...At present, financial accounting standards are established and propagated on the basis of two key conceptual structures, namely, Financial Accounting Standards Board (FASB) and International Accounting Standards Boards (IASB) (Cong 2013). This essay will discuss and justify that accounting theory played a role in setting of accounting practices but it played no significant role in setting of accounting standards. Rather, several accounting standards were set by the conceptual frameworks formulated by the accounting standards-setting groups. Several examples will be presented for supporting the arguments. There is need to analyze and justify the evolution of accounting theory to conceptual structures because accounting standards play a vital...
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...number of normative theories of accounting. In doing so we examined conceptual framework projects which prescribe guidelines for how accounting should be done. We then examined a number of normative theories relating to how profit and the elements of our financial statements should be measured. This week we abandon our normative theories and begin looking at positive theories. In particular we examine a positive theory that we have made mention of a number of times, Positive Accounting Theory or PAT. Upon completion of this module you should have: A clear understanding of how a positive theory differs from a normative theory, The origins of Positive Accounting Theory (PAT) The perceived role of accounting in minimizing the transaction costs of an organisation You should understand: How accounting can be used to reduce the costs associated with various political processes How particular accounting-based agreements with parties such as debtholders and managers can provide incentives for managers to manipulate accounting numbers And some of the criticisms of PAT Before we begin our discussion of specific positive theories we should recap on what a positive theory is and how it differs from the normative theories we have examined in the previous two modules. You will recall from module one and the previous two modules that normative theories prescribe how a particular practice should be undertaken. As was evident in our study of current cost accounting and general price...
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...Financial Accounting Theory Test 1: 1) Please briefly describe the essences of the following cases of accounting scandal or earnings management. (20 points) A) ENRON (8 points) * Enron created many special purpose entities (SPEs) controlled by senior Enron officers that they used in conducting off balance sheet financing * SPE’s borrowed money from banks using Enron’s stock as collateral However all of the liability was reported on the SPE’s books, not on Enron’s, even though the borrowed cash went to Enron * Thus investors had no idea of Enron’s debt because they did not consolidate the SPE’s like they were suppose to under GAAP * Enron also charged fees for management and other services supplied to their SPE’s and included appreciation of its own stock which exaggerated net income * They had to consolidate their financials resulting in a reduction of shareholder’s equity, restatement of previous 4 years earnings, loss of investor confidence, share price fell from $90 to 66 cents then 1 cent * The SEC revoked the auditing license of accounting firm they used, Arthur Anderson B) MCI WORLDCOM (8 points) * From 1999-2002 they overstated their earnings by $11 billion * $4 billion of this amount was from capitalization of network maintenance and other costs that should have been expensed * and $3.3 billion came from reductions in the allowance for doubtful accounts * WorldCom’s merger with MCI was a disaster and went bankrupt...
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...Assets and liabilities are determined at present value. Present value of a firm computed under ideals of certainty represents very relevant and reliable information. There is no opportunity for abnormal earnings under ideal conditions of uncertainty. Since there is only one interest rate in the economy, the dividends don’t affect the present value. As a result, the role of dividends becomes irrelevant under ideals of certainty.Net income is based on the accretion of discount and the future cash flows are already known so the net income becomes predictable under the ideal conditions. So the income statement becomes less useful to the investors. Balance sheet on the other hand contains more useful and relevant information for the investors .Financial statements are not biased and contains representational faithfulness .The information under ideal conditions are also verifiable. Ideal conditions of uncertainty Under ideal conditions of uncertainty we assume that the states of nature and state probabilities are publicly known. We also assume that no one can control which state of nature will occur for e.g. weather, equipment breakdown etc. State probabilities are objective which means that the investors assume a long sequence of repetitions within the assumed period. We also assume that the future cash flows are known and conditional on the states of nature. Interest rates are given and the markets are complete. Assets and liabilities are measured at expected present value. Under uncertainty...
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...$28.64 P.V. Ltd. Balance Sheet As at Time 2 Financial Asset Cash $315.00 Shareholders’ Equity Opening balance Net income Capital Asset Present value 0.00 $315.00 $315.00 $286.36 28.64 Note that cash includes interest at 10% on opening cash balance of $150. 2. Suppose that P.V. Ltd. paid a dividend of $10 at the end of year 1 (any portion of year 1 net income would do). Then, its year 2 opening net assets are $276.36, and net income would be: Copyright © 2009 Pearson Education Canada 8 P.V. Ltd. Income Statement For Year 2 Accretion of discount (10% × 276.36) $27.64 P.V.’s balance sheet at time 2 would be: P.V. Ltd. Balance Sheet As at Time 2 Financial Asset Cash: (140 + 14 + 150) $304.00 Shareholders’ Equity Opening balance: $276.36 (286.36 - 10.00 dividend) Capital Asset, at Present value 0.00 $304.00 $304.00 Net income 27.64 Thus, at time 2 the shareholders have: Cash from dividend Interest at 10% on cash dividend, for year 2 Value of firm per balance sheet $10.00 1.00 304.00 $315.00 This is the same value as that of the firm at time 2, assuming P.V. Ltd. paid no dividends (see Question 1). Consequently, the firm’s dividend policy does not matter to the shareholders under ideal conditions. It may be worth noting that a Copyright © 2009 Pearson Education Canada 9 crucial requirement here, following from ideal conditions, is that the investors and the firm both earn interest on financial assets at the same rate. 3. Year 1 At time 0, you...
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...Kapitel 1 Normative (prescriptive) accounting theory Inte baserad på empiriska tester (som positive teorier är) utan de är baserade på vad researcher tror ska eller borde inträffa vid särskilda omständigheter. Teorier som föreskriver (prescribe) istället för förklarar (describe) särskilda handlingar kallas för normativa teorier eftersom att dom baseras på normer som researchern som lägger fram teorierna har. T.ex. säger hur vi ska ta till oss och använda redovisningsmetoder. Kapitel 2 Theories of regulation Public interest theory There is the public interest theory of regulation which propose that regulation be introduces to protect the public. It assumes that the regulatory body (usually government) is a neutral arbiter of the public interest and does not let its own self-interest impact on its rule-making processes. “The regulator does its best to regulate so as to maximize social welfare. Consequently, regulation is thought of as a trade-off between the costs of regulation and its social benefits in the form of improved operations of markets”. Regulation put in place to benefit society as a whole rather than vested interests. Regulatory body considered to represent interests of the society in which it operates, rather than private interests of the regulators. Assumes that government is a neutral arbiter. Criticisms of public interest theory Critics question assumptions that economic markets operate inefficiently if unregulated. Question the assumption...
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...Convergence Project Financial Accounting Standards Board and International Accounting Standards Board By: Lydia Ferdin Our world is changing and sometimes in business, there are times when we must change our policies, standards, and guidelines as well to keep up with the natural changes in our environment. This leads to the idea of convergence as it relates to accounting. One of the world’s greatest naturalist and Greek professor Heraclitus (535 BC - 475 BC), once coined the theory and phrase “the only constant in life is change”. This is the same theory and philosophy that is used in business, specifically within the principles of the governing bodies and policies of accounting, today. The mission of the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) is to improve domestic and international accounting standards for the benefit of present and future investors, including lenders, donors, creditors, and users of financial statements. The FASB and the IASB believes that pursuing convergence will make accounting standards and principles as similar as possible while adhering to the mission of the FASB. Convergence among national and international accounting standards would foster comparability with the use of internationally converged accounting standards. Comparable Standards would reduce costs to users and preparers of financial statements and make worldwide capital markets more efficient. The purpose of the FASB and the...
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...1 Luca Pacioli: Father Of Modern Accounting ...................................................................................... 2 1.2 19th Century – The Beginnings of Modern Accounting in Europe and America ............................... 3 1.3 20th Century – The Development of Modern Accounting Standards................................................. 4 1.4 21st Century – Accounting Regulation in Modern Commerce ........................................................... 4 2. DEVELOPMENT OF ACCOUNTING .................................................................................. 4 3. EVOLUTION OF ACCOUNTING ......................................................................................... 5 4. THE CONSEQUENCE OF DOUBLE ENTRY ..................................................................... 6 5. RECENT GROWTHS AND DEVELOPMENTS IN ACCOUNTING ............................... 7 6. LOOKING TO THE FUTURE ............................................................................................... 8 REFERENCES .............................................................................................................................. 9 1. INTRODUCTION The main objective of this study is to critically review the Origin, Growth and Development of accounting theories and their impacts on financial reporting. Other objectives are to explore accounting theory in resolving areas of diversities among users of financial statements. It further examines...
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...Conceptual Framework Accounting Essay ‘Developing a conceptual framework is an impossible possibility ‘it is hard to say that this statement is wrong or not. First, there is no accurate or definitive view of what constitutes a conceptual framework, but there is no doubt that conceptual framework helping a development of academic theory, meanwhile, it is also provide a great deal of prescription. Developing a conceptual framework is feasible and promising. In this issue, I explain what is the conceptual framework? Who needs them? And list the importance of conceptual framework to financial report prove my view. NEED FOR A CONCEPTUAL FRAMEWORK Why do we need to develop a conceptual framework? Of course, it is be useful, the body of concepts should to make rules and relate to financial report; a soundly developed conceptual framework enables the IASB to issue more useful and consistent pronouncements over time. It means a coherent standard should result. So, if framework have no a soundly development, the guidance by it will influent standard-setting based on individual concepts. In other words, standard-setting cannot base on personal conceptual frameworks; it will lead to wrong conclusions about identical or similar issues than it did previously. As a result, past decisions is not treat as future ones, standards cannot be consistent with one another. Furthermore, the conceptual framework should be paying attention to users’ understanding about financial reporting. On the other...
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...Accounting Horizons Vol. 26, No. 1 2012 pp. 125–133 American Accounting Association DOI: 10.2308/acch-50087 COMMENTARY Some Conceptual Tensions in Financial Reporting American Accounting Association’s Financial Accounting Standards Committee (FASC) Yuri Biondi, Jonathan Glover, Karim Jamal (Chair and principal co-author), James A. Ohlson, Stephen H. Penman, Shyam Sunder (invited principal co-author), and Eiko Tsujiyama SYNOPSIS: We examine four key conceptual tensions that are at the heart of many financial reporting dilemmas: stocks versus flows, ex ante versus ex post, conventions versus economic substance, and top-down design versus bottom-up evolution as sources of accounting practice. Associated with each of these conceptual dimensions is an accounting duality; in some cases, one side (e.g., stocks) is easier to measure in a reliable manner, while the other side (e.g., flows) is easier to measure in other instances. We suggest that financial reporting would benefit from a willingness to pay attention to, and find compromise between, both sides of these tensions; forcing a choice of one over the other does not serve to improve financial reporting. Keywords: conceptual tensions; stocks-flows; ex ante-ex post; conventions-economic features; design-evolution. JEL Classification: M40. INTRODUCTION I n the developing of financial reporting, accountants have had to repeatedly deal with some basic conceptual tensions that arise due to the very nature of accounting...
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...Impossible Possibility Accounting Essay Accounting is playing an important role in nowadays society. It provides financial information to the user to make business decision. However, accountants have to follow accounting standards when they are providing the information. We may question what the principle of those standards is. Financial accounting theory was created as the principle in making standards, and conceptual framework for accounting built up. This essay is going to talk about whether developing a conceptual framework is an impossible possibility. In order to talk about this, I am going through some history of accounting, the definition and compare the conceptual framework under different standards. Accounting was created for thousands years ago. It dates back more than 7,000 years which is the time of ancient Babylon, Assyris and Sumeria. (Friedlob, G. Thomas & Plewa, Franklin James, 1996) At that time, people did accounting for their personal need. With the change of the times, accounting no longer work for personal need. People need common standards for stakeholders to use when making decisions. Countries built up Generally Accepted Accounting Principles (GAAP) to set up rules for accountants to do accounting. When the business is becoming bigger, people find out that it is hard to understand other countries' accounting report. People need international standards, so some international standards come out, Such as International Financial Reporting Standards (IFRS)...
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...The pros and cons of regulating corporate reporting:A critical review of the arguments Robert Bushman, Wayne R. Landsman Accounting and Business ResearchVol. 40, Iss. 3, 2010 Introduction There were a series of scandals in the UK in the 90’s which resulted in the collapse of Barings Bank, due to this the Financial Services Authority changed the structure of financial regulation that consolidated regulation responsibilities. The aftermath of the financial crisis of 2007 to 2009 has drawn the financial accounting standard setting into the orbit of political processes focused on restructuring the regulation of the world’s financial markets. The crisis has ignited worldwide debate on issues of systemic risk and the role played by financial regulation in creating exacerbating the crisis. There have been proposals for how to regulate the financial markets and financial institutions should be changed to ease the potential for large scale financial meltdowns in the future. There are many aspects of the financial system under debate, including the alleged role played by financial accounting standards in deepening the trajectory of the crisis. The crisis has forced politicians, regulators and economists to scrutinise financial accounting standards and create pressure for change, which creates an opportune moment to consider how to organise the analysis of efficient regulatory choice. This paper lays out the basic arguments that have been put forth both for and against...
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...the International Accounting Standards Board and the Financial Accounting Standard Board Accounting Theory & Research 541 The History & Relationship of the International Accounting Standards Board and the Financial Accounting Standard Board The International Accounting Standards Board (IASB), and independent standard-setting body of the IFRS Foundation was created after the Financial Accounting Standards Board (FASB) to develop and establish universal accounting procedures and standards for both boards. In recent years however, there has been significant shifts in the relationship between both entities given various considerations. Currently, IASB and FASB are working on a joint venture referred to as the convergence project, in hopes of eliminating a variety of differences between International Financial Reporting Standards and U.S. Generally Accepted Accounting Principles. It is further my intent to provide a brief history of the relationship between the two aforementioned entities as well as briefly address the importance of the prescribed course of study within the University of Phoenix’s Master of Accountancy program for individuals who are pursing professions within the field of accounting. History In 1973, FASB was born of the Financial Accounting Foundation (FAF) to generate and rectify practices of financial accounting and reporting for nongovernmental businesses. This change was made because of the censure of the Accounting Principles Board (APB)...
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... Doris Edwards ACC/541 – Accounting Theory and Research Instructor - Leslie Crews, JD, MBT March 28, 2011 Financial Accounting Standards Board History The Financial Accounting Standards Board (FASB) is a private sector organization that was established in 1973. The FASB is governed by the Financial Accounting Foundation (FAF). The FAF appoints the members of the Financial Accounting Standards Advisory Council (FASAC), the council is the entity that informs the FASB of pressing issues or topics to be reviewed (2003, Webster’s). The goal of the FASB is to set standards for financial accounting practices and the production of financial reports. The FASB works to ensure that financial reporting is; transparent, reliable, relevant, comparable, and consistent. It is the responsibility of the FASB to regularly review standards, to check for deficiencies within the current standards, and to also look for methods to improve reporting based on current day needs. As set by Section 108 of the Sarbanes-Oxley Act any standard set by the FASB is recognized to be “generally accepted” for the purpose of the federal securities laws (Schroeder, 2011). The FASB initially issued standards through two different types of pronouncements, these are more commonly known as Statements of Financial Accounting Standards (SFAS’s) and Interpretations. Today the...
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...Accounting Standards Board Paper Cassandra Fatchett ACC/541 Monday, March 23, 2015 Christine Errico Accounting Standards Board Paper International convergence of accounting standards is not exactly a new idea. In the 1950’s, in response to economic integration post World War II, initial efforts focused on reducing the differences among accounting principles used in major capital markets around the world. By the 1990's, 40 years later, the idea of harmonization had been replaced by the concept of convergence. Rather than all accounting principles complement each other, it was decided that a new set of internationally recognized accounting standards would be used in all major capital markets. Convergence is described as making global accounting standards as similar as possible. All users of financial information should benefit from the increased comparability of the convergence of financial accounting standards. The FASB has always been on a mission to improve the financial accounting standards in the U.S. for the benefit of investors, lenders, creditors, and all other users of financial statements. They believe that pursuing convergence is compliant with that mission. In 2008, both the FASB and the IASB issued a memorandum of understanding on the convergence of accounting standards called the The Norwalk Agreement. It outlined the agreement made by both entities to address accounting practices that were considered to be deficient in the U.S., GAAP, as well as practices...
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