ADMS 4510 - SESSION 12 ACCOUNTING THEORY

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ADMS 4510 - SESSION 12
ACCOUNTING THEORY

• OVERVIEW
• Politics of standard setting
• Recap of accounting theory
• Recap of revenue recognition performance
  reporting current topic

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POLITICS OF STANDARD SETTING

• Objectives of regulation, standards
• maximize social welfare
• reduce information asymmetry to prevent market
  failure
• prevent/detect fraud

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POLITICAL THEORIES OF STANDARD SETTING

• Public Interest Theory
• central authority looks after society's needs
• Interest Group Theory
• regulation goes to those who are most politically
  effective in convincing legislators

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REGULATORS

• CICA recommendations have force of law Canada
  Ontario Business Corp. Acts
• Other regulators OSC, FASB, SEC, International
  Accounting Standards Committee
• All characterized by due process interest group
  theory

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ACCOUNTING STANDARDS COMMITTEE

• Full-time Chair, 8 members, 2 full-time CICA
  employeesProcess Topic on agenda gt research
  paper by staff Task Force gt Statement of
  Principles ASC approval gt Exposure Draft
  Comments received gt Dropped, re-exposed, or
  incorporated as recommendation

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PROBLEMS

• Difficult to know which accounting policy is
  right what are its economic consequences?
• Difficult to know trade-offs required to reach
  political compromise is it decision useful for
  investors management?

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CRITERIA FOR STANDARDS

• Standards should be decision useful
  acceptable to both management investors
• Reduce information asymmetry efficient
  markets approach first-best contracts
• Requires use of professional judgment

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THEORY RECAP - Important themes

• Accounting as information
• Information asymmetry vs. ideal conditions
• Investors perspective
• rational investment decision
• Managers perspective
• contracting/economic consequences
• Role of accounting standards

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Framework of accounting theory - Figure 1-1
Inside information
Investment decision
Full disclosure
Value-based accounting (Ideal)
Regulation - Accounting standard setting
Unobservable manager effort
Contracts -compensation -debt covenants
Hard Net Income
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Revenue Recognition and Performance Reporting
RECAP - Important themes

• Revenue Recognition
• Why need for flexibility
• Problems abuses arising from flexibility
• Need for new standards
• Performance reporting
• Current GAAP earnings deficiencies
• Problems with Proforma earnings
• Proposed expanded income stmt presentation

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THEORY- RECAP

• Objective of course-
• explore theory that has been developed to
  explain
• why accounting exists
• the way accounting is
• how it got that way
• how it should be, given differing circumstances

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GOOD LUCK !