You are on page 1of 22

Lecture 01

ACCT 332 Accounting Thought and Practice


Introduction and Overview
- Course syllabus
y
- Overview of Chapter 1

Course Objective

This course builds on the knowledge you obtained in your


introductory and intermediate accounting courses.
courses

Course pre-requisites: ACCT 201/222 Corporate Reporting and

Financial Analysis
y
or ACCT 224 Financial Reporting
p
g and Analysis
y

The objective of ACCT 332 is to help you understand the theoretical


foundations of corporate financial reporting.

After completing this course, you will have acquired an

understanding of both the how of accounting procedures and the


underlying reasons why these practices are adopted.

Hopefully, this course will also help you to develop skills to think

independently and critically about various accounting standard-setting


issues.
issues

Course Organization (1)

Instructor:
Professor Holly Yang
Address: 4021 School of Accountancy
Phone: 6808-5447
e-mail: hollyyang@smu.edu.sg
Course Website: http://elearn.smu.edu.sg
Office Hours:
Wednesday, 23 p.m. or by appointment.

Course Organization (2)

Course Materials:
- Textbook: Financial Accounting Theory by W.R.
W R Scott,
Scott Prentice Hall
Hall,
2015 (7th Edition)

Available at SMU Booklink


Where can I find solutions to the end-of-chapter
end of chapter problems?

Journal articles, FASB/IASB opinions, and other supplementary


articles
i l ((available
il bl on the
h course website)
b i )

Course Organization (3)

Grading:
Classroom Professionalism
Classroom Contributions (individual and group)
Midterm Exam
Term Paper
Term Paper Presentation
Final Exam

5%
10%
15%
10%
10%
50%
100%

What is classroom professionalism?


How do I contribute to the learning environment?
Midterm is on Feb
Feb. 14th 1:00-3:30pm (Sat) in Ngee Ann Kongsi Auditorium
Auditorium.
Unauthorized absences result in grade of zero.
Final exam is on April 20th 1-4pm
1 4pm (Mon)
(Mon). (Cumulative)

Course Organization (3)

Class sessions will typically consist of two parts:


lecture and group exercises
exercises.
Groups:

Form your group and sit with them for the remaining
term. (Max 6 people)

Submit the names of each person in your group


group.

Tell me a little about yourself. (Why accounting?


Where do yyou see yyourself after graduation?)
g
)

Each week, one group will be assigned to lead the


group discussions as we go over the exercise
problems together during the second half of class.

Course Organization (4)

Term Paper and Presentations


S guidelines
See
id li
ffor tterm paper on course website.
b it
Important dates:

Week 1: Groups are formed


Week 3: Term paper topics assigned
Weeks 3 to 9: Group meeting with professor
Week 9: Submit hard copies of paper outlines
Week 13: Final paper and in-class presentation due

How do I succeed in this course?

Before class

R d th
Read
the required
i d readings
di

After class

Review lecture material


Review group exercise problems
Take advantage of office hours
Understand and digest, do not memorize.

Academic Integrity

All acts of academic dishonesty (including, but not


limited to
to, plagiarism
plagiarism, cheating
cheating, fabrication
fabrication, facilitation
of acts of academic dishonesty by others, unauthorized
possession of exam questions, or tampering with the
academic
d i work
k off other
th students)
t d t ) are serious
i
offences.
ff
All work (whether oral or written) submitted for
purposes
p
p
of assessment must be the students own
work. Penalties for violation of the policy range from
zero marks for the component assessment to
expulsion depending on the nature of the
expulsion,
offense. When in doubt, students should consult the
instructors of the course. Details on the SMU Code of
Academic Integrity may be accessed
at http://www.smuscd.org/resources.html.

Overview of the Scott Book

Ideal Conditions

What are the ideal conditions

P f t and
Perfect
d complete
l t markets
k t
No information asymmetry

Perfect: No one has information advantage, no


trading frictions. Information obtained w/o cost.
Complete:

Adverse selection & Effort (moral hazard)

Accounting reports in this setting are both relevant


and reliable.

Thi iis th
This
the fifirst-best
t b t setting
tti

as we will see, a setting where there is little role for


accounting standards
standards.

Information Asymmetry

Relax
R l ideal
id l assumptions
ti

iinformation
f
ti relevant
l
t tto
evaluate the firm is not costlessly available.

Two potential issues:


-

Adverse Selection: users do not have the information


necessary to separate good from bad investments.

Moral Hazard: unobservability of an agents effort.

Adverse Selection - Intuitions

Jeremy Scott Adidas Panda Shoes

where to buy them??

Assuming that I have no way of distinguishing authentic items ($400) from


counterfeits ($50), what is likely to happen in an online auction?
I will bid no more than $225 (0.5*400+0.5*50) for a pair of these shoes.

Disagree (logic)

Only sellers off counterfeits


O
f
will list their items since the authentic sellers
will incur a loss.
This is the consequence
q
of the adverse selection issue ((aka lemons
problem by economics Akerlof 1970)

What can be done to circumvent this problem?


Voluntarily provide more information!! (e.g. pictures, ratings,
descriptions guarantees,
descriptions,
guarantees etc.)
etc )

Moral Hazard - Intuitions

Un-observability of actions
Consequences of moral hazard problems

How hard would the seller attempt to satisfy the buyers


requests
t if th
they kknow th
they will
ill gett S$290 regardless?
dl
? ((e.g.
$225
no exchanges or refunds)

Moral hazard can lead to the problem that a party insulated


from risk may behave differently from the way it would
behave if it were fully exposed to the risk.

What are some other examples of moral hazard?

i.e. Non-ideal

Role of Information in a Market Economy

To improve operation of capital markets

Ad
Adverse
selection
l ti problem
bl

To improve operation of managerial labour markets

Moral hazard problem

Both roles are crucial

Turmoil of last few years shows the importance of both

Reckless lending, extravagant compensation (moral hazard


issues)
Investors and lenders stay away from markets so stock
markets drop and credit tightens (adverse selection)
Has resulted in more regulation which tries to address both
moral hazard and adverse selection issues

Role of Financial Reporting


in a Market Economy
y

Control adverse selection

Convert inside information into outside information

Two prominent theories in this area:

Provide more useful information to investors


Assumes a rational market in which accounting reports are
useful in assessing the amounts, timing, and uncertainty of
future cash flows (decision usefulness).

Information Perspective
Measurement Perspective

Best Annual Report

Objectives of the Award

To encourage excellent financial reporting presentation and a


wider scope of disclosures beyond the minimum regulatory
requirements that are in tandem with the needs of investors and
other stakeholders such as employees, creditors and the general
p
public;
;
The Best Annual Report Award was introduced to increase
awareness, through the encouragement of social responsibility
reporting that businesses and organisations are responsible to the
community both as employers and corporate citizens;
The Best Annual Report Award also gives recognition to maiden
annual reports of First
First-Year
Year Listed companies that show an
excellent standard of disclosure. The Committee hopes that this
will encourage First-Year Listed companies to raise the standard of
their annual report disclosures;

Role of Financial Reporting


in a Market Economy
y (contd)
(
)

Control moral hazard

Control manager shirking and improve corporate


governance

Accounting reports can be used in contracts.


In contrast to the adverse selection setting, accounting
choices and policies can matter because they can affect
the payoffs in these contracts.
E
Economic
i C
Consequences

As we will learn later, this is a role not considered by the


conceptual framework
framework.

The Role of Accounting Standards

The demand for regulation

M k t ffailures
Market
il

The challenge

It does not take too much reflection to conclude that


the conflicting objectives of accounting reports used
in the adverse selection setting versus the moral
hazard setting creates difficult challenges for
accounting policy-makers.

e.g., the most reliable numbers are better

for contracting, but they do not provide


relevant information needed to address the
adverse selection problem.