Should financial reporting reflect firms’ business models? What accounting can learn from the economic theory of the firm

The paper draws on the economic theory of the firm as developed by Ronald Coase and Oliver Williamson. The theory helps us to understand why firms exist and why market prices are available for some items in accounts and not for others that are part of in-firm processes. The paper argues that financial reporting already reflects firms’ business models and makes the case for an approach to measurement in financial reporting based on firms’ business models. This approach distinguishes between assets that are transformed by a firm’s in-firm processes and those that are not. Historical cost measurements would usually be appropriate for the former, market price measurements (fair value) for the latter. The paper identifies a number of problems with the business model approach to measurement, but suggests that none of them should lead to the conclusion that such an approach would be mistaken. It also suggests opportunities for further research.