Global Journal of Management and Business Research, D: Accounting and Auditing, Volume 22 Issue 2

India Company (EIC), founded in 1600. Dari-Mattiacci (2017, 196) explains that “[t]he two companies started with comparable capital but differed in an important dimension: the VOC charter adopted a longer maturity for its equity. This induced immediately another innovation, namely the free transferability of shares to ensure liquidity for the locked-in capital.” When the States General of the Netherlands granted the (VOC) strong entity shielding in 1612“…for the first time in history, a private firm had gained the prospect of indefinite life.” As a result, “…VOC could thus outspend and outperform the EIC for decades,” consistent with the assertion above that entity shielding results in increased productivity. d) Limited Liability Hansmann et al. (2006, 1338) assert that entity shielding is the core defining feature or the “sine qua non of the legal entity…”Corporations cannot exist without government-granted liquidity protection against the shareholders’ personal creditors. In contrast corporations can exist without limited liability. In fact, corporations existed for over 250 years until England and America enacted limited liability protection for shareholders in the mid-1800s. In America, California did not grant limited liability until 1931. Moreover, firms can privately contract with creditors to provide shareholders with limited liability protection against firm creditors. Although they cannot do the same against torts, if the risks are know and reserves establish, the effect on stock prices should be minimal. (See Weinstein 2003, 2005; Hessen 1979) Thus, liquidity protection is necessary for corporations to exist, but limited liability is not. The same is true for freely tradable shares. Hansmann et al. (2006, 1350) notes that, “…firms with unlimited liability have been traded in public markets into the twentieth century;” therefore, unlike liquidity protection, “…limited liability is in fact neither necessary nor sufficient for freely tradable shares to exist.” III. P redictions This paper focuses on the effects of entity shielding on firm-members’ legal claims to firm-assets in order to potentially provide standard setters with a principled basis on which to determine the appropriate reporting perspective (e.g., entity, proprietorship) for each firm-type (e.g., partnership, nonprofit corporation). Specifically, the prediction focuses on the effects of entity shielding on firm-members’ claims to firm-assets. Alternative Hypothesis 1 : Firm-members of firm-types with liquidity protection have less legal ownership claims to firm-assets than do firm-members of firm-types without liquidity protection. 2 FASB (1985, 10) requires that “[E]quity (net assets) describe levels or amounts of resources or claims to or interests in resources at a moment in time.” 3 IV. E vidence I f the results show that the legal claims of firm- members to the firm-assets vary across reporting entities (i.e., firm-type), the balance sheet should reflect this in its reporting perspective. To the extent the paper indicates a mismatch between reporting perspective and legal claims to firm-assets, the results are potentially useful in resolving the conflict over reporting perspective between the FASB and IASB. a) Assumptions and Method To test Alternative Hypothesis 1, this paper examines the legal claims firm-members have to firm- assets across firm-types. To this end, we evaluate firm- members with regard to their legal rights (i.e., claims) and powers (i.e., ability to claim) to the firm-assets for the firm-types: sole proprietorship; general partnership; business corporation; and nonprofit corporation. The paper assumes that the term, “claim,” as used in the standards, represents legal claims. This assumption is consistent with FASB (2010, BC 26), which states that, Wrong. This paper assumes that the legal claims creditors have to firm-assets are uncontroversial, leaving the firm’s net assets for others to claim. For the sole proprietors and partners, the analysis is straightforward as they both have exclusive legal ownership claims to the firm’s net assets. For the nonprofit business, no firm-member at any time has any claim to the firm’s nets assets. Therefore, the only firm-type that requires examination is the business corporation. This section examines the shareholders’ legal claims to the corporation’s net assets and compares them to the firm-members’ claims in other firm-types. Given the assumed claims of the sole proprietors, partners, and firm-members of nonprofit corporations, the Null Hypothesis cannot be rejected. The test of the hypothesis continues with evaluating the shareholders’ claims to the business corporation’s net assets. b) Rights of Share Ownership To determine the extent to which shareholders have claims to the firm-assets, this paper first identifies the rights and powers engendered from share 2 Since all firms have weak entity shielding, which gives priority to firm- creditors over the personal creditors of firm-members, it is not investigated. Firm-types differ in their degree of liquidity protection. 3 FASB (2008), Concept Statement No. 8, replaces the term “claims to resources” with “claims against the reporting entity.” Without a clear definition otherwise, this paper interprets the phrases to mean the same thing, that the balance sheet should present the various firm- members legal claims to the firm-assets. The Effects of Entity Shielding on Claims to Assets: Implications for Financial Reporting 23 Global Journal of Management and Business Research Volume XXII Issue II Version I Year 2022 ( )D © 2022 Global Journals