It is about the rules of the language used, e.g. the rules of grammar for English or the rules of mathematics for a mathematically expressed theory. Syntactic relationships are logical connections that link and explain the important concepts of the theory. At this point, instructors can use a number of theories that have developed in accounting that probably reflect the different 'views of the world' or the way accountants see problems as individuals.
The answer is yes to varying degrees and also depends on the student's (and instructor's) perception of the importance of each relationship. Students should then have some insight into the complexities of defining and studying 'accounting theory'. see chapter for further brief descriptions). A pragmatic theory involves observing the behavior of practicing accountants and then copying their accounting procedures and principles. i) the solutions of practicing accountants are related to the demands of the business world. ii) they have developed (and been passed on) over a number of centuries. iii) It is a pragmatic approach to solving the problems of accounting.
At this point, the instructor might point out that there are several theories that have evolved in accounting that reflect 'different worldviews' or how accountants see problems as individuals. This can be undertaken by checking market prices, stock prices or even historical cost depending on the stated purpose of accounting. Positive accounting theory was a return to testing or relating accounting theories to real-world 'facts' or 'experiences'.
If the underlying accepted premises of the logic have no reference to the real world or are false, then the conclusions either have no pragmatic utility or the conclusion is wrong.
What type of a theory is historical cost? How has it been derived? Do you have any criticisms of historical cost accounting?
Explain the psychological pragmatic approach to accounting theory. Give a example of how it can be applied
Give an example of an accounting convention usually adopted in historical cost accounting. Conventions govern the way accounting is practised, and
How do you think massive amounts of data now available from information technologies will affect
However, keep in mind that the British school tends to have a closer relationship with syntactic arguments from sociology, history and psychology.
How would you design an experiment to provide evidence on how auditors make judgements? What competing issues would arise?
International View
IFRS is a Big Four gravy train
Financial accounting: an epistemological research note
Theory in Action 2.1
Do share prices rise when profit improves?
The article describes a market reaction to accounting profit news. This description involves an example of which approach to theory
Consider the following syllogism
The flaw lies in the premise “When a company reports higher profits than before, investors force the stock price of that company to increase.” Reality shows that when a company reports higher profits, the stock price will not always rise. A company's stock price will generally rise when earnings are higher than expected by the market.
But for many reasons, such as the presence of short-term traders on a company's share register, the share price may fall if traders exit the stock, as earnings improvements are not expected to impact a company's very short-term cash flows company. the firm. The practical meaning is that it is not enough for a company to simply make a profit to increase its share price, as the market will only appreciate profit increases that exceed or complement its expectations. In other words, the company must exceed the market's expectations to increase its stock price.
Theory in Action 2.2
Normative theories of investment
What is a bull market? A bear market?
Why would high commodity prices and low interest rates help to maintain share prices?
What is the theory underlying the advice to ‘buy the dips’? Is this a normative theory? Explain your answer
Theory in Action 2.3
Alternative approaches to accounting theory construction
Theory in Action 2.4
Case Study 2.1
New accounting rules ‘don’t add up’
- What are International Financial Reporting Standards?
- Many arguments are expressed in this article. List three factors that you think are causing concern about the impact of adoption of IFRS
- Consider each of the three factors you mentioned in response to question 2
- How could researchers evaluate the decision-usefulness of adopting International Financial Reporting Standards?
- What role can positive theory play in resolving the issue(s) described in the article?
- What role can normative theory play in resolving the issue(s) described in the article?
The use of fair value accounting leads to the complaint that it introduces volatility into reported earnings because revaluations must be recognized in the income statements. The evidence used as a basis for the claims is naturalistic as far as corporate evidence is concerned. individual accounts that in many cases support the claims of individuals. These accounts have been observed by individuals who have been concerned about the increase in profits and volatility of leverage reported under IFRS.
However, if a research study has been carried out, say by academics, then this research study is likely to follow a scientific approach of analyzing the financial statements of many companies or reconstructing their historical financial statements in order to arrive at a general conclusion, statistically tested, regarding the view that volatility increases after the adoption of IFRS. iii) IFRS do not provide better insight into the company's risk than existing accounting standards. Empirical evidence may include the type of risk disclosed and its impact on profit and financial position; risk issues compared to the audit of financial statements prepared in accordance with national standards, etc. The evidence used to support the claims is natural if it is evidence from individuals learning to prepare/individual audit firm financial statements supporting the individuals' claims in many cases.
However, if a study has been conducted, for example by academics, then that study will likely follow the scientific approach of analyzing the time accountants and/or auditors spend on the financial statements of numerous companies, or reconstructions of their past. financial statements, or statements before and after the adoption of IFRS. The decision utility approach makes the basic assumption that the purpose of accounting is to assist users of accounting reports in their decision-making process by providing useful and relevant information in the accounting reports. To assess the decision usefulness of adopting IFRS, researchers should investigate whether financial reports prepared under IFRS are useful to users in making economic decisions.
One way is to conduct a value materiality study, which investigates whether certain items disclosed in financial statements, such as financial instruments or intangible assets, are material to value (ie provide relevant and reliable information for users). Another way is to survey companies that have adopted IFRS or to survey the users of their financial reports. Researchers can conduct positive accounting research to examine and find empirical evidence that can support or refute the issues described in the article.
Research on how IFRS adoption works in the UK can be used to improve the theory of how global accounting standards should deliver more benefits by describing and explaining the problems and implications associated with IFRS adoption. Starting with assumptions about the desirable attributes of a global accounting system and assumptions about how well various national and other accounting systems (including IFRS) meet these attributes (this can be the result of positive or normative theories, depending on the nature of the accounting system). attribute in question).
Case Study 2.2
The thrill is gone
In trying to explain shareholders’ subdued reaction to Lend Lease reported earnings, explain whether and/or how you could use the following
One of the questions that becomes the focus of some normative theorists is how to derive "real income". In attempting to explain shareholder response to Lend Lease's earnings announcement, a normative theory would focus on whether Lend Lease measured its earnings correctly and, if so, whether the amount of earnings would provide useful information to shareholders (decision utility approach). The normative theory approach does not explain the subdued reaction; instead, it can make recommendations on how companies should calculate and report their profits.
A naturalistic approach is suitable for use in explaining the individual shareholder's response to Lend Lease's announcements as it focuses on company-specific issues. Using a case study as a method, this approach will attempt to answer the question of why the market is not impressed with Lend Lease's performance, despite reaching 13.5%.
Which of the approaches described in answer to question (2) do you believe is most useful? Why?
Based on observations that company stock prices generally rise after positive earnings announcements, but sometimes don't, the scientific approach would prompt researchers to develop theories about why that was the case. It also relies on predetermined procedures and statistical techniques to validate or refute tested hypotheses, resulting in answers that can be applied to common understanding. The naturalistic approach, on the other hand, is based on the view that reality is socially constructed and a product of the human imagination.
In other words, reality is not objective, but a result of people's interpretations of situations and events they experience. Therefore, this approach is best used to analyze problems with a unique setting and no preconceived assumptions or theories (such as shareholder reaction to Lend Lease profit announcement). For example, the pragmatic approach provides a usability test for the decision-utility approach - one way to test whether accounting outputs provide useful information is by surveying users.
Normative theory prescribes what should be done, and one way to do this is by using the decision-utility approach. Positive theory identifies and tries to explain what is actually practiced in the real world using a scientific approach. This, in turn, can form the basis of the development of normative theory to improve current practices.
Case Study 2.3
- What are International Financial Reporting Standards (IFRS)?
- Many concerns are expressed in this article. List three factors that you think are causing concern about the impact of adoption of IFRS
- Is the analysis leading from the factor to the concerns about adoption of IFRS scientific or naturalistic in its approach? Explain your answer
- What role can normative theory play in resolving the issue(s) described in the article?
For example, Barth, Landsman, and Wahlen (1995) examined the fair value of US bank investment securities and found that earnings based on fair value are more volatile than earnings based on history. Is the analysis leading to concerns about the adoption of IFRS scientific or naturalistic in its approach. These accounts have been reviewed by individuals who are concerned about the nature of the changes required under IFRS.
However, if a research study is conducted, say by academics, then that research study is likely to follow the scientific approach of analyzing the financial statements of many firms, or reconstructing their past financial statements, to arrive at a .
Case Study 2.4
In trying to explain shareholders’ subdued reaction to Tabcorp’s reported earnings, explain whether and/or how you could use the following
There are some approaches that are mutually exclusive within a study and some that are not. However, positive accounting theory simply refers to the development of explanatory theory, and is therefore consistent with the decision utility approach, etc. Scientific and naturalistic approaches, for example, are mutually exclusive, as they cannot be applied at the same time due to different perspectives.
Therefore, this approach is best used to analyze problems with a unique setting and without preconceived assumptions or theories (such as shareholder reaction to Tabcorp's earnings announcement). Normative theory prescribes what should be done, and one way to do this is to use a decision utility approach.
Case Study 2.5
Alumina jumps on bad news
In trying to explain the positive response to Alumina’s reported earnings, explain whether and/or how you could use the following approaches to
Which of the approaches described in your answer to question (2) do you believe is most useful? Why?
Explain the importance to investors of developing a theory to explain the relationship between earnings announcements and share price movements
