Topic 1 - Accounting Policy Decisions Flashcards
Identify the four fundamental components of an accounting policy
definition,
recognition,
measurement, and
disclosure
Outline the role of accounting regulation and professional ethics in making and evaluating accounting policy decisions
accounting regulation provides guidance, professional ethics ensure that you make a policy decision based on true and fair view, .
What is the difference between positive and normative theories in accounting?
-Positive’ theories concerned with descriptive
statements (‘is’, ‘are’, ‘will’, etc.), used to explain and predict, e.g., capital market theory that more disclosure reduces a firm’s cost of capital
-‘Normative’ theories concerned with statements of value, i.e., what is ‘good’ and ‘bad’ (‘should’, ‘ought’, etc.),
Describe a basic decision making framework/model for evaluating and selecting accounting policies. (6 steps)
1.Identify the relevant facts including key
stakeholders, distinguish known facts from assumptions, identify the factors that are ‘unknown’
2. Define the accounting policy issues
3. Identify relevant accounting standards,
rules, & principles
4.Identify alternative accounting policies
5.For each alternative, decide to what extent
the particular alternative satisfies the
rules/principles in 3 above AND identify the
short & long term consequences
6.On the basis of the analysis in 5 above,
choose that policy that best satisfies the
relevant accounting principles/rules and
maximises positive (or minimises negative
consequences
What are the fundamental things that must be known for a transaction to be recorded in the financial statements?
- Definition: WHAT was the transaction about?
- Recognition: WHEN should it be recognised?
- Measurement: HOW MUCH?
- Disclosure: WHAT ELSE do financial statement users need to know? What other information should we disclose?
What is the definition of Accounting Policies?
Defined in AASB 108, para. 5 as:
“the specific principles, bases, conventions, rules and practices applied by an entity in preparing and presenting financial statements.”
Why Professional Judgement is Needed? (3)
Modern transactions are complex
Constant innovation (e.g., financial instruments)
Accounting standards:
-don’t cover all types of transactions
-can be ambiguous (relevance/faithful rep)
-give the user choices (i.e. depreciation)
Where no standard applies, must use JUDGEMENT that results in accounting information that is…….?
RELEVANT & RELIABLE
AASB 108: When exercising judgement what 4 things should we give consideration to?
- Australian Accounting Standards on similar issues
- Concepts in the Framework
- Pronouncements of overseas accounting standards setters
- Accepted industry practices
What should we use as the basis for justifying accounting policies in this course? (3)
- Provision of “A True and Fair View” (provides limited guidance in distinguishing between alternatives)
- Requirements of Accounting Standards
- Principles in the Conceptual Framework/Ethics
What happens if our judgement is wrong?
- cause people to lose money (investors, creditors)
- loss of public confidence in accounting profession
- increase in regulatory/compliance costs.
What is Theory? why is it useful?
Typically a series of propositions from which we reach conclusions/decisions
explaining how things work, or why events occur, predicting and prescribing (or guiding) behaviour.
What does a positive theory do?
Positive theories are descriptive, explanatory or predictive, fact based.
What does a normative theory do?
Normative theories prescribe how people should behave to achieve an outcome that is judged to be right, moral, just, or otherwise a good outcome. Therefore, normative accounting research is more concerned with policy recommendations.
how can you ensure that Accounting policy choices are JUSTIFIABLE? 4
- be made systematically;
- reflect appropriate rules & concepts;
- reflect available facts;
- reflect professional values & ethics, e.g.,
