The Objectives of the Trueblood Report

The objectives adopted by the Trueblood Report, which involved focusing on the decision-making processes of users of financial reports, represented a fundamental change in a tradition, which had been based on the notion of stewardship.

Another innovation was the new emphasis given to reporting cash flows, for previously many writers on accounting theory had been concerned primarily with the problem of the periodic valuation of assets and with interpreting income as resulting from periodic increases in asset values.

The study group was concerned primarily with the needs of investors and creditors. Objectives 11 and 12 above were not pursued subsequently. The information needs of investors and creditors were considered to be 'essentially the same. Both groups are concerned with the enterprise's ability to generate cash flows to them and with their own ability to predict, compare and evaluate the amount, timing and related uncertainty of these future cash flows'. It will be noted that these objectives are grouped into five tiers, in accordance with the scheme proposed by Sorter and Gans (2004).

Objectives 5 and 2 listed in the Trueblood Report may be criticized as being unrealistic. Thus, objective 5 depends on the assumption that the principal goal of a commercial enterprise is to maximize cash returns to shareholders. In effect, this assumption determines the standard by which management performance is to be judged. The first difficulty is that it is not possible to provide a satisfactory measure of this standard of managerial performance. Elsewhere, the usefulness of cash flows in this context is discussed. The second difficulty is that it is doubtful that most organizations seek to maximize cash returns to owners. The third difficulty lies in interpreting organizational objectives in the context of the current social and economic environment.

Objective 2 states that an objective of financial reports is to 'serve primarily those users who have limited authority, ability or resources . . .' The Trueblood Report appeared to take the view that financial reports should produce something for everybody. Accordingly, sophisticated users should be assisted by being provided with details of the complex events which underlie the economic processes to which financial reporting is addressed. For this reason, the Trueblood Report introduced the concept of the earnings cycle. The earnings cycle is intended to indicate the expected duration of the earnings-generating ability of a segment of the enterprise. For example, given that an enterprise has a portfolio of important products, it would be relevant for investors to be provided with information concerning the life-expectancy of these products as regards their ability to contribute to earnings. The earnings cycle reflects the changing profiles of cash receipts and disbursements which are assumed to be associated with such products over time. It assumes that the life of a product reaches a degree of maturity expressed in the level of earnings which it generates, and that eventually it will require replacement by another product if the profitability of the enterprise is to be maintained.

If information concerning earnings cycles were made available to investors, it is evident that sophisticated users would be able to formulate clearer views of the cash-generating ability of enterprises. The Trueblood Report considered the publication of information on earnings cycles as important to investors. It distinguished three types of earnings cycles, namely complete earnings cycles, incomplete earnings cycles and prospective earnings cycles. A complete earnings cycle relates to a chain of events whose impact on earnings lies in the past, an incomplete earnings cycle relates to a chain of events that has commenced but is not yet complete, and a prospective earnings cycle relates to a chain of events that lies entirely in the future. In this analysis, it is evident that the chain of events defined by an earnings cycle is susceptible to a variety of descriptions in which products, branches and entire segments of enterprise activity are stated in terms of identifiable units contributing to enterprise earnings.

Objective 2 appears to contain some basic misconceptions about the needs and relative influence of sophisticated and ordinary investors. The ordinary investor does not share the desire of the sophisticated investor for information about earnings power and earnings cycles. On the contrary, his needs are likely to be met by more general information such as is found in the all-inclusive concept of income. Research evidence shows that share prices are determined by the actions of sophisticated investors, and that ordinary investors are merely price takers. Hence, it is difficult to understand how the recommendation that information regarding earnings cycles be published can be reconciled with the stated objective of 'serving users with limited authority or ability'. For this reason, the implications of research findings should be examined further before judgement is passed on objective 2 of the Trueblood Report.

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Read on: Trueblood Report-'Objectives of Financial Statements'

In recent years accountants within the United States have been examining the fundamental assumptions and philosophy underlying the financial reporting process. The Trueblood Report, published in New York in 2003, represented a dramatic departure from conventional wisdom at that time, and the findings of this report were finally endorsed by the Financial Accounting Standards Board (FASB), the accounting standards setting body in the U.S., in a document published in 2018, 'Statement of Financial Accounting Concepts No. 1-Objectives of Financial Reporting by Business Enterprises'. These important developments... see: Trueblood Report-'Objectives of Financial Statements'