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Week 1 Notes

The document discusses accounting theory, types of accounting theory including deductive and inductive research. It also discusses conceptual frameworks, their purpose and importance. Reasons for regulating financial information are covered along with arguments for and against regulation. Principles-based and rules-based accounting standards are compared.

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16 views3 pages

Week 1 Notes

The document discusses accounting theory, types of accounting theory including deductive and inductive research. It also discusses conceptual frameworks, their purpose and importance. Reasons for regulating financial information are covered along with arguments for and against regulation. Principles-based and rules-based accounting standards are compared.

Uploaded by

tim.k.g.12
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Week 1: The Financial Reporting environment

Accounting Theory

Types of accounting theory

 deductive research (starts on theory or hypothesis)


 Inductive (broad theory or observations)
 Social science combine (both deductive and inductive)

Theories can be

- Positive (predictive)
o Explains why accountants adopt certain methods
- Normative (prescriptive)
o normally based on deductive research, what should be done in particular
circumstances

What is a conceptual framework and why is it necessary?

A conceptual framework is a set of concepts, principles and assumptions that provide the foundation
for the preparation and presentation of financial statements. It is a theoretical framework that guides
the development of accounting standards and practices.

The main purpose of a conceptual framework in accounting is to provide a common understanding of


accounting concepts and principles that can be applies consistently by prepares and users of financial
statements. It also helps in resolving accounting issues and improving the quality and comparability
of financial information.

Overall, the conceptual framework serves as a roadmap for accounting standards and practices
providing a basis for accounting standards and practices that enhance the reliability and relevance of
financial information for decision making purposes, the conceptual frameworks and considered to be
normative in nature as they prescribe what should be done ie the ways which entities should
produce financial reports.

Why is it important to pay particular attention to how the objective of financial reporting is defined
within the conceptual framework?

Paying particular attention to the definition of financial reporting in the conceptual framework is
important for several reasons

1. It sets the overall purpose and scope of financial reporting.


2. The purpose of financial reporting is to provide useful information for decision making to a
wide range of users interested in the companies performance.
3. If the objective of financial information is not clearly understood then it becomes difficult to
determine what information to include and exclude, leading to inconsistencies and
incomparability in reporting
4. The definition of financial reporting guides the development of accounting practices and
standards. If the definition is not clearly understood then these standards and practices may
not follow the true path of the conceptual framework.

Why do we need to learn financial accounting theory is all we are interested in is developing
accounting standards?
- Accounting theory is useful in understanding the theories and principles that guide
accounting standards
- By understanding theory we can develop more effective and relevant standards
- Allows us to understand strengths and weaknesses of current standards
- Accounting theory provides a basis for evaluating how useful and relevant information is
provided by financial information for decision making.
- Accounting standards are developed based on accounting theory

Accounting Regulation

Regulation is relatively new in Australia

- The changes in regulation (accounting standards) can affect people in different ways
- Pro regulation
o Markets for information are not efficient, hence need to be regulated
o Only those powerful get the information without regulation
o Regulation levels the playing field
o Gives the stakeholders power, through financial information
- Anti regulation
o Capital markets need information hence it will be supplied without regulation
o Information is provided in a efficient manner
o government may have private interests that it regulates to

Accounting methods

- require professional judgement to be exercised


- accountants are expected to be objective and free from bias
- is creative accounting a thing that serves self interest?

What are the arguments for regulating financial information?

- The information market is inefficient and if they are not regulated then a sub optimal
amount of information will be released for users of financial information.
- If financial information is not regulated it will be less comparable and as a result less useful
- If financial information is not regulated it will become less transparent and as a result less
useful
- Regulating financial information is required to protect investors

Quiz Questions

How do principles-based standards differ from rules based standards?

Principles based standards

- Focus on providing a general framework for objectives that guide financial reporting
- Principles bases standards are mor flexible, allowing for accoutants to exercise professional
judgement, determining the appropriate specific treatment based on the intention behind
the standards
- Principles based standards offer less detailed guidance nand rely on the accountants
understanding of the underlying concepts

Rules Based standards


- Emphasize detailed prescriptive rules that accountants must follow when preparing financial
information, focus is on adherence to the rules rather than the overall substance
- The rules offer very little flexibility as specific guidance is provided, there is little room for
professional judgement
- Rules provide extensive guidance and numerous rules + exceptions help accountants provide
the proper accounting treatment

To summarise

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