Accounting Theory (Doni Rahmad,Bagaskara,Fachriza)

8/11/2019 Accounting Theory (Doni Rahmad,Bagaskara,Fachriza)

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Group 9

Bagaskara satrio

Doni rahmad

Facriza mizafin

The Conceptual Framework of

Accounting


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p

There are three relevant theories

regarding accounting and auditingactivities that can help to answer

why the company (manager) must

disclose the information in the form

of company financial statements.

The three theories are:


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Theory of efficient markets

The forces of supply and demand influence

market behaviour and help keep markets

efficient

This applies to the market for accounting

information and should determine what

accounting data should be supplied and what

accounting practices should be used to prepareit

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Theory of efficient markets

The market for accounting data is not efficient

The free-rider problem distorts the market

Users cannot agree on what they want Accountants cannot agree on procedures

Firms must produce comparable data

The government must therefore intervene

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Agency theory

The demand for accounting information: for stewardship purposes

for decision-making purposes

A framework in which to study the relationshipbetween those who provide accounting

information - e.g. a manager - and those who

use ite.g. a shareholder or creditor

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Agency theory

Because of imbalances between data suppliers

and data users, uncertainty and risk exist

Resources and risk are likely to be mis-

allocated between the parties

To the extent the market mechanism is

inefficient, accounting regulation is required to

reduce inefficient and inequitable outcomes

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Theories of regulation

There are three theories of regulation:

public interest theory

regulatory capture theory

private interest theory

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Public interest theory

Government regulation is required in the

public interest whenever there is market

failure (inefficiency) due to:

lack of competition

barriers to entry

information asymmetry

public-good products

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Public interest theory

Governments intervene:

to get votes

because public interest groups demand

intervention

because they are neutral arbiters

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Regulatory capture theory

The public interest is not protected because

those being regulated come to control or

dominate the regulator

The regulated protect or increase their wealth

Assumes the regulator has no independent role

to play but is simply an arbiter between

battling interest groups

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Regulatory capture theory

Professional accounting bodies or the

corporate sector seek to control the setting of

accounting standards

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Private interest theory

Governments are not independent arbiters, but

are rationally self-interested

They seek re-election

They will sell their power to coerce or

transfer wealth to those most likely to achieve

their re-election (if they are elected officials)

or increase their wealth (if they are appointed

officials) or both

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How to applicate them?


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Application of public interest theory

The Sarbanes-Oxley Act (US, 2002)

Accounting Standards Review Board (AUS,

1984)

But:

Managers have incentives to voluntarily correctmarket failure perceptions about their firms

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Standard setting as a political

process

Standard setting is a political process because

it can affect many conflicting and self-

interested groups

The regulator must make a political choice

The regulator must have a mandate to make

social choices

The recognition of doubtful debts can affect

entities differently

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No. 5 Recognition and Measurement in

Financial Statements of Business

Enterprises Sets forth recognition criteria and

guidance on what information should be incorporated intofinancial statements and when this information should be

reported Defined comprehensive income as:Revenues Earnings

Less: Expenses Plus or minus cumulative

accounting adjustmentsPlus: Gains Plus or minus other

non-owner changes in equity

Less: Losses

= Earnings = Comprehensive Income


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No. 6 The Elements of Financial

Statements

Defines the ten elements of financial

statements that are used to measure the

performance and position of economicentities

These elements are discussed

in more depth in Chapters 6and 7.


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How should present value amortizations be used when the estimates ofcash flows change?

How should the estimates of cash flows and interest rates bedeveloped?

Does the measurement of liabilities at present value differ from themeasurement of assets?

SFAC No. 7 Using Cash Flow Information

and Present Value in Accounting

Measurements

Accounting measurement is a very broad topic. Consequently, the FASB focused on a series of questions relevant to measurement

and amortization conventions that employ present value techniques. Among thesequestions are:

What are the objectives of using present value in the initial recognition ofassets and liabilities? And, do these objectives differ in subsequentfresh-start measurements of assets and liabilities?

What are the objectives of present value when used in conjunction withthe amortization of assets and liabilities?


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Present value measurements that fully captures theeconomic differences between assets should include the

following elements:

SFAC No. 7 Using Cash Flow Information and

Present Value in Accounting Measurements

1. An estimate of the future cash flows

2. Expectations about variations in the timing of those cash flows

3. The time value of money represented by the risk-free rate of interest

4. The price for bearing the uncertainty

5. Other, sometimes unidentifiable, factors including illiquidity andmarket imperfections


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Principles Based vs. Rules BasedAccounting Standards

Continuum ranging from

highly rigid standardson one end

to general definitions of economics-based concepts on thother end.


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Previous practice: Goodwill is to be amortized over a 40 life until it is fully amortized.

Example: Goodwill

New FASB rule: Goodwill is not amortized.

Any recorded goodwill is to be tested for impairment and writtendown to its current fair value on an annual basis.


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FASB Questions

1. Do you support the Boards proposal for a principles-based approach to U. S. standard setting?Will that approach improve the quality and transparency of U. S. financial accounting and reporting?

2. Should the Board develop an overall reporting framework as in IAS 1?If so, should that framework include a true and fair override?

3. Under what circumstances should interpretive and implementation guidance be provided under aprinciples-based approach to U.S. standard setting?

Should the Board be the primary standard setter responsible for providing that guidance?

4. Will preparers, auditors, the SEC, investors, creditors, and other users of financial information beable to adjust to a principles-based approach to U.S. standard setting?

If not, what needs to be done and by whom?

5. What other factors should the Board consider in assessing the extent to which it should adopt aprinciples-based approach to U.S. standard setting?

6. What are the benefits and costs (including transition costs) of adopting a principles-basedapproach to U.S. standard setting?

How might those benefits and costs be quantified?


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Principles Based vs. Rules Based

Accounting Standards

The AAAs position

Dissenting opinion


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International Convergence

FASB & IASB pledged

Achieve compatibility

Maintain compatibility


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FASB-IASB Financial Statement

Presentation Project

Establish common standard

Goals

Understand past and present financial position

Understand changes and causes of changes

Evaluate future cash flows


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3 Phases

A. What constitutes complete set of statements?

1. Financial position

2. Earnings and comprehensive income

3. Cash flows

4. Changes in equity


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3 Phases

B. Fundamental issues for presentation of

information

C. Presentation of interim financial information in

U.S. GAAP

Accounting Theory (Doni Rahmad,Bagaskara,Fachriza)

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