Assignment 1

Instructions and Guidelines

1. Word Limit 1000 words

• Write400-500wordsforeachquestion
• Disclosethewordcountinyourfinalsubmission
• Ifyourassignmentexceedsthewordlimit,checkthatallyourcontentisrelevant,avoidrepetitionofthesameideasandparaphraselengthyquotes.
• thewordlimitwilltestyourabilitytoprovideaconciseargumentwhichprioritiesthestrongestpoints.

2. Style Guide

• useafontsizeof12orlarger
• youmayusetables,graphs,subheadings,coloretc.Howeveryoumaynotusebulletpoints

3. Referencing

• followtheAPAreferencingsystem
• youmayuseamaximumof6referenceincludingarticlesfrompeer-retrievedaccountingjournal.The articles must have been published in the last 5 years i.e 2012 on wards
• youmayonlyuseonedirectquotationforeachquestion

Answer both of the following questions separately

Question 1

TheoryConstruction(Unit2)

Read the following article, which is available on ProQuest, Google Scholar etc:

Hauriasi, A. Davey. (2009). Accounting and Culture: The case of Solomon Islands. Pacific Accounting Review Vol. 21 No 3 p 228-259.

Discuss whether Hauriasi and Davey (2009) adopted a naturalistic or scientific approach in their research. To do your conclusion, you will need to analyse the article according to the following criteria discussed in chapter 2 of the course text.

a.) Ontology

b.) Epistemology

c.) Methodology

d.) Methods

Question 2.

Regulation ( unit 3)

Chapter 3 of the course text discusses several approaches to setting accounting standards.

In relation to your own country ( for my case it would be Fiji), discuss whether accounting standards should be set by:

a.) the government

b.) the accounting profession; or

c.) some other body / approach

Support your arguments using at least theory of regulation discussed in Chapter 3 of the course text.

Student Note:

1. Ihaveattachedthearticleforquestion1namelyHauriasi,A.Davey.(2009).AccountingandCulture:ThecaseofSolomonIslands.PacificAccountingReviewVol.21No3p228-259.
2. ThecoursetextbookisGodfrey,J.A.HodgsonandS.Holmeset.al.(2010),AccountingTheory7thedition,Wiley.
3. Ihaveattachedpartoftextbookwherechapters2and3canbelocatedtohelpwiththeassignment.
4. Accounting standard setters in Fiji are Fiji Institute of Accountants, its url ------ www.fia.org.fj

Pacific Accounting Review Accounting and culture: The case of Solomon Islands Abraham Hauriasi Howard Davey Article information: Downloaded by University of the South Pacific At 18:46 23 February 2016 (PT) To cite this document: Abraham Hauriasi Howard Davey, (2009),"Accounting and culture", Pacific Accounting Review, Vol. 21 Iss 3 pp. 228 - 259 Permanent link to this document: http://dx.doi.org/10.1108/01140580911012494 Downloaded on: 23 February 2016, At: 18:46 (PT) References: this document contains references to 66 other documents. To copy this document: permissions@emeraldinsight.com The fulltext of this document has been downloaded 1718 times since 2009* Users who downloaded this article also downloaded: Iraj Noravesh, Zahra Dianati Dilami, Mohammad S. Bazaz, (2007),"The impact of culture on accounting: does Gray's model apply to Iran?", Review of Accounting and Finance, Vol. 6 Iss 3 pp. 254-272 http:// dx.doi.org/10.1108/14757700710778009 Ingrid Jeacle, (2012),"Accounting and popular culture: framing a research agenda", Accounting, Auditing & Accountability Journal, Vol. 25 Iss 4 pp. 580-601 http://dx.doi.org/10.1108/09513571211225051 Saeed Askary, James S. Pounder, Hassan Yazdifar, (2008),"Influence of culture on accounting uniformity among Arabic nations", Education, Business and Society: Contemporary Middle Eastern Issues, Vol. 1 Iss 2 pp. 145-154 http://dx.doi.org/10.1108/17537980810890329 Access to this document was granted through an Emerald subscription provided by emerald-srm:225371 For Authors If you would like to write for this, or any other Emerald publication, then please use our Emerald for Authors service information about how to choose which publication to write for and submission guidelines are available for all. Please visit www.emeraldinsight.com/authors for more information. About Emerald www.emeraldinsight.com Emerald is a global publisher linking research and practice to the benefit of society. The company manages a portfolio of more than 290 journals and over 2,350 books and book series volumes, as well as providing an extensive range of online products and additional customer resources and services. Emerald is both COUNTER 4 and TRANSFER compliant. The organization is a partner of the Committee on Publication Ethics (COPE) and also works with Portico and the LOCKSS initiative for digital archive preservation. *Related content and download information correct at time of download. The current issue and full text archive of this journal is available at www.emeraldinsight.com/0114-0582.htm PAR 21,3 Accounting and culture The case of Solomon Islands Abraham Hauriasi and Howard Davey 228 Waikato Management School, University of Waikato, Hamilton, New Zealand Abstract Downloaded by University of the South Pacific At 18:46 23 February 2016 (PT) Purpose - This paper sets out to review research on the compatibility between values underlying western accounting systems and traditional Solomon Islands cultural values. The research takes a sociological view of accounting to better understand how imported accounting values and practices t into, and interact with, local traditions. Design/methodology/approach - An interpretive methodology uses in-depth interviews and participant observation. Both inductive and a priori approaches identify and describe major themes. Findings - The areas of conict found between accounting themes and traditional Solomon Island group values relate to: the objectivity and neutrality of accounting; prot and wealth maximisation as the bottom-line; the separateness of the economic entity; time-based accounting controls; and the underlying basis of competition for efciency and effectiveness in western accounting systems. Research limitations/implications - The challenge is to identify how to adapt accounting and management practices so they t into existing local cultural values and practices. Solomon Islanders must also determine how some of their cultural values can be adapted to suit contemporary economic circumstances. Practical implications - The paper recommends that consideration be given to recasting elements of accounting and management practice so that they better reect the nature of the society/activities being represented - namely, the discharge of accountability; valuing intangible business outcomes; owner-entity separation; time management; and bounded competition. Originality/value - The research is one of the few studies on the culture-accounting relationship in a developing and economically poor part of the Asia-Pacic region. Keywords Accounting, Culture, Interviews Paper type Research paper 1. Introduction Accounting is a socio-technical activity involving both human and non-human resources or techniques, as well as interaction between the two (Perera, 1994). Hence accounting should be compatible with the cultural and social values of its environment if it is to have meaning. Not only can social values determine the type of accounting system but the reverse effect may also occur. As long ago as 1933, Littleton (1933) pointed out: Accounting is relative and progressive. The phenomena, which form its subject matter, are constantly changing. Thus surrounding conditions generate the fresh ideas and stimulate the ingenious to devise new methods. And as such ideas and methods prove successful, they in turn begin to modify the surrounding conditions (p. 361). Pacic Accounting Review Vol. 21 No. 3, 2009 pp. 228-259 q Emerald Group Publishing Limited 0114-0582 DOI 10.1108/01140580911012494 Accounting can no longer be regarded as a device that merely documents and reports the facts of economic activity but rather \"as a practice that is intrinsic to, and constitutive of social relations\" (Miller, 1994, p. 31). At a time when globalisation dominates business and accounting activity, there is a move towards homogeneous accounting practices and standards (Garrido et al., 2002). Downloaded by University of the South Pacific At 18:46 23 February 2016 (PT) Nevertheless, cultural factors have been identied as an important determining force in a country's accounting system (Hofstede, 1980, 1987; Violet, 1983). While the culture-accounting debate has focused on the impact of culture on accounting, research has generally shown a lack of denitive relationship (e.g. Chanchani and MacGregor, 1999; Gray, 1988; Hopwood, 1983; Nobes and Parker, 1998; Perera, 1989a, b). Research has also focused on the concern that western practices of accounting and the assumptions they are grounded on may not be universally valid (Chew and Greer, 1997; Hove, 1986; Okike, 1994). More recently, there has been a move to consider accounting in its relationship with indigenous cultures and people (e.g. Gallhofer and Chew, 2000a, b). This paper reviews research that investigates the interrelationship between socio-cultural values of the Solomon Islands and the accounting practices introduced by Anglo-American inuences. There have been arguments in the extant international accounting literature to the effect that signicant and inuential differences exist in the cultural environments of developed and developing countries (Jaggi, 1975; Ngangan et al., 2005; Perera, 1989b; Wallace, 1990). Background on the Solomon Islands' cultural, social, political, and economic characteristics, is provided, followed by the empirical research approach and results. Finally, the paper discusses implications of the research ndings and draws conclusions concerning accounting and management systems in the Solomon Islands. 2. Background to accounting, culture and developing countries One of the common features of the accounting systems of developing countries[1], including the Solomon Islands, is that their systems are merely extensions of those that existed historically in western capitalist countries, in particular, the UK, the USA, and Australia. Typically these systems have been introduced either through colonial inuences and/or powerful investors (Hove, 1986; Perera, 1985). Furthermore, the accounting practices and traditions were utilised without any serious consideration of the actual circumstances and needs of the recipient countries. Recent decades have seen increasing studies being conducted to assess the suitability of imported western accounting systems to developing countries (e.g. Askary, 2006; Briston, 1978; Brown and Tower, 2002; Chand, 2005; Hove, 1986; Perera, 1989b; Samuels and Oliga, 1982; Wallace, 1990; Wickramasinghe and Hopper, 2005). These studies have cast doubt on the ability of these systems to meet the needs of developing countries with the consequent call for developing countries to identify their own needs and, based on local circumstances, to develop new systems or modify existing ones. Given the historical dominance of western imperialism and colonialism, this is difcult without an appreciation of the impact of accounting and accounting systems on cultural values and indigenous peoples. The role that accounting has played in colonisation and its impact on indigenous cultures is increasingly debated (Gibson, 2000; Neu, 2000). Much of the recent research highlights the inherent tension between western accounting values and the core local indigenous values. Often, indigenous values concerning work, land, and kinship are fundamentally at variance with the values and principles imposed by accounting and accounting systems (Greer and Patel, 2000). The dominant western accounting system and practices tend to elevate property and economic values above family and social values. Gallhofer and Chew (2000b) contrast the values of sharing, relatedness and Accounting and culture 229 PAR 21,3 Downloaded by University of the South Pacific At 18:46 23 February 2016 (PT) 230 kinship obligations embodied in indigenous perspectives on work and land, with the values of efciency, productivity, quantication, reason and logic typically imposed by accounting and systems of accountability. It is the potential juxtaposition of this neo-classical view of accounting with indigenous values that stimulated the research reviewed here. One of the striking features of previous culture-accounting studies has been their predominant focus on hypothesis testing over theory development (Harrison and McKinnon, 1999). The majority of these studies were based on Hofstede's (1980, 1987) national cultural dimensions and this method has important limitations, notably its inability to capture the richness of the social and cultural dynamics of organisational settings. Most of these studies have focused on comparisons between Asian and western Anglo-American nations and cultures (e.g. Douglas and Wier, 2005; Lau and Eggleton, 2004; Tsui, 2001) although there is a growing number of studies on accounting in countries within the Muslim world (e.g. Baydoun and Willet, 1995) and in Latin American countries (e.g. Frucot and Sheraton, 1991). There is a dearth of cultural studies on accounting in countries within the developing world, particularly in the African and Oceania regions; studies cited so far relate to Fiji and Papua New Guinea (Chand, 2001; Ngangan et al., 2005; Pok, 1995). This is a signicant weakness as most countries in these regions are economically poor and studies to explore how accounting could be used to more effectively manage their scarce resources are most needed. 3. Solomon Islands background This section describes the unique cultural, political, social, and economic characteristics of the Solomon Islands. It describes these characteristics, both as they existed in traditional times, as well as the form in which they are present in modern society. 3.1 Political and social organisation Prior to the arrival of the Europeans and the subsequent declaration of the country as a Protectorate by the British in 1896, the Solomon Islands did not exist as a unied political community (Kabutaulaka, 1998). There was no central administration to govern the country. Instead, the society comprised of numerous autonomous, self-governing, and self-sufcient units based on kinship. These tribal or clan-based groups often resided together in small villages or groups of nearby clusters of hamlets. Even on a single island, there could be several or even up to hundreds of these social and political groupings. Each tribal group would normally have its own language; even in the present time, there are reportedly more than eighty languages spoken by the population of half a million. Most Solomon Islanders speak local vernaculars as their rst language and the country's lingua franca, Solomon Islands pijin, as their second. English, the ofcial language, is normally people's third language. These differences in languages mirror that within the country established as the Solomon Islands differences in beliefs and values occur among the various sub-cultural groups. The focus here is on the more general and dominant ones. Kinship was the cement of each society, binding the individual to the group. Loyalty to the group is still required from members to the extent that individual interests would be subjugated for the common good of the group[2]. Cooperation rather than competition is demanded from group members and confrontation within the clan is Downloaded by University of the South Pacific At 18:46 23 February 2016 (PT) discouraged. Through these kinship ties and wantokism (a term which refers to the preferential treatment of members of the extended family), the solidarity of the clan is protected and enhanced. The cohesiveness of kinship groups is also maintained and strengthened through a system of continuous \"creation and discharge\" of social obligations by members of the family group. In the past, with constant threats of attack from other tribes or clans, this cohesion was essential. Within households and villages, authority is mostly held by the males and is based on seniority. However within clan groups, leadership is exercised either through the big-man system or the \"chiey\" system. While chiey leadership is largely hereditary, the position of big-man has to be earned through individual accomplishments and reputation, such as having substantial crops, pigs, shell money, oratory or organisational skills. Sharing these with other members of the group is an important part of developing this reputation (Hogbin, 1964). Codrington (1972) observed that an individual could be removed from ofce (authority) to which he had been selected if he was growing old, was inactive, lost his reputation, or behaved in a way that ran counter to the moral and ethical codes of his clan. Ordinary people are expected to obey their leaders in return for their protection and generosity. In the past, it was common to nd communities (either one village or several) being led by a single man or several men who were typically known as Big Men[3] (Fox, 1975). At Independence in 1978, the country's constitution established a central government. The country adopted a state system modelled on the Westminster system, consisting of a unicameral parliament and a bureaucracy. This was alien to the traditional style of government, where individual islands, let alone a whole country, were not controlled by a central authority. To satisfy demands from island and regional groupings for greater autonomy, as opposed to centralised state control, the constitution provided for the creation of provincial governments, of which there are currently nine. Despite efforts to create a sense of Solomon Island nationhood, indigenous people identify with their kin group, village, region, island, cultural community, or language, group, or even denominational group. Rarely do they think of themselves as Solomon Islanders. Given the fragmented nature of these communities, island and language-based groups or institutions still nd it difcult to cooperate with each other or with the state (Otter, 2005). This lack of national consciousness has led to suspicions, animosity and fear of domination by people from other islands or regions. Given the need to avoid the perception of one island grouping dominating the rest in national governance, it is an unwritten rule that the Prime Minister and the Governor General should not come from the same province or island. There is always an attempt to spread ministerial portfolios evenly among members from the different island groups, regardless of whether they are suitably qualied for the post. Although the route to national leadership is now through an electoral process, the qualities required for leadership positions remain almost the same as traditionally, such as, being hospitable, approachable, generous, and being able to deliver tangible benets to the people. In prior national elections highly educated and urban-based candidates have lost to lesser educated but open, well known, and generous rural dwellers. Those who have acquired the status of a big-man either through leadership positions, education, business, or employment is held in high regard by their relatives. However, clan members expect to share in the rewards of those leadership positions or Accounting and culture 231 PAR 21,3 Downloaded by University of the South Pacific At 18:46 23 February 2016 (PT) 232 achievements. Such rewards may include preferential treatment over others. It is common practice in government ofces and indeed many organisations for ofcers to give preferential treatment to their wantoks and friends even if it involves ignoring company procedures and rules. Although still widely practised, the wantok system is becoming a subject of considerable debate with some describing it as a social safety net, while others see it as a \"drag net,\" being largely responsible for the country's slow economic progress. It is a safety net in that people can always count on the support of group members when in need, on the understanding that such help would be reciprocated in some form in the future. Problems arise when the support ceases to be a reciprocal exchange. The concept is increasingly abused. The process of creating or repaying a social obligation often becomes entangled in nepotism and corruption. The recruitment or promotion of unmerited candidates on the basis of family connections, kinship ties, and tribal, provincial, and regional origins, often results from this wantok system. 3.2 Economic and production system In traditional society and to a large extent in modern Solomon Islands, important resources such as land, forests and sea are communally owned by groups of blood-related kin, variably referred to as \"tribes\\fAccounting Theory 7TH EDITION IAYNE CODFREY ALLAN HODCSON ANN TAKA JANEHAMILTON SCOTT @ WILEY John Wiley & Sons Australia, Ltd HOLMES Seventh edition published 2010 by John Wiley & Sons Australia, Ltd 42 McDougall Street, Milton Qld 4064 Typeset in 10/12.5 ITC Giovanni L T Australian editions O John Wiley & Sons Australia, Ltd 1992, 1994, 1997,2000,2003,2006, 2010 Authorised adaptation of the original edition, Accounting Theory, published by John Wiley & Sons, New York, United States of America. 01986 in the United States of America by John Wiley & Sons, Inc. All rights reserved. The moral rights of the authors have been asserted. National Library of Australia Cataloguing-in-Publication entry Title: Edition: ISBN: Notes: Subjects: Other Authors/Contributors: Dewey Number: Accounting theory/ Jayne Godfrey . . . [et al.] 7th ed. 978 0 470 81815 2 (pbk.) Includes index. Accounting. Godfrey, Jayne M. (Jayne Maree) 657 Reproduction and Communication for educational purposes The Australian Copyright Act 1968 (the Act) allows a maximum of one chapter or 10% of the pages of this work, whichever is the greater, to be reproduced and/or communicated by any educational institution for its educational purposes provided that the educational institution (or the body that administers it) has given a remuneration notice to Copyright Agency Limited (CAL). Reproduction and communication for other purposes Except as permitted under the Act (for example, a fair dealing for the purposes of study, research, criticism or review), no part of this book may be reproduced, stored in a retrieval system, communicated or transmitted in any form or by any means without prior written permission. All inquiries should be made to the publisher. Cover and internal design images: O iStockphoto.com/O Lise Gagne; O Photodisc Typeset in India by Aptara Printed in Singapore by Craft Print International Ltd Professor Jayne Godfrey Professor Jayne Godfrey, BCom (Hons), DipEd, MEc, PhD, is President of Academic Board and Professor of Financial Accounting at Monash University. Her publications draw upon a range of accounting and auditing theories. For her service to Australian society through business leadership, Jayne was awarded Australia's Centenary Medal. A past member of the Australian '4ccounting Standards Board, and past president of the Accounting Association of Australia and New Zealand, she frequently addresses international and national audiences concerning accounting research issues. She is currently a member of Australia's Water Accounting Standards Board, applying principles consistent with accounting theories described in this book. Jayne's research focuses on the role of accounting and auditing in generating and distributing economic resources, including the contracting and capital market causes and consequences of earnings management, and auditor specialisation. Professor Allan Hodgson Professor Allan Hodgson, BEc (Hons), MEc, PhD, is Dean of the Amsterdam Business School and Director of Graduate Studies at the University of Amsterdam. Allan has lectured in accounting theory and financial statement analysis in Africa, Europe, Australia, the United Kingdom and the United States. His published research in international journals covers insider trading, derivative markets, banking, capital market research, corporate governance and intangibles. He is currently on the editorial boards of six international journals. Professor Ann Tarca Professor Ann Tarca, PhD, MAcc, BCom, is a professor in the Accounting and Finance group of the Business School at the University of Western Australia (UWA). She has over 20 years teaching experience, with the last 15 years being spent at UWA working with both undergraduate and post-graduate students. Following from her experience as a chartered accountant in public practice, her research has focused on financial reporting standards and practices. She has a particular interest in international issues including standard setting, regulation and enforcement. Professor Jane Hamilton Professor Jane Hamilton, BBus, MAcc, PhD, is Professor of Accounting at the Bendigo campus of the Regional School of Business, La Trobe University, and previously held academic positions at the University of Technology, Sydney. Jane has 20 years experience in teaching and has published the results of her auditing research in several Australian and international journals. Professor Scott Holmes Professor Scott Holmes, BCom, PhD, FCPA, is currently Pro Vice-Chancellor (Research), Dean of Graduate Studies and Professor of Accounting, The University of Newcastle and Honorary Professor, UQ Business School, The University of Queensland. Scott ABOUT THE AUTHORS has held academic positions at a number of universities, including Australian National University, Queensland University of Technology, The University c-f Queensland, University of Arizona and University of Oregon. He has also acted as a consultant to several of the multinational accounting firms, and in 2007-08 was senior adviser to the New South Wales Treasurer. In 2004, Scott was made a life member of the Small Enterprise Association of Australia and New Zealand in recognition of his research in the area of small-firm financial management and reporting. Scott's current research focus is budget and reporting models in a health setting. ABOUT THE AUTHORS About the authors v Preface x How to use this book xii Acknowledgements xiv THEORY AND ACCOUNTING PRACTICE 91 4 ACCOUNTING THEORY 1 5 Measurement theory 133 Importance of measurement 134 Scales 134 Permissible operations of scales 136 Types of measurement 138 Reliability and accuracy 140 Measurement in accounting 145 Measurement issues for auditors 150 Summary 152 Questions 153 Additional readings 154 Endnotes 159 6 Accounting measurement systerns 161 Three main income and capital measurement systems 162 Historical cost accounting 162 Current cost accounting 17 1 Financial capital versus physical capital 174 Exit price accounting 183 Value in use versus value in exchange 190 A global perspective and International Financial Reporting Standards 191 Issues for auditors 20 1 Summary 203 Questions 206 Problems 207 Additional readings 21 0. Endnotes 215 1 Introduction 3 Overview of accountirig theory 4 Content outline 14 Additional readings 1G Endnotes 17 Accounting theory construction 19 Pragmatic theories 20 Syntactic and semantic theories 2 1 Normative theories 24 Positive theories 28 Different perspectives 29 Scientific approach applied to accounting 37 Issues for auditing theory construction 39 Summary 42 Questions 43 Additional readings 45 Endnotes 51 3 A conceptual framework 93 The role of a conceptual framework 94 Objectives of conceptual frameworks 97 Developing a conceptual framework 101 A critique of conceptual framework projects 111 Conceptual framework for auditing standards 1 19 Summary 122 Questions 123 Additional readings 125 Endnotes 130 Applying theory to accounting regulation 53 The theories of regulation relevant to accounting and auditing 54 How theories of regulation apply to accounting and auditing practice 60 The regulatory framework for financial reporting 69 The institutional structure for setting accounting and auditing standards 74 Summary 80 Questions 82 Additional readings 84 Websites 84 Endnotes 88 CONTENTS vii 7 Assets 227 Assets defined 223 Asset recognition 232 Asset measurement 235 Challenges for standard setters 241 Issues for auditors 243 Summary 247 Questions 248 Problems 249 Additional readings 251 Endnotes 255 8 Liabilities and owners' equity Proprietary and entity theory 258 Liabilities defined 263 Liability measurement 268 Challenges for standard setters 275 Summary 281 Questions 283 Problems 285 Additional readings 286 Endnotes 289 9 Revenue 291 Revenue defined 292 Revenue recognition 295 Revenue measurement 301 Challenges for standard setters 305 Issues for auditors 311 Summary 314 Questions 315 Problems 317 Additional readings 321 Endnotes 327 10 Expenses 329 Expenses defined 330 Expense recognition 332 Expense measurement 333 Challenges for accounting standard setters 342 Summary 347 Questions 348 Problems 350 Additional readings 352 Endnotes 355 CONTENTS ACCOUNTING AND RESEARCH 357 11 Positive theory of accounting policy and disclosure 359 Background 360 Contracting theory 36 1 Agency theory 362 Price protection and shareholderlmanager agency problems 365 Shareholder-debtholder agency problems 369 Ex post opportunism versus ex ante efficient contracting 374 Signalling theory 375 Political processes 377 Conservatism, accounting standards and agency costs 379 Additional empirical tests of the theory 381 Evaluating the theory 389 Issues for auditors 392 Summary 394 Questions 396 Additional readings 398 Endnotes 400 12 Capital market research 403 Philosophy of positive accounting theory 404 Strengths of positive theory 405 Scope of positive accounting theory 407 Capital market research and the efficient markets hypothesis 408 Impact of accounting profits announcements on share prices 412 Trading strategies 426 Issues for auditors 433 Summary 435 Questions 436 Additional readings 43 7 Endnotes 440 13 Behavioural research i n accounting 445 Behavioural accounting research: definition and scope 446 Why is BAR important? 447 Representativeness: the evidence 462 Accounting and behaviour 464 Limitations of BAR 465 Issues for auditors 466 Summary 468 Questions 469 Additional readings 470 Endnotes 472 14 Emerging issues in accounting and auditing 477 Current factors influencing accounting and auditing research, regulation and practice 478 Issues surrounding the application of fair value accounting during the global financial crisis 481 Possible directions in future international accounting standard setting arrangements 483 Sustainability accounting, reporting and assurance 485 Other non-financial accounting and reporting issues 493 Summary 496 Questions 497 Endnotes 500 List of hey terms 503 Index 513 CONTENTS During the period that the seventh edition of Accountzng Theory was being prepared, the world financial system suffered its greatest crisis since the collapse of the US stock market in 1929. From mid-2007 financial markets experienced a number of economic shocks as borrowers in the United States began to default on home loans, and the 'subprime' crisis was born. An international liquidity crisis hit markets around October 2008 as banks in the United States, United Kingdom and elsewhere either failed or sought injections of capital from governments and other parties. As asset prices fell and market liquidity for investments disappeared, some commentators pointed to fair value accounting as the cause of the crisis. Political pressure on standard setters and regulators was intense as action to ameliorate the crisis was demanded and taken. We must ask the question of where an accounting theory textbook fits in such an environment. Does the crisis mean that past material about accounting theory is no longer relevant? Our answer is no. We suggest that our existing knowledge can be used to understand current events and to equip us for future action. The primary strength of Accounting Theory is the balanced approach taken in explaining and discussing the alternative theories and perspectives of accounting and the rigour of the learning material presented. It will always be important for students to study accounting theory, and that relevant material is presented and discussed in an objective manner. In part one of the revised text, our objective is to help readers explore what is meant by theory and how theory relates to the practice of accounting. In this part, chapter 3 addresses the role of theory in regulation and provides material that helps us to evaluate an event such as the global financial crisis and the responses to it. At the time the sixth edition was released in 2006, we noted a major change in the financial reporting environment, namely the adoption of International Financial Reporting Standards (IFRS). These standards are now used in more than 100 countries around the world, including Australia and New Zealand and the major European and Asian economies. The worldwide adoption of IFRS confirms our focus on these standards, their theoretical underpinnings and the process by which they are set. We include extensive material on IFRS, particularly in part 2, chapters 4 to 10. We do not aim to be a 'how-to' manual for IFRS but rather to explore the theory behind standards. We apply theories to practice and make extensive use of theory in action vignettes and case studies drawn from real-world examples. One of the strengths of our book is that we provide a longer term perspective on issues; we relate theory to practice over time. Not only do we provide up-to-date materials about standards, regulation and practice to inform readers of the current situation, we also provide the background to critical developments. Our historical perspective is particularly important in understanding current events, such as fair value accounting. For example, the material about the development of current cost accounting from the 1960s onwards provides essential background for readers to understand today's fair value accounting. Thus, readers have a wealth of material to develop informed views about the issues faced in practice today. Differences in accounting practice are a function of differences in theoretical viewpoints on the part of those responsible for measuring and reporting accounting information. In order for students to argue for a particular approach and to apply a particular view, they must understand the principles and research that underlie their perspective. PREFACE An important new feature of this edition is our introduction of material about auditing in each chapter. The crucial role of external auditing has long been recognised in capital markets. Thus, in the face of considerable external scrutiny of corporate financial reporting, we considered it was timely to introduce material that specifically addresses issues relating to auditors and the audit function. This innovation is consistent with our approach in which we aim to build on the solid foundation of detailed, wellresearched discussion and analysis in earlier editions of the book, but also to bring in new material that is relevant to understanding how theory applies in practice. By extending our text into the auditing area, we meet our goal of revealing as well as integrating material students will find useful in understanding the accounting domain. We also provide an objective analysis of issues to help students to understand and scientifically debate issues. Without such an approach we are in danger of producing students who are technically capable, but unable to exercise appropriate judgement to provide and present information that serves users' needs. In part three, we include chapters on positive accounting theory, capital market and behavioural research. These chapters provide an overview of important theories and studies and are updated with new theory in action vignettes and case studies to provide current material illustrating topical issues. We conclude with a new chapter on emerging issues in accounting and auditing in which vre refer again to IFRS and the global financial crisis as well as other topical issues. We hope that all our readers find their exploration of the world of accounting theory through our book an informative and thought-provoking experience. We know that accounting theory often represents a major challenge to accounting students. We therefore thank instructors for their continued commitment to the text and to its approach to informed, rigorous debate. In this regard, we are always keen for feedback and encourage both academics and students to contact us with comments and suggestions for improvements or expansion of the issues covered. Allan Hodgson thanks Brendan O'Dwyer at the University of Amsterdam for scholarly advice and support in mounting a course at Amsterdam Business School that draws heavily on this book. Ann Tarca thanks her students at the University of Western Australia, who provide lively discussions based on material in this book. She also acknowledges the contribution of her research colleagues, without whom developing an understanding of accounting theory and issues would not be possible. We also thank the professional editorial and management team at John Wiley & Sons for their hard work and persistence in updating and making the content relevant to students, and in their undoubted commitment to maintaining high academic standards in the accounting discipline. Finally, we thank our families for their continued support and understanding. layne Godfrey Allan Hodgson A n n Tarca lane Hamilton Scott Holmes November 2009 PREFACE Accounting Trzeory, 7th edition, has been designed with you - the student - in mind. The design is our attempt to provide you with a book that both communicates the subject matter and facilitates learning. We have accomplished these goals through the following elements. -LEARNING OBJECTIVESassist you to identify the essential elements of the chapter. They are clearly stated and linked to subsequent discussion in the chapter. The INTRODUCTlON outlines the key issues, topics, processes and procedures to be discussed in the chapter. T H E R L QF A CONCEPTUAL FRAMEWORK OE THEORY IN ACTION vignettes feature throughout the text, and profile industry experiences and professional events that reinforce the role of accounting theory in the profession. Questions are supplied with each, and the information that is included has been obtained from Australian and international newspapers and professional articles. r-I*(.."b R . , t*.. -.,.*.,, , PROBLEMS included in selected chapters present more challenging -activities to test your knowledge of the issues developed in the chapter. - , T .. ,,.b,*., .- . .-,,.".a-,...-qv"-*'.%-... .A %1 I.., ".."- .-..,-*% .. .". .w A .*. *a s-...w . A %, . 8 , ..."S#. .,-,..Am,.'-. .,.,",~.t.S.+.' w-. t*,"*,. e---, .-".a re.x a, ,nr--,,m -., .- .," . "- ,., *. ,.*. ... ..~~,.,.-- -* *--. ,.. - * * ......-..,*.,,-,<.>" .."% <. ....m e .pc . cbmac key terms are presented at the end of book and provide an invaluable resource for your learning. how to use this authors publisher would like thank following copyright holders organisations individuals their permission reproduce material in book. figures p. reproduced with joint cpa australia institute chartered accountants pp. portions various fasb documents by financial accounting standards board merritt po box norwalk ct usa reprinted permission. complete copies these available from o international committee foundation. all rights reserved. no granted or distribute figure australian research foundation ed ltd empirical evaluation income numbers r. ball brown journal vol. no. autumn wiley blackwell publishers graphs m. bowen d. burgstahler l. a. daley incremental information content accrual versus cash flows review american association statements lost relevance j. francis k. schipper 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providing overview chapters why do rockets need so much power lift off walk two legs answer questions we likely call upon theories gravity evolution. generally held high regard powers explanation prediction what gives them authority fact furthermore perfect there demand hence theory. simply look freely prices assets revenues inputs managerial arrow-debreu economy1 informatjon future time periods. live economic instead fill gaps knowledge reduce uncertainties about values. comes wide range stakeholders both external. major measurement. general liabilities measured historic cost selling updated buy present recognise internally generated intangibles when they evidenced external transaction takeover then again implementing different measurement economy each individual stakeholder term can ways. take several meanings. one definition deductive system decreasing generality arise agreed hypothesised premise. another ideas explain real-world observations. his classic hendriksen offered definitions appropriate text. defined points below respectively: coherent hypothetical pragmatic principles forming reference field inquiry. logical reasoning form broad evaluated guide practices procedure described underlying statement belief. accepted depends on: well explains predicts reality constructed theoretically empirically acceptable implications body scientists society whole. important understand abstract process. divorced reality. main objectives evolved suggest improvements practice. part c u i r y modern concept compared say emanating mathematics physics. developed tools record activities transactions. even pacioli treatise next page doubleentry focused documenting processes involved explaining method recording. chambers summarised mainly improvised fashion rather than systematically structured theory: frequently have response practical needs deliberate systematic thinking3 many prescriptions account were resolve arose. those also largely unstructured manner. led inconsistencies examples include methods depreciation inventory expensing within same industry measuring some whereas others cost. other transactions kept completely. example move regulate disclosures concerned capitalisation commitments direct being adopted failed company accounts. more recently increasing standard introduced requiring firms remuneration options. consistent illustrate inconsistency problem worth pointing out juncture theoretical argue because situations vary across countries variety fit changing business. multiple demands insiders managers employees outsiders investors creditors taxation legislative authorities general. complex under intense serve primary users determining objective information. years setters trying solve developing lead treatment items. however projects resolved often justify support them. frameworks seek universal guidance proved too clear decision obvious full choices required preparing reports. before double-entry formalised very little practices. 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