Accounting theory and conceptual frameworks
After studying this chapter you should be able to: & explain what accounting theory is & describe the main attempts at constructing an accounting theory & appraise current developments in the area & describe and discuss the contents of the IASB Framework & appraise the quality and usefulness of the IASB Framework in the context of its self-declared purposes & describe and discuss the parts of IAS 1 relating to accounting concepts and policies & appraise the overall effect of the Framework and comparable parts of IAS 1.
This chapter is about to deal with something that many people believe does not exist – a single generally accepted accounting theory. There is no generally accepted accounting theory at this time even though many attempts have been made to formulate one. According to Eldon S. Hendriksen in Accounting Theory (1977), Theory as it applies to accounting is the coherent set of hypothetical, conceptual and pragmatic principles forming the general frame of reference for a ﬁeld of inquiry. Thus accounting theory may be deﬁned as logical reasoning in the form of a set of broad principles that 1 Provide a general frame of reference by which accounting practices can be evaluated and 2 Guide the development of new practices and procedures. Accounting theory may also be used to explain existing practices to obtain a better understanding of them. But the most important goal of accounting theory should be to provide a coherent set of logical principles that form the general frame of reference for the evaluation and development of sound accounting practices.
IS AN ACCOUNTING THEORY POSSIBLE?
Let’s compare this with what many believe is the accounting framework, the IASC Framework for the Preparation and Presentation of Financial Statements. This Framework purports to: 1 assist the board of IASC in the development of standards and review of existing standards 2 provide a basis for reducing the number of permitted alternative accounting treatments 3 assist preparers in dealing with topics that have yet to form the subject of a standard. This certainly sounds like an accounting theory. But if it is, then this theory would clearly determine how we should provide information to users and different practices would not prevail. The primary purpose of an accounting theory should be to provide a basis for the prediction and explanation of accounting behaviour and events.
Is an accounting theory possible?
According to both Hendriksen (1977) and McDonald (1972) the development of an accounting theory should be possible. McDonald argues that a theory must have three elements: 1 encoding of phenomena to symbolic representation 2 manipulation or combination according to rules 3 translation back to real-world phenomena.
Do the three elements that McDonald states are necessary for a theory exist in accounting?
The ﬁrst obviously exists as we have the symbols of ‘debits and credits’ and we have also developed accounting terminology e.g. depreciation, accruals, matching, current cost, revaluation etc. all unique to accounting. The second also exists as we have a wealth of rules and regulations for manipulating or combining these debits and credits. Translation is evidenced in how we present these debits and credits to users in the form of ﬁnancial reports.
Approaches to the formulation of accounting theory
If it is possible to develop an accounting theory (Hendriksen and McDonald) then how do we approach its development? Research in this area has centred on traditional approaches, regulatory approaches and what has come to be regarded as new approaches. We will look brieﬂy at each of these three types.
ACCOUNTING THEORY AND CONCEPTUAL FRAMEWORKS
Traditional approaches cover:
Non-theoretical approaches to accounting theory are concerned with...