Positive Accounting Theory
Chapter 7 - Positive Theory
Positive Accounting Theory
Philosophy of PAT
Million Friedman championed positive theories in economics.
He stated that: (part 3 Empirical Research in Accounts of Accounting theory from Jayne Godfrey) The ultimate goal of positive science (i.e. INDUCTIVE) is • The development of a ‘theory ‘ or ‘hypothesis’; • that yields valid and meaningful “Predictions’ • about phenomena not yet “observed”.
Consistent with Friedman’s view, Watts and Zimmerman asserts that: The objective of “positive accounting theory” is to “explain” and “predict” accounting practice.
• “Explanation” means providing reasons for observed practice. For example, positive accounting theory seeks to explain why firms continue to use historical cost accounting and why certain firms switch between a numbers of accounting techniques. • “Prediction” of accounting practice means that the theory predicts “unobserved phenomena”.
“Unobserved phenomena” are not necessarily future phenomena; they include phenomena that have occurred, but on which systematic evidence has not been collected.
For example – Predicting the reaction of firms to a proposed accounting standard and an explanation of why firms would lobby for and against such a standard, even though the standard has already been released.
Testing these theories provides evidence that can be used to predict the impact of accounting regulations before they are implemented.
PAT has an economic focus and seeks to answer such questions – what is the effect of reported financial statements on share price, for example?
For the above issue, PAT is based on assumption about the behavior of individuals: that is Manager, investors, lender and other individuals are rational, evaluative utility maximize® (REM).
Chapter 7 - Positive Theory
Positive Accounting Theory
This theory attempts: 1. to explain manager’s choices of accounting methods in terms of
Positive Accounting Theory
Philosophy of PAT
Million Friedman championed positive theories in economics.
He stated that: (part 3 Empirical Research in Accounts of Accounting theory from Jayne Godfrey) The ultimate goal of positive science (i.e. INDUCTIVE) is • The development of a ‘theory ‘ or ‘hypothesis’; • that yields valid and meaningful “Predictions’ • about phenomena not yet “observed”.
Consistent with Friedman’s view, Watts and Zimmerman asserts that: The objective of “positive accounting theory” is to “explain” and “predict” accounting practice.
• “Explanation” means providing reasons for observed practice. For example, positive accounting theory seeks to explain why firms continue to use historical cost accounting and why certain firms switch between a numbers of accounting techniques. • “Prediction” of accounting practice means that the theory predicts “unobserved phenomena”.
“Unobserved phenomena” are not necessarily future phenomena; they include phenomena that have occurred, but on which systematic evidence has not been collected.
For example – Predicting the reaction of firms to a proposed accounting standard and an explanation of why firms would lobby for and against such a standard, even though the standard has already been released.
Testing these theories provides evidence that can be used to predict the impact of accounting regulations before they are implemented.
PAT has an economic focus and seeks to answer such questions – what is the effect of reported financial statements on share price, for example?
For the above issue, PAT is based on assumption about the behavior of individuals: that is Manager, investors, lender and other individuals are rational, evaluative utility maximize® (REM).
Chapter 7 - Positive Theory
Positive Accounting Theory
This theory attempts: 1. to explain manager’s choices of accounting methods in terms of