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1、Financial Accounting TheoryCraig Deegan,Chapter 2The financial reporting environmentSlides written by Michaela Rankin,Learning Objectives,In this chapter you will be introduced to the history of the accounting profession and of regulationsome of the arguments for and against the existence of account
2、ing regulationsome of the theoretical perspectives used to explain the existence of regulationhow and why various groups within society try to influence the standard-setting process,2,PPT t/a Carnegie et al; Financial and Organisational Decision Making. PPT t/a Financial Accounting Theory by Deegan,
3、Learning Objectives,The view that many accounting decisions are based on professional opinionan awareness of some of the theories that are used to explain what influences the accountant to choose one accounting methodarguments advanced to support the view that accountants are powerful members of soc
4、iety,3,PPT t/a Carnegie et al; Financial and Organisational Decision Making. PPT t/a Financial Accounting Theory by Deegan,Financial accounting defined,A process involving the collection and processing of information of a financial nature for the purpose of assisting various decisions to be made by
5、parties external to the organisation,4,PPT t/a Carnegie et al; Financial and Organisational Decision Making. PPT t/a Financial Accounting Theory by Deegan,Users of financial reports,Users have different information needs so not possible to generate reports to meet individual needsusers include:prese
6、nt and potential investors; lenders; suppliers; employees; customers; government and other parties performing a review or oversight function; media,5,PPT t/a Carnegie et al; Financial and Organisational Decision Making. PPT t/a Financial Accounting Theory by Deegan,Accounting knowledge required or e
7、xpected 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 regulationsGPFRs designed for users who exercise due diligence and who possess the proficie
8、ncy necessary to comprehend the significance of contemporary accounting practices,6,PPT t/a Carnegie et al; Financial and Organisational Decision Making. PPT t/a Financial Accounting Theory by Deegan,Use of highlight statements,Many companies provide multi-year summariesprofits, return on assets, ea
9、rnings per share, dividend yield etc.aid less accounting-literate reader focus on important issuesBUT management selects information so important information may be overlooked,7,PPT t/a Carnegie et al; Financial and Organisational Decision Making. PPT t/a Financial Accounting Theory by Deegan,Manage
10、ment accounting,Provides information for decision making by parties within the organisationinternal not external userslargely unregulated,8,PPT t/a Carnegie et al; Financial and Organisational Decision Making. PPT t/a Financial Accounting Theory by Deegan,Examples of management accounting informatio
11、n,Cash flow projectionssales budgetsproduction requirementsinventory requirementstends to be forward focussed (while financial accounting is historical in nature),9,PPT t/a Carnegie et al; Financial and Organisational Decision Making. PPT t/a Financial Accounting Theory by Deegan,Development of acco
12、unting practice: first documented use,Early systems of double entry accounting traced back to thirteenth and fourteenth century in Northern ItalyFranciscan monk named Pacioli first to document double entry accounting practice1494included debits and credits and used ledgers and journals,10,PPT t/a Ca
13、rnegie et al; Financial and Organisational Decision Making. PPT t/a Financial Accounting Theory by Deegan,Formation of professional associations,1854: Society of Accountants (Edinburgh)1880: Institute of Chartered Accountants in England and Wales 1887: American Association of Public Accountants alth
14、ough members required to prepare and audit reports pursuant to company laws and stock exchange requirements, no regulation about content of reports and how numbers compiled existed,11,PPT t/a Carnegie et al; Financial and Organisational Decision Making. PPT t/a Financial Accounting Theory by Deegan,
15、Initial regulation of accounting practice,Regulation did not commence until 20th centurypreviously limited separation between ownership and management of business entitiessystems of accounting were therefore designed to provide information to the owner/manager,12,PPT t/a Carnegie et al; Financial an
16、d Organisational Decision Making. PPT t/a Financial Accounting Theory by Deegan,Initial regulation of accounting practice - continued,Early 20th century limited work to codify accounting principles and rulesfrom 1920s researchers sought to identify and describe commonly accepted accounting conventio
17、nseg. doctrines of conservatism, materiality, consistency; entity assumption; matching principle1930- US profession and NYSE developed list of broadly used accounting principles,13,PPT t/a Carnegie et al; Financial and Organisational Decision Making. PPT t/a Financial Accounting Theory by Deegan,His
18、tory of accounting regulation,1934 - US Securities Exchange Act required specific disclosures of financial information by organisations seeking to trade securitiesadministered by Securities Exchange Commission (SEC)1938 - SEC only accepted financial statements prepared in accordance with gaap of the
19、 accounting professiongave great deal of power to accounting profession,14,PPT t/a Carnegie et al; Financial and Organisational Decision Making. PPT t/a Financial Accounting Theory by Deegan,History of accounting regulation - continued,From 1939 Committee on Accounting Procedure (committee of the US
20、 accounting profession) commenced issuing statements on accounting principlesbetween 1938 and 1939 released 12 Accounting Research Bulletins,15,PPT t/a Carnegie et al; Financial and Organisational Decision Making. PPT t/a Financial Accounting Theory by Deegan,Development of mandatory accounting stan
21、dards,In UK not until 1970 when Accounting Standards Steering Committee established (later Accounting Standards Committee) that mandatory standards developedIn US Financial Accounting Standards Board (FASB) formed in 1973later produced mandatory standardsfrom 1965 departures from principles had to b
22、e disclosed in footnotes,16,PPT t/a Carnegie et al; Financial and Organisational Decision Making. PPT t/a Financial Accounting Theory by Deegan,History of regulation in Australia,1946 - ICAA released 5 Recommendations on Accounting Principlesbased on documents released by ICAEW1956 - a number of rec
23、ommendations released by Australian Society of Accountantslater years the two bodies issued statements jointly through AARFAARF collaborated with AASB in developing mandatory standards,17,PPT t/a Carnegie et al; Financial and Organisational Decision Making. PPT t/a Financial Accounting Theory by Dee
24、gan,Rationale for regulating financial accounting practice,Initially introduced following the Great Depressionargued that problems with accounting information led to poor and uninformed investment decisionscompeting views as to whether regulation is necessary,18,PPT t/a Carnegie et al; Financial and
25、 Organisational Decision Making. PPT t/a Financial Accounting Theory by Deegan,Arguments in favour of regulation,Markets for information not efficienton average market efficiency arguments ignore the rights of individualsthose able to demand information can often do so as a result of power over scar
26、ce resources, while those with limited power are generally unable to secure information without regulation (even though the organisation may impact their existence),19,PPT t/a Carnegie et al; Financial and Organisational Decision Making. PPT t/a Financial Accounting Theory by Deegan,Arguments in fav
27、our of regulation - continued,Investors need protection from fraudulent organisations producing misleading informationregulation leads to uniform methods thus enhancing comparability,20,PPT t/a Carnegie et al; Financial and Organisational Decision Making. PPT t/a Financial Accounting Theory by Deega
28、n,Arguments against regulation,People will be prepared to pay for information to the extent that it has usecapital markets act to punish organisations that fail to provide informationno news deemed to imply bad newsregulation will lead to oversupply of information as users who do not bear the cost o
29、f supply tend to overstate their needs,21,PPT t/a Carnegie et al; Financial and Organisational Decision Making. PPT t/a Financial Accounting Theory by Deegan,Arguments against regulation - continued,Regulation restricts the accounting methods able to be used so organisations may be prohibited from u
30、sing methods which best reflect their particular performance and position,22,PPT t/a Carnegie et al; Financial and Organisational Decision Making. PPT t/a Financial Accounting Theory by Deegan,Theories used to describe benefits of regulation,Public-interest theory of regulationregulation introduced
31、to protect the publiccapture theory of regulationalthough regulation introduced to protect the public, regulatory mechanisms often controlled by groups most affected by regulation private interest theory of regulationgovernment not neutral arbiter and will regulate based upon impacts to key voters a
32、nd campaign financesdiscussed further in chapter 3,23,PPT t/a Carnegie et al; Financial and Organisational Decision Making. PPT t/a Financial Accounting Theory by Deegan,Private versus public sector regulation,Private sector regulation accounting profession best able to develop accounting standards
33、because of expertise and greater likelihood rules will be accepted by businesspublic sector regulationgovernment has greater enforcement powers, hence rules more likely to be followed, may be less responsive to pressure from business and more likely to consider public interest,24,PPT t/a Carnegie et
34、 al; Financial and Organisational Decision Making. PPT t/a Financial Accounting Theory by Deegan,The role of professional judgement in financial reporting,While the accounting treatment of many transactions and events is regulated, many others are unregulated accountants expected to be objective and
35、 free from biasinformation generated should faithfully represent underlying transactions and be neutral and verifiable,25,PPT t/a Carnegie et al; Financial and Organisational Decision Making. PPT t/a Financial Accounting Theory by Deegan,The role of professional judgement - continued,the considerati
36、on of economic and social implications of possible accounting standards implies bias in their development and implementationstandard setters face a dilemma which requires a delicate balancing of accounting and non-accounting variables (Zeff 1978, p. 62),26,PPT t/a Carnegie et al; Financial and Organ
37、isational Decision Making. PPT t/a Financial Accounting Theory by Deegan,Why are particular accounting methods applied?,Efficiency perspectivedifferent organisational characteristics explain why different firms adopt different accounting methods - they will adopt the method which best reflects their
38、 performanceaccounting regulations which restrict the set of available accounting techniques will be costlydoes not consider comparability benefits of regulation,27,PPT t/a Carnegie et al; Financial and Organisational Decision Making. PPT t/a Financial Accounting Theory by Deegan,Why are particular
39、accounting methods applied? - continued,Opportunistic perspectiveassumes that selection of an accounting method driven by self-interestaccounting methods which provide the desired results for preparers are selected refer to chapter 7 for a discussion of these perspectiveschapter 8 addresses other th
40、eoretical perspectives,28,PPT t/a Carnegie et al; Financial and Organisational Decision Making. PPT t/a Financial Accounting Theory by Deegan,The power of accountants,Output of the accounting process impacts many decisions about wealth transfers so the judgement of accountants affect various parties
41、 wealththe provision of accounting information leads to power of knowledge for others accountants can give legitimacy to organisations which may not otherwise be deemed legitimate (eg. emphasising profits)eg. profits legitimate Rothmans - exhibit 2.1,29,PPT t/a Carnegie et al; Financial and Organisa
42、tional Decision Making. PPT t/a Financial Accounting Theory by Deegan,The power of accountants - continued,Profit measures ignore many social and environmental externalities caused by the reporting entityeg. major adverse social consequences of a cigarette manufactureraccounting does not objectively reflect a particular entity - it creates it,30,PPT t/a Carnegie et al; Financial and Organisational Decision Making. PPT t/a Financial Accounting Theory by Deegan,