Professional Documents
Culture Documents
Accounting Theory
Normative Accounting (1956-1970) Normative period
REGULATORY APPROACHES
a. Public interest theory
Criticism
Complex task in deciding the right amount of regulations
Regulation carries substantial costs (ex: compliance cost)
Regulator will operate to serve his benefits rather than
operate on behalf of the best interest of the public.
b. Capture theory
Origin of the regulation is to protect the public interest however
this purpose is not achieved because in process of regulation, the
regulatee comes to control the regulator.
Assumption on capture theory :
People are economical rationally. Each person will pursue
his self-interest to the point where the private marginal
benefit from lobbying regulators just equals the private
marginal costs
Regulation has the potential to redistribute wealth,
therefore, people lobby for regulations that increase their
wealth.
Government has no independent role play in the
regulatory process, and that interest groups battle for
control of the governments coercive powers to achieve
their desired wealth distribution.
Capture theory is said to occur when regulated entities :
Control the regulation and the regulatory agency
Succeed in coordinating the regulatory bodys activities
with their activities, so that their private interest is
satisfied.
Regulatory decisions usually have major effects on their interest
of regulated industries. Therefore, they generate intense activity
aimed at influencing the regulatory agency.
Regulatory capture theory suggest that professional bodies or the
corporate sector will seek as much control as possible over the
settling of accounting standards governing the reporting by their
members. This involves :
Formal control over standard setting representation on
the relevant standard setting bodies.
Significant control over the decision made by the relevant
standard setting bodies.
Criticism
No reason suggest that regulated industry is the only
group able to influence the regulator
No reason why regulated couldnt prevent creation of the
regulatory agency.
c. Economic interest group theory (Private interest theory)
Qualitative Characteristics
i Understand ability
Refers to ability of information to understood by users
Users are assumed to have a reasonable knowledge of
business and economic activities and accounting, and
willingness to study the information with reasonable diligence.
ii Relevance (PFT)
Relevance information help users to evaluate the past,
present and future events (Predict Value) or to correct the
prior expectation (Feedback Value)
Information must be timeliness before it loss capacity to
influence decision maker.
iii Reliability (FVN)
Information should be faithfully represented transactions and
events without material bias or error.
Faithful representation
Refers to the relationship between accounting data
and the events of those data are supposed to
represent.
Verifiability
Get same result by examination same data.
Neutrality
Unbiased
iv Consistency
The accounting apply must same for every years
v Comparability
Refers to report the information for different entities in a
similar manner.
b Revenue Recognition
Recognized revenue when earned and realized
c Matching Principle
Expenses is matched to the revenues they help to generate
d Full disclosure
Provide information that is sufficient to influence the judgement
and decisions to decision maker.
Standard Setting Due Process in Malaysia
MFRS are words to words IFRS issued by the IASB except for the
nomenclatures
due process of MFRS Framework aligns the MASB's due process
timeline to that of the IASB with the aim of putting the new or
amended standards in place for adoption and application within a
timely manner
to ensure that the effective date of the new or amended standards will
be the same as that of IFRSs
STAGE 1: The MASB seeks public comment on IASB's draft technical
pronouncements
Technical pronouncement includes Discussion Paper, Exposure Draft,
Request for View.
MASB will disseminate the IASB draft technical pronouncement
together with an invitation to comment to local constituents by
publishing on MASB website a Comment Online feature and sending
a copy of the documents to the relevant authorities, professional
bodies, accounting firm, industry related association and public listed
companies.
The due date for the public to submit comment to MASB is usually on
month before IASBs comment deadline so as to allow MASB Working
Group and the Board a reasonable time to consider the comments
received before making a submission to the IASB
Public forum may be recognized if these IASB draft pronouncement
represent major change of shift from current practice.
STAGE 2: Deliberation at the Work Group level on IASBs draft
pronouncement
The IASBs draft pronouncements and public comments received will
be deliberated by the WG.
After due deliberation, the WG will provide comments and
recommendations to the issues raised on in the draft pronouncements
for the MASBs consideration.
STAGE 3 & 4: Deliberation by the MASB
All public comments received, WG's comments and recommendations
will be tabled to the MASB for deliberation and consideration
During the discussion, the MASB will consider all comments received
and thereafter, a comment letter to the IASB will be prepared and
submitted to the IASB accordingly.
STAGE 5, 6, & 7: Issuance of Standard by the IASB
Following publication of the new or amended IFRS by the IASB, the WG
will deliberate on the changes made, if any, to the draft
pronouncements.
Thereafter, the WG's recommendations including possible issues/
implications, if any, of the IFRS will be presented to the MASB for
consideration.
STAGE 8, 9, & 10: Issuance of standard by the MASB
After due deliberation by the MASB, a copy of the MFRS (word-for-word IFRS)
would be presented to the FRF members for their comments before it being
issued as approved accounting standards in Malaysia
IASB (FRAMEWORK)
United Kingdom
Develop IFRS
Principle based
Focus on financial
statement
Objectives
Focus on information
needs of a wide range of
users
Enterprise
resource
Performance
Changes in financial
position
Comparative
and other
qualitative
FASB(CONCEPT STATEMENT)
United states
Non-profit organization
Develop GAAP
Rule based
Focus on financial
reporting
Emphasizes usefulness
in
investment and
credit decision
Performance and
comprehensive income
Liquidity
Solvency
Funds flows
The need of accrual
accounting
Briefly discuss the going
concern but do not
emphasized on it
Three (3) elements of
changes in assets,
Qualitative
characteristi
cs
Recognition
Measuremen
t
Inventory
Extraordinar
y item
Developmen
t costs
Contract
Understandability
Relevant
Reliability
Comparability
Include the criterion that it
must be probable that any
future economy benefit as
a recognition
Do not specify the
relevant criterion
Less emphasize on use of
cash flow statements
Less use PV as
measurement technique
Prohibited the use of LIFO
(assets acquired last is the
first been sold)
Prohibited
Extraordinary items are
not segregated in the
income statement
Capitalized development
cost
Company can only settle
contract by cash
Understandability
Relevant
Reliability
Do not include
probability as a
recognition criterion
Criterion that included
must be relevant
Development cost as
expense
Choices given to the
company either to settle
contract by cash or
shares
C Income Maximization
o When the income is between the bogey and cap
o Manager involves in earning manager for the bonus purposes
(bonus hypothesis) and firms that close to debt covenant violations.
o Manager report high income in order to maximize his own selfinterest.
o Manager close to debt covenant violations report high net income to
get the lenders, they did not know the true picture of the
organization.
D Income Smoothing
o It is for when inflation period.
o Similar to income maximization but try to sustain income between
the bogey and cap.
o Managers are more likely to receive less variable bonus stream,
they use income smoothing to ensure the constant compensation.
o To reduce volatility if reported income so as to smooth covenants
ratio over time, because the more volatile the stream reported
income, the higher the probability that covenant violation will
occurs.
o Consequences of income smoothing:
Shows a good signal to the whole market
Maintain management reputation
Reduce the possible of reporting low income
Convey insider information to investors
Good EM
a Unblocked communication within management and users of
financial statements.
o EM can serve as a way to unblock communication to
outsiders. Blocked communication exists when it is very
difficult and costly to translate an expertise about a firm to
the BOD. By using the FS, EM can be used to inform outsiders
of managements inside information as their expertise.
o EM serve as a tool to convey inside information to
stakeholders and the transmitted information is more credible
as it is being presented in the financial statements.
b Efficient contracting
o Manager chooses accounting policies to attain corporate
governance objective of the firm and conservative accounting
to efficient contract.
o Assume that compensation contract and internal control
system, good corporate governance and limit opportunism
motivate managers to choose accounting policy to control
contracting costs, thereby benefiting the firm and its
shareholders.
EARNING MANAGEMENT
It is a strategy used by the management of a
company to influence/ manipulate reported
earnings by using specific accounting methods,
such as deferring/accelerating
expense/revenue transaction.
This practice is carried out for the purpose of
income smoothing. Thus the company will be
able to make its earning relatively stable from
year to year.
It is not illegal
Usually involves the artificial increase/decrease
of revenues, profits/earnings per share figure
through aggressive accounting tactics.
FRAUDULENT REPORTI
Fraudulent financial reporting is a
act taken by executives within a c
intentionally conceal financial info
about the company and to deceiv
about the wealth of the company.
Is an illegal act
Management manipulating/emitti
financial figures with the differenc
fraud usually has substantial mist
drastically change the bottom lin
of a company.
When a company commits fraud
reporting and is caught, the pena
substantial. They are usually expe
enormous fines to the governmen
compensate their shareholders, a
executives potentially paying tim
difficult to predict since the choices chosen by one player will depend
on what action that player thinks the other players will take
GT model shows that an accounting standard setting body that fails to
consider the interest of all constituencies affected by policy choice is in
danger of making policy recommendations that are difficult to
implement.
Non-Cooperative*
The situation where players see only their own interest and thus
binding agreements among the players are not possible. Benefit get
from 1 player will as losses for the other player
Non-cooperative is very difficult to envisage a binding agreement
between manager and investor about what specific info is to be
supplied. Even the agreement is made it would be very costly to
enforced.
o Example :
Investors will desire useful tradeoffs between relevant and
reliable financial statement info, to assist in assessing the
expected values and risks of their investment. Managers,
however may not wish to reveal all the info that investors
desires, they may fear that releasing too much info will benefit
their competitors.
Theory of CSR
1 Social Contract
Aims to explain the boundaries of acceptable interaction
between participants within society
Represents the implicit and explicit expectations that society has
about how the organisation should conduct its operations
Traditionally the optimal measure of performance was profit
maximisation,
public
expectations
have
changed
so
2 Stakeholder Contract
All stakeholders have the right to be treated fairly by an
organisation. Management should manage the organisation for
the benefit of all stakeholders. They have a fiduciary relationship
to all stakeholders
Offered a new way to organize thinking about organizational
responsibilities.
Suggesting that the needs of shareholders cannot be met
without satisfying to some degree the needs of other
stakeholders, it turned attention to consideration beyond direct
profit maximization.
Where interests conflict, business must managed to attain
optimal balance among stakeholders.
Even when firm seek to serve its shareholders as a primary
concern, its success in doing so is likely to be affected by other
stakeholders.
When there are conflicts of interest between stakeholders, should
consider the basic needs of other stakeholders.
3 Legitimacy Contract
May be among the corporate strategy theories the closest
counterpart to the Public Relations theories
Corporate management seeks to meet societys expectations,
entitys value system aligned with the larger social system.
Legitimacy is determined to exist when the organization goals,
output, and methods of operation are in conformance with societal
norms and values.
The theory provides an explanation of managements motivation to
disclose environment information
Strategies of legitimate :
o To educate and inform relevant publics about changes in the
organizations performance and activities.
o To alter society perception towards organization action without
making any changes to that action.
Intellectual capital
Intangible assets, trademarks, right, pattern
a Internal structure
How the company built up their intangible assets
Consist item such as patents, concept, model research which
usually created by the employees or are brought in the
company
Organization culture also considered as part of the internal
structure.
b External structure
It consists of the relationship with customers and suppliers.
How the supplier distribute their product to their customers.
c Employee competence
Refers to individuals education, skills, training and value
How does employee do their job?