Chapter 1 Financial Accounting Theory

1.3 Positive research and normative research

Research that seeks to predict and explain particular phenomena is
classified as positive research and the associated theories are referred to as
positive theory.
A positive theory begins with some assumption(s) and, through logical
deduction, enables some prediction(s) to be made about the way things will
be.
If the prediction is sufficiently accurate when tested against observations of
reality, then the story is regarded as having provided an explanation of why
things are as they are. E.g. A positive theory of accounting may yield a
prediction that, if certain conditions are met, then particular accounting
practice will be observed.
Positive theories can initially be developed through some form of deductive
(logical) reasoning. Their success in explaining or predicting particular
phenomena will then typically be assessed based on observation that is,
observing how the theorys predictions corresponded with the observed
facts.
Positive Accounting Theory is developed by Watts and Zimmerman, which
seeks to predict and explain why managers elect to adopt particular
accounting methods in preference to others. The theory relied in great part
of work undertaken in the fields of economics, and central to the
development of Positive Accounting Theory was the acceptance of
economics based rational economic person assumption.
That is the assumption that an accountant are primarily motivated by selfinterest, and that the particular accounting method selected will be
dependent on certain conditions.
Factors - FAT
1. Assumption : self-interest
2. Premises :
a. The accountant is rewarded in terms of accounting-based bonus;
b. The organization they work for is close to breaching negotiated
accounting based debt covenants.
However, PAT does not seek to tell us that what is being done in practice is
the most efficient or equitable process.