International Accounting

Question 1

What is an assumption of inductive theories?

Answer 1

Whatever is done by the majority is the best practice

Question 2

Which type of theory is likely to be conservative (won’t result in changes in practice)?

Answer 2

Inductive Theories

Question 3

What are prescriptive/normative Theories?

Answer 3

Theories which try to prescribe particular accounting practices. Based on arguments about what accountants should do-deductive reasoning

Question 4

What are the two types of normative Theories?

Answer 4

True income Theories:make assumptions of the role of accounting, then give a ‘best measure’ of profits

Decision usefulness theories: ascribe certain types of info to certain users based on assumed decision making needs

Question 5

What are predictive/positive theories?

Answer 5

Research aimed at explaining and predicting accounting practices rather than prescribing

Question 6

What are the criticisms of positive theories? 3

Answer 6

• don’t provide prescription
• based on personal opinion
• make value judgements (self interest)

Question 7

What is the free market perspective?

Answer 7

An argument against regulation:demand and supply should be allowed to generate optimal supply

Treat accounting info as goods

Question 8

What are private economic incentives?

Answer 8

Private economic incentives: info asymmetry between agents and principles

Question 9

What is market for managers?

Answer 9

Managers perform well to impact on the remuneration they can command in the future

Try to maximise their own pay to make their firm look good so they can get a job easily in the future

Question 10

What is market for corporate takeovers?

Answer 10

Under performing firms will be taken over by another entity-so managers are motivated to maximise firm value

Question 11

What is market for lemons?

Answer 11

Silence implies that a firm has bad information- so managers are motivated to disclose both good and bad info

But it assumes that markets know that managers have info to disclose

Question 12

What are the arguments for regulation?

5

Answer 12

• markets for information is not efficient
• market efficiency ignores the rights of individuals
• info is costly to produce (won’t do it voluntarily)
• accounting standards lower rep of the profession:need regulation to compensate
• regulation leads to better comparability and usefulness

Question 13

What theories are used to describe regulation? 3

Answer 13

• Public interest theory:regulation protects the public as a result of inefficient markets
• capture theory:although regulation is to protect the public,it’s controlled by groups most affected by regulation
• economic interest group:government is not neutral, and will regulate based on impact to campaign finances/key voters

Question 14

What are the benefits of ifrs-practitioner viewpoints? 4

Answer 14

• universal financial language
• improve financial reporting quality
• increased transparency
• opens up capital markets

Question 15

What are the benefits of ifrs-academic viewpoints? 3

Answer 15

• forecast accuracy improved
• reduced cost of capital
• more active trading

Question 16

What are the political influences of standard setting?

Answer 16

Regulators may be subject to lobbying by powerful groups (economic interest group theory)
Using:comments letters, public statements, behind the scene discussions
-accounting standard setters are still accounting professionals (ex big 4)

Question 17

What is the difference between harmonisation and standardisation?

Answer 17

Harmonisation-make accounting standards released by different countries as similar as possible
Standardisation-make all accounting standards the same round the world

Question 18

What are the regiments for harmonisation? 3

Answer 18

• cheaper for developing countries
• lower cost of capital
• increased comparability for different countries

Question 19

What are the barriers to harmonisation? 2

Answer 19

• ifrs is strongly Anglo American

- national interest:policies are sometimes used to promote political goals

Question 20

What is individualism vs collectivism?

Answer 20

Individualism: individuals care for themselves and immediate family
Collectivism: tightly knit social framework where clans/groups look after each other

Question 21

What is power distance?

Answer 21

Large power distance: society accepts a hierarchical order where everyone has a place
Small power distance: strive for power equalisation

Question 22

What is uncertainty avoidance?

Answer 22

Strong uncertainty avoidance:societies have rigid codes of belief/behaviour
Weak uncertainty avoidance: societies have a more relaxed atmosphere where practice counts more than principle

Question 23

What is gender equality?

Answer 23

Masculinity:preference for achievement, material success, heroism
Femininity:preference for relationships,modesty,caring for the weak

Question 24

What is a conceptual framework?

Answer 24

Attempts to provide a structured theory if accounting (normative theory)

Question 25

What are the advantages of conceptual frameworks? 4

Answer 25

- increased international compatibility - standard setter will be more accountable - might be a reduced need for additional standards if accounting concepts cover the topic - standards will be more consistent and logical

Question 26

What are the disadvantages of conceptual frameworks? 4

Answer 26

- too complicated for small firms - often developed after accounting standards, so accounting standards are inconsistent - just for standard setters - just a means for legitimising the accounting profession and standard setters

Question 27

What is accounting neutrality?

Answer 27

The practice of accounting is heavily reliant on professional judgement

Question 28

What are inductive Theories?

Answer 28

The development of ideas/theories through observation