Acct Theory- Mod 10

Question 1

What are the two theories of regulation?

Answer 1

Public interest theory

Interest Group Theory

Question 2

What are three reasons that management may be reluctant to report financial information?

Answer 2

Externalities

Adverse Selection

Moral Hazard

Question 3

Describe the Public Interest Theory.

Answer 3

Public Interest Theory:

• Market forces drive financial reporting to a certain point
• Public pressure causes a central authority to set regulations to force balance and prevent market collapse

-This is the old way of doing things. Impractical in real life as the motivations of investors varies widely and regulatory bodies are difficult to oversee

(IN A NUTSHELL)
Public regulator attempts to do what is best for the public

Question 4

Describe the Interest Group Theory?

Answer 4

INTEREST GROUP THEORY:

• Interest groups (The big 4) influence regulation by central authorities
• This is the common way presently

Other groups include:

• Industry associations
• Customers
• Environmental groups
• Labour unions

Question 5

Describe the accounting standards board (AcSB) and what their role is

Answer 5

• Comprised of 9 members
• Studies and responds to IFRS standards (Makes them Canadian)
• Publishes accounting rules in CPA handbook

Question 6

Describe the 2 main steps of the AcSB standard setting process. Describe the sub steps of each.

Answer 6

DUE PROCESS

• Exposure Draft circulated for feeback
• Meetings with interest groups
• If significant changes, new exposure draft

APPROVALS

• Requires super majority of 67% (6 out of 9)
• Then will be included in CPA handbook

Question 7

What is an exposure draft?

Answer 7

A draft of potential new accounting rules circulated by the AcSB in order to test reaction and garner feedback. Anyone can submit feedback.

Question 8

Outside of the AcSB, who else sets regulations?

Answer 8

• Provincial securities commissions (Canadian Securities Administrators (CSA) was created to harmonize provincial bodies)
• TSX sets some rules that listed companies must follow

Question 9

Which organization has the most influence over the TSX?

Answer 9

Ontario Securities Commission (OSC)

Question 10

How does standard setting in the U.S. work?

Answer 10

• Government plays a bigger role (EX: Dodd/Frank Act)
• Most rules developed and overseen by the Financial Accounting Standards Board (FASB)
• 7 Members, simple majority required
• SEC oversees all securities markets in the U.S.

Question 11

How does standard setting on the international stage work?

Answer 11

• International Accounting Standards Board (IASB)
• Founded in 1973 but didn’t really catch on until the internet took off in the early 2000’s and international trade became much much easier
• Prior to this every country did whatever the fuck they felt like
• 16 members, super majority is required
• All member countries get the same IFRS rules, but they apply them differently
• Canada generally applies the rules directly with little change

Question 12

IMPORTANT: What are the 4 criteria for a succesfuly new standard? Describe each.

Answer 12

Decision Usefulness:
The standard should provide (or improve) information available to investors

Reduction of Information Asymmetry:
The standard should reduce barriers to information

Economic Consequences:
Cost of information should not outweigh the benefit

Reasonable Compromise:
The standard should strike a balance between the interests of management and the interests of investors