ACCOUNTING THEORY: TEXT AND READINGS

RICHARD G. SCHROEDER MYRTLE CLARK JACK CATHEY

CHAPTER 1

THE DEVELOPMENT OF ACCOUNTING THEORY

Introduction What is theory?

Webster defines theory as: “Systematically organized knowledge, applicable in a relatively wide variety of circumstances, a system of assumptions, accepted principles and rules of procedure to analyze, predict or otherwise explain the nature of behavior of a specified set of phenomena.”

Normative theory (what should be)Positive theory (what is)

A good theory should cover the two of them

Why is the development of a general theory of accounting important?

What is the relationship of accounting research to accounting theory?

Introduction What is theory?

Webster defines theory as: “Systematically organized knowledge, applicable in a relatively wide

variety of circumstances, a system of assumptions, accepted principles and rules of procedure to analyze, predict or otherwise explain the nature of behavior of a specified set of phenomena.”

Theory may be described as:Normative theory (what should be)Positive theory (what is)

A good theory should cover the two of them

The goal of accounting theory is to provide a set of principles and relationship that explains observed practices and predicts unobserved practice

Introduction What is theory?

Webster defines theory as: “Systematically organized knowledge, applicable in a relatively wide

variety of circumstances, a system of assumptions, accepted principles and rules of procedure to analyze, predict or otherwise explain the nature of behavior of a specified set of phenomena.”

Theory may be described as:Normative theory (what should be)Positive theory (what is)

A good theory should cover the two of them

THE EARLY HISTORY OF ACCOUNTING

The Zenon Papyri (30 B.C, founded in 1915)

The impact of the Renaissance Fra Luca Pacioli – Summa de Arithmetica Geometria Proportioni et

Proportionalita (1419)

The evolution of joint ventures into ongoing businesses The impact of the industrial revolution and the

progressive movement The concept of capital maintenance The accountant as a protector of business interests

ACCOUNTING IN THE UNITED STATES SINCE 1930 Meetings between NYSE and AIA AAA SEC

Securities Act of 1933Securities Exchange Act of 1934

Committee on Accounting Procedure Accounting Principles Board Financial Accounting Standards Board

THE ACCOUNTING PRINCIPLES BOARD Formation and structure Types of pronouncements

APB Opinions The flap over accounting for the investment

tax Credit Rule 203 Criticism of the APB

THE FINANCIAL ACCOUNTING STANDARDS BOARD

The Wheat Committee The Trueblood Committee The FASB was established The structure of the FASB

is illustrated in the following diagram

Structure of the FASBFinancial

AccountingFoundation

Board ofTrustees

AppointElectors

GovernAppoint and fund

FinancialAccountingStandardsAdvisory

Committee(approx.

20 members)

Financial Accounting Standards

Board(7 members)

Task Forces of the Standards Board

Appointt

Admin. Staff

Research Staff

||||||

- - - - - - -- - - - - - -

Appoint andfund

FASB Mission Types of pronouncements

Statements of Financial Accounting ConceptsStatements of Financial Accounting StandardsInterpretationsTechnical Bulletins

FASB Emerging Issues Standards Overload Standard setting as a political process Economic Consequences

GAAP

Evolution of phrase: Changed wording of auditor’s certificate brought about by

meetings between NYSE and AIA The APB’s definition The Auditing Standards Executive Committee’s definition

The current sources of GAAP consist of four levels described as A, B, C, and D by Statement of Auditing Standards No 69

GAAP Hierarchy

LEVEL A: FASB StatementsFASB Interpretations

SEC Rules and Interpretive ReleasesAccounting Principles Board Opinions (unless amended)

Account Research Bulletins (unless amended)

LEVEL B: FASB Technical Bulletins

AICPA Industry Audit Guides that have been reviewed by the FASB

GAAP Hierarchy

LEVEL C: AcSEC Practice Bulletins that have been reviewed by the FASB

Consensuses reached by the EITF

LEVEL D: AICPA Accounting Interpretations (no longer issued)

FASB Implementation GuidesOther widely recognized or prevalent accounting practices

The Business Reporting Research Project Steering Committee Working Groups

THE ROLE OF ETHICS IN ACCOUNTING The public accountant as a

watchdog

Accounting in Crisis – The Events of the Early 2000s Enron and the Accounting Scandals

Accounting in Crisis – The Events of the Early 2000s

Two major changes in the accounting profession have taken place in the wake of the accounting scandals:

1. Arthur Andersen

formerly one the Big 5 audit firms has gone out of business

2. Sarbanes-Oxley Act President Bush signed into law July 2002 imposes a number of corporate governance rules on publicly traded

companies (Discussed in Chapter 17).

International Accounting Standards

The concept of harmonization The IASB The IASB’s objectives:

1. To formulate and publish in the public interest accounting standards to be observed in the presentation of financial statements and to promote their worldwide acceptance and observance

2. To work generally for the improvement and harmonization of regulations, accounting standards, and procedures relating to the presentation of financial statements.

41 Statements of Accounting Standards and 5 Statements of Financial Reporting Standards to date