ACC307 – Accounting Theory 1. Students are required to complete three case studies. 2. Your answer must be both uploaded to Moodle in word file and handed over a printed copy with signed coversheet. 3. You need to support your answers with appropriate Harvard / APA style references where necessary. 4. Only include information in your appendixes that has been directly referred to in the body of your document. 5. Include a title/cover page containing the subject title and code and the name, student id numbers. 6. Please save the document as ACC307AT1_first name_Surename _Student Number Case Study 1 (1000 words) Revisiting the conceptual framework The FASB and IASB began a joint agenda project to revisit their conceptual frameworks for financial accounting and reporting in 2002. Each board bases its accounting standards decisions in large part on the foundation of objectives, characteristics, definitions, and criteria set forth in their existing conceptual frameworks. The goals of the new project are to build on the two boards' existing frameworks by refining, updating, completing, and converging them into a common framework that both Boards can use in developing new and revised accounting standards. A common goal of the FASB and IASB, shared by their constituents, is for their standards to be 'principles-based'. To be principlesbased, standards cannot be a collection of conventions but rather must be rooted in fundamental concepts. For standards on various issues to result in coherent financial accounting and reporting, the fundamental concepts need to constitute a framework that is sound, comprehensive, and internally consistent. Without the guidance provided by an agreed-upon framework, standard setting ends up being based on the individual concepts developed by each member of the standardsetting body. Standard setting that is based on the personal conceptual frameworks of individual standard setters can produce agreement on specific standard-setting issues onf y when enough of those personal frameworks happen to intersect on that issue. However, even those agreements may prove transitory because, as the membership of the standard-setting body changes over time, the mix of personal conceptual frameworks changes as well. As a result, that standard-setting body may reach significantly different conclusions about similar (or even identical) issues than it did previously, with standards not being consistent with one another and past decisions not being indicative of future ones. That concern is not merely hypothetical: substantial difficulties in reaching agreement in its first standards projects was a major reason that the original FASB members decided to devote substantial effort to develop a conceptual framework. The IASB Framework is intended to assist not only standard setters but also preparers of financial statements (in applying international financial reporting standards and in dealing with topics on which standards have not.

1. ACC307 – Accounting Theory
1. Students are required to complete three case studies.
2. Your answer must be both uploaded to Moodle in word file
and handed over a printed copy with signed coversheet.
3. You need to support your answers with appropriate Harvard /
APA style references where necessary.
4. Only include information in your appendixes that has been
directly referred to in the body of your document.
5. Include a title/cover page containing the subject title and
code and the name, student id numbers.
6. Please save the document as ACC307AT1_first
name_Surename _Student Number
Case Study 1 (1000 words)
Revisiting the conceptual framework
The FASB and IASB began a joint agenda project to revisit
their conceptual frameworks for financial accounting and
reporting in 2002. Each board bases its accounting standards
decisions in large part on the foundation of objectives,
characteristics, definitions, and criteria set forth in their
existing conceptual frameworks. The goals of the new project
are to build on the two boards' existing frameworks by refining,
updating, completing, and converging them into a common
framework that both Boards can use in developing new and
revised accounting standards. A common goal of the FASB and
IASB, shared by their constituents, is for their standards to be
'principles-based'. To be principlesbased, standards cannot be a
collection of conventions but rather must be rooted in
fundamental concepts. For standards on various issues to result
in coherent financial accounting and reporting, the fundamental
concepts need to constitute a framework that is sound,

2. comprehensive, and internally consistent.
Without the guidance provided by an agreed-upon framework,
standard setting ends up being based on the individual concepts
developed by each member of the standardsetting body.
Standard setting that is based on the personal conceptual
frameworks of individual standard setters can produce
agreement on specific standard-setting issues onf y when
enough of those personal frameworks happen to intersect on that
issue. However, even those agreements may prove transitory
because, as the membership of the standard-setting body
changes over time, the mix of personal conceptual frameworks
changes as well. As a result, that standard-setting body may
reach significantly different conclusions about similar (or even
identical) issues than it did previously, with standards not being
consistent with one another and past decisions not being
indicative of future ones. That concern is not merely
hypothetical: substantial difficulties in reaching agreement in
its first standards projects was a major reason that the original
FASB members decided to devote substantial effort to develop a
conceptual framework.
The IASB Framework is intended to assist not only standard
setters but also preparers of financial statements (in applying
international financial reporting standards and in dealing with
topics on which standards have not yet been developed),
auditors (in forming opinions about financial statements), and
users (in interpreting information contained in financial
statements). Those purposes also are better served by concepts
that are sound, comprehensive, and internally consistent. (In
contrast, the FASB Concepts Statements state that they do not
justify changing generally accepted accounting and reporting
practices or interpreting existing standards based on personal
interpretations of the concepts, one of a number of differences
between the two frameworks.)
Another common goal of the FASB and IASB is to converge
their standards. The Boards have been pursuing a number of
projects that are aimed at achieving short-term convergence on

3. specific issues, as well as several major projects that are being
conducted jointly or in tandem. Moreover, the Boards have
aligned their agendas more closely to achieve convergence in
future standards. The Boards will encounter difficulties
converging their standards if they base their decisions on
different frameworks.
The FASB's current Concepts Statements and the IASB's
Framework, developed mainly during the 1970s and 1980s,
articulate concepts that go a long way toward being an adequate
foundation for principles-based standards. Some constituents
accept those concepts, but others do not. Although the current
concepts have been helpful, the IASB and FASS will not be able
to realise fully their goal of issuing a common set of principles-
based standards if those standards are based on the current
FASS Concepts Statements and IASB Framework. That is
because those documents are in need of refinement, updating,
completion, and convergence.
The planned approach in the joint project will identify
troublesome issues that seem to reappear time and time again in
a variety of standard-setting projects and often in a variety of
guises. That is, the focus will be on issues that cut across a
number of different projects. Because it is not possible to
address those cross-cutting issues comprehensively in the
context of any one standards-level project, the conceptual
framework project provides a better way to consider their
broader implications, thereby assisting the boards in developing
standards-level guidance.
As noted in the chapter, the boards have issued and received
comments on an exposure draft relating to Phase A Objectives
and Qualitative Characteristics. A discussion paper relating to
Phase D Reporting Entity had been issued and work is
continuing on Phase B Elements and Recognition and Phase C
Measurement.
Source: Excerpts from Halsey G. Bullen and Kimberley Crook,
'Revisiting the concepts: A new conceptual framework project',
M<1y 200'), FASB and 11SB, www.fasb.org or www.idsh.org.

4. Questions
1. Explain why principles-based standards require a conceptual
framework.
2. Why is it important that the IASB and FASB share a common
conceptual framework?
3. It is suggested that several parties can benefit from a
conceptual framework. Do you consider that a conceptual
framework is more important for some parties than others?
Explain your reasoning.
4. What is meant by a 'cross-cutting' issue? Suggest some
possible examples of crosscutting issues.
Case Study 2 (1000 words)
The trend toward fair value accounting
by J Russell Madray, CPA
The Debate
Critics contend that GAAP is seriously flawed. Some in the
accounting profession go so far as to pronounce financial
statements almost completely irrelevant to the financial analyst
community. The fact that the market value of publicly traded
firms on the New York Stock Exchange is an average of five
times their asset values serves to highlight this deficiency.
Many reformers, including FASB chairman Robert Herz, believe
that fair value accounting must be part of the answer to making
financial statements more relevant and useful.* Advocates of
fair value accounting say it would give users of financial
statements a far clearer picture of the economic state of a
company.
But switching from historical cost to fair value requires
enormous effort. Valuing assets in the absence of active markets
can be very subjective, making financial statements less
reliable. In fact, disputes can arise over the very definition of
certain assets and liabilities.
The crux of the fair value debate is this: Each side agrees that
relevance and reliability are important, but fair value advocates
emphasize relevance, while historical cost advocates place

5. greater weight on reliability.
Relevance versus Reliability
The pertinent conceptual guidance for making trade-offs
between relevance and reliability is provided by FASB Concepts
Statement No. 2, Qualitative Characteristics of Accounting
Information. It provides guidance for making standard-setting
decisions aimed at producing information useful to investors
and creditors. Concepts Statement No. 2 states:
The qualities that distinguish "better" (more useful) information
from "inferior" (less useful) information are primarily the
qualities of relevance and reliability ... The objective of
accounting policy decisions is to produce accounting
information that is relevant to the purposes to be served and is
reliable.
Critics of fair value generally believe that reliability should be
the dominant characteristic of financial statement measures. But
the FASB has required greater use of fair value measurements in
financial statements because it perceives that information as
more relevant to investors and creditors than historical cost
information. In that regard, the FASB has not accepted the view
that reliability should outweigh relevance for financial
statement 4
measures.
Some critics also interpret reliability as having a meaning that
differs in at least certain respects from how that term is defined
in the FASB's Conceptual Framework. Some critics equate
reliability with precision, and others view it principally in terms
of verifiability. However, Concepts Statement No. 2 defines
reliability as "the quality of information that assures that
information is reasonably free from error or bias and faithfully
represents what it purports to represent." With respect to
measures, it states that "[t]he reliability of a measure rests on
the faithfulness with which it represents what it purports to
represent, coupled with an assurance for the user, which comes
through verification, that it has that representational quality."

6. Thus, the principal components of reliability are
representational faithfulness and verifiability.
Although there are reliability concerns associated with fair
value measures, particularly when such measures may not be
able to be observed in active markets and greater reliance must
be placed on estimates of those measures, present-day financial
statements are replete with estimates that are viewed as being
sufficiently reliable. Indeed, present day measures of many
assets and liabilities (and changes in them) are based on
estimates, for example, the collectability of receivables,
salability of inventories, useful lives of equipment, amounts and
timing of future cash flows from investments, or likelihood of
loss in tort or environmental litigation.
Even though the precision of calculated measures such as those
in depreciation accounting is not open to question since they
can be calculated down to the penny, the reliability of those
measures is open to question. Precision, therefore, is not a
component of reliability under Concepts Statement No. 2. In
fact, Concepts Statement No. 2 expressly states that reliability
does not imply certainty or precision, and adds that any
pretension to those qualities if they do not exist is a negation of
reliability.
* Robert H. Herz's remarks to the Financial Executives
International Current Financial Reporting Issues Conference,
New York Hilton Hotel, November 4, 2002.
Source: Excerpts from ‘The trend toward fair value accounting',
Journal of Financial Service Professionals, May 2001, pp. 16-
113.
Questions
1. What you think is the fundamental problem with financial
statements based upon the historic cost measurement principle
used under US GAAP ?
2. What do you think of the principle' ... accounts must reflect
economic reality' as a core principle of measurement in
accounting?
3. How would you measure economic reality?

7. 4. What is reliability in accounting?
Case Study 3 (1000 words)
Disclosure of environmental liability
by Lindene Patton C.l.H., Senior vice-president and counsel,
Zurich 5
Around the world, companies are being required to meet higher
levels of disclosure of environmental liability ... In the United
States, for example, the US Financial Accounting Standard
Board (FASB) issued provisions in 2002 for accounting for
environmental liabilities on assets being retired from service.
The provision for accounting for asset retirement obligations
required companies to reserve environmental liabilities related
to the eventual retirement of an asset if its fair market value
could be reasonably estimated.
The intent of the ruling was disclosure, but the conditional
nature of estimating a fair market value caused corporations to
take the position that they could defer their liability indefinitely
by 'mothballing' a contaminated property. Companies
effectively postponed the recognition of their environmental
liabilities in the absence of pending or anticipated litigation.
Earlier this year, FASB clarified its intention by providing an
interpretation that said companies have a legal obligation to
reserve for environmental and other liabilities associated with
the eventual retirement of manufacturing facilities or parts of
facilities, even when the timing or method of settlement is
uncertain. Among examples given by FASB:
• An asbestos-contaminated factory cannot simply be
'mothballed' without adequate reserves to cover the eventual
cost of removing the asbestos
• Reserves must be established today for the eventual disposal
of still-in-use, creosotesoaked utility poles
As a result of what may seem like a minor technical re-
interpretation, companies may have to recognise immediately
millions of dollars in liabilities in their income statements to
comply with this change.

8. In Europe, regulators have also initiated efforts to promote
disclosure. In 2001, the European Commission promulgated
tougher, non-binding guidance for disclosing environmental
costs and liabilities, and various countries in Europe have
issued additional requirements related to environmental
disclosure. In 2002, the Canadian Institute of Chartered
Accountants published voluntary guidance that stressed the
importance of disclosing all material risks, including
environmental liabilities, in companies' annual reports.
Some financial institutions have also pledged to adhere to tenets
of international initiatives such as the Equator Principles, which
factor environmental and social considerations into assessing
the risk of a project. Also, a group of pension funds,
foundations, European investors and US state treasurers have
endorsed UN efforts to promote a minimum level of disclosure
on environmental, social and governance issues.
Recognition of environmental liabilities may also soon emerge
as an issue for companies in Asia. While environmental issues
may have taken a back seat to rapid economic development over
the past 20 years, that situation may change as legislation and
regulation catch up with development.
The responsibility for disclosing future environmental liability
is clearly a growing issue for companies around the world.
However, accurately estimating cleanup costs is not an easy
task due to unknown contaminants, legacy liabilities related to
formerly operated property, regulatory changes or unexpected
claims related to natural resource damage.
Questions
1. The article states that the US standard setter FASB requires
companies to record a provision in relation to environmental
costs of retiring an asset ('to reserve environmental liabilities')
if its fair value could be reasonably estimated. How do you
think companies would go about estimating such a provision? 6
2. What aspects of the requirements were used by US companies
to defer recognition of a liability?

9. 3. In what ways does the recognition of the liability in relation
to future restoration activity affect (a) net profit in the current
year and future years; and (b) cash flow in the current and
future years?
4. The article refers to changes in disclosure requirements
relating to environmental liabilities in many countries around
the world. How important is it that companies recognise the
liability? To what extent is disclosure about the liability
sufficient?
The impacts of ads
Advertising is done through many different forms. Some of
these forms include the media that is television, radios, and
publications. Also, advertising is done through billboards,
walls, streets, buildings/ roof tops and vehicles branding among
many others. Advertising is a very strong and influential
marketing strategy because of its potential and capability to
reach out to many consumers located far and wide. Being in the
realization of this fact, many advertisers tend to take advantage
of the power of advertising to manipulate the consumers. On,
the other hand, the consumers are easily carried away by the
information passed to them through advertising thus
encouraging advertisers to continue with the manipulation.
There are numerous ways through which advertising
manipulates the consumers.
There are different products in the market thus confusing the
consumer with a choice of what product is better than the other
one. Hence, advertising uses attracting and manipulative
messages while advertising, unique and inviting packaging and
branding, and competitive prices so that the consumer can
notice the product. This helps different products to appear
unique and easy to identify in the midst of other similar
products.
According to research, consumers always like products that
shall benefit them in one way or another, hence advertising uses
the exact information that the consumers would like to see or

10. hear thus manipulating the consumer’s choice. Whenever a
product said through advertising to be cheap and affordable
despite its quality, the consumers are manipulated to consume
the product more frequently and in high quantities due to its
affordability nature. Also, when a product is said to be of many
benefits to the consumer, regardless of the price, the consumers
strives to ensure that they acquire the product. This is normally
no matters the cost and efforts to be made for the purpose of
gaining the benefits being advertised.
Some adverts are true to their words while others are not. One
way through which as a consumer one can avoid being
manipulated is being true to oneself and knowing what one
really need and in what quantity and quality. Setting these
personal principles helps one to avoid being carried away by the
juicy adverts that constantly keep on being advertised. This
avoids one from purchasing poor quality products in the name
of reduced prices and also helps one to avoid paying excess in
the name of gaining added benefits.
With the world being digital and computerized, the consumer
can also search on the internet and learn the products that bear
the content as the one being advertised. Having adequate
information about products helps the consumer from being
easily manipulated as he/she is already informed and hence can
detect the true and also the exaggerated information in the
adverts.
Hi class,
This week's discussion board is all about integrating research
into your own work. This is why you are asked to focus on
selecting signal phrases which create smooth and logical
transitions between your points and the research you are using
to support those points.

11. Here are samples of the types of posts you should be creating
this week:
INITIAL POST
Ok, so here is my original paragraph and a revised paragraph. I
chose the one on saving money. I needed to add research
information on exactly how much money could be saved and
how this would affect administrative costs. I picked an article
entitled Interconnected cloud computing environments:
Challenges, Taxonomy, and Survey. I found it in the KU
Library, and it's written by three experts on the subject, so I
think it's reliable. My concern is whether the information I
picked is entirely relevant to the paragraph idea. What do you
think?
ORIGINAL PARAGRAPH:
This method saves memory space on multiple PCs. For a
business, this can save money by reducing the amount of
memory the company needs overall, reducing the number of
memory-oriented servers, and reducing the number of system
administrators needed to support those servers. Also, the types
of PCs the company purchases can be more for faster computing
and with less internal memory.
PARAGRAPH WITH ADDED SOURCES:
This method saves memory space on multiple PCs. For a
business, this can save money by reducing the amount of
memory the company needs overall, reducing the number of
memory-oriented servers, and reducing the number of system
administrators needed to support those servers. Also, the types
of PCs the company purchases can be more for faster computing
and with less internal memory. According to an article called
Interconnected cloud computing environments: Challenges,
Taxonomy, and Survey, something as simple as purchasing and
updating internal memory can be a very expensive proposition
for businesses, particularly if each employee is supplied with a
computer at work. Servers also add an astronomical amount to

12. budgets, and the cost to house them is also high. Facebook, for
example, spends upwards of $30 million to purchase, house and
upkeep their servers. Granted, not all companies can just
replace their servers with cloud based systems, but this gives an
indication of potential cost savings.
Thanks