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financial accounting theory

Questions and Answers of Financial Accounting Theory

It is argued by some researchers that even in the absence of information organisations have an incentive to provide credible information about their operations and performance to certain parties
Would you expect independent financial statement audits to exist for listed companies even in the absence of regulation requiring them to be undertaken? Why?
Some companies argue that introducing mandatory reporting requirements will tend to stifle innovation in relation to the reporting. Do you believe that the introduction of mandatory reporting
Read and evaluate the following paragraph extracted from Cooper and Keim (1983, p. 202):It should also be noted that the nature and degree of the effect of disclosure requirements (and other aspects
Private contractual incentives will assist in ensuring that, even in the absence of regulation, organisations will provide such information as is demanded by its respective stakeholders. Evaluate
Why would the managerial labour market motivate the manager to provide information voluntarily to outside parties?
What is the market for corporate takeovers and how would its existence encourage organisations to make accounting disclosures even in the absence of regulation?
Market failure has been defined as the inability of market forces to produce a socially ‘right’ amount of information, that is, to produce information to the point where its marginal cost to
A newspaper article entitled ‘Hannes “knew of TNT valuation”’ ( The Australian , 18 June 1999, p. 24) reported a case involving a person who was before the courts on a charge of insider
What assumptions are made about the motivations of the regulators in:(a) the public interest theory of regulation(b) the capture theory of regulation(c) the economic interest theory of regulation?
Is it realistic to assume, in accordance with ‘public interest theory’, that regulators will not be driven by their own self-interest when designing regulations?
Is it in the public interest for regulators to be driven by their own self-interest?
Identify and evaluate the key negative economic and social consequences that might potentially arise following the introduction of an accounting standard with which you are familiar.
Under the economic interest theory of regulation, what factors will determine whether a particular interest group is able to secure legislation that directly favours that group above all others?
What do we mean when we say that financial accounting standards are the outcome of a political process? Why is the process ‘political’?
Provide a comment on the following statement:Accounting information is a ‘public good’ and therefore is likely to be under-produced in the absence of regulation. Therefore, the production of
Is the fact that accounting standard-setters consider the economic and social consequences of accounting standards consistent with a view that accounting statements, if compiled in accordance with
If an accounting standard-setter deems that a particular accounting standard is likely to adversely affect some preparers of financial statements, what do you think it should do? Justify your view.
Read Accounting Headline 3.8, and explain the Senate committee’s concerns from a capture theory perspective.
Assume that a government regulator makes a decision that all companies with a head office in Australia must separately disclose, within their annual financial report, the amount of expense incurred
Accounting Headline 3.9 discusses how European banks were able to lobby the European Union (EU) so as to be regulated by a ‘watered-down’version of the accounting standard IAS 39. Explain whether
Read Accounting Headline 3.10 and, using a particular theory of regulation (choose the most appropriate one), explain what factors might have motivated the then president Jacques Chirac to lobby
Read Accounting Headline 3.11, and then answer these questions:(a) What theory of regulation seems to explain the actions of Sir David Tweedie?(b) What theories of regulation would appear to explain
Comment on the following statement from Shleifer (2005):The public interest theory of regulation has become the cornerstone of modern public economics, as well as the bible of socialist and other
One of the most pressing problems confronting the world is global warming. To effectively address this issue, governments across the world will be required to introduce regulations to mitigate the
Let us assume that the government has become concerned that existing disclosure regulation tends to fixate on the financial performance of organisations but fails to address other aspects of
In the context of financial accounting, what is harmonisation and what is standardisation?
Global standardisation of accounting requires the United States to adopt IFRS. Do you think it is likely that the United States will embrace IFRS in the near term, and what do you think are some of
Identify some factors that might be expected to explain why different countries use different systems of accounting.
Does the adoption of IFRS by different countries necessarily mean that the accounting procedures and practices they adopt will be consistent and comparable internationally?
After considering the Hofstede–Gray model, briefly explain the hypothesised link between society values, accounting values and accounting practice.
Any effort towards standardising accounting practices on an international basis implies a belief that a globalised ‘one size fits all’ approach is appropriate. Is this naïve?
Continental European countries historically relied upon capital provided by the state, banks or families whereas other countries, such as the United States, the United Kingdom, Canada and Australia
While it is often argued that within particular countries there should be some association between various value systems and accounting systems, it is also argued (for example, by Baydoun and
Baydoun and Willett (1995, p. 72) identify a number of problems in testing the Hofstede–Gray theory. They emphasise that many accounting systems are imported from other countries with possibly
As noted in this chapter, Hamid, Craig and Clarke (1993) provide an argument that religion can have a major impact on the accounting system chosen by a particular country and that before
Nobes (1998) suggests that for countries that have organisations that rely relatively heavily on equity markets, as opposed to other sources of finance, there will be a greater propensity for such
In the early 1990s, the US Financial Accounting Standards Board’s chairperson Dennis Beresford claimed that the US accounting and reporting system was regarded by many as ‘the most comprehensive
Do you think it is realistic to expect that there will eventually be an internationally uniform set of accounting standards? What factors would work for or against achieving and maintaining this aim?
Prior to recent international actions to adopt IFRSs, would you expect that large international companies domiciled in a particular country would have adopted different accounting policies from
Evaluate how reasonable it is to assume that the inflow of foreign investment into Australia would have been restricted if Australia, through the decision of the Financial Reporting Council, had not
Explain barriers to ongoing standardisation of financial accounting across all EU member states. Given these barriers, do you think that the European Union has been naïve in embracing the
What are some perceived benefits that flow from the decision that a country will adopt IFRSs?
On the basis of recent actions to standardise accounting across countries, does it appear that organisations such as the IASB are ignoring academic research that signals why we would expect to find
It is often argued that the accounting standards of the FASB are rule-based, whereas the accounting standards issued by the IASB are principles-based.Rules-based standards by their nature can be
Is it appropriate for accounting standard-setting bodies to consider culture and religion when devising accounting regulations, particularly given that the output of financial reporting is expected
What are some possible reasons for historical differences in accounting rules operating within Australia, the United States and the United Kingd
Does the standardisation of accounting standards on a global basis necessarily equate with a standardisation in accounting practice?
The website of the FASB (www.fasb.org ) has a section entitled ‘Facts about FASB’, in which there is information about how accounting standards are developed (as accessed in late 2013). In part,
The IASC (1998, p. 50) stated that:many developing and newly industrialised countries are using International Accounting Standards as their national requirements, or as the basis for their national
In considering the relevance of IFRS to developing countries, Chand and White (2007, p. 606) state:While the forces of globalisation and convergence are moving accounting practices towards a unified,
Latest evidence suggests that it is possible that the United States might not ultimately adopt IFRS. With the material provided within this chapter in mind, identify some possible reasons to explain
Ball (2006, p. 17) makes the following comment:In sum, even a cursory review of the political and economic diversity among IFRS-adopting nations, and of their past and present financial reporting
Irvine (2008, p. 127) makes the following comment:Global accounting technologies, including IFRS, provide developing nations with legitimacy. Similarly, emerging economies, if they wish to gain
The website of the FASB says that it considers the views of its constituents. Do you think that the financial information demands or expectations of‘constituents’ in the United States would be
In continental European countries, prior to the adoption of IFRS, the domestic accounting rules were typically much more aligned with local taxation regulation than would be the case in countries
Paragraphs QC38 and 39 of the IASB Conceptual Framework for Financial Reporting state:QC38: In applying the cost constraint, the Board assesses whether the benefits of reporting particular
Ball (2006, p. 17) states:Under its constitution, the IASB is a standard-setter and does not have an enforcement mechanism for its standards: it can cajole countries and companies to adopt IFRS in
Ball (2006, p. 22) provides the following statement:In the presence of local political and economic factors that exert substantial influence on local financial reporting practice, and in the absence
The European Commission made the following statement in a press release issued in 2002:European Commission has welcomed the Council’s adoption, in a single reading, of the Regulation requiring
What does ‘measurement’ mean from an accounting perspective?
Why is accounting measurement potentially controversial?
What assumptions, if any, does historical cost accounting make about the purchasing power of currency?
List some of the criticisms that can be made of historical cost accounting when it is applied in times of rising prices.
The IASB and the FASB, as part of their joint initiative to develop a revised Conceptual Framework for Financial Reporting , identified a number of factors that need consideration before a preferred
Why do you think that corporate management might prefer to be allowed to use historical costs rather than being required to value assets on the basis of current values?
Evaluate the following statement:Measures such as the lower of cost and net realisable value, which is required for inventory, can perhaps be justified in terms of conservatism but are very difficult
As cited earlier in this chapter, Mautz (1973) made the following statement:Accounting is what it is today not so much because of the desire of accountants as because of the influence of businessmen.
From an accounting standard-setting perspective, do you think there should be a relationship between the measurement method that is prescribed for assets, and the objective of general purpose
What is the ‘additivity’ problem that Chambers refers to?
Is the summation of assets that are measured using different measurement principles (thereby giving a ‘total assets’ figure) effectively like adding apples and oranges? Explain your answer.
Explain the difference between income derived from the viewpoint of maintaining financial capital (as in historical cost accounting) and income derived from a system of ensuring that physical capital
In current purchasing power accounting:(a) Why is it necessary to consider monetary assets separately from non-monetary assets?(b) Why will holding monetary assets lead to a purchasing power loss,
What is the basis of Chambers’ argument against valuing assets on the basis of replacement costs?
If Continuously Contemporary Accounting is adopted and an organisation is involved with selling goods, when would the profit from the sale of goods be recognised? How does this compare with
What are holding gains, and how would holding gains be treated if current cost accounting was applied? Do we need to differentiate between realised and unrealised holding gains?
Do you think that ‘profits’ that result from holding gains should be allowed to be distributed to shareholders? Explain your view.
What are some of the major strengths and weaknesses of historical cost accounting?
Under what circumstances is fair value likely to provide a ‘representationally faithful’ measure of the value of an asset?
What are some of the major strengths and weaknesses of current purchasing power accounting?
What are some of the major strengths and weaknesses of current cost accounting (applying replacement costs)?
What are some of the major strengths and weaknesses of Continuously Contemporary Accounting?
Evaluate the statement of Chambers (1995, p. 82) that ‘in the context of judgement of the past and decision making for the future, the products of Current Value Accounting of the Edwards and Bell
Evaluate the statement of Edwards (1975, p. 238) that ‘I am not convinced of the merit of adopting, as a normal basis for asset valuation in the going concern, exit prices in buyer markets. These
Despite the efforts of authors such as Chambers, Edwards and Bell, and Sterling, historical cost accounting is still used within financial accounting.Why do you think that historical cost accounting
As indicated in this chapter, various studies have provided support for a view that CCA/CPPA is of little relevance to users of financial statements.Nevertheless, numerous organisations lobbied in
The IASB Conceptual Framework for Financial Reporting does not prescribe a specific approach to measurement. However, in recent years accounting standards have been released which have shown a
According to Watts and Zimmerman (1978), what factors appeared to motivate corporate management to lobby in support of general price level accounting (current purchase power accounting)?
Critically evaluate the claimed procyclical role of fair value accounting. How persuasive are arguments that fair value accounting’s procyclicality should be used as an argument to reduce the use
Compare and contrast level 1, level 2 and level 3 fair value measurements. What implications do these different measurement techniques have for the reliability of fair value disclosures?
What is a conceptual framework of accounting?
Do you think we need conceptual frameworks? Explain your answer.
What is the difference between an accounting standard and a conceptual framework of accounting?
Why did Australia adopt the IASB Framework effective from 2005?
Would Hines argue that financial statement readers or the accounting profession will gain more from the establishment of a conceptual framework?
What advantages or benefits have been advanced by standard-setters to support the development of conceptual framework projects? Do you agree that in practice such benefits will be achieved?
Conceptual framework projects identify a number of qualitative criteria that financial information should possess if it is to be useful for economic decision making. Two such attributes are
The IASB Conceptual Framework states that financial reports should be representationally faithful and provide useful information that is neutral and free from bias. But, given that accounting
Income and expenses can be determined by way of either the asset/liability approach or the revenue/expense approach. Explain the difference between these two approaches and identify which approach
The two main qualitative characteristics that financial information should possess have been identified as relevance and representational faithfulness .Is one more important than the other, or are

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