FAR 600 ACCOUNTING THEORY

TOPIC 3 : ACCOUNTING THEORY CONSTRUCTION

Prepared By :
AHMAD FIRDAUS BIN S JOHARY MUNZIR ABD RAHMAN AMARUL HANIF BIN HARUN MOHD NAZRAN RAMDAN BIN YUSOF MOHD KHAIRUDDIN BIN AMAT FADZIL MOHD NAZIR BIN MATULIDI MOHAMAD NASIRUDDIN BIN SELAMAT 2010669076 2010826444 2010210806 2010801524 2010416616 2010645494 2010894746

PRAGMATIC THEORY

POSITIVE THEORY

ACCOUNTING THEORY CONSTRUCTION

SYNTACTIC & SEMANTIC THEORY

NORMATIVE THEORY

TYPES OF PRAGMATIC THEORIES

DESCRIPTIVE PRAGMATIC APPROACH

PSYCHOLOGICAL PRAGMATIC APPROACH

Is an inductive approach. Based on continual observation of accountants

The oldest and most universally used method of accounting theory construction

DESCRIPTIVE PRAGMATIC APPROACH

Descibe the real world practices and how accountant act in certain situations

Not include an Analytical judgement of the quality of an accountants actions. Not provide for accounting technique to be challenged, it does not allow for change. Focus attention on accountants behavior, not on measuring the attributes of the firm.

PSYCHOLOGICAL PRAGMATIC APPROACH

Is an inductive approach.

Based on observation make on users response to the accountants output, such as financial statement

Also describe real world practices

Others may not react when they should Some might have a preconditioned response User may react in illogical manner

Criticism of Psychological Approach

Syntactic theory
The link between basic concept of a theory to objects in the real world in search of meaning correspondence of truth

Focus on logic relationship

Semantic theory

Advantage : it is easier to record since its verify what is happened

Criticism of syntactic theory : to logical, do not take into account inflation factor, ignore market value of asset and liabilities

Disadvantage : do not show time value of money

Criticism of semantic theory : only in recorded transaction

HISTORICAL COST ACCOUNTING

Semantic theory used as input to a system and verified only by examining the underlying document And check mathematical calculation

The syntactic have been criticized on the practice of summing several different amounts assigned to specific assets

THE CRITICISM OF SEMANTIC AND SYNTATIC THEORIES

Final output not verified empirically and not observe

Historical theory has semantic content only

In auditing process

True income
Concentrated on deriving a single measure for assets and a unique profit figure No agreement on what constituted a correct or true measure of value and profit

Decisionusefulness
Basic objective aid the decision making process of certain users of accounting reports by providing useful accounting data Argue that all users have the same requirement for accounting data

Based on classical economics concepts of profit and wealth or rational decision making

Profits and value can be measured precisely

Accounting should be a measurement system

ASSUMPTION S OF NORMATIVE THEORY

There is one unit profit major

Financial accounting is useful for making economic decisions

Markets are inefficient and can be fooled by creative accountant

Conventional accounting is inefficient

Can be used only as an instrument for prediction

Predicitive success is distributed by uncontrollable interning variable. E.g. : inflation, interest rate, customer confidence

 Experience or fact of the real world

Nature
Observable and verifiable Used scientific approach

Accounting policy choice Capital market research

Meaning

Focus
Assumption
Positive theory are net value free The theory use large scale statistical research

Explain reason for current practice

Objective

Accounting should be a measurement system Profit and value can be measure precisely

Criticism

DIFFERENCES BETWEEN
Normative
Normative theories are prescriptive It prescribes how people such as accountants should behave to achieve an outcome that is judged to be right moral just or otherwise a good outcome Cannot be used practice in a real world

Positive
Positive theories a descriptive explanatory and predictive They describe how people do behave in a certain manner or they predict what people have done or will do Can be used practise in a real world

POSITIVE THEORY OF ACCOUNTING POLICY AND DISCLOSURE

POLITICAL PROCESSES

AGENCY THEORY

CONTRACTING THEORY

 Firm is a legal nexus (connection) relationship among supplies and consumers of CONTRACTING factor of THEORY production

AGENCY THEORY

When agent interest more than principal it will lead to agency cost

Definition
Agency relationship happen when there is a contract which the principal engage with another party (agent) to perform the services on the principal behalf

Residual loss

Monitoring cost

Types

Bonding cost

Happen when firm has high public profile and firm is an appropriate target for political action

AGENCY COST
Political Cost

Principal review the remuneration package given to the agent

Settling up Residual opportunism

Remuneration level has to tally with the agent effort

Wealth transfer away from a firm due to its political exposure

Cost borne by agent due to loss of reputation

POLITICAL PROCESSES
Relationship between the firm and other parties interested in the firm (government, trade union, community group)
Political market less demand less incentive for the production of information compare to capital market Greater information cost, diffusive reward and increase monitoring cost = greater residual occurring

Scientific methodology Theory are consistent Tested empirically

What is PAT

Understanding the acctg policies matters Economic Focus

Model connection btw Acctg, Firm & Market

- Empirical - Identifiable - Tested Theory Positive Accounting

Strengths of PAT

Normative Accounting

- Unempirical - Unidentifiable - Irrefutable

SCOPE OF PAT
First Stage - Capital Market Research -

Second Stages - Actg Policy Choice -

o Did not explain actg practice. o Actg report focus on stewardship function.

o Focus on 2 central focuses Opportunistic reason ( ExPost) Efficient reason ( Ex-Ante)