Advanced Accounting Theory

ACC 4303 - AAT Nature and Definition of Accounting Conceptual Framework Evolution of Accounting Thought Recognition of Assets, Liabilities, Expenses, Revenue in Financial Statements Concept of Goodwill Valuation & Accounting for Goodwill

ACC 4303 - AAT The concept of true and fair view Depreciation in Accounting Accountability in Accounting Social Responsibility Accounting Human Resources Accounting Creative Accounting Accounting Standards Accounting Theories Process of accounting theory construction

ACC 4303 - AAT Examination Midterm Test (15 marks) Assignment (15 marks) Final Examination (70 marks)

ACC 4303 - AAT How to Tackle Theoretical Questions No one correct answer (open ended questions) Demonstrates how you evaluate different views (corresponds to how much you have read ?) Finally express your own view Outline: Main issue, different views and your own view Give reference Expected not a professor’s knowledge

ACC 4303 - AAT How to Tackle Theoretical Questions No one correct answer (open ended questions) Demonstrates how you evaluate different views (corresponds to how much you have read ?) Finally express your own view Outline: Main issue, different views and your own view Give reference Expected not a professor’s knowledge

Key Terms Theory Accounting theory Nature and role of accounting Descriptive, normative and positive theories Postulates, concepts and principles Conceptual framework

Definition of Theory What is a theory? …the coherent set of hypothetical, conceptual and pragmatic principles forming the general framework of reference for a field of inquiry (Hendriksen) theories are composed of words or other symbols…they are statements and do not have a physical form

Why do we need theory? To Systematically Create New Knowledge!

Accounting Theory …logical reasoning in the form of a set of broad principles that: provide a general framework of reference by which accounting practice can be evaluated and guide the development of new practices and procedures (Hendriksen).

What is the Nature of Accounting? …the process of identifying, measuring and communicating economic information to permit informed judgements and decisions by users of information (AAA, A statement of Basic Accounting Theory)

Function of Theories Theories which explain (e.g. accountants do not do X because of Y) Theories which predict (e.g. cosmetic accounting policy changes will have no impact on share price) - Positive Theories which recommend/ prescribe (e.g. current cost accounting should be used to provide more useful information) Normative

Accounting Theory Eras ‘General Scientific Period’ (up to 1955??) ‘What is’ theories (descriptive) Based on observations Empirical analysis e.g. Choose ‘best’ depreciation method based on the one that has been used the most

Accounting Theory Eras ‘Prescriptive/Normative Period’ 1956 + ‘What should be’ (prescriptive) Norms for best practice Not necessarily based on observation e.g. the development of current value accounting systems in the late 1960s - early 1970s

Some prescriptive theories Decision usefulness theories Decision makers: ask the users what they want Decision models: researcher deduces what is necessary for efficient decisions to be made Measurement Issues and Concept of Income Conceptual framework projects

Accounting Theory Eras ‘Positive Period’: 1975 + ‘Specific scientific theory’ Dissatisfaction with normative theories Normally based on observation Seek to explain and predict

Some descriptive/positive theories capital market based research behavioural research

Criticisms of PAT Does not provide prescription so does not provide a means of improving accounting practice Not value-free but rather value-laden Underlying assumption of wealth maximisation Issues being addressed have not shown any significant development Scientifically flawed

Evaluating theories Consider logic and evidence Use of emotional words Using ‘all’ instead of ‘some’ Repeated ‘affirmation’ Argument by analogy only Use of emotional words False credentials Appeal to authority Change in the meaning of terms during arguments

Historically Accounting seen as pragmatic, procedural endeavour Rules, practices and procedures developed on an ad-hoc basis usually in response to recording and reporting issues that presented themselves for resolution Repetition and general acceptance has provided support and legitimacy to the practitioners’ rules.

Hierarchy of the Elements of Structure of Accounting Theory

Accounting Postulates

Theoretical Concepts

Accounting Principles

Systems Concepts and Accounting

Systems Everywhere Solar System Eco-System Digestive System Transportation System Economic System Political System School System ... and on and on.

What is a System A System is a set of parts (or components) coordinated to accomplish a set of goals. Input Output Process

Characteristics of a System Component Parts A Process Goal Input Output (Goal) Process

Sub/Super Systems Subsystem Supersystem a component may itself be a system a subsystem Supersystem a system may itself be a component of a bigger system the supersystem Supersystem Subsystem

Boundary and Environment The Environment Boundary System Interaction

Interfaces System 2 System 1 Interface

Types of System Closed Systems Relatively Closed Systems Open Systems No Interaction with environment Relatively Closed Systems Controlled interaction Open Systems Uncontrolled interaction Feedback Control Systems Portion of output returned as input

AIS as a System A Relatively Closed System Subsystems of AIS Classified as Application Systems Cash Disbursement Accounts Receivables Classified as Transaction Cycles Revenue Cycle Expenditure Cycle Conversion Cycle Financial Cycle

Environment Environment Customers Vendors Government Owners Creditors

AIS as a Subsystem AIS is a subsystem of MIS Executive Information System Budgeting and Responsibility Reporting System Transaction Processing System

Spectrum of Mgt. Info. Needs Structured Retrospective Recurring Unstructured Prospective Nonrecurring Responsibility Reporting Systems Budgeting Systems Decision Support Systems Transaction Processing Systems