Acct 3563 Summary

Topics: Depreciation, Balance sheet, Goodwill Pages: 24 (7433 words) Published: September 10, 2011
Issues in Financial Reporting & Analysis
Semester 1 – 2010 Version 0.5.0 1st April 2010

Page 3 Page 7 Page 12 Page 17 Page 20 Positive Accounting Theory Ethics in Accounting Accounting for Physical Assets & Intangible Assets Accounting for Assets in Mining & Agricultural Industries ounting Accounting for Provisions

Copyright © Ka Hei Yeh 2010 Fifth Revision published April 2010 2010. This work is licensed under the Creative Commons Attribution Attribution-Non-CommercialNo Deriva Derivative Works 2.5 Australia Licence. To view a copy of this license, visit or send a letter to Creative nd/2.5/au/ Commons, 171 Second Street, Suite 300, San Francisco, California, 94105, USA. Disclaimer: The author does not guarantee the accuracy of the notes available and will not be held liable for any damages (including lost marks etc.) as a result of the use of these notes. Use at your own discretion with etc.) caution. Do not rely on them; these notes are not intended to serve as a replacement for your own.

Issues in Financial Reporting & Analysis – Semester 1 2010


Positive Accounting Theory

Positive Accounting Theory
Background In previous accounting subjects, we explored what should happen when a firm uses a particular set of accounting principles and practices. However, in real life, we know this is not always the case. Hence, Positive Accounting Theory (PAT) tries to explain, and possibly predict, accounting practices. Assumptions As always there are some assumptions that PAT takes: • • • • Everyone takes measures to maximise their own self-interest; even at the expense of others. Rational behaviour. Efficient markets in that prices for shares and debt will adjust instantly to changes in the business. Price protection in that markets will continually and accurately adjust prices to reflect managerial actions.

The Agency Problem The Agency Problem is one issue PAT tries to predict. The theory predicts that businesses will have mechanisms to align the interests of the owners and the managers. However, we know that there can be a conflict of interest between inside and outside equity holders. Inside equity holders are those who are more knowledgeable about the business and usually have a large stake in them such as family groups. One well known example is the Packer family. Outside equity holders are just your regular shareholders that usually only have a small portion of their equity in the firm. Both these parties have different wants and views of the business. Since insiders have a larger stake in the business, they will want less risk and more immediate returns. Outsiders would rather have a higher risk and longer term returns since they have less money in the firm. Anti-Regulation? Since we have imperfect markets, we have transaction costs and information asymmetry. This means we will get residual agency problems. PAT predicts that even without regulation, firms will voluntarily prepare publically available financial statements and have them audited. PAT argues that firms will select the best accounting method to represent the firm in the financial statements. Thus, PAT predicts that with regulation, firms will no longer be able to select the best available accounting method and the financial statements will no longer provide the best reflection of the firm’s performance. With this in mind, we can see that PAT includes an argument against regulation. This view is seen as the Efficiency Perspective.

Issues in Financial Reporting & Analysis – Semester 1 2010


Positive Accounting Theory

Or Not? However, another way of looking at PAT – the Opportunistic Perspective – predicts that after all contractual arrangements have been set, individuals will seek out opportunistic behaviours within those constraints to maximise their self-interest. For example, a manager may have a contractual...
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