This document outlines the key concepts and learning objectives from Chapter 3 of the textbook "Financial Accounting Theory" by Craig Deegan. It discusses theories of regulating financial accounting practice, including arguments for and against regulation from free-market and public interest perspectives. It also examines theories for why regulation is initially introduced, such as public interest theory, capture theory, and economic interest group theory. Finally, it frames financial accounting standard-setting as a political process that is influenced by various stakeholder groups through submissions and lobbying.
financial accounting theory by Craig Degan 3rd edition chapter 2
prepared by: Dewan Mahbood Hossain
Assistant Professor, dept. of A.I.S
UNIVERSITY OF DHAKA
financial accounting theory by Craig Degan 3rd edition chapter 2
prepared by: Dewan Mahbood Hossain
Assistant Professor, dept. of A.I.S
UNIVERSITY OF DHAKA
"Accounting Theory" is a course of MBA in Jagannath University. This course is very important understanding all the aspects of accounting in business atmosphere.
A theory is defined as “a set of interrelated concepts, definitions, and propositions that represents a systematic view of an Accounting Theoryevent by specifying relations among variables with the purpose of explaining and predicting the event” Copy the link given below and paste it in new browser window to get more information on Theory of Accounting:- www.transtutors.com/homework-help/finance/theory-of-accounting.aspx
1
7-1
ACCOUNTING THEORY
TOPIC 6
CHAPTER 7
Positive Accounting Theory
Learning objectives
7.1 Understand how a positive theory differs from a normative
theory.
7.2 Be aware of the origins of Positive Accounting Theory (PAT).
7.3 Understand that PAT uses insights from agency theory and
why agency theory is of relevance to financial accounting
practices.
7.4 Be aware of the central assumptions of PAT.
7.5 Be aware of the meaning and nature of agency costs.
7.6 Understand why an organisation can usefully be referred to
as a ‘nexus of contracts’.
7.7 Understand the perceived role of accounting in minimising the
transaction costs of an organisation.
continued
Learning objectives (cont.)
7.8 Be aware that accounting policy choices made by
management will be influenced by both efficiency
considerations as well as opportunistic motivations.
7.9 Be able to identify the reasons for the existence of ‘creative
accounting’.
7.10 Be able to explain the meaning of ‘political costs’ and how
accounting can be used to reduce the costs associated with
various political processes.
7.11 Understand the role of accounting-based management
compensation schemes and debt covenants in reducing
potential conflicts (agency costs) within an organisation.
7.12 Understand how particular accounting-based agreements
with parties such as debtholders and managers can provide
incentives for managers to manipulate accounting numbers.
continued
1
2
3
2
Learning objectives (cont.)
7.13 Be aware of what constitutes ‘conservative’ accounting
procedures and why conservative accounting procedures
provide efficient mechanisms for minimising the contracting
costs within an organisation.
7.14 Understand the relevance of PAT to current debates about
how assets and liabilities should be measured.
7.15 Be able to identify some of the criticisms of PAT.
Positive theories compared to
normative theories
• A positive theory seeks to explain and predict
particular phenomena
– Positive Accounting Theory (PAT), which we explore in this
lecture, is one example of a positive theory of accounting.
Other examples are covered in the next lecture (when we
consider theories such as Legitimacy Theory and
institutional theories which are positive theories that can be
applied to explain the practice of accounting)
• By contrast, normative theories (which were
considered in Chapters 5 and 6) prescribe how a
particular practice should be undertaken
– the prescription might depart from existing practice
Positive Accounting Theory
defined
• PAT ‘… is concerned with explaining accounting
practice. It is designed to explain and predict which
firms will and which firms will not use a particular
method … but it says nothing as to which method a
firm should use.’ (Watts and Zimmerman 1986, p. 7)
• Again, positive theories do not prescribe what should
occur – they focus on explaining or predicting what
does occur
continued
4
5
...
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