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business
financial accounting theory

Questions and Answers of Financial Accounting Theory

Which groups within society are likely to benefit from the development of a conceptual framework of accounting?
Would you consider that conceptual frameworks have been successful in achieving their stated objectives? Why or why not?
Conceptual frameworks have yet to provide prescription in relation to measurement issues. Why do you think this is the case?
Discuss and evaluate the following statement:A conceptual framework provides an accounting standard-setter with a defence against claims that an accounting standard advances particular economic
Hines (1989, p. 89) argues that conceptual frameworks are ‘a strategic manoeuvre for providing legitimacy to standard-setting boards during periods of competition or threatened government
The Corporate Report (UK) referred to the ‘public’s right to information’. How does this differ from the perspectives adopted in other conceptual framework projects?
According to the IASB Framework, what level of proficiency in accounting are financial statement readers expected to possess? Do you agree with this position?
Hines (1991) states that ‘in communicating reality, accountants simultaneously create reality’. What does she mean?
This chapter discussed how accounting standard-setters typically find it difficult to get support for newly developed requirements if those requirements represent major changes to existing practice.
Do you think that the newly proposed definitions of assets and liabilities, as proposed in the work being undertaken by the IASB (and reproduced in this chapter), will have major implications for
The IASB Conceptual Framework states that the primary users of general purpose financial reports are existing and potential investors, lenders and other creditors. Do you think that identifying this
Within the IASB Conceptual Framework , the following objective of general purpose financial reporting has been determined (2010, paragraph OB 2, p.9):The objective of general purpose financial
Financial reports can embrace a decision usefulness and/or a stewardship function. You are required to explain what these two terms mean and to explain which of these two functions the IASB appears
Do you agree with a ‘one size fits all’ approach to international financial accounting—that is, that all countries should adopt the same accounting standards and conceptual framework? Explain
The IASB Conceptual Framework states that the fundamental qualitative characteristics of useful information are relevance and representational faithfulness. Must both of these qualitative
The FASB and IASB (2005, p. 12) state:The long-standing unresolved controversy about which measurement attribute to adopt—particularly between historical-price and currentprice measures—and the
In the near future it is expected that a new accounting standard on leasing will be released. It will remove the classification of leases that has been used for decades and which divides leases into
Hines (1991, p. 328) made the following statement:Conceptual Frameworks presume, legitimise and reproduce the assumptions of an objective world and as such they play a part in constituting the social
What is the difference between a positive and normative theory of financial accounting, and is one better than the other?
Early positive research investigated evidence of share price changes as a result of the disclosure of accounting information. However, such research did not explain why particular accounting methods
What does it mean to say that an organisation can be represented as a ‘nexus of contracts’?
Explain the management bonus hypothesis and the debt hypothesis of Positive Accounting Theory.
Explain why a decision made in London by members of the International Accounting Standards Board and incorporated within an accounting standard could influence the business operating strategies
If a manager is paid a percentage of profits, does this generate a motive to manipulate profits? Would this be anticipated by principals and, if so, how would principals react to this expectation?
What is an agency relationship and what is an agency cost ? How can agency costs be reduced?
Explain the political cost hypothesis of Positive Accounting Theory.
Why is accounting important in political processes?
As part of efforts to develop a revised Conceptual Framework for Financial Reporting , the IASB is currently investigating alternative approaches for measuring the assets and liabilities of reporting
Explain the efficiency perspective and the opportunistic perspective of Positive Accounting Theory. Why is one considered to be ex post and the other ex ante ?
Would managers who have negotiated debt contracts with accounting-based covenants based around ‘rolling GAAP’ be relatively more likely to lobby an accounting standard-setter about a proposed
Organisations typically have a number of contractual arrangements with debtholders, with many covenants written to incorporate accounting numbers.(a) Why would an organisation agree to enter into
Positive Accounting theorists typically argue that managers can reduce political costs by simply adopting an accounting method that leads to a reduction in reported income. Does this imply anything
Do you think the policy decisions made by members of the International Accounting Standards Board would or should give consideration to the insights provided by Positive Accounting Theory? Why?
If a reporting entity has a choice of either expensing or capitalising an item of expenditure, and if the entity is subject to a high degree of political scrutiny, then what choice would be predicted
If senior managers within a company were rewarded by way of accounting-based bonus plans then would they, or the owners/shareholders (or both), prefer the use of conservative accounting methods?
Read Accounting Headline 7.7 and answer the following questions:(a) Do you think that parties such as investors and analysts can properly determine the risk of investing in an organisation if they do
Assume that Kahuna Company Ltd decides to undertake an upward revaluation of its non-current assets just prior to the end of the financial year, the effect being that the total assets of the company
Mather and Peirson (2006) report that public debt contracts tend to have a lower average number of accounting-based debt covenants as well as less binding debt covenants relative to private debt
Within annual reports, companies frequently disclose information about how their managers are rewarded in terms of the components of their management compensation plans. For example, within IAS 24
Positive Accounting Theory assumes that all individual action is driven by self-interest, with the self-interest being tied to wealth maximisation.(a) Is this a useful and/or realistic assumption?(b)
What are some of the criticisms of PAT? Do you agree with them? Why or why not?
In a newspaper article that appeared in The Sydney Morning Herald on 25 March 2013 (written by Ross Gittins and entitled ‘Both sides must end budget dishonesty’), the following comments were made
Traditionally, organisations have tended to choose accounting methods that applied conservative measures of profits, net assets, and therefore equity.From a contracting perspective, why do you think
Positive Accounting Theory embraces a reasonably simplistic assumption that all individuals’ utility functions are maximised by actions that lead to a maximisation of their own wealth. Does such a
Zhang (2008) argues that if a borrower adopts conservative accounting methods this will reduce the risk exposure of the lender and will lead to a reduced interest cost for the borrower. What is the
If companies use conservative accounting methods, and they have accounting-based debt covenants, then do the conservative accounting methods provide greater protection to debtholders relative to a
Read Accounting Headline 7.8. As you will see, Babcock & Brown had negotiated an agreement with lenders that its market capitalisation would not fall below an agreed amount of $7.50 per share.
Read Accounting Headline 7.9 and, adopting a Positive Accounting Theory perspective, consider the following issues:(a) If a new accounting standard impacts on profits, should this impact on the value
Applying Positive Accounting Theory, and after reading Accounting Headline 7.10, which relates to an article published in the United Kingdom, answer the following questions:(a) From an efficiency
Read Accounting Headline 7.5(earlier in the chapter) and explain why publicity such as this might be costly to an organisation. How would Positive Accounting theorists expect the banks to react to
Read Accounting Headline 7.11 and then answer the following questions:(a) Why could the new accounting standard trigger debt covenants (that is, create a technical default)?(b) Do you think the
Read Accounting Headline 7.12, which discusses the accounting practices used at the Australian company Harris Scarfe. It has been shown that Harris Scarfe reported results that inappropriately
Explain the notion of a social contract, and what relevance the social contract has with respect to the legitimacy of an organisation.
What is organisational legitimacy and why might it be considered to be a ‘resource’?
Explain why organisational legitimacy is place- and time-specific.
What does the notion of legitimacy and social contract have to do with corporate disclosure policies?
How would corporate management determine the terms of the social contract (if this is indeed possible) and what would be the implications for a firm if it breached the terms of the contract?
If an organisation’s management considered that the organisation might not have operated in accordance with community expectations (it broke the terms of the social contract), consistent with
If an organisation was involved in a major accident or incident, would you expect it to use vehicles such as an annual report or a sustainability report to try to explain the incident? If so, explain
Do the resource flows into an organisation provide an indication of the legitimacy of the organisation? Explain your answer.
What is a ‘legitimacy gap’, and why could such a gap suddenly occur?
What is the difference between legitimising strategies that are ‘symbolic’ and those that are ‘substantive’? Is one type more effective than the other?
Identify the various phases an organisation might be in with regards to its legitimation strategies.
Why might an organisation abandon efforts to regain lost legitimacy?
Consistent with the material provided in this chapter, would you expect management to make disclosures in relation to real-world events, or, alternatively, in relation to how it believed the
What insights are provided by Political Economy Theory and why are these insights relevant to accounting?
Do you think we can measure organisational legitimacy directly? If not, are there other indicators that we could use to provide an indication of changes in corporate legitimacy?
Briefly outline the central arguments of Media Agenda Setting Theory as presented in this chapter and explain why this theory would be of relevance to accounting researchers.
Legitimacy Theory, Stakeholder Theory and Institutional Theory are considered to be systems-oriented theories. What does this mean?
Is Stakeholder Theory a single well-defined theory or a broad umbrella term for a whole lot of different theories? Explain your answer.
a. How do you think that information could be used to manage an organisation’s relationships with its powerful stakeholders?b. Do you think that managing stakeholders is an ‘appropriate’
Assume that you were undertaking a research project that was investigating how a particular adverse environmental event negatively impacted the legitimacy of an organisation. How would you determine
This chapter divided Stakeholder Theory into the ethical branch and the managerial branch. Explain the differences between the two branches in terms of the alternative perspectives about when
Under the managerial perspective of Stakeholder Theory, when would we expect an organisation to meet the information demands of a particular stakeholder group?
Identify and explain some of the possible limitations or gaps within the Legitimacy Theory literature.
What is the difference, if any, between ‘organisational legitimacy’ and ‘institutional legitimacy’?
Read Accounting Headline 8.6 on p. 381, an article that relates to claimed financial exclusion of some sectors of society. After reading the article:(a) Apply the managerial perspective of
Read Accounting Headline 8.7 and, using Legitimacy Theory as the basis of your argument, explain why a company such as McDonald’s would not want a radio station to make adverse comments about it.
Read Accounting Headline 8.8 and, with the material of this chapter in mind, explain why (or perhaps, why not) the community needs to be protected from the media.
Would you expect management to worry about attitudinal surveys, such as the one described in Accounting Headline 8.9? Explain your answer, as well as explaining how such surveys might impact on the
Assume you have been appointed by BHP Billiton to formulate a strategy to respond to the comments provided in Accounting Headline 8.10. Explain the strategies you would adopt assuming you are a
Read Accounting Headline 8.11 and explain whether you think the banks would or should respond to the concerns of the Australian Consumers’Association and/or the concerns of the Finance Sector
What do isomorphism and decoupling mean with respect to their use in Institutional Theory?
Why might an organisation decouple its actual internal process from those that it portrays to the ‘outside world’ (and which have become institutionalised)?
Explain the concepts coercive isomorphism, mimetic isomorphism and normative isomorphism . How can these concepts be used to explain voluntary corporate reporting practices?
Pursuant to Institutional Theory, do particular processes and practices become institutionalised because they are considered to be the most efficient processes and practices?
Larrinaga-Gonzalez (2007, p. 151) wrote:The results of KPMG surveys of corporate social reporting reveal that while, in 1993, 13 per cent of the top 100 companies in 10 countries published a separate
To what extent do Stakeholder, Legitimacy and Institutional Theories provide competing, mutually exclusive, explanations of voluntary corporate reporting practices?
As we saw in this chapter, the BHP Billiton Sustainability Report 2012 , makes the following statement under the heading, ‘Our Stakeholders’:We define stakeholders as those who are potentially
On page 10 of the BHP Billiton Annual Report 2012 , it is stated that ‘Due to the nature of our operations Health, Safety, Environment and Community(HSEC) incidents or accidents and related
In July 2005 many newspaper articles discussed how the fast-food ‘giant’ McDonald’s in Australia was reducing its use of Australian farm produce(particularly potatoes) in favour of cheaper
In an article entitled ‘Profits before health, again: tobacco products dominate supermarkets’ top 10 in big boost to bottom line’ (Pharmacy News , 28 February 2008, p. 12) it was reported:A
An article entitled ‘The killing fields’ appeared in the Sunday Morning Post (Hong Kong) on 7 August 2005. The article refers to practices used to produce furs from racoon dogs, foxes, spotted
What has the environment got to do with accounting?
What is accountability and what is its relationship to:(a) accounting(b) an organisation’s responsibilities?
Do you think it would make sense for a student of accounting to undertake an education in accounting without being thoroughly exposed to the idea of accountability? Explain your view.
Do conventional financial accounting practices, principles and definitions encourage or assist corporations to adopt sustainable business practices?Explain your answer.
Why would a company produce a sustainability report?
Are ‘economic rationality’ (as defined by economists) and ‘sustainability’ mutually inconsistent?
Would advocates of Positive Accounting Theory (as explained in Chapter 7 ) believe that organisations will embrace sustainable development in the way described by The Brundtland Report ? Explain your

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