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FAR 600ACCOUNTING
THEORYTOPIC 3 : ACCOUNTING
THEORY CONSTRUCTION
AHMAD FIRDAUS BIN S JOHARYMUNZIR ABD RAHMANAMARUL HANIF BIN HARUNMOHD NAZRAN RAMDAN BIN YUSOFMOHD KHAIRUDDIN BIN AMAT FADZILMOHD NAZIR BIN MATULIDIMOHAMAD NASIRUDDIN BIN SELAMAT
2010669076
2010826444
2010210806
2010801524
2010416616
2010645494
2010894746
Prepared By :
ACCOUNTING THEORY
CONSTRUCTION
PRAGMATIC THEORY
SYNTACTIC & SEMANTIC
THEORY
NORMATIVE THEORY
POSITIVE THEORY
TYPES OF PRAGMATIC THEORIES
DESCRIPTIVE PRAGMATIC APPROACH
PSYCHOLOGICAL PRAGMATIC APPROACH
DESCRIPTIVE
PRAGMATIC
APPROACH
Is an inductive approach. Based on continual
observation of
accountants
Descibe the real world
practices and how
accountant act in
certain situations
The oldest and most
universally used
method of accounting
theory constructio
n
Not include an Analytical judgement of the quality of an
accountant’s actions.Not provide for
accounting technique to be challenged, it does not allow for
change.Focus attention on
accountant’s behavior, not on measuring the
attributes of the firm.
Criti
cism
s on
Desc
riptiv
e
Prag
mati
c App
roac
h
PSYCHOLOGICAL PRAGMATIC APPROACH
Is an inducti
ve approa
ch.
Based on observation
make on user’s
response to the
accountant’s output, such as financial statement
Also describe
real world
practices
Others may not react when they should
Some might have a preconditioned response
User may react in illogical manner
Criticism of
Psychological
Approach
Syntactic theory
Focus on logic
relationship
Semantic
theory
The link between basic concept of a
theory to objects in the real world in
search of meaning
correspondence of truth
HISTORICAL COST
ACCOUNTING
Criticism of syntactic theory :
to logical, do not take into
account inflation
factor, ignore market value of asset and
liabilities
Advantage : it is easier to record since its
verify what is happened
Disadvantage : do not show time value of
money
Criticism of semantic
theory : only in recorded transaction
THE CRITICISM OF
SEMANTIC AND
SYNTATIC THEORIES
Semantic theory used as input to a system and verified only by examining the underlying document And check
mathematical calculation
Final output not verified
empirically and not observe
In auditing process
Historical theory has semantic content only
The syntactic have been criticized on the practice
of summing several different amounts
assigned to specific assets
Concentrated on deriving a single measure for assets and a unique profit figureNo agreement on what constituted a correct or true measure of value and profit
True incomeBasic objective – aid the decision making process of certain users of accounting reports by providing useful accounting dataArgue that all users have the same requirement for accounting dataBased on classical economics concepts of profit and wealth or rational decision making
Decision-usefulness
NORMATIVE THEORIES
ASSUMPTIONS OF
NORMATIVE THEORY
Profits and value can be
measured precisely
Financial accounting is
useful for making
economic decisions
Markets are inefficient and can be fooled by ‘creative
accountant’
Conventional accounting is
inefficient
There is one unit profit
major
Accounting should be a
measurement system
CRITICISM OF
NORMATIVE
THEORY
Can be used only
as an instrumen
t for prediction
Predicitive success is
distributed by uncontrollable
interning variable. E.g. :
inflation, interest rate,
customer confidence
• Experience or fact of the real world
Meaning
• Observable and verifiable
• Used scientific approach
Nature• Accounting
policy choice• Capital market
research
Focus
• Explain reason for current practice
Objective
• Accounting should be a measurement system
• Profit and value can be measure precisely
Assumption• Positive theory
are net value free
• The theory use large scale statistical research
Criticism
POSITIVE THEORIES
Normative• Normative theories are
prescriptive• It prescribes how people
such as accountants should behave to achieve an outcome that is judged to be right moral just or otherwise a good outcome
• Cannot be used practice in a real world
Positive• Positive theories a
descriptive explanatory and predictive
• They describe how people do behave in a certain manner or they predict what people have done or will do
• Can be used practise in a real world
DIFFERENCESBETWEEN
POSITIVE THEORY OF ACCOUNTING
POLICY AND DISCLOSURE
AGENCY THEORY
CONTRACTING THEORY
POLITICAL PROCESSES
CONTRACTING THEORY
• Firm is a legal nexus (connection) relationship among supplies and consumers of factor of production
Definition
• Agency relationship happen when there is a contract which the principal engage with another party (agent) to perform the services on the principal behalf
When agent interest
more than principal it will lead to agency cost
AGENCY COST
TypesMonitorin
g cost
Residual loss
Bonding cost
Settling up
Principal review the remuneration package
given to the agent
Remuneration level has to tally with the
agent effort
Residual opportunis
m
Cost borne by agent due to
loss of reputation
Political
Cost
Wealth transfer away from a firm due to its political exposure
Happen when firm has high public profile and firm is an appropriate target for
political action
Greater information cost, diffusive reward and increase monitoring cost = greater residual occurring
POLITICAL PROCESSES
What is PAT
Theory are consistent
Tested empirically
Scientific methodology
Model connection btw Acctg,
Firm & MarketEconomic Focus
Understanding the acctg
policies matters
Strengths of PAT
Positive Accounting
Normative Accounting
- Empirical- Identifiable
- Tested Theory
- Unempirical- Unidentifiable- Irrefutable
SCOPE OF PAT
o Did not explain actg practice.
o Actg report focus on stewardship function.
o Focus on 2 central focuses Opportunistic reason ( Ex-
Post) Efficient reason ( Ex-Ante)
Second Stages- Actg Policy Choice -
First Stage- Capital Market
Research -