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

characteristics of public corporations: (1) its legal personality, (2) its limited liability for common shareholders, and (3) its free transferability of shares. But, as this paper has explained, limited liability is unnecessary for a corporation to exist and can be privately contracted to a large degree. More importantly, Demsetz’ definition does not include entity shielding as a characteristic of a corporation when, without it, transferable shares could not exist. If stock markets can and have existed with limited liability, but not entity shielding, which is a more important characteristic of the business corporation? Instead, to determine the appropriate reporting perspective for each firm-type, academics should focus on how entity shielding affects firm-members’ (e.g., shareholders’) claim to the firm- assets. VI. C onclusion In a 2008 joint Exposure Draft, IASB and FASB recommended that “[A]n entity’s financial reporting should be prepared from the perspective of the entity (entity perspective) rather than the perspective of its owners or a particular class of owners (proprietary perspective)” (IASB 2008, 5). But when FASB realized that an entity perspective would not list net assets and profits under Shareholders’ Equity, it abandoned plans to converge reporting entity perspectives. 46 The unique feature of liquidity protection afforded to business corporations necessarily restricts shareholders’ claims to firm-assets. Specifically, Instead, FASB continues to require the proprietary perspective for business corporations, which implies that shareholders have exclusive ownership claims to the firm’s net assets, including the profit. The reporting perspective most appropriate for each reporting entity should depend on underlying principles to which standard setters agree. This paper assumes that the claims firm-members have to the firm- assets implies what reporting perspective is appropriate for each firm-type. This paper finds that shareholders, unlike sole proprietors, of business corporations have no legal claims to the corporation’s net assets or profit. Instead, shareholders of business corporations have similar claims to those of beneficiaries of nonprofit corporations. The reason for the similarity is that both business and nonprofit corporations have liquidity protection because their firm-assets are shielded from firm-members, as well as the firm-members’ creditors. The ability to shield the creditors of firm-members cannot be accomplished through private contracting and, as such, this type of liquidity protection distinguishes the business corporation from other business firm-types. 46 www.iasplus.com/en/meeting-notes/iasb/2010/agenda_1011/agen da1551#entity-versus-proprietary-perspective shareholders, because of liquidity protection, have no claims to the firm’s net assets, while sole proprietors with no liquidity protection have exclusive claims to firm- assets. Therefore, requiring business corporations to present net assets as part of Shareholders’ Equity misrepresents shareholders claims to the net assets. Shareholders do not have identical claims to firm-assets to those of sole proprietors; rather the opposite is true, they have no claims. The shareholders’ lack of claims to the firm- assets implies that the proprietary perspective is inappropriate for the balance sheet of the business corporation. Academics should focus on how entity shielding affects each firm-members claim to the net assets., because entity shielding uniquely identifies firm- type, cannot be privately contracted, and enables transferable shares without which founders could not maintain personal liquidity. Entity shielding, not limited liability, should serve standard setters as the principle underlying what reporting perspective should be required for each firm-type. R eferences R éférences R eferencias 1. Alchian, Armen A., Harold Demsetz. 1972. “Production, Information Costs, and Economic Organization.” The American Economic Review. Vol. 62. No. 5. Dec. pp. 777-795. 2. Bainbridge, Stephen M. 2002. “The Board of Directors as a Nexus of Contracts: A Critique of Gulati, Klein & Zolt's 'Connected Contracts' Model.” UCLA, School of Law Research Paper No. 02-05. 3. ___. 2008. The New Corporation Governance in Theory and Practice. Oxford University Press . 4. Bebchuk, Lucian Arye. 2005. “The Case for Increasing Shareholder Power” 118 Harv. L. Rev. 833-842. 5. Becker, Lawrence, C. 1977. Property Rights: Philosophic Foundations. Routledge. 6. Blair, Margaret M. 2003. "Locking in Capital: What Corporate Law Achieved for Business Organizers in the Nineteenth Century," UCLA Law Review . Vol 51. 387. 7. __. and Lynn A. Stout. 1999. “A Team Production Theory of Corporate Law,” Virginia Law Review , Vol. 85, 2. 247-328. 8. Bodner, Randall W. and Peter L. Welsh. 2005. “Disney Directors Not Liable But Questions Remain.” Insights; the Corporate & Securities Law Advisor . Englewood Cliffs: Sep. Vol.19, Issue 9. 2-8. 9. Bork, Paul. 2005. “Fiduciary Duties of a Director of a Delaware Corporation.” Prepared for Board of Directors 101 - October 27. Massachusetts Society of Certified Public Accountants Inc. and National Association of Corporate Directors Co-Sponsors. 1- 21. The Effects of Entity Shielding on Claims to Assets: Implications for Financial Reporting 32 Global Journal of Management and Business Research Volume XXII Issue II Version I Year 2022 ( )D © 2022 Global Journals