, income to date and present financial position at adiscrete point in that continuum.

Arguably, the CoCoA Statement of Financial Position would provide a usefulreality check on the Economia Aziendale valuation of the firm at those points.We have noted above that in most scholars’ opinions, the general compromisespecifies that the sum of the separate monetary amounts for the assets and liabil-ities for Italian firms is not to exceed the attributed economic capital underEconomia Aziendale (Amodeo et al., 1964). The intention is to use the comparisonas a check to ensure that capital is not being distributed. But unless those amountsare determined in contemporary terms, such a comparison fails to provide indica-tions that the capital has been maintained. Thus, the most suitable data set forthat purpose—the comparison of the Economia Aziendale value of the firm andaccounting residual equity—would be found in the CoCoA Statement of FinancialPosition. An excess of the Economia Aziendale economic capital of the firm overCoCoA residual equity would be a workable indication of capital having beenmaintained in NPV terms. In contrast, an excess of the CoCoA residual equityover the Economia Aziendale economic capital of the firm would give good reasonto reassess its going concern status.

CONCLUSION

This article has argued complementarity between the data emerging fromaccounting in accord with the principles of Economia Aziendale and those emerg-ing from the application of CoCoA. Faced with the need for periodic financialinformation relating to income and financial position, and the customary use ofthe data in published financial statements to derive indicators of the financialcharacteristics of firms, and of solvency in particular, it is clear that EconomiaAziendale data are inadequate for that purpose. Likewise it is clear that CoCoA

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data, while relevant to, do not provide the assessments of the value of the firmunderpinning the historical status of Economia Aziendale in the Italian account-ing literature.

While primarily examining the relationship between Economia Aziendale andCoCoA, related issues highlighted in this work reveal general insights into debatesabout the limited nature of essentially historical cost-based financial statements,their failure to provide data on the value of the firm as a whole, and some of theproblems of future-oriented statements, such as those likely to arise from comply-ing with IFRSs based on ‘fair values’ of individual assets and liabilities. This isespecially the case when fair value is deemed to be synonymous with deprivalvalue, as in the FASB’s latest initiatives on measurement.

Combined, Economia Aziendale and CoCoA form a strong coalition, poten-tially a very congenial mix of ex ante and ex post financial data, primarily by virtueof both entailing a focus exclusively on the contemporary financial characteristicsof firms—Economia Aziendale on the approximations of the net present valueof the firm, and CoCoA on the measurement of the firm’s financial wealth andprogress period by period, and a representation of its financial position at eachperiod’s end. In a curious twist, the features of CoCoA that in earlier times wouldhave brought its greatest criticism in much of the Anglo-American accountingliterature—its use of current market prices to approximate the current money’sworth of its physical assets, its unique capital maintenance mechanism to ensureincome is indicative of a pure increment in current general purchasing power, andits dominant focus of measurement in terms of current money or its equivalent—forge a link between CoCoA and Economia Aziendale.

Paradoxically, one of the least supported applications of the Anglo-Americanaccounting tradition has potential complementarity with what is arguably themost extreme application of the European accounting tradition, Italy’s EconomiaAziendale.

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