HI5025 ACCOUNTING STANDARDS AND THEORY
TRIMESTER 2, 2011
INDIVIDUAL ASSIGNMENT 1
Assessment Value: 20%
Instructions:
1. Answer all questions.
2. Maximum marks available: 20 marks.
3. Due date of submission: 5 pm, Friday, 26th August 2011.
4. Each question is of 1,000 words (+/-5%).
Academic Integrity
This assignment is to be submitted in accordance with assessmentpolicy stated in the Subject Outline and Student Handbook.
It is the responsibility of the student who is submitting the work, toensure that the work is in fact her/his own work. Incorporatinganother’s work or ideas into one’s own work without appropriateacknowledgement is an academic offence. Students are required to submitall assignments for plagiarism checking on Blackboard before finalsubmission in the subject.
For further details, please refer to theSubject Outline and Student Handbook.
Question 1 (10 marks)
What are the main criticisms of Positive Accounting Theory? Explain why you agree or disagree with them.
Solutions
There are a number of criticisms of PAT:
One criticism of PAT is that by limiting its focus to explaining and predicting accounting practice it fails to provide guidance to practitioners. In defence, 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.
Another criticism of PAT is that it is not value free as it asserts. As explained in this chapter, no research can really be value free. Hence, while we might not criticise PAT because it is not value free, we can challenge the early claims that it was value free.
A further criticism that has been made of PAT relates to the assumption that all individual actions are driven by wealth maximising 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 behaviour rely upon simplifying assumptions about how people behave. At issue is whether the assumption is too simplistic.
PAT provides predictions which are not always supported by available evidence.
However, we can probably expect that most theories about human behaviour will not always provide accurate predictions of actual behaviour.
PAT relies upon various assumptions about the efficiency of markets, including the capital market, the managerial labour 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 organisations 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 organisations are the same and hence that doing large scale studies over many organisations is quite naïve.
(Maximum 1,000 words)
Question 2 (10 marks)
Brunswick Ltd (the “Company”) operates a chain of retail stores in Victoria. Theretail stores have been in operation for five years and during that period have hadto pay only one claim to a customer who was injured as a result of slipping andfalling on a wet floor. The claim was settled by the Company for $200,000. On thebasis of that experience, the board of directors has proposed charging $40,000each year as an expense and recognising a corresponding liability that wouldaccumulate in amount to $200,000 at the end of five years.
The CEO of the Company has recently resigned and signed arestrictive covenant in which he has agreed not to work in competition with theCompany for a period of two years. As such, the Company paid the formerCEO an amount of $250,000 in respect of the agreement. The boardof directors has proposed that this restrictive covenant should be recognised asan asset.
REQUIRED:
Discuss whether the above transactions and events meet the Australian
conceptual framework definitions of assets, liabilities, equity, income or
expenses. Give reasons for your answers.
(Maximum 1,000 words)