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Accounting Theory Introduction Power Point Slides

This document discusses accounting theory and the underlying principles of accounting standards. It addresses debates around the aims of financial statements and whether accounting should be driven more by economic theory or practical business needs. While economic perspectives can identify logical approaches, some do not translate well to practical accounting. The document also notes ongoing issues with financial instability and "creative accounting" that accounting theory seeks to address through clarifying concepts and improving standards.

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loy
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94 views

Accounting Theory Introduction Power Point Slides

This document discusses accounting theory and the underlying principles of accounting standards. It addresses debates around the aims of financial statements and whether accounting should be driven more by economic theory or practical business needs. While economic perspectives can identify logical approaches, some do not translate well to practical accounting. The document also notes ongoing issues with financial instability and "creative accounting" that accounting theory seeks to address through clarifying concepts and improving standards.

Uploaded by

loy
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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ADVANCED FINANCIAL

ACCOUNTING

WEEK 1: ACCOUNTING THEORY INTRODUCTION


ACCOUNTING THEORY

 Accounting theory is the principles, concepts and definitions


that underpin accounting standards.
ACCOUNTING THEORY

Issue with Accounting principles


 Wide range of accounting standards-some clear definitions
are already in accounting standards.
 However, what are underlying principles in accounting?
 Accounting can be used in many different ways: can’t be just
one guiding principle involved
 Debate: what accounts are used for and different principles
might have been suggested.
ACCOUNTING THEORY

Aims and objectives of accounting?


 Eg. What is the balance sheet? What are its aims?
 Direct interpretation: list of assets and liabilities. However, what
does B/S actually do??? How do people use balance sheet?
 Arguments: B/S reflect the value of a business or tool used by
investors to monitor managers-2 different ways of looking at
the usefulness of a B/S
 Can use both ways, but ….what is the core aim of B/S, and
again, what is the underlying principle to cater for the different
ways it is used.
ACCOUNTING THEORY
Economic theories as underlying principles in accounting.
 Develop theories on how people make decisions
 Economic behaviors that suggest what accounting should be
 Clash of perspectives: accounting is practical discipline but
economics is more towards theoretical
 Practical business perspectives ≠ theoretical & philosophical
 Eg. Value an asset at cost is simple & practical, but economist
would prefer asset is valued at MP or FV. Is it appropriate for
the business? Is it pratical to accountants, managers, etc?
 Economists’ theory driven logic can be different from
accountant’s logic.
Accounting Theory
 Debated question in accounting: what is depreciation?
 Economists’ perspective: cast doubt in depreciation
accounting
 Accounting practices that have become established over
time, through experience eg. Depreciation, may lack logical
or rigorous theoretical explanation within existing
economic theory
 Strengths of depreciation (matching) and weaknesses (it is
not cash flow)
ACCOUNTING THEORY
Compatibility of Accounting Practices to Economist
perspectives
 Some accounting practices, eg. discounted cash flows
perfectly logical from economists’ perspectives but don’t
work quite so well in practice.
 Definition of DCF: a valuation method used to estimate the
value of an investment based on its future cash flows. DCF
analysis attempts to figure out the value of acompany today,
based on projections of how much money it will generate in
the future.
ACCOUNTING THEORY
Accounting theory must lead to improvements in accounting
practice.
 Economic theory-logical ideas about why people make
decisions.
 Theory’s key attributes: must be based on robust definitions
& concepts, clear logical links, explain human DM and be
relevant to key problems. (e.g. financial instability, creative
accounting)
 The purpose of IFRS Conceptual Framework (2010): to
improve accounting practice by strengthening, consistency,
relevance or faithful representation.
 Strong CF: help to stabilize financial markets and encourage
investment.
ACCOUNTING THEORY
Debate about accounting issues and problems.
 gain exposure during recession but when economic growth
returns, issues are forgotten and reemerge when recession
resumes
 Debate on accounting’s CF-cyclical: recently shaped by
growing awareness of financial instability.
 Starting in 1980’s-groth in capital markets created a need for
globally comparable data, annual reports and accounts.
 Need: agreed framework to achieve comparability and
agreed accounting theory.
 FM have other needs e.g. the problem of managing risks-
needs to shift towards CF for financial stability &
investment.
ACCOUNTING THEORY

 FRC is dealing with the problem of financial instability, but


accounting is also not in good shape.
 Problems are not terminal
 Creative accounting-1st recognized in the > 30 years, not
resolved
 E.g. Tesco Plc accounting, UK Banking collapses, Enron in
USA.
 Other accounting problems: audit expectations gap,
oligopoly by 4 big firms (not enough competition).
 Emphasize: gap between economic theory based on perfect
markets and the economic reality of accounting in which 4
firms dominate.
ACCOUNTING THEORY

 Author’s view: Modern accounting theory based on


Americanized version, has limitations that have been
underestimated. Prefer traditional approach of historical
cost and accruals.

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