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Accounting Theory and Practice Essay

QUESTION 1 – Question 1.8:
What is the difference between developing a theory by induction and developing a theory by deduction?

QUESTION 2 – Question 1.9:
Is the study of financial accounting theory a waste of time for accounting students? Explain your answer.

QUESTION 3 – Question 1.26:
Would you reject as ‘insignificant and useless’ a positive theory of accounting on the basis that in a particular research study the results derived failed to support the hypotheses and the related theory? Explain your answer.

QUESTION 4 – Question 1.27 (NEW):
The International Accounting Standards Board has a number of roles, including formulating accounting standards and developing a conceptual framework. Is the work they do in developing an accounting standard or the conceptual framework normative or positive in nature?

QUESTION 5 – Question 1.33 (NEW):
In this chapter we provided quotes from Gray, Owen and Adams (2010), in which they discuss an apparent herding phenomenon that seems to be occurring in respect of the selection and use of particular theories. They state, ‘there has been a strange herding tendency, especially around legitimacy theory’, as well as stating that they ‘also have a sneaking feeling that institutional theory may be coming up fast as the next theory around which to herd’.

What do they mean by this apparent practice of ‘herding’, and what are some possible advantages and disadvantages that are related to this practice?

QUESTION 6 – Question 1.35 (NEW):
Do we really need financial accounting theory if all we are interested in doing is developing accounting standards?

TUTORIAL 2 – Semester 2 2014

Deegan Topics 2 and 3:
The financial reporting environment and Regulation of financial accounting

QUESTION 1 – Question 2.3:
Do you believe that the media portray accounting numbers, such as profits, as some sort of ‘hard’ and objective performance indicator? Why do you think they might do this, and, if they do, what are some of the implications that might arise as a result of this approach?

QUESTION 2 – Question 2.7:
Is it appropriate to look at changes or trends in corporate profits over time without making any adjustments? Explain your answer.

QUESTION 3 – Question 2.14:
If regulators acted in accordance with predictions provided by the private interest theory of regulation, which assumes that all individuals (including politicians and regulators) are motivated by their own economic self-interest, what is the likelihood of the introduction of regulations aimed at reducing the problems associated with climate change – particularly if business corporations opposed such regulations?

QUESTION 4 – Question 3.7:
Is regulation more likely to be required in respect of public goods than other goods? Why?

QUESTION 5 – Question 3.30:
Accounting headline 3.9 (SEE END OF TUTORIAL 2 QUESTIONS) discusses how European banks were able to lobby the European Union (EU) so as to be regulated by a ‘watered down’ version of the accounting standard IAS 39. Explain whether the decision of the EU to embrace a ‘watered down’ version of the standard is consistent with a ‘public interest theory of regulation perspective’, or whether it can be explained by an alternative theoretical perspective (which you should attempt to identify).

QUESTION 6 – Question 3.35:
Let us assume that the government has become concerned that existing disclosure regulation tends to fixate on the financial performance of organisations but fails to address other aspects of corporate performance, including a failure to provide information about corporate social and environmental impacts as well as about various initiatives and investments an organisation has undertaken to improve its social and environmental performance. As such, the government has decided to introduce legislation that will require business corporations to provide information about the social and environmental impacts of their operations, as well as the social and environmental initiatives undertaken by the corporations.

You are required to do the following: (a) Explain from a public interest theory perspective the rationale for the government introducing the legislation and how the government will ultimately assess whether any proposed legislation should actually be introduced. (b) Predict from a capture theory perspective the types of constituents that will benefit in the long run from any social and environmental disclosure legislation. (c) Predict from an economic interest group theory perspective whether any potential legislation to be introduced will lead to an increase in the accountability of corporations in relation to their social and environmental performance despite any implications that this increased corporate accountability might have for the financial success of large but heavily polluting organisations.

TUTORIAL 3 – Semester 2 2014
Deegan Topics 4 and 5:
International accounting and The conceptual framework project

QUESTION 1 – Question 4.19:
It is often argued that the accounting standards of the FASB are rule-based, whereas the accounting standards issued by the IASB are principles-based. Rules-based standards by their nature can be quite complex, particularly if they seek to cover as many situations as possible. Do you think it would be easier to circumvent the requirements of rules-based or principles-based accounting standards?

QUESTION 2 – Question 4.22:
Does the standardisation of accounting standards on a global basis necessarily equate with a standardisation in accounting practice?

QUESTION 3 – Question 4.25
In considering the relevance of IFRS to developing countries, Chand and White (2007, p.606) state: (see below). Explain the reasons behind Chand and White’s claim. “While the forces of globalization and convergence are moving accounting practices towards a unified, or at least, harmonized regulatory framework for financial reporting, this is unlikely to best serve the diverse interests of disparate user groups of financial reports.”

QUESTION 4 – Question 4.27:
Ball (2006, p. 17) makes the following comment: (below). Explain the basis of Ball’s comments. “In sum, even a cursory review of the political and economic diversity among, IFRS-adopting nations, and of their past and present financial reporting practices, makes the notion that uniform standards alone will produce uniform financial reporting seem naïve.”

QUESTION 5 – Question 4.30 (NEW)
In continental European countries, prior to the adoption of IFRS, the domestic accounting rules were typically much more aligned with local taxation regulation than would be the case in countries like the United States, the United Kingdom, Canada, Australia or New Zealand. Why do you think this could have been the case?

QUESTION 6 – Topic 5: Question 6.7:
Conceptual framework projects identify a number of qualitative criteria that financial information should possess if it is to be useful for economic decision making. Two such attributes are neutrality and representational faithfulness? Do you believe that financial information can, in reality be neutral and representationally faithful? Explain your answer.

QUESTION 7 – Topic 5: Question 6.10:
The two main qualitative characteristics that financial information should possess have been identified as relevance and reliability. Is one more important than the other, or are they equally important? TUTORIAL 4 – Semester 2 2014

Deegan Topic 6:
Chapter 10: Reactions of capital markets to financial reporting

QUESTION 1 – Question 10.4 (NEW):
What is an event study and why would an event study be of relevance to an accounting standard-setter?

QUESTION 2 – Question 10.9 (NEW):
If individuals have access to insider information and are able to make large gains on a securities market as a result of using information that is not widely known, then is this an indication that the market is inefficient?

QUESTION 3 – Question 10.16 (NEW):
Evidence shows that share prices might not fully react to financial accounting information immediately and that abnormal returns might persist for a period of time following the release of information (a case of ‘post-announcement drift’). Does this indicate that securities markets are not efficient and that assumptions about market efficiency should be rejected?

QUESTION 4 – Question 10.17:
If an organisation’s operations rely heavily on the specialised expertise of its management team, would you expect there to be a higher or a lower correspondence between the net assets recognised in the statement of financial position (balance sheet), and the total market value of the organisation’s securities, relative to an organisation that relies more on tangible assets (for example, commonly used plant and machinery) to generate its income?

QUESTION 5 – Question 10.24:
Refer to Accounting Headline 10.3 (SEE END OF TUTORIAL 4 QUESTIONS) and explain why investors might have reacted to the false rumour. Is the reaction of investors to this false rumour consistent with the view that the capital market is efficient or inefficient?

QUESTION 6 – Question 10.25:
Review Accounting Headline 10.7 (SEE END OF TUTORIAL 4 QUESTIONS) and explain the reason for the change in the price of Wesfarmers shares. Also, what might have caused the price changes in the shares in the other retail organisations?

QUESTION 7 – Question 10.28:
Read Accounting Headline 10.10 (SEE END OF TUTORIAL 4 QUESTIONS) and, relying on some of the capital markets studies considered in this chapter, explain why the share prices of the pharmaceutical companies might have reacted in the way they did.

TUTORIAL 5 – Semester 2 2014

Deegan Topics 8 and 9: Accounting for Corporate Social Responsibilities

QUESTION 1 – Question 8.1:
Explain the notion of a social contract, and what relevance the social contract has with respect to the legitimacy of an organisation.

QUESTION 2 – Question 8.7:
If an organization was involved in a major accident or incident, would you expect it to use vehicles such as an annual report or a sustainability report to try to explain the incident? If so, explain how and why it would use reports in this way.

QUESTION 3 – Question 8.21 (NEW):

Chapter 8 divided Stakeholder Theory into the ethical branch and the managerial branch. Explain the differences between the two branches in terms of the alternative perspectives about when information will, or should, be provided by an organisation.

QUESTION 4 – Question 9.1:
What has the environment got to do with accounting (NEW)?

QUESTION 5 – Question 9.9:
What is an externality, and why do financial accounting practices typically ignore

QUESTION 6 – Question 9.20 (NEW):
Explain what is meant by the following statement:
…In the long term, environmental sustainability is necessary for both social and economic sustainability, so attention to minimising impacts in respect of the environment is necessary to ensure a sustainable social and economic future.

QUESTION 7 – Question 9.35 (NEW):
What is a cap-and-trade system and what accounting issues does it create?

QUESTION 8:
What is international integrated reporting and how does it differ from the current financial reporting system we have. TUTORIAL 6 – Semester 2 2014

Topic 7: Positive accounting theory

QUESTION 1 – Question 7.5:
Explain why a decision made in London by members of the International Accounting Standards Board and incorporated within an accounting standard could influence the business operating strategies employed by a manager in Melbourne, Australia.

QUESTION 2 – Question 7.10:
As part of efforts to develop a revised Conceptual Framework for Financial Reporting, the IASB is currently investigating alternative approaches for measuring the assets and liabilities of reporting entities. In relation to asset measurement it appears that fair value is a favoured option of the IASB. In this regard, would researchers who embrace the view that accounting plays a vital role in reducing the contracting costs of an organisation favour the adoption of fair value in all situations? Carefully explain your answer.

QUESTION 3 – Question 7.12:
Would managers who have negotiated debt contracts with accounting-based covenants based around ‘rolling GAAP’ be relatively more likely to lobby an accounting standard-setter about a proposed accounting standard than would a manager from a firm who has negotiated accounting-based debt covenants that use ‘frozen GAAP’. Why or why not? Illustrate using AASB2 Share Based Payments and assume that it is the year 2003.

QUESTION 4 – Question 7.15:
Do you think the policy decisions made by members of the International Accounting Standards Board would or should give consideration to the insights provided by Positive Accounting Theory? Why?

QUESTION 5 – Question 7.17:
If senior managers within a company were rewarded by way of accounting-based bonus plans then would they, or the owners/shareholders (or both), prefer the use of conservative accounting methods? Explain the reasoning for your answer.

QUESTION 6 – Question 10.22
Accepted assumptions about market efficiency mean that it is the information content of disclosure, and not the form of the disclosure, that is valued by the market. Therefore it should not matter whether information is disclosed within the notes to the financial statements, or in the financial statements themselves. If this is true, then why would managers care if something – such as a lease liability – is disclosed only in the notes, or included within the liabilities disclosed within the balance sheet?


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