TAK: Introduction

== Overview of Accounting Theory


 * What is theory
 * …the coherent set of hypothetical, conceptual and pragmatic principles forming the general framework of reference for a field of inquiry. (Hendriksen’s definition)


 * What is an accounting theory
 * logical reasoning in the form of a set of broad principles that
 * provide a general framework of reference by which accounting practice can be evaluated and
 * guide the development of new practices and procedures.

Whether a theory is accepted depends on how:
 * well it explains and predicts reality
 * well it is constructed both theoretically and empirically
 * acceptable its implications are


 * Accounting theory is a modern concept compared to mathematics or physics
 * Even Pacioli’s treatise on double-entry accounting focused on documenting practice and did not explain the underlying theoretical basis for it

The development of accounting theory has been mostly unstructured. Chambers:
 * Accounting has frequently been described as a body of practices which have been developed in response to practical needs rather than by deliberate and systematic thinking.

inconsistency in practice
 * Was developed to resolve problems as they arose – reactive
 * Ad hoc approach
 * Led to inconsistencies in practice
 * e.g. different depreciation methods
 * Accounting standard setting
 * Conceptual framework projects have not resolved

Pre-theory (1400s-1800)
Goldberg:
 * No theory of accounting was devised from the time of Pacioli down to the opening of the nineteenth century

Pragmatic accounting (1800-1955)
The ‘general scientific period’
 * based on empirical observation of practice
 * provided an explanation of accounting practice
 * focused on the existing ‘viewpoint’ of accounting

Normative accounting (1956-1970)

 * Sought to establish ‘norms’ for the best accounting practice
 * Focused on what should be (the ideal) v. what is
 * Degenerated into battles between competing viewpoints
 * Two groups dominated:
 * conceptual framework proponents
 * critics of historical cost


 * Factors prompting the demise of the normative period include:
 * the unlikelihood of one particular normative theory being generally accepted
 * the application of financial economic principles
 * the availability of empirical data and new testing methods


 * The major criticisms of normative theories were:
 * they do not necessarily involve empirical hypothesis testing
 * they are based on value judgements

Positive Accounting (1950-now)

 * A shift to a new form of empiricism called ‘positive theory’
 * Had its origins in the ‘general scientific period’
 * It seeks to explain the accounting practices being observed
 * Its objective is to explain and predict accounting practice
 * e.g. the bonus plan hypothesis


 * It helps predict the reactions of ‘players’, such as shareholders, to the actions of managers and to reported accounting information


 * Major deficiencies are:
 * ‘wealth maximisation’ has become the answer to explain all accounting practices and reported information
 * it relies excessively on agency theory and dubious assumptions about the efficiency of markets


 * Behavioural research:
 * concerned with the sociological implications of accounting numbers and the associated actions of ‘key players’
 * emerged in the 1950s
 * despite growing acceptance since the 1980s, positive accounting theory still dominates

Recent developments

 * Academic and professional developments in accounting theory have tended to take different approaches
 * Academic research focuses on capital markets, agency theory and behavioural aspects
 * The profession has sought a more normative approach – what accounting practices should be adopted


 * Conceptual framework – resurrected in 1980s
 * states the nature and purpose of financial reporting
 * Establishes criteria for deciding between alternative accounting practices
 * SACs 1–4


 * Conceptual framework – Recent Developments
 * Joint project between IASB & FASB
 * International harmonisation of accounting practices through a single consistent set of international financial reporting standards (IFRS)


 * The conceptual framework underpinning the IFRS favours a move toward
 * accounting practices that provide information for enhancing decision making by investors and others
 * recognising all gains and losses in the accounting periods in which they occur
 * measurement using exit values

Ref

 * https://sirius.is3.cloudhost.id/docs/ppt-godfrey/Slide-AKT-405-Teori-Akuntansi-1-Godfrey.ppt.pdf