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The operating‐financing distinction in financial reporting

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  • Richard Barker

Abstract

This paper addresses an important issue of presentation in the financial statements, namely the distinction between, on the one hand, the obligations and associated flows arising from the provision of finance to an entity ('financing') and, on the other hand, all other activities of the entity ('operating'). This operating‐financing distinction has been wellestablished in the finance literature since the work of Miller and Modigliani (1958, 1961) and is ubiquitous and of considerable importance in practice in financial markets (e.g. Koller et al., 2005; CFA Institute, 2005; Penman, 2006). Yet accounting standards are underdeveloped in this area, and there are gaps and inconsistencies in both IFRS and US GAAP. Drawing upon the distinction between nature and function in the presentation of financial statement information, the paper contributes, first, to enhance our theoretical understanding of the operating‐financing distinction, which is currently defined in different and unreconciled ways in the literature and, second, to propose a practical basis for accounting standard‐setters to determine requirements for the reporting of financing activity in the financial statements.

Suggested Citation

  • Richard Barker, 2010. "The operating‐financing distinction in financial reporting," Accounting and Business Research, Taylor & Francis Journals, vol. 40(4), pages 391-403.
    • Handle: RePEc:taf:acctbr:v:40:y:2010:i:4:p:391-403
    DOI: 10.1080/00014788.2010.9995319
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    1. Hirst, DE & Hopkins, PE, 1998. "Comprehensive income reporting and analysts' valuation judgments," Journal of Accounting Research, Wiley Blackwell, vol. 36, pages 47-75.
    2. DeFond, Mark L. & Park, Chul W., 1997. "Smoothing income in anticipation of future earnings," Journal of Accounting and Economics, Elsevier, vol. 23(2), pages 115-139, July.
    3. Merton H. Miller & Franco Modigliani, 1961. "Dividend Policy, Growth, and the Valuation of Shares," The Journal of Business, University of Chicago Press, vol. 34, pages 411-411.
    4. Kasznik, R, 1999. "On the association between voluntary disclosure and earnings management," Journal of Accounting Research, Wiley Blackwell, vol. 37(1), pages 57-81.
    5. Healy, Paul M., 1985. "The effect of bonus schemes on accounting decisions," Journal of Accounting and Economics, Elsevier, vol. 7(1-3), pages 85-107, April.
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    1. Michele Bertoni & Bruno De Rosa & Laura Peressin, 2019. "Early Warning Systems: A Risk of Increasing Managerial Myopia?," Management, University of Primorska, Faculty of Management Koper, vol. 14(4), pages 305-323.
    2. Michele Bertoni & Bruno De Rosa & Paola Rossi, 2020. "Is "Operating Profit" Set in Stone? A Commentary on the New IASB's Exposure Draft "General Presentation and Disclosures"," MIC 2020: The 20th Management International Conference,, University of Primorska Press.
    3. Carien van Mourik & Yuko Katsuo Asami, 2018. "Articulation, Profit or Loss and OCI in the IASB Conceptual Framework: Different Shades of Clean (or Dirty) Surplus," Accounting in Europe, Taylor & Francis Journals, vol. 15(2), pages 167-192, May.

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