1、Financial Accounting TheoryCraig Deegan,Chapter 2 The financial reporting environment Slides written by Michaela Rankin,Copyright 2000 McGraw-Hill Book Co. Aust. PPT t/a Financial Accounting Theory by Deegan,2.2,Learning Objectives,In this chapter you will be introduced to the history of the account

2、ing profession and of regulation some of the arguments for and against the existence of accounting regulation some of the theoretical perspectives used to explain the existence of regulation how and why various groups within society try to influence the standard-setting process,Copyright 2000 McGraw

3、-Hill Book Co. Aust. PPT t/a Financial Accounting Theory by Deegan,2.3,Learning Objectives,The view that many accounting decisions are based on professional opinion an awareness of some of the theories that are used to explain what influences the accountant to choose one accounting method arguments

4、advanced to support the view that accountants are powerful members of society,Copyright 2000 McGraw-Hill Book Co. Aust. PPT t/a Financial Accounting Theory by Deegan,2.4,Financial accounting defined,A process involving the collection and processing of information of a financial nature for the purpos

5、e of assisting various decisions to be made by parties external to the organisation,Copyright 2000 McGraw-Hill Book Co. Aust. PPT t/a Financial Accounting Theory by Deegan,2.5,Users of financial reports,Users have different information needs so not possible to generate reports to meet individual nee

6、ds users include: present and potential investors; lenders; suppliers; employees; customers; government and other parties performing a review or oversight function; media,Copyright 2000 McGraw-Hill Book Co. Aust. PPT t/a Financial Accounting Theory by Deegan,2.6,Accounting knowledge required or expe

7、cted by users,Changes to accounting standards or new standards affect the numbers within financial reports (profits, net assets) users should ideally have sufficient knowledge to assess effect of changes to regulations GPFRs designed for users who exercise due diligence and who possess the proficien

8、cy necessary to comprehend the significance of contemporary accounting practices,Copyright 2000 McGraw-Hill Book Co. Aust. PPT t/a Financial Accounting Theory by Deegan,2.7,Use of highlight statements,Many companies provide multi-year summaries profits, return on assets, earnings per share, dividend

9、 yield etc. aid less accounting-literate reader focus on important issues BUT management selects information so important information may be overlooked,Copyright 2000 McGraw-Hill Book Co. Aust. PPT t/a Financial Accounting Theory by Deegan,2.8,Management accounting,Provides information for decision

10、making by parties within the organisation internal not external users largely unregulated,Copyright 2000 McGraw-Hill Book Co. Aust. PPT t/a Financial Accounting Theory by Deegan,2.9,Examples of management accounting information,Cash flow projections sales budgets production requirements inventory re

11、quirements tends to be forward focussed (while financial accounting is historical in nature),Copyright 2000 McGraw-Hill Book Co. Aust. PPT t/a Financial Accounting Theory by Deegan,2.10,Development of accounting practice: first documented use,Early systems of double entry accounting traced back to t

12、hirteenth and fourteenth century in Northern Italy Franciscan monk named Pacioli first to document double entry accounting practice 1494 included debits and credits and used ledgers and journals,Copyright 2000 McGraw-Hill Book Co. Aust. PPT t/a Financial Accounting Theory by Deegan,2.11,Formation of

13、 professional associations,1854: Society of Accountants (Edinburgh) 1880: Institute of Chartered Accountants in England and Wales 1887: American Association of Public Accountants although members required to prepare and audit reports pursuant to company laws and stock exchange requirements, no regul

14、ation about content of reports and how numbers compiled existed,Copyright 2000 McGraw-Hill Book Co. Aust. PPT t/a Financial Accounting Theory by Deegan,2.12,Initial regulation of accounting practice,Regulation did not commence until 20th century previously limited separation between ownership and ma

15、nagement of business entities systems of accounting were therefore designed to provide information to the owner/manager,Copyright 2000 McGraw-Hill Book Co. Aust. PPT t/a Financial Accounting Theory by Deegan,2.13,Initial regulation of accounting practice - continued,Early 20th century limited work t

16、o codify accounting principles and rules from 1920s researchers sought to identify and describe commonly accepted accounting conventions eg. doctrines of conservatism, materiality, consistency; entity assumption; matching principle 1930- US profession and NYSE developed list of broadly used accounti

17、ng principles,Copyright 2000 McGraw-Hill Book Co. Aust. PPT t/a Financial Accounting Theory by Deegan,2.14,History of accounting regulation,1934 - US Securities Exchange Act required specific disclosures of financial information by organisations seeking to trade securities administered by Securities

18、 Exchange Commission (SEC) 1938 - SEC only accepted financial statements prepared in accordance with gaap of the accounting profession gave great deal of power to accounting profession,Copyright 2000 McGraw-Hill Book Co. Aust. PPT t/a Financial Accounting Theory by Deegan,2.15,History of accounting

19、regulation - continued,From 1939 Committee on Accounting Procedure (committee of the US accounting profession) commenced issuing statements on accounting principles between 1938 and 1939 released 12 Accounting Research Bulletins,Copyright 2000 McGraw-Hill Book Co. Aust. PPT t/a Financial Accounting

20、Theory by Deegan,2.16,Development of mandatory accounting standards,In UK not until 1970 when Accounting Standards Steering Committee established (later Accounting Standards Committee) that mandatory standards developed In US Financial Accounting Standards Board (FASB) formed in 1973 later produced

21、mandatory standards from 1965 departures from principles had to be disclosed in footnotes,Copyright 2000 McGraw-Hill Book Co. Aust. PPT t/a Financial Accounting Theory by Deegan,2.17,History of regulation in Australia,1946 - ICAA released 5 Recommendations on Accounting Principles based on documents

22、 released by ICAEW 1956 - a number of recommendations released by Australian Society of Accountants later years the two bodies issued statements jointly through AARF AARF collaborated with AASB in developing mandatory standards,Copyright 2000 McGraw-Hill Book Co. Aust. PPT t/a Financial Accounting T

23、heory by Deegan,2.18,Rationale for regulating financial accounting practice,Initially introduced following the Great Depression argued that problems with accounting information led to poor and uninformed investment decisions competing views as to whether regulation is necessary,Copyright 2000 McGraw

24、-Hill Book Co. Aust. PPT t/a Financial Accounting Theory by Deegan,2.19,Arguments in favour of regulation,Markets for information not efficient on average market efficiency arguments ignore the rights of individuals those able to demand information can often do so as a result of power over scarce re

25、sources, while those with limited power are generally unable to secure information without regulation (even though the organisation may impact their existence),Copyright 2000 McGraw-Hill Book Co. Aust. PPT t/a Financial Accounting Theory by Deegan,2.20,Arguments in favour of regulation - continued,I

26、nvestors need protection from fraudulent organisations producing misleading information regulation leads to uniform methods thus enhancing comparability,Copyright 2000 McGraw-Hill Book Co. Aust. PPT t/a Financial Accounting Theory by Deegan,2.21,Arguments against regulation,People will be prepared t

27、o pay for information to the extent that it has use capital markets act to punish organisations that fail to provide information no news deemed to imply bad news regulation will lead to oversupply of information as users who do not bear the cost of supply tend to overstate their needs,Copyright 2000

28、 McGraw-Hill Book Co. Aust. PPT t/a Financial Accounting Theory by Deegan,2.22,Arguments against regulation - continued,Regulation restricts the accounting methods able to be used so organisations may be prohibited from using methods which best reflect their particular performance and position,Copyr

29、ight 2000 McGraw-Hill Book Co. Aust. PPT t/a Financial Accounting Theory by Deegan,2.23,Theories used to describe benefits of regulation,Public-interest theory of regulation regulation introduced to protect the public capture theory of regulation although regulation introduced to protect the public,

30、 regulatory mechanisms often controlled by groups most affected by regulation private interest theory of regulation government not neutral arbiter and will regulate based upon impacts to key voters and campaign finances discussed further in chapter 3,Copyright 2000 McGraw-Hill Book Co. Aust. PPT t/a

31、 Financial Accounting Theory by Deegan,2.24,Private versus public sector regulation,Private sector regulation accounting profession best able to develop accounting standards because of expertise and greater likelihood rules will be accepted by business public sector regulation government has greater

32、 enforcement powers, hence rules more likely to be followed, may be less responsive to pressure from business and more likely to consider public interest,Copyright 2000 McGraw-Hill Book Co. Aust. PPT t/a Financial Accounting Theory by Deegan,2.25,The role of professional judgement in financial repor

33、ting,While the accounting treatment of many transactions and events is regulated, many others are unregulated accountants expected to be objective and free from bias information generated should faithfully represent underlying transactions and be neutral and verifiable,Copyright 2000 McGraw-Hill Boo

34、k Co. Aust. PPT t/a Financial Accounting Theory by Deegan,2.26,The role of professional judgement - continued,the consideration of economic and social implications of possible accounting standards implies bias in their development and implementation standard setters face a dilemma which requires a d

35、elicate balancing of accounting and non-accounting variables (Zeff 1978, p. 62),Copyright 2000 McGraw-Hill Book Co. Aust. PPT t/a Financial Accounting Theory by Deegan,2.27,Why are particular accounting methods applied?,Efficiency perspective different organisational characteristics explain why diff

36、erent firms adopt different accounting methods - they will adopt the method which best reflects their performance accounting regulations which restrict the set of available accounting techniques will be costly does not consider comparability benefits of regulation,Copyright 2000 McGraw-Hill Book Co. Aust. PPT t/a Financial Accounting Theory by Deegan,2.28,Why are part