The paper "Accounting Standards and Theory" is a wonderful example of an assignment on finance and accounting. This essay asserts that Positive Accounting Theory (PAT) is not improved than other forms of hypothesizing though the proponents of PAT argue that PAT steer clear of normative statements. PAT as maintained by Watts and Zimmerman is free of assessment, just enlightens and envisages accounting practice. They also assert that PAT responds to what is and why not what ought to be nor how to do. In contrast, normative accounting theory tries to answer what should be done by accounting practices to contribute to the social change (i. e.
social welfare distribution). As a subject of reality what is asserted by PAT proponents is not factual because accounting, as a practical discipline is not possible to be free of value. The accounting profession ought to have such principle course. Accounting theory will be insignificant if it just clarifies and envisages accounting practice with no providing prescriptions. Therefore it is apparent that PAT is not enhanced than other forms since it still leaves a lot of questions unrequited and makes accounting to be futile. There are a number of criticisms of PAT all of which I agree with, one criticism of PAT is that by limiting its focus to explaining and predicting accounting practice it fails to provide guidance to practitioners.
In defense, Positive Accounting theorists might argue that before we prescribe one method of accounting in preference to others it is necessary to predict the consequences of alternative methods of accounting. This is not true as theory fails to provide a detailed guideline on specific accounting aspects that are used in the accounting process.
This guideline is essential in guiding accountants and other users of the accounting information. Another criticism of PAT is that it is not value-free as it asserts. As explained in this essay, no research can really be value-free. Hence, while we might not criticize PAT because it is not value-free, we can challenge the early claims that it was value-free. Free and value aspect for key in the accounting disciple in the effort to promote social welfare distribution. Its fair value cannot, therefore, be underestimated. An additional criticism that has been made of PAT relates to the assumption that all individual actions are driven by wealth maximizing self-interest considerations.
Some individuals consider that such a perspective provides a ‘ morally bankrupt view of the world in general and of accounting in particular’ . However, most theories about human behavior rely upon simplifying assumptions about how people behave. At issue is whether the assumption is too simplistic. PAT provides predictions that are not always supported by available evidence. However, we can probably expect that most theories about human behavior will not always provide accurate predictions of actual behavior. PAT relies upon various assumptions about the efficiency of markets, including the capital market, the managerial labor market, and the market for corporate takeovers.
In practice, markets will not always be efficient. Further, Positive Accounting theorists often use the idea of efficient markets to support calls for the deregulation of accounting practice by arguing that accounting information should be treated like any other good, and hence, the forces of supply and demand should be allowed to operate to determine the optimal amounts of information to produce.
Such a perspective ignores the fact that accounting information has ‘ public good’ characteristics (the good can be used without payment), and that it is generally accepted that markets do not operate efficiently with respect to public goods. PAT researchers typically undertake their research by collecting a large number of observations of data emanating from different reporting entities. They ignore many underlying differences in organizations and assume that their unit of measurement provides an accurate reflection of the issue under investigation (realist philosophy). Researchers that are critical of the PAT paradigm argue that no two organizations are the same and hence that doing large scale studies over many organizations is quite naï ve. Its three hypotheses are also extensively criticized as they fail to address the specific problems that have been encountered in the accounting disciple.
They have only remained hypothetical and have failed to give solutions to the specific problems that were intended to address. They are therefore rendered absolute and lack merit QUESTION TWO: Australian conceptual framework gives different definitions of assets, liabilities, equity, incomes, or expenses.
These elements are the important building blocks that form the financial statements and are represented in words and numbers and stand for certain entity resources and claims to those resources. These elements are affected by any transaction, event, or circumstances that result from a change in those resources and claims. According to the FASB concepts statements, assets are defined as probable future economic benefits resulting from or controlled by a particular entity as a result of past transactions or events. Some of the essential characteristics include but not limited to: assets embodying probable future benefits, entities are able to obtain benefits and control others from accessing the same.
Assets are also able to obtain control of transactions or other events giving rise to the rights of the entity and benefits that have resulted. There are some transactions, activities, and events that change the assets of an entity. Cash and other assets can be obtained by an entity and transfer cash and other assets to other entities. Through using, combining, and transforming goods and services, an entity is able to add value to its non-cash assets.
Through the control of the management, assets can be decreased or increased. Once acquired an asset remains an asset of the entity until such a time when the entity collects, transfers, uses it or its future benefits removed. Brunswick Ltd, actions to recognize the restrictive covenant with the former CEO to be paid were right and conforms to the existing FASB conceptual framework that defines the elements of financial statement. The services that will be rendered to the company by the former CEO by agreeing to work with the company and not work against the company is treated as an asset to the company.
This is because though not tangible and cannot be stored by the company, his personal services are received and used simultaneously and therefore are momentarily treated as assets to the company as they are used by the company. Its use is can add value to other assets belonging to the company. The right to receive these services from this former CEO for the period agreed of two years becomes an asset to the company. The other reason why his services qualify as an asset to the company is that posses the common characteristic that is common to all assets that are the “ service potential” and “ future economic benefits” .
The former CEO will therefore provide services and benefits to the company that will eventually translate to net cash flows to the company. These service potential and future economic benefits are however indirect to the net cash flow the company gets. Liabilities according to FASB conceptual framework are probable future sacrifices with economic benefits that occur from an entity’ s obligations to transfer services to other entities in the future as a result of transactions or events.
The three essential characteristics include the responsibility or duty obligating an entity leaving it with less or no discretion to avoid future sacrifice, responsibility to settle future probable transfer, or use assets at a specified period of time. Liabilities are also identified by the transaction or events that obligate the entity that has already happened. Liabilities of a company can be changed by its transactions or activities and events that happen. A company can get a liability from other entities and can also transfer the same liabilities to other entities.
These liabilities reduce the value of the company while others can either increase or decrease the liability of the company. Other events or circumstances can either increase or decrease the number of liabilities to the company. In the case of Brunswick Ltd, the decision of the company to recognize the expenses on claims by one of the customers as a liability to the company conforms to the existing conceptual frameworks by FASB. According to the FASB conceptual framework, liability arises when the company becomes liable or is responsible in the event an event occurs.
In case the injuries that occur on one of the customers obliges the company to take responsibility. This involves a sacrifice of future economic benefits by the company. The company has to pay the concerned party as a result of the events. This is also applicable to the future whereby the company will have to pay or transfer assets or provide services to other entities or parties in the future as a result of past events or transactions.
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