Problems of Income Recognition in a Capital Markets Institution

Abstract

The capital markets today pose many problems for accountants. The apparently simple question ‘what is profit?’ can and does bring many complex answers. The seemingly obvious answer, that profit is the difference between what the asset is bought for and what the asset is sold for, is rarely that easy to compute. This is particularly so at interim reporting dates when the asset has not been sold. Instead, we have a situation where modern-day players in the market place build highly complex products where the cash return can arise over several periods and the profits have to be accounted for at interim reporting dates. Almost without exception all of today’s problems concerning income recognition relate to difficulties as to how to deal with reporting dates during the life of a transaction. In so doing they reveal many deficiencies in accounting theory and practice as a tool for economic decision making.