Financial Accounting: In an Economic Context

ECONOMIC EVENTS

Economic events reflected in the financial statements must be both relevant to the financial condition of a company and objectively measurable in monetary terms.

Relevant Events

Relevant events have economic significance to a particular company and include any occurrence that affects its financial condition. Events of general economic significance, like the election of a new U.S. president, the passage of federal legislation, or the outbreak of war, could be considered relevant. Events that are more company-specific, like the signing of a new labor agreement, the hiring of a new chief executive officer, the sale of an item of inventory, or simply the payment of monthly wages, are also relevant. Each of these events could have a significant impact on the financial resources of a particular company. Anyone interested in the company's financial status (shareholders, investors, creditors, managers, auditors, and other interested parties) wants to be able to assess the financial impact of all such events.

Objectivity

Unfortunately, only a small percentage of all relevant events are reflected on the financial statements. The dollar values assigned to the accounts on the financial statements must be determined in an objective manner.

In general, a dollar value is considered objective if it results from an exchange in which two parties with differing incentives reach agreement. To illustrate, in 2008 when Nokia offered to purchase NAVTEQ, a U.S.-based digital mapping company, ...