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26 Cards in this Set
- Front
- Back
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What is accounting policy? |
The coherent set of hypothetical, conceptual and pragmatic principles forming a general framework of reference for a field of enquiry. |
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What does accounting policy address? (4) |
1. Definition 2. Recognition 3. Measurement 4. Disclosure |
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What are the types of accounting theory and describe them (2) |
1. Normative - prescribes what should happen - e.g. Conceptual Framework - est a principle: who should look at your financial statements etc. - Designed to explain and predict which firms will and which firms will not use a particular method 2. Positive - Explain or predict activities - Why did you choose policy |
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Development of theories |
Positive: Definitions/Actions > Principles > Assumptions > Objectives (Start with what you know and find info to support it) Normative: Objectives > Assumptions > Principles > Definitions/Actions (Deductive) |
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What is positive accounting theory derived from (2) |
1. Contracting theory 2. Agency theory |
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What is agency theory |
Principal delegates decision-making authority to an agent. Agent has legal and fiduciary duty to act in the best interests of the principal |
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Assumption that the agent is a utility maximiser (3) |
1. Monitoring costs - incur to monitor behaviour of agent 2. Bonding costs - ensure agents aft in best interest of principal reports 3. Residual loss - loss as a result of separation of control |
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What is Owner-Manager Agency |
Managers are likely to act in their own interests |
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What are the 3 major problems in owner-manager agency relationships |
1. Horizon problem - differing time horizons are important to each party 2. Risk aversion - managers generally prefer less risk 3. Dividend retention - managers preference to hold onto funds |
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What is the risk when a lender agrees to provide funds to an entity (Manager-Lender Agency Relationships)? (2) |
Borrower may not honour its obligation to repay all of the borrowed funds with interest 1. Credit risk 2. Debt covenants |
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What problems increase the lenders risk (4)? |
Excessive dividend payments to owners Asset substitution Claim dilution Underinvestment |
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What entities have political relationships? (3) |
Govt Trade Unions NGOs |
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What are the implications of agency theory for accounting policy choice (3) |
Bonus plan hypothesis Debt hypothesis Political cost hypothesis |
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Bonus plan hypothesis |
Managers with bonus plans prefer accounting policies that increase profit |
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Debt hypothesis |
Managers of entities with high leverage prefer accounting policies that increase profit and equity |
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Political cost hypothesis |
Managers of larger entities are more likely to prefer accounting policies that reduce profit (e.g. decrease taxable income) |
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Hypothesis involved in role of accounting in capital markets (2) |
1. Mechanistic hypothesis 2. Efficient markets hypothesis |
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Mechanistic hypothesis (3) |
Predicts that market reacts mechanistically to changes in accounting nos Investors assumed to ignore diffs in acctg policies Implication that investors could be fooled by cosmetic changes in policies |
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Efficient Markets Hypothesis (3) |
Markets are efficient Prices in mkt rapidly adjust to new info so that price fully reflects available info Three forms: Weak, Semi Strong, Strong |
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Positive accounting research - types of market based data (3) |
Event studies Do share prices respond to specific events Association studies Is share price or returns associated with level or changes in earnings Value relevance Are asset values associated with share price / returns |
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What does accounting theory tell us about accounting policies (3)? |
Capital markets theories attempt to explain the effects of accounting policy coice on share prices
Mechanistic hypothesis predicts that investors ignore diffs in accounting policy choice and fixate on reported nos. The efficient market hypothesis predicts that share price will rapidly impound all publicly avail info incl the choice of acctg policy on profit |
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Legitimacy theory (3) |
Organisational legitimacy The values and norm evident in the social contract have changed over time In the past legitimacy was considered only in terms of economic performance Now businesses are expected to consider a range of issues including the env and social consequences of their activities |
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4 ways organisation can obtain or maintain legitimacy |
Seek to educate and inform society about actual changes in the orgs performances and activities Seek to change perceptions of society, but not actually change behaviour Seek to manipulate perception by deflecting attention from the issue of concern to other related issues Seek to change expectations of its performance |
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How can disclosure of info abt an org's effect on, or relationship with society be used in each of the strategies |
provide info to offset negative news which may be publicly avail draw attention to strengths |
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Stakeholder Theory - Normative (3) |
Orgs should treat all stakeholders fairly Org should be anaged for benefit of all its stakeholders Stakeholders are identified, and should be considered in org decisions because of their interest in the activities of the org |
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Stakeholder Theory - Managerial (2) |
Seeks to explain how stakeholders influence org actions Extent to which an org will consider its stakeholders is related to the power / influence of those stakeholders - stakeholders' power is related to the degree of control that have over resources required by org |
