F0812 P1A Introduction to Course and Accounting Theory

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Introduction to Course & AccountingTheory

Session 1A

Course : F0812 Accounting Theory

Year : February 2011


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GODFREYHODGSON

HOLMES

TARCA

CHAPTER 1

INTRODUCTION


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Overview of AccountingTheory

What is a theory?

Hendriksens definition:

the coherent set of hypothetical,conceptual and pragmatic principlesforming the general framework ofreference for a field of inquiry.

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What is an accounting theory?

Hendriksens definition:

logical reasoning in the form of a set of

broad principles that

provide a general framework ofreference by which accounting

practice can be evaluated and guide the development of newpractices and procedures.

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Whether a theory is accepteddepends on how:

well it explains and predicts reality

well it is constructed both theoreticallyand empirically

acceptable its implications are

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Accounting theory is a modernconcept compared to mathematicsor physics

Even Paciolis treatise on double-entry accounting focused ondocumenting practice and did not

explain the underlying theoreticalbasis for it

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The development of accounting

theory has been mostly unstructured

Chambers:Accounting has frequently beendescribed as a body of practices whichhave been developed in response to

practical needs rather than bydeliberate and systematic thinking.

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Was developed to resolve problemsas they arose reactive

Ad hoc approach

Led to inconsistencies in practice

e.g. different depreciation methods

Accounting standard setting Conceptual framework projects have not

resolved inconsistency in practice


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Pre-theory (1400s 1800)

Goldberg:

No theory of accounting was devised fromthe time of Pacioli down to the opening ofthe nineteenth century.

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Pragmatic accounting(1800 1955)

The general scientific period

based on empirical observation ofpractice

provided an explanation of accountingpractice

focused on the existing viewpoint of

accounting

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Normative accounting(1956-1970)

Sought to establish norms for thebest accounting practice

Focused on what should be (the

ideal) v. what is

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Degenerated into battles betweencompeting viewpoints

Two groups dominated:

conceptual framework proponents

critics of historical cost

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Factors prompting the demise of thenormative period include:

the unlikelihood of one particular

normative theory being generallyaccepted

the application of financial economic

principles the availability of empirical data and

new testing methods

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The major criticisms of normativetheories were:

they do not necessarily involve

empirical hypothesis testing

they are based on value judgements

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Positive accounting (1950 tothe present day)

A shift to a new form of empiricismcalled positive theory

Had its origins in the generalscientific period

It seeks to explain the accountingpractices being observed

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Positive accounting (1950to the present day)

Its objective is to explain and predictaccounting practice

e.g. the bonus plan hypothesis

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It helps predict the reactions ofplayers, such as shareholders, tothe actions of managers and to

reported accounting information

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Major deficiencies are:

wealth maximisation has become theanswer to explain all accounting

practices and reported information it relies excessively on agency theory

and dubious assumptions about the

efficiency of markets

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Positive accounting (1950 tothe present day)

Behavioural research: concerned with the sociological

implications of accounting numbers and

the associated actions of key players emerged in the 1950s

despite growing acceptance since the1980s, positive accounting theory stilldominates

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Recent developments

Academic and professionaldevelopments in accounting theoryhave tended to take different

approaches

Academic research focuses on capitalmarkets, agency theory and

behavioural aspects The profession has sought a more

normative approach what

accounting practices should be 21


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Recent developments

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Recent developments

Conceptual framework resurrectedin 1980s

states the nature and purpose of

financial reporting

Establishes criteria for deciding betweenalternative accounting practices

SACs 14

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Recent developments

Conceptual framework RecentDevelopments

Joint project between IASB & FASB

International harmonisation ofaccounting practices through a singleconsistent set of international financial

reporting standards (IFRS)

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Recent developments

The conceptual frameworkunderpinning the IFRS favours amove toward

accounting practices that provideinformation for enhancing decisionmaking by investors and others

recognising all gains and losses in theaccounting periods in which they occur

measurement using exit values

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Content outline

Part 1: Accounting theory (chapters 1 3)

Part 2: Theory contributing topractice (chapters 4 10)

Part 3: Accounting and research(chapters 11 14)

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Summary

Accounting theory

Major periods of accounting theorydevelopment

Normative accounting

Positive accounting

Conceptual framework IFRS

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Key terms and concepts

Theory

Accounting theory

Normative theory Positive theory

Behavioural theory

Conceptual framework IFRS

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Bina Nusantara University

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F0812 P1A Introduction to Course and Accounting Theory

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