How Should We Interpret the Realization Concept?

Abstract This article examines realization concept in accounting and suggests rules that may clarify its meaning and its usefulness. The reporting process should be broadened to encompass any upward value changes that can be supported by objective, verifiable evidence. Value changes such as increases in specific replacement prices for inventories should be recognized but labeled as unrealized if the assets in question are still being held. The interpretation of realization is a major aspect of the clash between the critics and defenders of current accounting practice. The realization concept should be retained. The author wishes to substitute a different term to describe the concept, but realization enriches our reporting by highlighting at least two concepts of net income, by formally distinguishing between different types of events and various management accomplishments, and, perhaps least important, by gradating various degrees of objectivity. The combination of a liberal recognition test and a strict realization test is the best practical means of obtaining what advocates of economic income measures deem as a desirable evolution in financial reporting.