Definition
Proprietary View in accounting is a perspective that highlights the interests and rights of shareholders over the notion of the company as a distinct legal and financial entity. This view prioritizes shareholders as the primary beneficiaries of the company’s operations and financial reporting, often reflecting their stake in the company’s net assets.
Comparison with Entity View
The proprietary view contrasts sharply with the Entity View, which treats a company as a separate legal entity, independent of its shareholders. While the entity view promotes transparency and uniformity in financial reporting for all stakeholders (including creditors and regulators), the proprietary view leans towards maximizing shareholder value and may provide financial reports that emphasize returns and benefits to shareholders.
Implications for Financial Statements
Under the proprietary view, financial statements are crafted with a focus on how assets and liabilities impact the shareholders. For instance, the balance sheet under this perspective is more about showing what is leftover for shareholders after settling all outsider claims (liabilities).
Related Concepts
Residual Equity Theory
This theory aligns closely with the proprietary view; it suggests that shareholders are entitled to the “residual equity” of the company after all other claims have been satisfied. Residual equity theory supports the idea that shareholders’ interests should come first in the hierarchy of financial claims.
Shareholder Value
A term often used in conjunction with the proprietary view, emphasizing that all decisions and strategies of a company should increase the value delivered to shareholders. It is a cornerstone philosophy in many modern corporate governance models, focusing on wealth maximization for shareholders.
Further Reading
“Shareholder Value: A Guide for Managers and Investors” by Alfred Rappaport – Provides insights into how managers and investors can align their interests through the shareholder value approach.
“Theory of Financial Decision Making” by Jonathan E. Ingersoll – Offers a detailed examination of various theories in finance, including the proprietary and entity views, providing a solid theoretical framework for financial decision making.
Conclusion
The proprietary view serves a specific interest group within the accounting sphere — the shareholders. While it provides clarity and focus for financial reporting in terms of shareholders’ needs, it’s crucial for those using this information to understand its perspective and inherent biases. This ensures balanced judgment and decision making, especially in multi-stakeholder environments.
