Based on Statement of learning outcomes 2012A Update Mon 14-05-2012 5:15PM Topic 1: Introduction to Financial Accounting Theory Describe

be the different functions performed by different accounting theories (p. 5). Theories: -prescribe how assets should be valued, based on historial costs or market value -predict why managers will choose particular accounting methods (ex: managers are given bonuses on the basis of profits => they will adopt those accounting methods that lead to an increase in reported profits) -explain how an individuals cultural background affects accounting information provided (chapter 4) -prescribe what accounting information should be provided to particular classes of stakeholders (chapter 5) -predict that the relative power of a stakeholder group will affect the accounting information it receives (chapter 8) -explain or predict how accounting disclosures might be used as part of a strategy to legitimise (hp php ha) the operations of an organization Describe and evaluate the different theories in financial accounting ( pp. 7-16). -Inductive/ Descriptive Research (1920s to 1960s): theories developed from observing what accountants did in practice, codified [h thng ha] as doctrines or conventions of accounting. It is assumed that what is done by the majority of accountants is the most appropriate practice. -Prescriptive Research (Normative Theories) (1960s to 1970s) Based on what the researcher believes should occur in particular circumstances, not based on observation. Should not be evaluated on whether they reflect actual accounting practice Ex: Seek to provide improved approaches to asset valuation in a time of widespread inflation (assets should be valued at replacement costs / net realizable value / present value) Predictive Research (Positive Accounting Theories) (mid to late 1970s) Research aimed at explaining and predicting accounting practice rather than prescribing particular practices. Known as positive theories It begins with some assumptions of particular conditions, through logical deduction (suy lun), some predictions will be made about the way accounting practices occur. If predictions are sufficiently accurate when tested against reality, they are regarded as having provided explanation of actual accounting practices Based on rational economic person assumption, accountants are primarily motivated by self-interest (tied to wealth maximisation), positive theories seeks to predict and explain why accountants elect to adopt particular accounting methods in preference to others, such as the use of a particular accounting method is tied with accounting-based bonus system, or tied with debt-to-asset ratio to negotiate a loan covenant (hip c vay mn) Evaluation / Criticisms of : (pp.13-16) -Inductive approach: Inductive approach does not evaluate the logic of current theories, whether they should and should not be used, also it does not introduce any improvements for those ones in the future. -Normative theory: Normative theories have been criticised for basing on personal opinion about what should happen, this is like unscientific research. -Positive Theory: Not tell us the efficiency of what is being done, not say wich method a firm should use like prescriptive theory ??? Positive theories of accounting have been criticised for not providing prescription (law, rules). The decision not to provide prescription could alienate (lm xa lnh) academic accountants (who support positive accounting) from their counterparts (who support normative theory) within the profession Topic 2: The Financial Reporting Environment Explain the arguments for and against the existence of regulation (pp.40-43). In favor of regulation Markets for information are not efficient and without regulation a sub-optimal [khng ti u] amount of information will be produced. Some parties can obtain their desired information due to their control over scare resources. Conversely, parties with limited power is generally unable to secure [c c/ t c] information without regulation Investors need protection from fraudulent organizations that may produce misleading information Regulation leads to uniform methods being adopted by different entities, thus enhancing comparability. In against of regulation -Accounting information is like any other good, and users will prepare to pay for it to the extent that they need. This will lead to an optimal supply of information by entities -Any organization that fails to provide information in capital markets will be punished by the market, it will find more costly to attract funds than the other entities -Regulation will lead to an over-supply of information (at a cost to the producing firms) because users will tend to overstate the need for the information -Regulation typically restricts the accounting methods that may be used. This means some organization will be prohibited from using accounting methods that efficiently reflect the performance & position of the entity.

Ex: AASB 138 Intangible, all expenditure on research has to be expensed as incurred. On the basis of efficiency, this regulation is deemed to be inappropriate, as it does not allow annual report readers to differentiate between companies with or without valuable research. Discuss the role of professional judgment in accounting decisions (pp.44-45). -While the accounting treatment of many transactions and events is regulated, many others are unregulated. Ex: the buildings must be depreciated, there is still a range of useful life & residual value to be selected. -Accountants are expected to be objective and free from bias when performing their duties. The information being generated should represent faithfully and the underlying transactions and events and it should be neutral & complete. However, throughout the world, several national accounting setters have considered the economic & social implications of possible accounting standards prior to their induction. If the economic or social implications of a particular accounting standard have been deemed to be negative, then it is likely that the introduction of the standard would have been abandoned, even though the particular standard may reflect more accurately particular transactions or events => It is difficult to accept that accounting standards are neutral or unbiased Topic 3: The Regulation of Financial Accounting Discuss the various theoretical arguments for and against regulation of financial accounting (pp.59-73). Free-Market Perspectives (pp.59-64) -Basic assumption: Accounting information should be treated like other goods, and demand and supply forces should be allowed to operate freely to generate an optimal supply of information about an entity Private economic-based incentives = Pessimistic assumption -Basis view: In the absence of information about the organizations operations, parties who are not involved (like owners, debtholders) in the management of the organization, will assume that the managers might be operating the business for their own benefit -Shareholders & debtholders expect that managers will take opportunistic actions to fulfill their self-interest. Therefore, shareholders pay less for the shares, lenders charge higher interest => That is, the lenders will price-protect: the higher the perceived (nhn thy) risk, the higher the demanded return) => Increase the operating costs: the cost of attracting capital will increase, resulting in negative implications for the value of the organization (decreased Net Present Value of future cash flows) In situation where manager have large investment in the organizations shares (internal shareholder), they will try to maximize their share value => They will enter into contracts with shareholders & debtholders & make a commitment that certain strategies which are against the interests of shareholders & lenders, will not be undertaken Ex1: Manager make an agreement that they will keep the ratio debt to asset below a certain percentage Ex2: Managers ensure profits will cover interest expense by a specific number of times (interest coverage requirements) -Such contractual arrangements are tied to accounting numbers. In the absence of regulation, there will be the private incentives to produce accounting information. Organizations that do not produce information will be penalized by higher costs associated with attracting capital, this will damage the financial interest of those managers who own shares in their organization. -Depending on the parties involved and the types of assets, the organization will be best placed (nh gi) to determine what information should be produced to increase the confidence of external stakeholders ??? Imposing (applying) regulation that restricts the available set of accounting methods will decrease the efficiency which negotiated contracts will reduce agency (trung gian, mi gii) cost -Even in the absence of regulation, there will be a demand to have the accounting reports audited by external party => such an activity will increase the reliability of the data, and this is expected to reduce the risk of the external stakeholders, and further decreasing the organizations cost of capital Criticism: -In the presence of too many different parties, the negotiation costs & information production with every potential investor would be prohibitive (rt t) & time-consuming Market for managers

??? Assumption: In an efficient market for managers and that managers previous performance will impact on how much remuneration (payment for services) they command (ch huy, ra lnh) in the future, either from their current employer or elsewhere. -Even in the absence of regulation, managers will be encouraged to adopt strategies to maximise value of firm (provides favourable view of own performance), these strategies would include providing optimal amount of accounting information ??? Underlying assumption: Managerial labour market operates efficiently. Information about past performance is known by prospective (tng lai) employers and will be impounded (ct cht) in future salaries. Capital market is efficient. Effective managerial strategies reflected in positive share price movements However, problems arise if the manager is approaching retirement. Also, we might question whether the managerial labour market is always efficient Market for corporate takeovers -Assumption: underperforming organization will be taken over by another entity with the existing management team subsequently replaced. => Managers would be motivated to maximize firm value to minimize the likelihood that outsiders could seize (chim ot) control of the organization at low cost. => Accounting information will be produced to minimize the organizations cost of capital & thereby increase the value of the organization. They will provide information to the point where the marginal cost equals the marginal benefit -Criticism: However, working out the marginal cost & marginal benefits of providing information is difficult & unrealistic. Market for lemons Even in the absence of regulation, organization would still be motivated to disclose both good & bad news about their financial position & performance. -Even though the firm may be worried about disclosing bad news, the market may make an assessment that silence implies that the organization has very bad news to disclose. Failure to do so will have implications for the managerss wealth ??? The assumption that the market knows the managers has particular information to disclose might not always be realistic, as the market will not always know that there is information available to disclose. The presence of unequal distribution of information, the manager might know some bad news but the market might not expect any information disclosure at the time. Also, at certain times, withholding (giu gim) information could be in the interest (li ch) of the organization. Ex: the organization may not want to disclose information about certain market opportunities because of the fear for competitors using such information. Pro-regulation Perspective (pp.64-73) -Accounting information is a public good => once available, people can use it without paying and can pass it on to others (free riders) => This provide a lack of incentive for accounting preparers, which in turn leads to an underproduction of accounting information => Regulation is necessary to reduce the impacts of market failure Counter-arguments (Criticism): -Free goods are often overproduced as a result of regulation. The users knowing that they do not have to pay for the free goods, will oversate their need for good or service. ??? The lobbying by particular parties, such as financial analyst, may create a cost for companies in terms of compliance with accounting standards (s tun theo, phc tng). This leads to the existence of accounting standards overload. Explain the theoretical perspectives that describe who is likely to gain from the implementation of regulation Public interest Capture Theory Private Interest Theory (pp.74-88) Public Interest Theory (p.74) -Relugation is supplied in respone to the demand of the public for the correction of inefficient & inequitable market practice. The regulation is put in place to benefit the society as a whole. -The regulatory body is considered to be neutral & represent the interests of the the society, rather than the interest of the regulators

-The enactment (s ban hnh) of regulation / legistration is a balancing act between the social benefits and social costs of the regulation. => Regulation is deemed to be an instrument (cng c) to create the confidence that capital markets efficiency allocate resources to productive assets Criticism: -Questions that economic markets operates inefficiently if unregulated -Question that government regulation is virtually (gn nh) costless -Legislators will put in place (set up) legistration only because it might increase their own wealth (being reelected) and people will lobby (vn ng ng h) for particular registration only if it is in their own self-interest. Capture Theory (pp.75-82) -Although regulation might be introduced with the aim of protecting the public interest, this aim will not be achieved because the organization that is subject to (l thuc) the regulation will ultimately (finally) come to control the regulator. -The regulated industries will seek to gain control of the regulatory body because they know that the decisions made by the regulator will have significant impact on their industry. => It will be difficult for a regulator to remain independent of those parties or industries being regulated, as the survival of the regulatory body over a period of time often depends on satisfying the expectations of those parties or groups Criticism: -No reason is suggested why regulated industry is the only group to influence an agency. Customers of the regulated firm have an obvious interest in the outcome of the regulatory process, they are able to capture the agency as effectively as the regulated firm -No reason is suggested why industries are able to capture only existing agencies rather than creating of an agency that will promote their interest -If particular groups did not perceive a potential threat or opportunity from a regulator to their social or economic interests, why would they devote (cng hin) resources to capture the regulator Private Interest Theory (Economic Interest Group Theory) (pp.85-88) -Different groups are viewed as being in conflict with each other & they will lobby government or other regulators to put in place legislation that economically benefits them (at the expense of the others). Ex: Consumers might lobby government for price protection, or producer might lobby government for tariff (tax) protection. -No notion of public interest in this theory. Private interests are considered to dominate the legislative process. -The regulator itself is an interest group that is motivated to embrace strategies to ensure re-election, or to ensure the maintenance of its position of power within the community. -The minority group does not have sufficient power (reflected by the numbers of controlled votes, or by funds available to support an election campaign), then that group will not be able to effectively lobby for regulation that might protect its interests. Explain the social and economic impact of regulation(pp.83-84) There is evidence that accounting regulation have real social & economic consequences for many organizations and people Ex: AASB 138 requires expenditure on internally developed brand names & research expenditure to be written off as an expense when incurred. As a result, retained profits will be reduced, affecting the companys ability to pay dividends, share price & relationship with banks -Accounting regulation will have an impact on managerial decisions (as managers will seek to manage their business to optimize their reported accounting numbers), and the resulting changes in managerial decision will have a social and/or economic impact on those affected by that decisions Explain why accounting standard setting is considered a political process (pp.89-91). Because financial accounting affects the distribution of wealth within society, it consequently will be political => Financial accounting should be objective, neutral & apolitical (phi chnh tr) is something that can be easily challenged. -Regulators typically encourage various affected parties to make submissions on draft version of proposed accounting standards, it provides an opportunity to be heard => accounting standards and therefore financial reports are the result of various social and environmental considerations. They are tied to the values, norms & expectations of the society in which the standards are developed.

-Accounting standard-setters need to consider the potential costs & benefits of particular accounting requirements before they are put in place -User may not be aware that financial reports are the outcome of various political pressures. Topic 4: International Accounting Explain the reasons of differences in accounting practices among different countries (pp.132-152). - If countries are wealthy, they tend to develop their own accounting standards (which can be costly). Less-developed countries typically adopt the accounting standards issued by the IASB (which may not be relevant to the information needs of the local people). - The nature of the business ownership and financing systems can influence the accounting methods being used within a country. For example, in countries which have companies that rely relatively more on equity capital (funds from many outsiders) there will be a tendency to provide greater disclosures than in countries with companies that rely relatively more on debt capital. - Invasion is another factor that can affect accounting practices. A country invaded by another may have a particular method of accounting imposed upon it. - Sources of finance might also influence the accounting methods used. For example, an international funding organisation (such as the World Bank) might require that particular accounting rules be used as a condition of providing funds to a country. -Religion can have a major impact on the accounting system chosen, affect how people do business & how they make decision. Within the Islamic faith (=beliefs), notions (=concepts) of interest returns are also not relevant because there is a general prohibition of interest on debt. However, a number of Western accounting standards specifically consider present values with the association of interest rate (for example, accounting for leases or accounting for liability provisions). These standards are not applicable to faiths such as the Islamic religion. Legal systems -Common Law system: few prescriptive statutory laws, rely heavily on professional judgment -Roman Law system: laws tend to be very detailed, covers how each type of transactions should be treated in the accounts, less need for the use of professional judgement Business Ownership & Financing Systems: -Outsider system: external shareholder, who are not involved in the management of the company, are a significant source of finance for much business activity, will need to be provided with separate financial accounting information to help them have a basis of evaluating the performance of the company, and subsequently making their investment decisions. => Accounting information must be fair & unbiased => A process requires extensive use of professional judgement -Insider system: provision of finance by external shareholder is much less significant. Instead, there has been a dominance of family-owned businesses or providers of long-term finance (banks or governments) The owners of family-owned business tend to have access to the detailed internal accounting information of the business Banks/Governments tend to develop long-term relationships. They will have representatives on the director board & are provided with the detailed accounting information inside the organization. => Little pressure for providing information to aid (=facilitate) investment decisions making by shareholders Distinguish between harmonization and standardization (p.109). Standardization: imply the imposition (s p t) of a more rigid (strict) and narrow set of rules than harmonization Harmonization: a process of increasing the compatibility of accounting practices by setting bounds (ranh gii) to their degree of variation. => Allow more flexibility than standardization Harmonisation refers to efforts to make the accounting standards being released by different countries as similar as possible and to remove all fundamental differences. Standardisation is typically construed as meaning that the accounting standards released by different countries will be identical. In recent times the two terms have been used synonymouslyalthough arguably, this is incorrect. Discuss the arguments in favour (or the benefits) of harmonization and standardization (pp. 109-111).

According to Nobes & Parker (2004): -If investors are investing in companies from diverse countries and using financial statements as an important source of information to base their investment decision on => standardization is important to enable them to understand the financial statements, to have a basis for comparing the financial accounting numbers from different countries. If an international investor has to understand numerous different sets of accounting assumptions, rules & regulations, the task of making effective international investment decisions becomes more complicated. - Standardisation will facilitate greater capital inflows. A multinational company needs long-term finance & may need to raise finance by listing its securities on the stock exchange of more than one country. It would not be easy if that company has to produce financial reports in accordance with the accounting rules of the stock exchanges of each country where its shares are traded. - Standardization of accounting will create greater flexibility and efficiency in the use of experienced staff by multinational firms of accountants & auditors Without standardization, the different accounting regulations in different countries act as a barrier to the transfer of staff between countries. According to Ball (2006): - IFRS will lead to more accurate, comprehensive and timely financial statement information, relative to the information that would have been generated from the national accounting standards which they replaced => More-informed valuations [nh gi] in the equity markets, and hence lower the risks faced by investors - Small investors might be less likely than larger investors to be able to access financial information from other sources. Improving financial reporting quality will allow smaller investors to compete more fully with larger investors Describe the recent actions of IASB and other accounting standard-setting bodies to establish a uniform set of standards for global use (pp.112-125). The IASB was established and published IFRS in 2001 IFRS have still not been accepted by the US Securities and Exchange Commission. The IASB and US standardsetter have been working to reduce the differences between the international standard and US accounting standards. A significant participant in the process of standardizing accounting practices was the European Union. The EU agreed that from 1 January 2005 all companies whose shares were traded on any stock exchange in the EU would have to follow IFRS In Australia, a decision was made in 2002 by the Financial Reporting Council that Australia would adopt accounting standard being issued by the IASB Discuss the reasons why standardization of accounting standards will not necessarily lead to standardization in accounting practice (pp. 126-132) There are a number of reasons why the standardisation of accounting standards will not necessarily lead to standardisation in practice. Some of the reasons include the following: Differences in Taxation Systems - Asset impairment are tax deductible in Germany, but not in the UK => Tax-driven accounting choices - which are domestic - might flow through to [=affect] IFRS statements Differences in Economic and Political Influences Powerful local economic and political forces determine how managers, auditors, regulators and other parties influence the implementation of rules. These forces have exerted [=used] substantial influence on financial reporting practice historically, and are unlikely to suddenly cease [=stop] doing so, even with IFRS or without IFRS Modifications of IRFS at national level The IASB has no ability to enforce the application of its accounting standards in countries that have made the decision to adopt IFRS. This is a key limitation. Regulatory bodies in particular countries may take the decision to modify a particular IFRS before it is released. Differences in Implementation, Monitoring and Enforcement

-Different countries will have varying levels of expertise in applying IFRS because different countries will have accounting professions of differing skills and professionalism. This will flow through to [=affect] how they apply accounting standards such as IFRS. => We cannot expect accounting practices to be uniform despite the actions of the IASB because there is inconsistency in the adoption of accounting standards in all countries. => Investor might be misled into believing that IFRS adoption has created a consistency in international accounting practices. The adoption of IFRS might incorrectly be construed [=interpreted] as a signal that a country has improved its quality of reporting Free-rider problem associated with IFRS If a symbol of legitimacy [=being legal] can be acquired at low cost, some countries with low accounting proficiency [thnh tho] will make the choice to adopt IFRS because such choice may generate reputational benefits. However, such adoption will have costly implication for countries with higher levels of accounting proficiency since those countries have incurred lot of costs for appropriate implementation, monitoring & enforcement mechanisms for their own developed accounting standards. Identify the obstacles to harmonization and standardization (pp.152-153). (1) International cultural differences caused financial accounting to vary in the first place => Difficult to see how a single set of accounting rules will be appropriate or suitable for all countries. (2) The lack in some countries of a developed accounting profession => Problems implementing IFRS (since IFRS based on accounting profession quite much) (3) Accounting can have economic consequence => Government may regret giving the process of accounting standard settings to an international body Topic 5: Normative Theories of AccountingChanging Prices Explain the limitations of historical cost accounting (pp.165 -169). Historical costs information lacks relevance in times of rising prices (Chambers) If prices of different assets acquired in different periods are simply added together then the total figure can be quite meaningless, like adding together different currencies. The final figure will generally understate the current market value of the assets. Tied to the above point, if assets are understated then this will in turn mean that the net book value of the entity (assets less liabilities) is understated. This could perhaps, lead to the owners selling an entity for less than it is actually worth (although clearly the owners should consider other information about the value of the organisation before determining how much to sell it for). When historical cost accounting is used, depreciation and cost of goods sold which are based on historical costs will be understated. That means profits are overstated in times of rising prices => Dividends can be paid out of profits, the actual operating capacity of the firm might be eroded because too much has been distributed to the owners and not enough has been retained to replace certain assets whose replacement costs have increased. Historical cost accounting distorts [lm sai s tht] the current years operating results because it includes holding gains that might have accrued over a number of periods. For example, if an asset such as land is acquired for $10 000 and increases in value by $1000 each year (and assuming no revaluations are undertaken, then if it is sold in year 5 for $15 000, a $5 000 gain will be shown wholly in year 5. No gain will be shown in any other year. Given this aspect of historical cost accounting, management might elect to sell certain assets in certain years simply to offset losses that might otherwise be reported. The assumption that the purchasing power of the dollar remains constant is simplistic and flawed [rn nt]. Information generated through historical costs accounting suffers from the additivity problem it is argued that it makes little sense to add together the costs of assets acquired in different time periods. Historical cost accounting can lead to an overstatement of profits in times of rising prices and this overstatement can cause a reduction in the operating capacity of the entity because an excess amount of dividends might be distributed (because historical cost accounting relies upon a financial capital maintenance perspective). Historical cost accounting data is of limited relevance to current decisions. Historical cost accounting assists an organisation to manipulate its profits given that the decision to dispose of a non-current asset can directly lead to the recognition of gains on disposal, The decision to sell an asset might be made in an effort to offset other losses that will be recorded. Explain the arguments that support the continued use of historical cost accounting (pp.198-202).

 Users of historical accounting information considered the information to be suitable for their decision-making purposes and did not seek change Various studies have tended to show that the alternatives have not appeared to generate significant demand. Preparers of financial statements were reluctant to change. Perhaps they had a number of accounting-based contractual arrangements in place with various parties such as lenders, and changing accounting methods might have had negative implications for these agreements, and for the value of the organisation. Tied to the above point, major shifts in how financial accounting valuations are undertaken could have major economic and social implications for many different people and this in itself might have meant that the adoption of alternative forms of accounting were unlikely. It would take time to learn new methods of valuation, there might be a general reluctance to change. Within historical cost accounting holding, gains on assets are not recognised until the time an asset is sold. As such, management might plan to sell particular non-current assets at times when it is suitable to them to record the gains (for example, when other significant losses have occurred and they want to offset the losses). Historical cost accounting gives the management a degree of discretion [s t do] in terms of when they recognise gains and management might maintain their support for historical cost because they fear losing such discretion.

It is a generally accepted accounting system, hence maintaining its use will not lead to drastic changes in accounting practice => Does not lead to significant economic and social consequences. People are used to preparing and reading historical cost accounting reports => Saving cost of training From an efficiency perspective, managers might consider that historical cost provides a more objective measure of the value of an item and this is preferable in terms of demonstrating proper stewardship over the resources contributed to an organisation. They might also consider that other bases of measurementsuch as market valuesprovide less relevant or reliable information. For example, perhaps they operate in an industry that has high volatility [tnh cht bin i rt nhanh] in asset values and they may consider that if assets were valued on the basis of fluctuating market values then this might create confusion in the minds of the financial statement readers. From an opportunistic perspective managers might prefer to retain the use of historical cost accounting as it can allow them to manipulate profit by determining when to sell an asset that has appreciated in valuewith such appreciation not being acknowledged until the asset is ultimately sold. The accumulated gain will be fully recognized in the period of the sale. Also, historical cost accounting can lead to higher profits (due to such factors as lower depreciation given that depreciation will be based on the original cost of an asset which could be significantly lower than its current marker value). This attribute of historical cost might be particularly attractive to managers who are paid a bonus tied to reported profits. Describe the alternative methods of accounting (CPPA, CCA, Cocoa) that have been developed to address problems associated with changing prices (pp.170-196). CPPA: Current Purchasing Power Accounting In time of rising prices, if an entity distributes unadjusted profits based on historical costs, the result could be a reduction in real value of an entity When applying CPPA, a price index must be applied. The price index may be broad if a general price index such as CPI is used, or the price index may be narrow if it relates to particular assets within a particular industry (a specific price index) It is necessary to consider monetary & non-monetary assets separately + Cash and Accounts Receivable remain fixed in term of their monetary value, but their purchasing power will decrease over time as a result of inflation + Relative to Inventory and PPE (Planty, Property, Equipment), the purchasing power remain constant but monetary equivalent will increase overtime as a result of inflation. In time of inflation, holders of monetary assets will lose as the assets will have less purchasing power at the end of the period. Conversely, holders of monetary liabilities will gain because the amount they have to repay will be worth less purchasing power at the end of the period. Under current purchasing power accounting, gains and losses only relate to the holding of monetary items, but do not arise from holding non-monetary items. CCA: Current Cost Accounting CCAs valuation is based on replacement cost (only applied for non-monetary items). Under physical operating capital maintenance, it differentiates between operating income from trading & gains of holding assets. CCA operating income represents profits of historical cost accounting less the realized holding gain of the goods that were sold. This CCA profits is the maximum amount that would be available for dividends in order to maintain physical operating capacity.

For example, an entity acquires goods for $20 and sells them for $30, the normal profit would be $10 and this can be distributed as dividends under historical cost accounting. However, under CCA, if at the time the goods are sold, their replacement cost to the entity was $23, and then $3 would be considered a holding gain. And to maintain physical operating capacity, only $7 (10-3) could be distributed => CCA profit would be $7 [Textbook page 184] Under CCA, depreciation of non-current assets is based on the replacement cost of the asset. For example, machinery was acquired in 2009 for $100,000 and had a life of 10 years and no salvage value. Assuming the straight line method of depreciation is used, and then depreciation expense would be $10,000/year. Under CCA, if in 2010 its replacement cost is $120,000, then the new depreciation expense would be $12,000. So a further $2000 would be deducted to determine the CCA profits. CoCoA: Continuously Contemporary Accounting CoCoA is another form of CCA but it is based on net-selling price (exit price) to value non-monetary assets Current cash equivalent refer to the cash that an entity would expect to receive through the sale of an asset. According to Chamber, the most important item of information to evaluate future decsion is current cash equivalent. The higher the current net selling value of the entitys asset, the greater the ability of the organization to adapt to changing circumstances. Profit is directly tied to the increase (or decrease) in the current net selling price of the entitys assets. No distinction is drawn between realized and unrealized gains. All gains are treated as part of profit. Rather than relying on sales, revenues are recognized at such points as production or purchase. Within CoCoA, there is an adjustment for changes in general purchasing power, which is referred to as capital maintenance adjustment. The capital maintenance adjustment forms part of the periods income/expense, with a credit to a capital maintenance reserve account in owners equity. For example, if opening equity was $5000 and the price index increased from 140 to 148, then the capital maintenance adjustment would be calculated as $5000 x (148-140)/140 = $286. $286 would be recognized as an expense for the period, and create a credit to a capital maintenance reserve account in owners equity. Identify the strengths and weaknesses of CPPA, CCA, & CoCoA (pp.170-196). Some strengths of current purchasing power accounting would include: Current purchasing power accounting is relatively simple and inexpensive to apply and does not require collecting data about replacement costs or market values. Information about movements in general price indices would be easily available. Relative to historical cost accounting, it can reduce the possibility of paying excessive dividends, which in turn could reduce the operating capacity of an entity. Some weaknesses of current purchasing power accounting would include: It is not generally favored by the business or professional community Various studies show there is not a great deal of demand for price-adjusted information. People are used to preparing and reading historical cost accounting reports, hence there would be a need to re-educate them about the strengths and limitations of current purchasing power accountingthis might be costly. Because one price index is generally applied to all assets, the adjusted values of the assets may show little correspondence [s ph hp] with their actual values Some strengths of current cost accounting would include: Relative to historical cost accounting, it can reduce the possibility of paying excessive dividends which could otherwise reduce the operating capacity of an entity. If all assets are valued at replacement cost then logically they can be added together; which solves the additivity problem. Allows for a separation of holding gains and losses from other results and therefore provides a better insight into management performance. Some weaknesses of current cost accounting would include: Replacement costs do not provide an indication of the assets current value if the entity decides to sell. It will not always be easy to determine replacement costsfor specialized assets the values can be very subjective. Implementing current cost accounting requires the entity to go to the expense of collecting information about replacement costs. People are used to preparing and reading historical cost accounting reports, hence there would be a need to re-educate them about the strengths and limitations of current cost accountingthis might be costly.

Some strengths of Continuously Contemporary Accounting would include: CoCoA provides information about an entitys capacity to adapt. Chambers considers such information crucial for effective decision making It solves the additivity problemthere is a common basis of valuation (net-market values) so it makes logical sense to add the various asset values together. There is no need for cost allocations through depreciation, only the movement in exit price is recognized in the periods income [see textbook page 194, the first 2 tables] Some weaknesses of Continuously Contemporary Accounting would include: Not all assets will have a readily determined market pricehence a deal of subjectivity will be involved. ?? Some assets can generate income within a particular entity, but have little or no value to anybody else (for example, the case of the blast furnace). The value in use of such assets is ignored. It values assets on the basis of the separate disposal of the respective assets. The implication of this is that assets which cannot be separately sold are deemed to have no valuefor example, goodwill. This attribute of CoCoA has attracted a great deal of criticism. CoCoA has never had widespread acceptance within the business community and hence there would be numerous obstacles to its implementation. People are used to preparing and reading historical cost accounting reports, hence there would be a need to re-educate them about the strengths and limitations of CoCoAthis might be costly. Tied to the above point, valuing all assets on the basis of selling prices has been criticised if it is considered that the entity is a going concern. Distinguish between the three capital maintenance perspectives (financial capital, purchasing power, and physical operating capital) and understand how income is calculated under each approach (pp.168-169). Financial capital maintenance: [For example, assume that an entity started the year with $200 in assets and $50 in liabilities (that is, net assets or owners equity of $150 which we also will assume was contributed by the owners). Also assume that at the end of the year the net assets had increased by $100 to $250 and that no additional capital contributions had been made by the owners throughout the year] Financial capital maintenance is based on historical cost accounting This perspective allows dividends could be distributed to the extent that [=as long as] financial capital is not eroded by the payment [$100}. Within financial capital maintenance, realised holding gains are treated as part of income. The approach ignores the fact that the replacement costs of many assets could have changed during the year and that while the financial capital has remained intact, if the entity was required to replace certain assets it may not be able to. => So the companys real operating capacity may have decreased. Purchasing power maintenance Under this perspective, historical cost accounts are adjusted for changes in the purchasing power by the use of the price index => Adjusted amount will lead to a reduction in operating income, compared to income calculated under historical cost accounting. Physical Operating capital maintenance This approach relies on the use of current cost accounting ( replacement cost or exit price ) to calculate how much income can be distributed and allow the company to retain sufficient funds to replace current assets as required. Holding gains are not considered to be available for dividend distribution. Therefore, the entitys physical operating capital is maintained intact. Topic 6: Normative Theories of Accounting-Conceptual Framework Explain the role of the conceptual framework in the concept of financial reporting (pp.211-215). The conceptual framework has been defined as a coherent [cht ch] system of interrelated [c lin quan] objectives and fundamentals [quy tc c bn] that is expected to lead to consistent standards.

It is further stated that the conceptual framework prescribes the nature, function and limits of financial accounting and reporting. = A conceptual framework makes prescriptions in regards to What financial reporting means and what should be its scope what organizational characteristics indicate that entity should produce financial reports [=reporting entity] what the objectives of financial reporting are what qualitative characteristics financial information should possess How the elements of accounting should be defined, when they should be recognized, and how the elements of accounting should be measured. => A conceptual framework of accounting can be considered to be a normative theory of accounting. Without conceptual framework, there will be a degree of inconsistency between various accounting standards released The framework must be developed in a particular order. Some issues need to be resolved before moving on to the subsequent building blocks [look at figure 6.1 on page 213 textbook] For example: If we reject the objectives of financial statements: to provide information about the financial position, performance and changes in financial position of an entity that is useful to a wide range of users in making economic decisions, then we might reject the prescription of underlying assumption, qualitative characteristics and other following building blocks. Identify, explain and critically evaluate the various building blocks of the conceptual framework (pp.220-244). Reporting entity Definition: A reporting entity is an entity for which there are users who rely on the financial statements as their major source of making decisions about allocating resources to the entity. Factors may indicate a reporting entity - The increase the separation of management and ownership of the entity is, the greater likelihood the entity will be considered to be a reporting entity - The more economic or political influence the entity has, the greater likelihood the entity will be considered to be a reporting entity - The greater financial characteristics the entity has (amount of sales, value of assets, number of customers & employees), the greater likelihood the entity will be considered to be a reporting entity. => This defintions & factors are highly subjective [ch quan] and could lead to conflicting opinions. General purpose financial statement: Definition: intend to meet the information needs {which are} common to users who are unable to command the preparation of reports tailored [=customized] so as to satisfy, specifically, all of their information needs Users of financial reports 3 primary user groups - Resource provider: employees, lenders, creditors, suppliers, investors - Recipients of goods & services: customers - Parties performing review or oversight [gim st] function: governments, regulatory agencies, analyst, labour union, media groups => IASB appears to maintain a restricted view of the users of general purpose financial statements and tends to disregard information rights or needs of users who do not have a direct financial interest in the organization. Readers of financial reports are assumed to have a reasonable knowledge of business and economic activities and accounting & a willingness to study the information with reasonable diligence [sing nng] Objective of general purpose financial reporting to provide information about the financial position, performance and changes in financial position of an entity that is useful to a wide range of users in making economic decisions - Stewardship: Enable outsider to assess the stewardship [the act of managing something] of management whether resources entrusted [giao ph] to management have been used for their intended or appropriate purpose - Decision usefulness: Assist users in making economic decisions about the allocation of scare resources - Accountability (between the entity and the parties which the entity is accountable to): + Definition: the duty to provide an account [li gii thch] or reckoning [s xem xt n] of those actions for which one is held responsible Underlying assumptions of financial statements

- Financial reports are prepared on the accrual basis of accounting. The transactions and events are recognized when they occur (not as cash is received or paid) - Financial reports are prepared on the assumption that an entity is a going concern and will continue in operation for the forseeable [can be predicted] future. The entity has neither the intention nor the need to liquidate [ph sn] its operation. If such intention exists, the financial report may have to be prepared on a different basis Qualitative characteristics of financial reports