Accounting Theory Godfrey 7e

JAYNE ALLAN

GODFREY H O D G S O N

SCOTT ANN

HOLMES TARCA

WITH CONTRIBUTIONS FROM

GEOFF

m | » ' • •Will

F R O S T

BRIEF

CONTENTS

Preface x Acknowledgements

xii

Part 1 Accounting theory 1. Introduction

I

3

2. Theory and method

16

3. Accounting theory construction 4. Measurement theory

47

68

P a r t 2 Alternative models of accounting 5. Adopting an accounting perspective 6. Historical cost

91

93

131

7. Current cost accounting 8. Exit price accounting

174

224

P a r t 3 Empirical research in accounting 9. Positive theory and capital market research 10. A positive theory of accounting discretion I I. Behavioural research in accounting

255 257 298

341

P a r t 4 Accounting regulation and specific issues 12. Standard setting in a political environment 13. The conceptual framework

411

14. Assets, liabilities and owners' equity

448

15. Measurement of assets and liabilities

484

16. Profit

513

17. Revenue and recognition 18. Expense and matching

562

598

19. Social and environmental reporting Glossary 665 Index 673

Brief contents

630

371

369

CONTENTS

Preface x Acknowledgements

Part I Accounting theory 1.

Introduction

Theory and method Imposing order 17 A range of accounting theories Theory formulation 22 Testing a theory 29 Summary 40 Questions 41 Additional readings 43 Endnotes 46

3.

I

3

Overview of accounting theory Content outline 13 Additional readings 15 Endnotes 15

2.

4

16 18 6.

Accounting theory construction Pragmatic theories 48 Syntactic and semantic theories 49 Normative theories 52 Positive theories 55 Different perspectives 56 Scientific approach applied to accounting Summary 61 Questions 63 Additional readings 64 Endnotes 67

4.

The boundary assumptions 95 Proprietary theory 99 Entity theory 102 Physical capital concept 108 Fund theory/cash flows 109 Commander theory 113 Investor theory 114 Enterprise theory 114 The reporting entity concept 118 Summary 121 Questions 124 Additional readings 126 Endnotes 129

xii

Measurement theory

7. 59

68

Adopting an accounting perspective 93 Accounting viewpoints

94

Current cost accounting

155

174

Rationale for current cost accounting 175 Financial capital versus physical capital 178 Current cost — a global perspective 186 Criticisms of current cost 189 In support of current cost 190 Summary 200 Appendix 7.1: Edwards and Bell system 202 Questions 216 Problems 216 Additional readings 220 Endnotes 222

What is measurement? 69 Scales 69 Permissible operations of scales 71 Types of measurement 73 Reliability and accuracy 75 Measurement in accounting 78 Summary 84 Questions 85 Additional readings 85 Endnotes 90

5.

131

Basic concepts 132 Defence of historical cost 139 How objective is historical cost? 149 Criticisms of historical cost accounting Summary 162 Questions 164 Problems 165 Additional readings 168 Endnotes 171

47

Part 2 Alternative models of accounting

Historical c o s t

8.

91

Exit price accounting

224

In support of exit price accounting 225 Criticisms of exit price accounting 232 A mixed measurement system and international standards 238 Summary 239 Appendix 8.1: An example o/CCE 241 Questions 246 Problems 246 Additional readings 248 Endnotes 253

Contents

Part 3 Empirical research in accounting 9.

255

Positive theory and capital market research 257 Philosophy of positive accounting theory 258 Strengths of positive theory over normative theory 259 Scope of positive accounting theory 261 Capital market research and the efficient markets hypothesis 261 Impact of accounting profits announcements on share prices 266 Association studies and earnings response coefficients 272 Trading strategies 283 Mechanistic or behavioural effect 286 Summary 290 Questions 292 Additional readings 292 Endnotes 294

10. A positive theory of accounting discretion 298 Background: early demand for theory 299 Contracting theory 300 Agency theory 301 Ex post opportunism versus ex ante efficient contracting 313 Information perspective and signalling 315 Political processes 317 Empirical tests 320 Evaluation of the theory 328 Summary 331 Questions 333 Additional readings 334 Endnotes 339

11. Behavioural research in accounting 341 Behavioural accounting research: definition and scope 342 An overview of approaches to understanding information processing 345 Lens model studies — the evidence 350 Process tracing studies — the evidence 353 Format and presentation of financial statements 353 Probabilistic judgement studies — the evidence 355 Accounting and behaviour 360 Limitations of BAR 361

Vlll

Contents

Summary Questions Additional Endnotes

362 363 readings 366

364

Part 4 Account regulation and specific issues 369 12. Standard setting in a political environment 371 Development of the Australian standard-setting process 372 Adoption of international accounting standards in Australia 375 Regulation debate in Australia 383 Standard-setting approaches 394 Summary 399 Questions 400 Additional readings 401 Websites 402 Endnotes 408 13. T h e conceptual f r a m e w o r k 411 What is a conceptual framework? 412 Why have a conceptual framework? 413 Objectives of conceptual frameworks 416 A new conceptual framework project for the IASB and FASB 426 A critique of conceptual framework projects 428 Summary 43 7 Questions 439 Additional readings 440 Endnotes 446

14. Assets, liabilities and owners' equity 448 Assets 449 Liabilities 458 Owners' equity 466 Accounting for specific financing arrangements Summary 472 Questions 474 Problems 476 Additional readings 479 Endnotes 483

471

15. Measurement of assets and liabilities 484 Why does it matter how we measure assets and liabilities? 485 What do we measure? 486 Approximations of true value 492 Measurement concepts: guidance from standard setters 498 Summary 502 Questions 503 Problems 505 Additional readings 507 Endnotes 512

16. Profit

513

What is profit? 514 Business profit 514 Profit under uncertainty 520 Evidence on usefulness of price level adjusted data 537 Summary 540 Appendix 16.1: Calculation ofprofit 542 Questions 553 Problems 555 Additional readings 558 Endnotes 561

17. Revenue and recognition

562

Nature of revenue 563 Recognition of revenue 565 Guidance from standard setters 573 Revenue recognition and measurement — standard setters' current activities 579

Summary Questions Problems Additional Endnotes

584 585 586 readings 596

591

18. Expense and matching

598

Nature of expense 599 Recognition criteria and matching Criticisms of matching 610 Summary 615 Questions 616 Problems 618 Additional readings 620 Endnotes 629

603

19. Social and environmental reporting 630 What is social and environmental reporting? 631 What motivates corporate social responsibility? 634 A theoretical framework for corporate social responsibility 637 Social and environmental reporting 640 Accounting and reporting issues 649 Summary 656 Questions 656 Additional readings 658 Endnotes 662 Glossary 665 Index 673

Contents