Scott Accounting Theory CHAPTER 13

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Scott Accounting TheoryCHAPTER 13

• Standard Setting Political Issues

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Ch. 13, Question 1

• Contrast the public interest and the interest
  group theories of regulation with respect to
• A. The role of the regulatory body
• B. Their implications for the amount of the
  regulated commodity or service to be supplied

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Two Theories of Regulator Behavior

• Public Interest Theory
• A first best theory
• Interest Group Theory
• A second best theory

Question 1 page 436
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Regulation as Conflict Resolution

• Distribution of the costs and benefits of
  information production

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Contrasting Perspectives

• INVESTORS
• Investors represented by OSC, SEC, IOSCO
• Want full disclosure, fair values, transparency
• Want high correlation with future firm performance

• MANAGEMENT
• Wants flexibility to control (manage) reported
  net income
• Wants high correlation with effort

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Role of Standard-Setter

• No True Net Income
• The fundamental problem of financial accounting
  theory
• Mediation and Compromise
• Standards must be acceptable to both investors
  and management
• Text Section 13.6.1 re SFAS 115

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Criteria For a Successful Standard

• Theoretical correctness is NOT sufficient!
• Other desirable characteristics
• Decision useful
• Reduce information asymmetry
• No serious economic consequences
• Consensus

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International Accounting Standards

• The IASB
• IASB Canadian AcSB Cooperation
• FASB and Canadian AcSB
• SEC and IASB
• Enforcement of International Standards

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http//www.iasplus.com/restruct/restruct.htm
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US Standard Setting Structure
17 trustees
1 full time, 6 part-time board members
7 full time board members
2005 Expenses 31 million
34 members appointed by FAF
More than 25 members
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The Process of Standard
Setting (FASB)
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FASB

• The new funding source is via SOX

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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 6
• To kill the FASB

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Ch. 13, Question 9

• A. Why does SFAS115 require unrealized gains and
  losses on available for sale securities to be
  included in OCI instead of net income?
• B. If securities markets are fully efficient,
  would a strategy of trying to disguise gains
  trading by reporting OCI in a statement of
  changes in owners equity instead of separate
  statement work?
• C. What is securities markets are not fully
  efficient?

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Ch. 13, Question 9 - Ethics

• D. You are the auditor of a firm using this
  strategy (hiding gains trading). You object to it
  and management responds that the strategy is
  clearly in accordance with GAAP since SFAS130
  allows OCI in statement of changes in owners
  equity. If you do not accept, you will be forced
  to RESIGN as auditor and you will also lose
  systems and tax consulting work for the client.
  Would you resign?

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Other Comprehensive Income

• Presented with Income Statement
• Net income from operations xxx
• Extraordinary items xxx
• Net income xxx
• Other comprehensive income xxx
• Comprehensive income xxx
• Alternative Presentation
• Separate statement (FASBs preferred method)
• As part of statement of changes in shareholders
  equity
• Less transparent, especially if securities
  markets not fully efficient

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OCI, El Paso ElectricChapter 13 Problem 7
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OCI, El Paso ElectricChapter 13 Problem 7

• B. As an investor, which earnings measure is most
  useful to you in deciding whether to buy, hold or
  sell El Paso shares?
• C. As a member of the Compensation Committee of
  the board of directors of the company, which
  measures is most useful to you in deciding on
  amount of cash bonus for senior officers?

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OCI, El Paso ElectricChapter 13 Problem 7

• D. A former member of FASB stated that if
  unrealized gains and losses on available for sale
  securities had to be included in net income, FASB
  No. 115 would not have been viable.
• Explain using the 4 criteria for standard setting
  in Section 3.8