The search for objectives

THE SEARCH FOR OBJECTIVES

Nyoman Ardiantha Putera / 344132 Muhammad Heickal

Pradinanta / 350168

Orientation to Theory

“a cohesive set of hypothetical, conceptual and pragmatic principles forming a general frame of reference for a field of study”

1. To identify the field of accounting so that useful generalizations about the field can be made and a theory developed

2. To establish standards by which accounting information can be judged

3. To point out possible improvements in accounting practice

4. To present useful framework for accounting researchers seeking to extend the uses of accounting and the scope of accounting subject matter as the needs of society expand

ASOBAT definition of Theory

“process of identifying, measuring, communicating economic information to permit informed judgments & decisions by users of information”

Objectives of Accounting

Making decisions concerning limited resources⬜ Involves an evaluations of what is

expected to happen in the future⬜ Informal manner or Complex calculations ⬜ Users of accounting comes from diverse

groups⬜ Accounting reports DO NOT make

predictions, give inputs for users

Directing and Controlling Resources⬜ For managerial uses⬜ Different needs from the external users⬜ Follows same standards

Maintaining Custodianship of Resources⬜ Stewardships⬜ Funds used by Management that have

been entrusted by Investors⬜ Agency Theory

Facilitating Social Functions and Controls⬜ Stewardships to the society as a whole

◼ Taxation, fraud deterrence and prevention, governmental regulation, statistics information used to measure economic activity

⬜ Entity bears additional data’s cost

Standards for Accounting Information

⬜ Relevance⬜ Verifiability⬜ Freedom of Bias⬜ Quantifiability

Guidelines for Communicating Accounting

1.Appropriateness to expected use2.Disclosure of significant relationships3.Inclusion of environmental information4.Uniformity of practice within and among

entities5.Consistency of practices through time

ASOBAT is critized for being too brief, but it still is important and has beneficial influence

APB Statement 4⬜The Theory that used by DSAK⬜published in October 1970⬜Criticized heavily

◼inadequacy of research, lack of independence, lack of sufficient exposure

⬜State fundamental concepts of financial reporting as a foundation for the opinions of the APB

Orientation to Definitions⬜Definition of Accounting

◼“Accounting is a service activity. Its function is to provide quantitative information, primarily financial in nature, about economics entities that is intended to be useful in making economic decisions”

⬜Other Definitions◼“assets, liabilities, owners’ equity, revenues,

and expenses as basic elements of financial accounting”

◼recognized and measured in conformity with generally accepted accounting principles

Other Aspects of APB Statement 4

⬜Accounting is a measurement discipline (paragraph 67)⬜The section on objectives aligned with

the work of ASOBAT, which overlapped “qualitative objective” of APB Statement 4

◼relevance, understandability, neutrality, timeliness, comparability, and completeness.

⬜Less innovative◼rehash some of the postulates from ARS 1◼present virtually no theoretical innovation

Concluding Remarks on APB Statement 4

Still questioned◼can the objectives be implemented to various

accounting principles?

Considering its positive aspects, it has served a useful purpose

The Trueblood Committee Report

⬜AICPA formed the Trueblood Committee at a time when APB was under heavy criticism◼Founded April 1971

◼Charged with using APB Statement 4 as a vehicle for refining the objectives of financial statements

⬜Enumerated 12 objectives of financial accounting

12 Objectives of Financial Accounting

1. Basic objective of financial statements is to provide information useful for making economic decisions.

2. An objective of financial statements is to serve primarily users who have limited authority,ability, or resources to obtain information and who rely on financial statements as their principal source of information about an enterprise’s economic activities.

3. An objective of financial statements is to provide information useful to investors and creditors for predicting, comparing, and evaluating potential cash flows to them in terms of amount, timing, and related uncertainty.

12 Objectives of Financial Accounting (cont.)

3. An objective of financial statements is to provide information useful to investors and creditors for predicting, comparing, and evaluating potential cash flows to them in terms of amount, timing, and related uncertainty.

4. An objective of financial statements is to provide users with information for predicting, comparing, and evaluating enterprise earning power.


5. An objective of financial statements is to supply information useful in judging management’s ability to utilize enterprise resources effectively in achieving the primary enterprise goal.

6. An objective of financial statements is to provide factual and interpretive information about transactions and other events which is useful for predicting, comparing, and evaluating enterprise earning power. Basic underlying assumptions with respect to matters subject to interpretation, evaluation, prediction, or estimation should be disclosed.


7. An objective is to provide a statement of financial position, useful for predicting, comparing, and evaluating enterprise earning power. This statement should provide information concerning enterprise transactions and other events that are part of incomplete earning cycles. current values should be reported when they differ significantly from historical costs. Assets and liabilities should be grouped or segregated by the relative uncertainty of the amount and timing of prospective realization or liquidation.


8. An objective is to provide a statement of periodic earnings useful for predicting, comparing, and evaluating enterprise earning power. The net result of completed earnings cycles and enterprise activities resulting in recognizable progress toward completion of incomplete cycles should be reported. changes in the values reflected in successive statements of financial position should be reported, but separately, since they differ in terms of their certainty of realization.


9. Another objective is to provide a statement of financial activities useful for predicting, comparing, and evaluating enterprise earning power. This statement should report mainly on factual aspects of enterprise transactions having or expected to have significant cash consequences. This statement should report data that require minimal judgment and interpretation by the preparer.

10.An objective of financial statements is to provide information useful for the predictive process. Financial forecasts should be provided when they will enhance the reliability of users’ predictions.


11.An objective of financial statements for governmental and not-for-profit organizations is to provide information useful for evaluating the effectiveness of the management of the resources in achieving the organization’s goals. Performance measures should be quantified in terms of identified goals.

12.An objective of financial statements is to report on those activities of the enterprise that affect society which can be determined and described or measured and which are important to the role of the enterprise in its social environment.

SATTAA Statement on Accounting Theory and

Theory Acceptance (1973)⬜provide a survey for:

◼the current financial accounting literature◼a statement of where the profession stood

relative to accounting theory

Very cautionary document in terms of the possibility for adopting any one valuation theory

Theory Approaches in Accounting

Classical Approaches◼Old systems◼Primarily normative and deductive◼Considered superior for user needs by the

developers◼in some cases, used inductive approach (a

gleaning from accounting literature, from some observations of practice)

Theory Approaches in Accounting (cont.)

Decision-Usefulness Approachconcentrates on:⬜users of accounting reports⬜users decisions⬜information needs⬜information-processing abilities

Dichotomized into Decision Models and Decision Makers

Decision-Model Orientation

⬜Normative and Deductive, criteria of a metatheoretical framework⬜Some form of relevance for particular

decisions by a particular user groups is stressed⬜The relevance criterion is instrumental in

measuring:◼assets, liabilities, and income transactions

Decision-Maker Orientation

⬜Descriptive and Inductive◼assumes: the information that is desired

should be supplied◼empirical◼produces advocacy for particular valuation

systems and income measurement systems

Theory Approaches in Accounting (cont.)

Information Economics Approach⬜does not deal directly with alternative

valuation systems⬜concerned with costs and benefits from

information production and usage

Views accounting information as economic good

Deficiencies of Present Approaches to Theory

The acceptance of a particular valuation system

⬜Problem: diversity of users -> different information needs

“the heterogeneity of users information need is still unproven”

Concluding Remarks on SATTA

User objectives

⬜Two major areas where broad information is applicable to many user groups

◼Predictive Ability◼Accountability

User objectives (cont.)

Predictive ability⬜The usefulness of accounting data as

an aid to predict future variables.⬜Predict future income on the basis of

present and past income numbers⬜Two other sets of accounting-

generated numbers:◼quarterly earnings announcements as

predictors of annual earnings◼financial ratios as predictors of

bankcruptcy


Accountability⬜The responsibility of management to

report on achieving goals for the effective and efficient utilization of enterprise resources.⬜The measurements based on earnings

per share and return on investment and its components.


Secondary objectives⬜Capital maintenance

◼gives information about the amount of dividends that are paid during a period without returning capital to the stockholders

⬜Adaptability◼concerned with measuring, total liquidity

available to the firm.

User diversity⬜Some of the information needs of

different user groups may be complementary.⬜Two further points that are quite

important:◼There may be considerable overlap among

these group◼The specialized information that is needed by

these various groups may already exist and information technology makes dissemination of the information relatively inexpensive.

Economy & Finance

The search for objectives