WORKSHOP 1 – Trimester 2 2017
Deegan Topic 1:
Introduction to financial accounting theory
What is a conceptual framework, and would it be considered to be a positive or a normative theory of accounting?
A conceptual framework, such as the International Accounting Standards Board (IASB) Framework, provides some fundamental assumptions about the role of general purpose financial reporting and the attributes that financial information should possess for it to be useful in assisting the resource allocation decisions of financial statement readers. As indicated in this chapter, the United States’ Financial Accounting Standards Board (FASB) defined a conceptual framework as ‘a coherent system of interrelated objectives and fundamentals that can lead to consistent standards’.
Since conceptual frameworks provide perspectives about such issues as: the qualitative characteristics that financial information should posses; the identification of the types of entities that should produce general purpose financial reports; the way in which the elements of financial accounting should be defined and recognised, and so forth (note the emphasis on ‘should’), the conceptual frameworks—in providing prescription—are considered to be normative in nature. Positive research, on the other hand, might simply attempt to describe or predict the behaviour of those people in charge of producing general purpose financial reports, or the behaviour of financial report readers
In an article that appeared in the Age (‘Way cleared for Turnbull to challenge’, by Michelle Grattan, 12 September 2008), Peter Costello, former federal treasurer, is quoted as saying, ‘I have a theory that every government wins one more term than it should.’ Do you believe he really has a ‘theory’ in terms of the way a ‘theory’ is defined in this chapter?
Arguably, Peter Costello has a hunch, rather than a theory. The Oxford English Dictionary defines a theory as ‘a scheme or system of ideas or statements held as an explanation or account of a group of facts or phenomena’. Theories would not generally be considered to be ad hoc in nature, and should be based on systematic and coherent reasoning. It is not obvious that Peter Costello’s ideas match with our views of what constitutes a theory.
Why would it not be appropriate to reject a normative theory of accounting because its prescriptions could not be confirmed through empirical observation?
Prescriptions are clearly not the same thing as predictions. If, for example, a researcher is prescribing a particular approach to accounting (that is, he or she is being ‘normative’ in nature) that does not mean when we look at actual accounting practice we will find that the prescribed method is being used. In fact, the reason why the researcher developed a particular normative theory (a theory that prescribes what should be done) could well be driven by the researcher’s...