1. © 2006 Pearson Education Canada Inc.13-1 CHAPTER 13 Standard Setting: Political Issues

2. © 2006 Pearson Education Canada Inc.13-2 Two Theories of Regulator Behaviour Public Interest Theory –A “first best” theory Goal is to maximize social welfare Interest Group Theory –Implies conflict between constituencies –A “second best” theory, since regulator takes own interests into account, while balancing demands of investors and managers

3. © 2006 Pearson Education Canada Inc.13-3 Investors’ Demands On Standard Setting Investors Represented by OSC, SEC, IOSCO Want Full Disclosure, Fair Values, Transparency Want to Predict Future Firm Performance

4. © 2006 Pearson Education Canada Inc.13-4 Management's Demands on Standard Setting Wants Flexibility to Control (Manage) Reported Net income Wants Net Income to be Highly Informative About Effort

5. © 2006 Pearson Education Canada Inc.13-5 Role of Standard-Setter Role is Difficult –No “true” net income –The fundamental problem of financial accounting theory Implies conflict between investors and managers Mediation and Compromise –Standards must be acceptable to both investors and management –Text: Section 13.6.1 re SFAS 115

6. © 2006 Pearson Education Canada Inc.13-6 Structure of Accounting Standard-Setting Bodies Most Consistent with Interest Group Theory –Broad representation –Exposure drafts –Super-majority voting The Interest Group Theory in Action –See Chapter 13, Question 5 To “kill” the FASB

7. © 2006 Pearson Education Canada Inc.13-7 Rules-Based v. Principles-Based Accounting Standards Rules-Based Standards –Lay down detailed rules –Possible? Principles-Based Standards –Lay down general rules –Auditor professional judgement to prevent opportunistic manager behaviour –Possible?

8. © 2006 Pearson Education Canada Inc.13-8 Criteria For a Successful Standard Decision Useful Reduce Information Asymmetry No Serious Economic Consequences Consensus

9. © 2006 Pearson Education Canada Inc.13-9 Other Comprehensive Income Presented with Income Statement –Net income from operations xxx –Extraordinary itemsxxx –Net incomexxx –Other comprehensive incomexxx –Comprehensive incomexxx Alternative Presentation –As part of statement of changes in shareholders’ equity Less transparent, especially if securities markets not fully efficient

10. © 2006 Pearson Education Canada Inc.13-10 International Accounting Standards The IASB IASB-AcSB Cooperation –AcSB proposal to move to IASB standards FASB and AcSB –Moving towards standards harmonization SEC and IASB –Should SEC allow IASB standards without reconciliation? Enforcement of International Standards –Enforcement up to individual jurisdictions