Topic 1 Tutorial sach Flashcards
(10 cards)
1.2 If you develoed a theory to explain how a person’s cultural background influences how they prepare financial statements, whould you have developed a positive theory or a normative theory?
1.2 If you develoed a theory to explain how a person’s cultural background influences how they prepare financial statements, whould you have developed a positive theory or a normative theory?
If we developed a theory to explain how a financial statement preparer’s cultural background influences how they prepare financial statements then, as we are attempting to ‘explain’ particular practice, we have developed a positive theory. Such a theory would then be evaluated in terms of how well its predictions (perhaps based on particular cultural attributes of a given population) correlate with the predicted accounting practices (for example, we might have predicted that people from a ‘conservative’ society are more likely to adopt historical cost accounting rather than utilising valuations based on fair values). In developing such a theory we are not attempting to prescribe what accounting methods should be used – which contrasts our research with normative research.
1.4 In an article that appeared in The Age (‘Way cleared for Turnbull to challenge’, by Michelle Grattan, 12 September 2008), Peter Costello, former federal treasuree, is quoted as saying, ‘I have a theory that every government wins one more term than it should’. Do you believe he really has a ‘theory’ in terms of the way a ‘theory’ is defined in this chapter?
1.4 In an article that appeared in The Age (‘Way cleared for Turnbull to challenge’, by Michelle Grattan, 12 September 2008), Peter Costello, former federal treasuree, is quoted as saying, ‘I have a theory that every government wins one more term than it should’. Do you believe he really has a ‘theory’ in terms of the way a ‘theory’ is defined in this chapter?
Arguably, Peter Costello has a hunch, rather than a theory. The Oxford English Dictionary defines a theory as ‘a scheme or system of ideas or statements held as an explanation or account of a group of facts or phenomena’. Theories would not generally be considered to be ad hoc in nature, and should be based on systematic and coherent reasoning. It is not obvious that Peter Costello’s ideas match with our views of what constitutes a theory.
1.5 Why would it not be appropriate to reject a normative theory of accounting because its prescriptions chould not be confirmed through empirical observation?
1.5 Why would it not be appropriate to reject a normative theory of accounting because its prescriptions chould not be confirmed through empirical observation?
Prescriptions are clearly not the same thing as predictions. If, for example, a researcher is prescribing a particular approach to accounting (that is, he or she is being ‘normative’ in nature) that does not mean when we look at actual accounting practice we will find that the prescribed method is being used. In fact, the reason why the researcher developed a particular normative theory (a theory that prescribes what should be done) could well be driven by the researcher’s observation of the inadequate practices currently being employed. For instance, Raymond Chambers developed a theory of accounting (labelled Continuously Contemporary Accounting) which prescribes that assets should be valued on the basis of exit (market) values. He did this on the basis of the perceived limitations of historical cost accounting. The fact that almost all reporting entities used historical cost at the time does not of itself invalidate Chambers’ theory.
1.6 The IASB is currently developing a revised Conceptual Framework for Financial Reporting. It you have been asked to review the framework - which is an example of a normative theor of accounting - Why would it be important for you to pay particular attention to how the objective of financial reporting is defined within the framework?
1.6 The IASB is currently developing a revised Conceptual Framework for Financial Reporting. It you have been asked to review the framework - which is an example of a normative theor of accounting - Why would it be important for you to pay particular attention to how the objective of financial reporting is defined within the framework?
If the revised conceptual framework (which is an example of a normative theory) is based upon, or built upon, a particular assumption then, before we are likely to accept the prescriptions provided by the revised framework we would need to satisfy ourselves that we accept the central assumption. If we reject the central assumption, then no matter how logically developed the theory might be we will reject its prescriptions.
Within the component of the revised IASB Conceptual Framework for Financial Reporting that was released in 2010 it was stated:
The objective of general purpose financial reporting is to provide financial information about the reporting entity that is useful to present and potential equity investors, lenders and other creditors in making decisions in their capacity as capital providers.
Therefore, if we rejected the above belief about the objective of general purpose financial reporting then we would probably reject the contents of most of the revised conceptual framework; given that is has been developed from the perspective of this underlying objective. For example, if we believed that general purpose financial reporting should provide information about the financial impacts an organisation has on a broad group of stakeholders beyond those that hold, or intend to hold, a financial interest (that is, we take a broader accountability-based perspective rather than one that focuses on providing information to parties involved in resource allocation decisions) then we would question the prescriptions provided by the framework.
1.8 What is the difference between developing a theory by induction and developing a theroy by deduction?
1.8 What is the difference between developing a theory by induction and developing a theroy by deduction?
As explained in this chapter, theory that is developed through induction is developed as a result of undertaking a series of observations of particular events, and on the basis of these observations, a theory is developed. Early theories of accounting (for example, in the 1960s) were often developed by observing what accountants were actually doing in practice. This led to the formulation of certain conventions and doctrines of accounting which were considered to be theories. As we discussed however, developing theory on the basis of observation typically does not allow us to address the issue of what would be the most appropriate behaviour in particular circumstances (and determining ‘appropriate behaviour’ will in turn be influenced by particular assumptions or value judgments made by the researcher). That is, it does not encourage us to evaluate what the accountants are doing.
By contrast, developing theory on the basis of deduction does not rely upon observation. Rather, it relies upon the use of logic to develop arguments and related theory. Some theories developed through deduction—such as positive accounting theories which are developed and then used to predict particular behaviour—can be tested (but not initially developed) through subsequent observation. Other theories developed through deduction—such as Chambers’ theory of accounting (Continuously Contemporary Accounting)—should not be evaluated through subsequent observation as he was prescribing a particular approach to accounting that was in stark contrast to what accountants were doing at the time.
1.9 Is the study of financial accounting theory a wast of time for accounting students? Explain your answer?
1.9 Is the study of financial accounting theory a wast of time for accounting students? Explain your answer?
Some interesting answers should be given here. Some students might argue it is a total waste of time. The perspective adopted by the author of your textbook, and many other accounting academics, however, is that the outputs of the accounting system are used in many decisions throughout society and hence it is important to consider how particular accounting methods, or changes thereto, will impact various groups. If we only considered how to calculate accounting numbers, without considering their impacts, then we would be only getting a fraction of the total ‘story’. People involved in accounting logically need to have some perspective about how people will react to different accounting numbers or forms of disclosure; accounting theories can provide us with such insight. Apart from considering how accounting numbers might impact different groups, people involved in accounting should arguably understand the different factors which might have influenced accounting standard-setters when they developed particular requirements. They should also be aware of research that suggests improvements to current practices (with such information perhaps being derived from different normative theories of accounting).
As you will see throughout the textbook, there are various perspectives about why organisations might adopt particular accounting methods. If we are ultimately involved in reading financial statements, then understanding the possible motivations of those in charge of preparing the financial statements will be useful. For example, some theories suggest that managers will want to use those accounting methods that provide the greatest benefits to themselves personally (from Positive Accounting Theory). Other theoretical perspectives suggest that a reporting entity will be motivated to provide information primarily to powerful stakeholders (from Stakeholder Theory), or that the managers of reporting entities provide information to legitimise the entity’s ongoing existence (from Legitimacy Theory). Chapter 12 of the book provides a perspective (a critical perspective) that suggests that financial accounting is a mechanism to further the interests of those people who currently have wealth, and to undermine the interests of those without wealth. As this brief discussion shows, there are numerous views about the implications of accounting, and the factors which cause managers to select one accounting method in preference to another. Such insights might be useful when interpreting particular accounting disclosures. If we do not read about accounting theory then these valuable insights might not be available to us.
1.22 If an accounting researcher adopts a particular accounting theory to predict which firms will make particular accounting disclosures, how much supporting evidence must the resercher gather before he or she can claim that the theory is ‘proved’? Explain your answer
1.22 If an accounting researcher adopts a particular accounting theory to predict which firms will make particular accounting disclosures, how much supporting evidence must the resercher gather before he or she can claim that the theory is ‘proved’? Explain your answer
Central to this question is the issue of whether a theory can ever be proved. There are different views on this. The falsificationists, initially led by Karl Popper, would typically argue that theories cannot be proved regardless of the amount of evidence collected to support a theory. Theories are deemed to be developed through trial and error and at a particular time a theory might appear to provide the best explanation for a particular event among the theories available at a point in time—but there is always the possibility that a new or refined theory might ultimately provide better explanations or predictions.
In accounting we are dealing with human behaviour, so from a logical perspective we would not expect to have a theory that provided perfect explanations or predictions in all cases—hence we would be cautious about saying our data ‘proved’ a theory. Indeed, when some researchers say that they have ‘proved’ particular theories, or have proved the existence of particular relationships, this often effectively signals a degree of naivety this is held by the researchers in that they appear to be ignorant of alternative plausible explanations for particular phenomena. There is always likely to be somebody who acts differently to the majority. We are safer in saying that our evidence ‘supports’ a theory.
1.25 According to the ‘falsificationists’ what should a ‘good’ theory do?
1.25 According to the ‘falsificationists’ what should a ‘good’ theory do?
A good theory, according to the falsificationists, should generate predictions or hypotheses that are of a nature that they can be rejected should evidence be provided that is not supportive of the theory’s predictions or hypotheses. Knowledge is deemed to advance as a result of continual refinement of theories. Lack of empirical support for theories, through rejection of predictions or hypotheses that emanate from the theory, encourage refinement of existing theories. Therefore, failure to find support for a theory is not deemed to be a ‘bad’ outcome. Researchers are expected to continually look for evidence which challenges or disproves a theory.
1.30 What is a ‘hypothesis’ and do you consider that accounting research should necessaarily involve the development of empirically testable hypotheses?
1.30 What is a ‘hypothesis’ and do you consider that accounting research should necessaarily involve the development of empirically testable hypotheses?
A hypothesis can be defined as a proposition, typically derived from theory, which can be tested for causality or association using empirical data.
Not all research will provide testable hypotheses. For example, normative research which prescribes what organisations should do would typically not involve the development of hypothesis about what organisations actually do. Hypotheses often act to provide predictions that can then be empirically tested. For much normative research there is not an intention to explain or predict current practice, hence the development of empirically testable hypotheses would not necessarily be appropriate. Nevertheless, normative research has the potential to provide valuable insights into improving the practice of accounting.
Whilst hypotheses are often developed within positive research that utilises large amounts of observations (for example, thousands of observations of movements in share prices), for researchers who seek to develop ‘rich insights’ from case study research (which might involve the detailed investigation of the practices adopted in only one or more organisations), it is generally accepted that the use of hypotheses is not appropriate. Further, if a researcher adopts a view (or research paradigm) that suggests that all organisations and individuals are fundamentally different, then such a researcher would not tend to develop hypotheses to test across a broad range of individuals or organisations. By contrast, a researcher who adopts an assumption that all individuals are fundamentally the same (for example, they are all motivated by self interest tied to wealth maximisation) might be inclined to develop hypotheses for testing across different samples of the population.
What is being emphasised here is that the absence of empirically testable hypotheses does not necessarily negate the value of particular research.
1.35 Do we really need financial accounting theory if all we are interested in dowing is developing accounting standards?
1.35 Do we really need financial accounting theory if all we are interested in dowing is developing accounting standards?
Absolutely yes! In developing accounting standards there will be many questions, such as:
- What will be the effect of the related information on different stakeholder groups?
- Will the new rules incorporated within the proposed accounting standard provide more benefits to some groups relative to others?
- Will organisations be likely to oppose the requirements, and why?
- Does the proposed accounting standard provide the best approach for accounting for the particular transaction or event?
- What are the costs and benefits of the proposed accounting requirements?
- Is the accounting standard applicable across all countries?
To answer questions such as those provided above requires knowledge of various theories of accounting.
