FAR 600ACCOUNTING

THEORYTOPIC 3 : ACCOUNTING

THEORY CONSTRUCTION

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ACCOUNTING THEORY

CONSTRUCTION

PRAGMATIC THEORY

SYNTACTIC & SEMANTIC

THEORY

NORMATIVE THEORY

POSITIVE THEORY

TYPES OF PRAGMATIC THEORIES

DESCRIPTIVE PRAGMATIC APPROACH

PSYCHOLOGICAL PRAGMATIC APPROACH

DESCRIPTIVE

PRAGMATIC

APPROACH

Is an inductive approach. Based on continual

observation of

accountants

Descibe the real world

practices and how

accountant act in

certain situations

The oldest and most

universally used

method of accounting

theory constructio

n

Not include an Analytical judgement of the quality of an

accountant’s actions.Not provide for

accounting technique to be challenged, it does not allow for

change.Focus attention on

accountant’s behavior, not on measuring the

attributes of the firm.

Criti

cism

s on

Desc

riptiv

e

Prag

mati

c App

roac

h

PSYCHOLOGICAL PRAGMATIC APPROACH

Is an inducti

ve approa

ch.

Based on observation

make on user’s

response to the

accountant’s output, such as financial statement

Also describe

real world

practices

Others may not react when they should

Some might have a preconditioned response

User may react in illogical manner

Criticism of

Psychological

Approach

Syntactic theory

Focus on logic

relationship

Semantic

theory

The link between basic concept of a

theory to objects in the real world in

search of meaning

correspondence of truth

HISTORICAL COST

ACCOUNTING

Criticism of syntactic theory :

to logical, do not take into

account inflation

factor, ignore market value of asset and

liabilities

Advantage : it is easier to record since its

verify what is happened

Disadvantage : do not show time value of

money

Criticism of semantic

theory : only in recorded transaction

THE CRITICISM OF

SEMANTIC AND

SYNTATIC THEORIES

Semantic theory used as input to a system and verified only by examining the underlying document And check

mathematical calculation

Final output not verified

empirically and not observe

In auditing process

Historical theory has semantic content only

The syntactic have been criticized on the practice

of summing several different amounts

assigned to specific assets

Concentrated on deriving a single measure for assets and a unique profit figureNo agreement on what constituted a correct or true measure of value and profit

True incomeBasic objective – aid the decision making process of certain users of accounting reports by providing useful accounting dataArgue that all users have the same requirement for accounting dataBased on classical economics concepts of profit and wealth or rational decision making

Decision-usefulness

NORMATIVE THEORIES

ASSUMPTIONS OF

NORMATIVE THEORY

Profits and value can be

measured precisely

Financial accounting is

useful for making

economic decisions

Markets are inefficient and can be fooled by ‘creative

accountant’

Conventional accounting is

inefficient

There is one unit profit

major

Accounting should be a

measurement system

CRITICISM OF

NORMATIVE

THEORY

Can be used only

as an instrumen

t for prediction

Predicitive success is

distributed by uncontrollable

interning variable. E.g. :

inflation, interest rate,

customer confidence

• Experience or fact of the real world

Meaning

• Observable and verifiable

• Used scientific approach

Nature• Accounting

policy choice• Capital market

research

Focus

• Explain reason for current practice

Objective

• Accounting should be a measurement system

• Profit and value can be measure precisely

Assumption• Positive theory

are net value free

• The theory use large scale statistical research

Criticism

POSITIVE THEORIES

Normative• Normative theories are

prescriptive• It prescribes how people

such as accountants should behave to achieve an outcome that is judged to be right moral just or otherwise a good outcome

• Cannot be used practice in a real world

Positive• Positive theories a

descriptive explanatory and predictive

• They describe how people do behave in a certain manner or they predict what people have done or will do

• Can be used practise in a real world

DIFFERENCESBETWEEN

POSITIVE THEORY OF ACCOUNTING

POLICY AND DISCLOSURE

AGENCY THEORY

CONTRACTING THEORY

POLITICAL PROCESSES

CONTRACTING THEORY

• Firm is a legal nexus (connection) relationship among supplies and consumers of factor of production

Definition

• Agency relationship happen when there is a contract which the principal engage with another party (agent) to perform the services on the principal behalf

When agent interest

more than principal it will lead to agency cost

AGENCY COST

TypesMonitorin

g cost

Residual loss

Bonding cost

Settling up

Principal review the remuneration package

given to the agent

Remuneration level has to tally with the

agent effort

Residual opportunis

m

Cost borne by agent due to

loss of reputation

Political

Cost

Wealth transfer away from a firm due to its political exposure

Happen when firm has high public profile and firm is an appropriate target for

political action

Greater information cost, diffusive reward and increase monitoring cost = greater residual occurring

POLITICAL PROCESSES

What is PAT

Theory are consistent

Tested empirically

Scientific methodology

Model connection btw Acctg,

Firm & MarketEconomic Focus

Understanding the acctg

policies matters

Strengths of PAT

Positive Accounting

Normative Accounting

- Empirical- Identifiable

- Tested Theory

- Unempirical- Unidentifiable- Irrefutable

SCOPE OF PAT

o Did not explain actg practice.

o Actg report focus on stewardship function.

o Focus on 2 central focuses Opportunistic reason ( Ex-

Post) Efficient reason ( Ex-Ante)

Second Stages- Actg Policy Choice -

First Stage- Capital Market

Research -