Positive Accounting Theory

(PAT)
Positive Accounting Theory (PAT)............................................................................1
Scope of PAT....................................................................................................................4
Definition......................................................................................................................4
Seeks to understand accounting phenomena by observing
empirical events and use these results to make predictions about
wider set of observations or to predict future results...........................4
Philosophy....................................................................................................................4
Consistent with Fiedmans view : Watt and Zimmerman asserted
that the objective of PAT is to explain and predict accounting
practice.....................................................................................................................4
EXPLAIN means providing reasons for observed practice. Predict
means PAT predicts unabsorbed phenomena...........................................4
Strength........................................................................................................................4
Jensen stated that Accountant have been justifiably concerned
with the effects of general price level adjusted accounting (GPLA)
on accounting numbers. But a manager interested in maximising
the value of his firm also must estimate either explicitly or
implicitly how such accounting procedures will affect firm value.. . .4
And how General Price Level Adjusted Accounting (GPLA) affects
firm value is a purely positive issue in the sense that the term is
used in the social sciences................................................................................4
.in the end, of course we all interested in theses methodological
topics and in positive theories........................................................................5
Stages............................................................................................................................5
1 Did not explain accounting practice Involved research into
accounting and behaviour of capital markets..........................................5
2 Stage literature sought to explain and predict accounting
practices across firms.........................................................................................5
Dissatisfaction With Prescriptive Standards...................................................5
Prescriptions requires specification of both objective and an
objective function.................................................................................................5
Normative theory based on value of judgments, produce
irrefutable prescriptions.....................................................................................5
Even they are falsifiable, the choice of objective function would
still have to be justified......................................................................................5
Political Process..............................................................................................................5
Model - political accounting theory - involve relationship between
the firm and other parties interested in the firm........................................5
Important - accounting information - one of the sources of
information about firms and impact the social values..............................6

Difference between political accounting theory and capital market:less demand, less intensive for the production of information in
political markets........................................................................................................6
Accounting information plays such a role and evidence in political
cost allocation............................................................................................................6
ACCOUNTING STANDARD SETTING.....................................................................6
Social decision impact on the well being of a wide variety of
interest groups.....................................................................................................6
Limit behavior & accounting choices thus wide range of users try
to lobby for standard which will benefit them most.............................6
Setters would go for standard that give public confidence. To
ensure legitimacy of a rule making body and consensus, due
process follows democracy procedures......................................................6
Capital Market Research.............................................................................................6
1 Two Types of Capital Market..............................................................................6
1.1 The study sought to determine the impact of the release of
financial information to share return.............................................................6
1.2 Those studies that consider the effect of changes in accounting
policies on share prices......................................................................................7
2 Efficient Market Hyphotesis...............................................................................7
2.1 Weak Form.......................................................................................................7
2.2 Semistrong Form............................................................................................7
2.3 Strong Form.....................................................................................................7
3 Economic Consequences (EC)..........................................................................7
concept that asserts that despite the implications of efficient
securities market theory, accounting policy choice can affect firm
value..........................................................................................................................7
4 Factors That Led To The Development of PAT of Accounting Policy..9
4.1 Firms tended to choose accounting methods that offered
conservative measure of profit, assets, and equity................................9
4.2 Firms made consistent patterns of accounting policy choice
that were related to the economic and gov. characteristics of the
firms...........................................................................................................................9
4.3 Companies lobbied in relation to proposed accounting
standards, costly activity only be conducted if the benefits
outweighed the costs.........................................................................................9
4.4 There should be benefits in preparing financial reports as
many firms voluntarily incurred the costs of preparing financial
reports even prior to any regulation requiring them to do so...........9

Scope of PAT
Definition
Seeks to understand accounting phenomena
by observing empirical events and use these
results to make predictions about wider set
of observations or to predict future results.
Philosophy
Consistent with Fiedmans view :
Watt and Zimmerman asserted that
the objective of PAT is to explain
and predict accounting practice..
EXPLAIN means providing reasons for
observed practice. Predict means PAT
predicts unabsorbed phenomena
Strength
Jensen stated that Accountant have been
justifiably concerned with the effects of
general price level adjusted accounting
(GPLA) on accounting numbers. But a
manager interested in maximising the
value of his firm also must estimate either
explicitly or implicitly how such accounting
procedures will affect firm value.
And how General Price Level Adjusted
Accounting (GPLA) affects firm value is
a purely positive issue in the sense that
the term is used in the social sciences.

.in the end, of course we all interested in

theses methodological topics and in positive
theories.
Stages
1 Did not explain accounting practice
Involved research into accounting and
behaviour of capital markets
2 Stage literature sought to explain and
predict accounting practices across firms.
Dissatisfaction With Prescriptive Standards
Prescriptions requires specification of
both objective and an objective function.
Normative theory based on value of
judgments, produce irrefutable prescriptions.
Even they are falsifiable, the choice of
objective function would still have to be justified.

Political Process
Model - political accounting theory - involve
relationship between the firm and other
parties interested in the firm.
Important - accounting information - one
of the sources of information about firms
and impact the social values.

Difference between political accounting

theory and capital market:- less demand,
less intensive for the production of
information in political markets.
Accounting information plays such a role
and evidence in political cost allocation.
ACCOUNTING STANDARD SETTING
Social decision impact on the well
being of a wide variety of interest
groups.
Limit behavior & accounting choices
thus wide range of users try to lobby
for standard which will benefit them
most.
Setters would go for standard that give
public confidence. To ensure legitimacy
of a rule making body and consensus,
due process follows democracy
procedures.

Capital Market Research

1 Two Types of Capital Market
1.1 The study sought to determine the impact of the
release of financial information to share return.
1.2 Those studies that consider the effect of changes
in accounting policies on share prices.
2 Efficient Market Hyphotesis

2.1 Weak Form

where the price of a security is
currently only reflects the past
price.
2.2 Semistrong Form
where the price of a security is
currently showing all available
information, apart from the
price of the past.
2.3 Strong Form
which shows the entire information
security's price includes unpublished
information.
3 Economic Consequences (EC)
concept that asserts that despite the implications
of efficient securities market theory, accounting
policy choice can affect firm value.
Analysis
Accounting Substance
How do alternative accounting
choices affect accounting numbers?
Economic Effects
What are the institutional and economic
factors that suggest these alternative
choices will have a real effect on the firm?

Rise of EC
Stephen Zeff
define EC "the impact of accounting reports
on the decision making behaviour of business,
goverment and creditors.
Accounting report
can AFFECT the real decisions
made by managers and others.
rather than simply REFLECTING
the results of these decisions.
Example: Oil and Gas Company
May alter managers - exploration
and development of activities.
May affect firm value
If changes are negative, and if many
investors are affected, investors may
pressure to bear on their elected
representative.

4 Factors That Led To The Development

of PAT of Accounting Policy
4.1 Firms tended to choose accounting
methods that offered conservative
measure of profit, assets, and equity.
4.2 Firms made consistent patterns of
accounting policy choice that were
related to the economic and gov.
characteristics of the firms.
4.3 Companies lobbied in relation to
proposed accounting standards,
costly activity only be conducted
if the benefits outweighed the
costs.
4.4 There should be benefits in preparing
financial reports as many firms
voluntarily incurred the costs of
preparing financial reports even prior
to any regulation requiring them
to do so.