1. Part I Introduction: Approach
Standard setting and theory formulation together chronologically.
Key-change factors.
Why together:
They are related, dependent and interwoven.
To provide background to understand New View of Accounting and FASB.
To provide background to understand the CF project.

2. Chapter 1 Foundation of Standard Setting and Theory Formulation
See “roots” of standard setting.
Introduction to theory.

3. Pre-CAP Setting The past (1900, not 0000). Why the past?...
Past as prologue to future
Pre-CAP context…..

4. Pre-CAP Context: 1900
Accounting reflects economic environment, so describe in 1900:
Public interest in capital markets
Dominant capital source
Financial media coverage
Pubic interest in accounting
Dominant management goals
Stage of the economy
New growth industries
So….accounting is…..
Little public interest in capital markets
Loan capital was dominant
Since FS to banks was private, little financial media coverage
Little public interest in accounting
Management interested in profits, growth, and cash flows to meet loans.
Economy was in midst of manufacturing binge.
New industries: automobiles
So accounting was mainly private, no regulation, no standards, so no good?

5. Pre CAP Setting 1931 GE benchmark. Discussion Topics: 1931 GE
Characterize tone
Fact vs fiction
Partial vs complete
Simple vs sophisticated
3 interesting/surprising disclosures
Bonds, Boom, Bust, Blame
First opportunity (1932).
Second opportunity (1936).

6. Standard Setting II: Committee on Accounting Procedure (CAP) I
AICPA response 1938
Structure…..
Issuances?
SEC support?
CAP approach?

7. Standard Setting III CAP II CAP Tenure
21 years.
Bad situation.
CAP evaluation.

8. Theory I Nature of Theory
When you study theory…
1. fundamental nature
2. substance
3. essential concepts & principles
Different than GAAP…..

9. Example Cases
Text case

10. What exactly is theory... Theory defined: A coherent set
of hypothetical, conceptual, and pragmatic principles
forming a general frame of reference for a field of study.
Or”….nets cast to catch.. ‘the world’ to rationalize, to explain and to master it.”

11. Why theory? Theory is designed to ... simplify complex world
help identify and describe relationships between phenomena
find stability
lead to predictions

12. Purposes of Theory Three purposes of theory 1. explain 2. evaluate
3. facilitate development

13. Theory Verification Important Predict Explain Internal structure
Real world

14. Approaches to Theory Formulation
Intuitive cognitive flash vs. observed regularities
1960’s theory search
Two main approaches
inductive
deductive

15. Standard Setter’s 2 Needs
Authority
Theory