MAA725 - Advanced Accounting Principles and Practice



MAA725 - Advanced Accounting Principles and Practice

Introduction

The objective of this paper is to describe and discuss the two contrasting arguments, regarding policy selection and application, in the context of positive accounting theory and the other relevant theories. The assignment is based on the topic that “An entity's financial accounting policies are selected and applied on the basis of either ex ante 'efficiency' or ex post 'opportunistic' arguments set out in positive accounting theory and various other relevant theories of financial accounting”. Furthermore, the sections of this paper are divided into Literature Review, Critical Analysis of Positive Accounting Theory and the Other Relevant Theories. Finally the paper will end with the concrete conclusion.

It is implied by the positive accounting theory that managers base decisions based on personal or organizational objectives such as higher compensation or increased implementation of corporate governance procedures. The two standard setting bodies try to implement policies in order to ensure better reliability and transparency of financial statements relevant to specific managers applying these standards. The two bodies set standards to improve accounting practice in their respective regions so they act on improving areas of corporate governance. Decision usefulness deals with the process of decision making based on accounting theories, concepts and principles (Deegan, 2009).

Literature Review

Positive Accounting Theory (PAT) that popularized by Watts and Zimmerman is one of positive theory accounting. PAT is concerned with explaining accounting practices. It is designed to explain and predict which firms will not use a particular method. It does not say something as to which method a firm should use. This is what differentiates positive and normative theories. Normative theories prescribe how a particular practice should be undertaken and this prescription might be a significant departure from existing practice. PAT focuses on the relationship between the various individuals involved in providing resources to an organisation and how accounting is used to assist in functioning of these relationships. PAT is based on the central economics-based assumption that all individuals' actions are driven by self-interest and that individuals will always act in an opportunistic manner to the extent that the actions will increase their wealth.

PAT has been one of the most influential accounting research programs during the last four decades. One important reason which Watts & Zimmerman (1986) have used to popularize and legitimize their approach is that their view of accounting theory is the same as that used in science. Thus, it is important to examine how far accounting has been successful in imitating natural science and how the development of PAT compares with the three standard accounts of science. Further, the methodological positions of PAT conform to none of the standard accounts of science. Rather, PAT contains elements of all three (Dyckman, 2011).

There is some confusion about what PAT is. If the definition of accounting theory (i.e., accounting theory seeks to explain and predict accounting and auditing practice) given in Watts and Zimmerman's 1986 book is taken to mean PAT, studies of accounting choices ...