The Australian Accounting Standards Board - Coursework Example

Group Work Students Name Institution Supervisor Date Accounting is a human activity. To study financial accounting, it is also important to study accounting theories. Accounting theories entail people’s behavior to accounting information, why people in organizations decide to pass certain information and why people need accounting information. Theories in accounting help in many ways such in determining how assets are expected to be valued and in the prediction of choice in accounting method. There is existence of universal theories of accounting but there is none which is accepted universally. To select a theory, researchers look at theories which best reflect their values. Accounting standards try to reduce choices in accounting methods for the public. In the early development of the theory of accounting, theories and ideas were developed by observation. It was assumed that what the majority did in accounting practices was the most appropriate. . This was a problem as not all practices are similar. Observing accounting practices could not work in the same way for all accounting situations. Theory development took place between the 1960s and 1970s. This was referred to as the normative period of accounting research (Scott W., 2011, 230). It was inductive in nature and not driven by practices that were existing. These theories were deductive and relied on logical reasoning to develop new accounting methods. These theories tried to improve asset valuation approaches in a period where there was wide inflation. Normative theories are based on what researchers think should occur in a circumstance. This theory should be evaluated on whether it is a reflection of accounting practices but is not based on observation. Normative theories are classified as decision usefulness theories and true income theories. In the mid and 1970s, the positive theories were established aimed at predicting and explaining particular phenomenon in accounting. In this theory, logical deductions are made from assumptions allowing prediction. Normative theories could be useful in accounting for some individuals. However, individual thoughts on best accounting methods could be misleading, hence, having international accounting standards helps to solve this problem. Individual preference of a particular theory is usually based on merit of argument and the employed research method. This is because some accounting methods work for some people while others do not. Researchers may also adopt strategies to support their theoretical perspective and research (Demski, J., 1973, 720). This is appropriate as criticizing one theory leads to advancement in the accounting theories. This criticism results to identification of problems in the theories which can be corrected by making improvements in the theories. Theories are important as they might prescribe how assets can be valued; predict why managers choose certain accounting methods over others, explain why cultural backgrounds affect information that is provided on accounting. Accounting theories are usually used to determine which accounting alternative should be in use. Attempts have been made to determine a theory that would be useful to determine accounting alternative that is best. In making these attempts, standards such as usefulness, relevance, fairness, objectivity and verifiability to define the desired alternatives are used. Institutions on social choice also show reliance on standards. Standards formed are usually seen as accounting measurement processes, perceptions regarding the environment and environment that measurement is taken and used. However, approaches removed from individual preferences create a lot of difficulty. Normative theories of accounting cannot be made by using such sets of standards as it may lead to incorrect and undefined specifications in accounting. Standards therefore work to create a universal balance which is acceptable. If a person is confronted with accounting alternatives that are not singular or null, the former admits to trivial problems while the later admits to no problem (Ijiri, Y., 1971, 600). When considering accounting alternatives, completeness requires an individual to be certain on preference between two choices. Comparing the two alternatives must hold for the pairs of alternatives which are available. An accounting alternative that is acceptable and more profitable is a better selection. A person can also be confronted by three alternatives. If the historical cost is as good as the current cost which is as good as the price level adjusted historical cost, then, the historical cost is as good as its counterpart whose price level has been adjusted. Therefore, if accounting issues are viewed as specifying or selecting alternatives that should be in use, a better alternative must be identified. If not, accounting issues would not be resolved. If comparisons are not transitive, there may be needless consumption of resources. Transitivity and completeness are enough to explore different issues such as questions that are related to the existence of alternatives that are preferred. However, since information systems alternatives are related to accounting alternatives, a framework that is more revealing can be developed by invoking additional axioms that are sufficient in ensuring the expected utility hypothesis (Wolk, H., & Harri, I., 2012, 740). Additional assumptions can be made which ensure existence of probability and utility functions so that the relationship can be represented by utility which is expected following a course of action. The advantage of this is it is specific about using accounting information with a minor decrease in being general. Ordering relation should admit to a preference factor and subjective belief so that the accounting alternative with the highest expected value of utility is the alternative which is preferred. The utility and preference factoring and the probability or belief factoring should be denoted. The utility description can be characterized further by adopting conventional specification of a choice problem that is uncertain. Action will be selected and consequences observed as a result. Characterization of specification or choice of an accounting alternative is an expected utility variant in the situation as can be seen from the above discussion. Comparisons of pairs of alternatives are transitive and are placed utility format as they are convenient. Reliance on standards to point out accounting alternatives follows a different format. For instance, International accounting standard boards selects alternatives which are preferred even though the methods of analysis are not dependent on subjective preference and opinion regarding outcomes. Instead, it relies on extrinsic properties of the accounting alternatives. Standards usually give criteria that can be used when looking at potential accounting information. It constitutes of basis of exclusion or inclusion of as information for accounting. If these criteria are not met adequately, resulting information cannot be accepted. Likewise, economic data that adequately fulfills this criterion represents accounting material which should be considered for reporting. Therefore, there is no individual option for people in Australia as the Australian Accounting Standards Board has its set of rules. The standards approach reflects the qualities that are basic in accounting alternatives regardless of an individual’s preference or belief. An instance is relevance and usefulness referring to partition by the system not looking at the cost. There is therefore no set of assertions that exist which can identify the most preferred alternative in accounting without incorporating individual preferences and beliefs. Beliefs and preferences that individuals have will continue to be part of accounting. Generally speaking, standards cannot be depended on to provide a normative accounting theory (Wolk, H., & Harri, I., 2012, 600). There is no set of existing standards that rank alternatives according to beliefs and preferences, no matter what the preferences and beliefs are. The basic thing is that the alternatives can consistently admit to the utility characterization that is expected. This negotiation is far reaching as it implies the use of aggression or measure theory, use of information theory and the use of sets of standards that are more typical. Using alternatives also applies to financial and managerial reporting areas. Physical identification, benefits received and facilities provided is a criterion that does not work universally (Lev, B., 1969, 167). Difficulty does not end with multiperson orientation. This is because a situation may be single person or a setting made of many people where only a singles person’s beliefs and preferences counted. This is similar to standards where many individuals are involved but the standards have to be followed in accounting. If the nature of the decision problem that is being faced is not restricted, there is no set guarantee that a particular set of standards will be singled out as a preferred accounting alternative. To add to this, an interpretation that is less stringent does not remove the impossibility results in standards. Accounting standards in Australia are based on international financial reporting standards. This shows there is internal harmonization on standards. The Australian Accounting Standards Board also delivers transparent information for regulators and shareholders. The standards keep changing as better approaches are identifies (Hogget, J., & Edward, L., 1999, 320). This explains the change from pre-IASB to AASB. This is because accounting practices change as new theories are formulated. In conclusion, particular Accounting Standard, Corporation Law or Conceptual Frameworks reduces the choice of accounting methods that are in use. Australian accounting standards board sets standards; this is applied to all general purpose financial reports in entities of the private and public sectors. Ethical and professional standards require accountants to use accounting standard when they are involved in preparation audit, presentation, compilation or review of financial statements of general purposes. This therefore restricts the choice of individual and different accounting methods. References Australian Accounting Standards Board [AASB], 2010. AASB 101 Presentation of financial statements, Financial Reporting Handbook 2011. Volume 1, Institute of Chartered Accountants, Wiley, NSW. Deegan, C., 2010, Australian financial accounting, 6th edn, Wiley, NSW. Demski, J., 1973. The general Impossibility of Normative Accounting Standards. American Accounting Association, The accounting review, Vol. 48, No. 4, p.g 718-723. Gaffikin, M., 2008. Accounting Theory. New York; NY:Pearson Education Canada; 1 edition. Accounting Theory and Practice [Paperback] Glautier, M.,& Underdown B., 2000. New Jersey; Financal Times Management; 7 edition Harris, P., Mongiello, M., 2006. Accounting and Financial Management. United States; U.S: taylor & francis; 1 edition Hogget, J., & Edward, L., 1999. Financial accounting in Australia. Australia: John Wiley & Sons Australia Ltd. Ijiri, Y., 1971. "Fundamental Queries in Aggregation Theory," Journal of The American Statistical Association Lev, B., 1969. Accounting and Information Theory. American Accounting Association. Scott W., 2011. Financial Accounting theory (6th Ed.). United States: Prentice Hall Watts, R., & Zimmerman, J., 1985. Positive Accounting Theory [Facsimile]. Chicago: Prentice Hall; 1 edition Wolk, H., & Harri, I., 2012. Accounting theory: Conceptual issues in a political and economic environment. UK:London; Sage Publications. Read More