Prepared by Arabella VolkovUniversity of Southern Queensland

References

• Text – Chapter 5

Adopting an accounting perspective

• IAS 7/AASB 107 • AASB 1025 and IFRS 3/AASB 3• SACs

Learning Objectives

At the conclusion of this lecture, you should have an appreciation of:

• the several prevailing viewpoints that can be adopted in recording, measuring and reporting accounting information and that each viewpoint has certain embedded assumptions that should be considered when comparing alternative viewpoints

Learning Objectives

At the conclusion of this lecture, you should have an appreciation of:

• the factors determining the adoption of a viewpoint are not clear-cut and often relate to the main objective of those in control of accounting policy

• the reporting boundary issue, and the need for reporting boundaries to be defined in order to report on the economic and associated activitiesof an entity

Learning Objectives

At the conclusion of this lecture, you should have an appreciation of:

• the relationship between activities ofkey stakeholders, namely shareholders, debtholders and government, and the activities of accounting entities and the problems created by defining organisations as separate legal entities

Learning Objectives

At the conclusion of this lecture, you should have an appreciation of:

• the physical capital concept and its relationship to reporting issues and perspectives

• the reporting entity concept adopted by the Australian accounting profession in accounting standards

Accounting viewpoints

A function of a range of factors• History• Culture• Societal values• Nature of economic activity• Objectives of those who

– Prepare– Interpret – Apply

Accounting viewpoints

A function of a range of factors• Quantifiable logic

– Government– Group– Individual

• Latham: Political perspectives in Australia– Left– Right

Accounting viewpoints

A function of a range of factors• Objective of accounting (SAC 2)

– Measurement– Reporting– Economic activity

• Significant changes– Reporting entities – Public and private

The boundary assumptions

• Activities and means of supporting an entity’s activities need to be defined

• Set of assumptions or principles about boundaries of an entity – Process of creating a reality (Hines)

• Each viewpoint defines the boundaries to support perspective adopted

The boundary assumptions

(Source: I. Ball, Definition of the Reporting Entity, Accounting Theory Monograph 8, Australian Accounting Research Foundation, 1988, p. ix.)

The boundary assumptions

Ball’s universal definition of the reporting entity concept:

• Consistent with SAC 2• Entities defined with reference to ownership

or control• Ignores users without control• Does not define entities who are not

candidates for general purpose accounts

The boundary assumptions

SAC 1 Definition of a Reporting Entity:• Broader definition of a reporting entity• Links the reporting entity to the reporting

needs of users and the objectives of general purpose financial reports

But:• Definitions may be altered by organisations

in response to organisational or external pressures

• Increasing external demands on organisations to expand reporting to include non-financial impacts

Proprietary theory

• Littleton: proprietorship – Substance of double-entry system– Purpose of the firm

• Goldberg:– Instances where double-entry system

used but proprietorship is not underlying objective

Proprietary theory

• Balance sheet accountsAssets – Liabilities = Proprietorship

• Profit– Owner’s net worth primary concern

(balance sheet)– Income earned and expenses incurred

due to actions of the owner

Proprietary theory

• Effect on practice– Present accounting essentially based on

proprietary theory

• Financial capital concepts

Proprietary theory

Limitations– Developed when businesses small– Increasing separation of ownership and

control– Corporate entity– Accountability

Entity theory

• Formulated to address separate legal status of company

• Accounts and transactions are classified and analysed from the viewpoint of the entity as an operating unit

• Accounting principles and procedures not formulated in terms of a single interest e.g. proprietorship

Entity theory

Two Views of an Entity:Objective of accounting from entity

position?1. Business firm operates for the benefit

of equityholders2. Entity in business for itself

• From either view the stewardship role is of primary significance

Entity theory

• Balance sheetAssets = Equities

• Profit – Emphasis on the determination of profit– Income statement more relevant than

balance sheet

• Effect on practice– Proprietary view has a greater impact on

present procedures

Physical capital concept

• Under the entity view– Physical capacity of the entity to deliver

goods and services is determined after taking into account changes in prices of assets and liabilities

• Financial capital concept– Changes in the monetary values of

assets and liabilities are included in profit

Physical capital concept

PROPRIETARY VIEWSales revenue $ 1000Current Cost of Sales 800

Operating Profit 200Holding Gain 100

Income $ 300

PROPRIETARY VIEWSales revenue $ 1000Current Cost of Sales 800

Operating Profit 200Holding Gain 100

Income $ 300

ENTITY VIEW

Sales revenue $ 1000

Current Cost of Sales 800

Income 200

Capital Maint. Adj. $ 100

ENTITY VIEW

Sales revenue $ 1000

Current Cost of Sales 800

Income 200

Capital Maint. Adj. $ 100

Comparison of viewpoints

Fund theory/cash flow

Vatter

• Impersonal ‘fund’

• Assets = Restrictions on assets (equity, liabilities)

• Frame of reference for government and not-for-profit organisations

• Cash flows

Commander theory

Goldberg

• Focus on control of resources

• Accounting functions carriedout on behalf of commanders

• Financial position and performance statements

• Effect on practice

Investor theory

Staubus

• Investor viewpoint

• Assets = specific equities + residual equity

• Emphasises needs of external users

• Cash flow information

Enterprise theory

Suojanen

• Enterprise as a social institution

• Value-added income

• Implications

• Deprival value concepts

• Reporting entity concept

• Value-added profits

Enterprise theory

Key terms and concepts

• Proprietorship

• Commander

• Entity

• Enterprise

• Investor

• Funds/cash flow

Summary

• A range of different viewpoints exist

• Current thinking emphasises proprietary theory

• Historical cost is the model generally followed in practice

• Application of the reporting entity concept

Where to get more information

• Other courses

• List books

• Articles

• Electronic sources