F3-Accounting Theory PDF

International financial
accounting.
Content:
Disclosure and strategies.
Protective-, informative-, non-mandatoryand differential disclosure.
Non-mandatory disclosure Why?
Arguments by positive- and normative-based
theory.
Example: Sustainability report.
accounting.
Disclosure Reveling of information
in financial statements.
International difference in disclosure
related to laws/regulations and culture.
Secrecy- versus transparency-tradition.
Critical perspectives of accounting.

Capital market and behavioural
reactions to financial accounting.
(c) Per-Ola Maneschild
accounting.
accounting.
Disclosure of information as:

Protective disclosure.
Protection of stakeholder with lowest
capacity (naive) with mandatory information
by law/regulation.
Informative disclosure.
Informative approach to add additional
aspects around information disclosed.
Non-mandatory disclosure.
Disclosure of (free) information besides
mandatory (not mandatory).
Disclosure of information as:

Differential disclosure.
Information disclosed divided into separate
sub-reports relevant for different
stakeholders.
Argument for more disclosure.
More relevant information beneficial for
decison-making.
Argument against more disclosure.
Too much information can be negative to
extract relevant content from it.
accounting.
accounting.
Shift in disclosure-strategy:
From strict mandatory towards
informative and differential disclosure.
From hard information towards soft
information.
Reason:
(1) Increased complex global business environment
with international stakeholders with (2) different aims
in engagement and needs of information.
Generate (a) demand for more information and
informative disclosure generating (b) demand for
differential disclosure.
Disclosure-strategy Why?
Production and disclosure of information
costly to company.
Voluntary (non-mandatory/free) information
over mandatory information what costs
and benefits?
Guide to what information to reveal over
mandatory based on cost/benefit analysis.
Why produce/disclose non-mandatory

information Reasons (benefits)?
accounting.
Corporate social responsibility (CSR):
CSR-report:
Disclosure to stakeholders on a voluntary
basis.
Extending financial accounting (highly
regulated) with integration of social and
environmental concerns (highly
unregulated) in business operations.
Triple bottom line reporting:
Including information about the economic,
environmental and social performance of an
entity.
accounting.
Sustainability accounting Social
and environmental disclosures.
Extensive regulation of financial
accounting on national level.
By national corporate laws, stock exchange
requirements and accounting standards.
Generally related to information in Income
statement, Balance sheet and Cash flow
statement.
accounting.
accounting.


Lack of regulation to public disclosure of

social and environmental performance
of entity.
Generally voluntarily public disclosure about
social and environmental impact of company
operations.
Why? To whom? What information? How to
inform?
Lack of regulation generate voluntarily

public disclosure.
Theoretical underpinings to why disclose
based on:
Normative theory.
Positive theory.
Legitimacy theory.
Stakeholder theory.
Institutional theory.
accounting.
accounting.
Normative theory:
Theories based on what researcher
believes should occur in particular
circumstances.
Provide prescription how accounting should
be undertaken in best way.
E.g. how financial accounting should be
undertaken in most appropriate way (based on
a norm).
Not necessarily based on observations but
norms.
Not evaluating whether theories reflect actual
accounting practice.
Positive theory:
Seeks to explain and predict a particular
phenomena.
Explaining practice based on empirical
observations E.g.
Predict and explain why managers/accountants
adopt particular accounting methods in
preference to others.
Why managers disclose information not
mandatory to disclose.
accounting.
Central in positive accounting theory
(PAT):
Agents act in self-interest to optimize
outcome.
E.g. contractual arrangements to align the
interests of various self-interested parties.
Done by disclosing information choosing one
accounting method in preference to another.
Explanation to why management voluntarily
provide information to outside parties.
accounting.
System-oriented theories (Positive
theory):
System-oriented view of organisation.
See organisation as part of a broader social
system.
Permits focus on role of information and
disclosure in relationship between organisation
and its stakeholders.
accounting.
accounting.
System-oriented theories:
Legitimacy theory, Stakeholder theory and
System-based perspective:
Entity assumed to influence as well as be
influenced by society in which it operates.
System-oriented theories:
Legitimacy theory, Stakeholder theory and
Accounting disclosure policies and

system-oriented theories:
Constitute a strategy to influence
organisations relationships with other
parties it interacts with.
E.g. why organisations make social responsibility
and environmental disclosures, apply particular
accounting techniques, voluntary corporate
reporting.
accounting.
accounting.
System-oriented theory and Political

economy theory.
System-oriented theories: Legitimacy-,
Stakeholder- and Institutional theory.
Political economy theory:

Assumes inseparability between:
Social, political and economic environment (were
human life takes place).
Social, political and economic decisions.
System-oriented theory and Political

economy theory.
Classical political economy:
With tensions within society with a class dominating
another class.
Bourgeois political economy:

Without tensions within society with no class
dominating another class.
Legitimacy- and Stakeholder theory

bourgeois.
Institutional theory bourgeois or classical.
accounting.
Legitimacy theory:
Operate within bounds and norms of
society in which it operates.
Relies upon notion of a social contract
implied to represent norms and expectations
of the community in which the organisation
operates.
accounting.
Legitimacy theory:
Organisation legitimate if it complies
with terms of the social contract.
Legitimacy to the right to operate.
Accounting disclosures represent one way for
organisation to legitimaze its ongoing operations
(can restore legitimacy).
accounting.
accounting.
Stakeholder theory:
Legitimacy theory and Stakeholder
theory overlaps.
Legitimacy theory:
Expectations of and interaction with society in
general.
Stakeholder theory:
Expectations from particular sub-groups of society
(stakeholders).
Stakeholder theory:
Different stakeholder groups have
different views about how an
organisation should behave.
Result: Generating different social contracts
on how to behave rather than one general
(legitimacy theory).
Different stakeholders have different
power/influence affecting organisations behaviour
in accordance to its power.
accounting.
accounting.
Ethical stakeholder theory:

Ethical/moral or normative branch.
Aspects related to rights to information for
stakeholders based on ethical aspects.
Disclosure considered to be responsibility driven
on ethical aspects.
Right to information regardless of degree of
power of stakeholder.
Managerial stakeholder theory (positive

branch):
Organisations satisfy information demanded by
stakeholders important to organisations
ongoing survival.
Stakeholders receive information in relation to how
powerful/important to organisations survival they
are.
E.g. degree of power related to scarcity of controlled
resource of importance to organisation.
Disclosure of information as a strategy in managing

stakeholders.
accounting.
Legitimacy theory discuss how disclosure
strategies might gain, maintain or regain
legitimacy.
Institutional theory discuss how

disclosure strategies bring legitimacy to
an organisation.
accounting.
Views organisations as operating within
a social framework of norms, values and
taken-for-granted assumptions.
Related to what constitutes acceptable
economic behaviour.
accounting.
accounting.
Institutional theory and isomorphism:

Organisations tend to adopt same structure
and practices.
Result: Generating homogenisation of organisations.
Adoption of an institutional practice by an organisation.
Disclosure subject to pressure to change/adopt

certain voluntary corporate reporting practices.
Institutional image can sometimes be more
apparent/imagionary than real.
Social/environmental reporting
process:
Voluntary process given lack of
regulation.
Many organisations voluntarily disclose
public information about social and
environmental performance.
Why? To whom? What information? How to
inform?
accounting.
accounting.
Motivation for disclosure (why?).

Economic motivation (positive theory):
Organisation gain support/trust from
powerful stakeholders.
Ethical motivation (normative theory):

Organisation has accountability to
stakeholders.
Arguments to why:
Legitimacy theory (social contracting).
Entity undertake activities if management
believe it was expected by society in which
it operates.
Part of social contract or licence to operate.
Arguments by:
Legitimacy-, stakeholder-, institutional- and
positive accounting theory.
accounting.
accounting.
Arguments to why:
Arguments to why:
Stakeholder theory.
Institutional theory:
Managerial/positive version:
Management more likely to meet expectations of
powerful stakeholders reaching the organisations
objectives.
Powerful stakeholder: Stakeholder controlling
scarce and essential resources for company.
Management develop/adopt new practices

due to instutitional pressures.
Follow common institutional practice not to risk
disapproval by powerful stakeholders.
Ethical/normative version:
Rights to information by all parties affected by its
operations regardless of their power.
accounting.
accounting.
Arguments to why:
Positive accounting theory (PAT).
All people driven by self-interest.
Disclosure of information if it has positive
implications for managers involved.
Whom to direct the information?

Managerial reasoning:
To stakeholders who hold and exercise
greatest economic power over organisation.
Ethical/moral reasoning:
Address information needs of broader range
of stakeholders.
Stakeholders most affected by operations of
organisation.
accounting.
accounting.
Arguments to who:
Which stakeholders related to motives
for reporting?
Motivation to maximise shareholder value.
Implies maintaining approval of powerful
stakeholders.
Ethical aspect generate information to all

stakeholders regardless of power.
What are information needs of

stakeholders to disclose?
What issues an entity is held
responsible/accountable for by
stakeholders.
Involves dialogue/communication with
stakeholders.
Given that they are affected by organisations

operations.
accounting.
Arguments to what information:
Related to issues stakeholders hold
organisation responsible and
accountable for.
accounting.
How should information/report be
disclosed?
How to report to generate reliability of
information?
Identifying information needs through

dialogue with stakeholders.
Generate relevant stakeholders through
managerial- or etichal stakeholder theory.
Negotiating a consensus among competing
stakeholder needs and expectations.
accounting.
accounting.
Arguments for how to inform:

Lack of regulation and absence of
accepted conceptual framework
generate variation in how to report.

Aspects on reporting principles include:
Materiality:
Report include organisations significant
social/environmental impacts.
Stakeholder inclusiveness:
Reporting how organisation responded to
stakeholder expectations.
Sustainability context:
Report organisations performance in wider
context of sustainability.
accounting.
accounting.

Completeness:
Coverage sufficient to reflect significant
social/environmental impact.
Result: Enable stakeholders to assess
organisations performance.

Comparability:
Consistent reporting.
Result: Enabeling stakeholders to analyse
organisations performance over time and
relative to other organisations.
Balance:
Report balanced reflecting positive and negative
aspects neutrally.
accounting.
Accuracy:
accounting.
Clarity:
Information sufficiently accurate and detailed for

stakeholders analysis.
Timeliness:
Reporting regularly in time for stakeholders
informed decisions.
Information reported in understandable manner.
Reliability:
Processes used in preparation of report performed
to establish quality and materiality of information.
accounting.
accounting.
Arguments for how to inform Disclosure

types based on strategic level:
Strategy and profile:
Disclosures to understand organisations strategy,
profile and governance.
Critical perspectives of accounting:

How practice of accounting tends to
support particular economic and social
structures.
Management approach:
Disclosures to provide context to understand
performance in a specific area.
Performance indicators:
Indicators to compare social/environmental
performance of organisation.
accounting.
accounting.
Critical perspectives of accounting:

Assumption:
Reinforcing (maintain) unequal distribution
of power and wealth across society.
Accounting not objective and unbiased as neutral
and faithful representation.
Arguments accounting-content: Maintain
powerful positions of sectors in society holding
back other sectors.
Political economy theory:

Assumes social, political and economic
environment (were human life takes place)
and social, political and economic decisions as
inseparable.
Classical political economy:
With tensions within society with a class dominating
another class.
Bourgeois political economy:

Without tensions within society with no class
dominating another class.
Legitimacy- and Stakeholder theory bourgeois.

Institutional theory bourgeois or classical.
accounting.
Critical (classical political) accounting
challange bourgeois political
accounting:
Bourgeois accounting research
assumes:
Economic, social and environmental
structures as given.
Critical accounting research assumes:

Accounting-techniques constructed to
protect/support certain sectors in society
holding back other sectors.
accounting.
Critical (classical) accounting
Example:
Aim: Increased disclosure of social and
environmental information.
With suggestions to fundamental changes to
structure of society.
Critical (classical political) accounting to change
current social power structures.
Policy-recommendation: Related to
improvement of accounting-rules questioning
e.g. Conceptual framework generating rules.
accounting.
accounting.
Bourgeois political economy (positive

theory) Example:
Critical accounting Disclosure (nondisclosure) of information:
Aim: Increased disclosure of social and

environmental information.
Without suggestions to fundamental
changes to structure of society.
Bourgeois political accounting taking current
social power structures as given.
Policy-recommendation: Related to
improvement of accounting-rules given e.g.
Conceptual framework generating rules.
Argument disclosure:
Constructed as important strategy to
promote and legitimaze particular social
orders.
Maintain power and wealth of elites and
undermining positions of others.
Aim:
Provide policy-recommendations to
accounting-rules to generate equalized
society.
accounting.
accounting.
Capital market reactions to financial

reporting decisions by management.
Individual reactions to financial

reporting decisions by management.
Aggregate market level:

Determine whether information is used.
Determine impact release of information has on
share price for investors.
Individual behaviour level:

Determine how information is used.
Determine impact of information on decisions by
individual users representing various stakeholdergroups.
accounting.
Capital market research on
accounting.
Explores role of accounting and financial
information in equity markets.
How disclosure of particular information
influences individuals trading activities on
aggregate level (event study).
accounting.
Capital market research on accounting.
Information assumed to signal positive
(negative) information given a significant
increase (decrease) in its equity price.
No significant change in equity price implies no
significant new information.
Assumption: Efficient market hypothesis.
Significant (no significant) impact on equity price

implies:
Relevant (no relevant) information useful for
investment decision-making.
accounting.
accounting.
Other sources of the information

than accounting disclosures:
Result: Accounting information
correlated (perfectly?) to expectations.
Accounting information of confirmatory
nature.
Outcome: No significant impact on equity price.
Reasonable assumption: Some new
information in accounting information with
some significant impact on equity price.
Information has significant (no

significant) impact on equtiy price:
Conclusion significant (no significant)
impact:
Accounting information valuable (no
valuable) for investors decision-making.
Outcome: Information valuable (not valuable) to
be produced/disclosed.
accounting.
accounting.
Information has no significant impact

on equtiy price:
Outcome: Information not valuable to
be produced/disclosed.
What about the right to information for
other stakeholders besides investors
(normative)?
E.g. monitoring purposes of management by
owners, emplyees/unions, peoples right to
know (ethical aspect and duty of accountability).
Capital markets and earnings

Theory:
Dividends (cash flow) a function of
accounting earnings.
Reason: It can only be paid out of past and
present earnings.
Conclusion: Theoretical link earnings and equity
prices.
Technique: Equity price present value of
dividends.
10
accounting.
Capital markets and earnings Empirical
evidence:
Significant link earnings-information and
equity prices.
Limitation: Only new earnings-information not
already in equity-price has significant impact.
Reason: Investors obtain much of the information from
other sources.
Conclusion:
(1) Earnings-information has value for decision-making
and should be produced.
(2) Choosing between accounting disclosure-rules to
improve accounting regulation if impact/use known.
accounting.
Empirical evidence:
Capital market impact of unexpected
changes in earnings (new information):
Depends on if unexpected change is
assumed to be permanent (larger effect) or
temporary (smaller effect).
accounting.
accounting.

Empirical evidence:
Capital market impact to earnings
depends on relative magnitude of cash
flow and accruals.
Cash flows can be recognised before
received.
E.g. credit sales/purchases components of current
earnings.

Empirical evidence:
Capital market impact of earnings
announcements of other firms in same
industry.
E.g. earnings-announcements by
competitors signaling new information.
Accrual accounting: Transactions recognized when

they occur (IAS 1).
accounting.
accounting.

Empirical evidence:
Capital market impact to earnings
associated with voluntary disclosure of
information.
Reasons: Increased possibility to forecast
future economic performance and reduce
information asymmetry.

Empirical evidence:
Capital market impact of earnings
announcements inversely related to
size.
Reason: Greater impact on smaller firms
due to information on larger firms to the
market by other channels to higher degree.
11
accounting.
Behavioural research of accounting.
Reactions of individuals to financial
reporting:
Aim: Understand decision-making processes
by individuals.
Outcome: Improve decision-making
processes by individuals.
accounting.
reporting.
Aim: Understand decision-making
processes.
Result: Knowledge used to improve
accounting rules/information.
Done by anticipating reaction to particular
accounting disclosures and forms of disclosures.
Anticipations based on knowledge about
individuals reactions to financial reporting.
accounting.
accounting.

reporting.
Outcome: Improve decision-making
processes.
Result: Knowledge of how users make
decisions using accounting information.
Use of knowledge:
Improve information content in accounting.
Suggestions on how decision-making can be
improved using the information.
accounting.
Behavioural accounting research
empirical evidence:
To make predictions of financial returns:
Analysts acquire earnings and sales
information more often than other
information.
Behavioural accounting research:

Investigate impact of different
accounting and disclosure methods on
decision-making by individuals.
Effect of accounting rules on human
behaviour.
E.g. accountants and managers behaviour related
to design, construction and use of accounting
system.
Effect of format and content of accounting

information on human behaviour in
decision-making.
accounting.
empirical evidence:
Use of current cost information
questioned in favour of historical cost
information.
E.g. to distinguish between temporary and
permanent effects.
12
accounting.
empirical evidence:
Presentation formats influence users
decisions.
E.g. 1: Bar charts, line graph, pie charts and
tables influencing more than number-ratios
on same topic.
E.g. 2: Presentation within finanical
statement or as footnote made no difference
for loan officers.
accounting.
Limitations of behavioural research:
Research examining similar issues
generated conflicting results.
Reason: Difficult to determine causes of
inconsistencies.
Settings of studies/experiment often

different to real-world settings.
Implications for generalisability.
accounting.
accounting.
Limitations of behavioural research:

Very difficult to replicate information
available in decision-makers real-world
workplace.
Students often used as surrogates.
Small number of subjects often used.
Why is behavioural research useful?

Gives an idea what impact financial
reporting decisions have on users in
decision-making.
Useful for regulators when deciding on
new or changed accounting standards.
Can be undertaken by researchers prior
to new regulations being developed.
accounting.
Conclusion:
Disclosure and strategies.
Protective-, informative-, non-mandatoryand differential disclosure.
Non-mandatory disclosure Why?
Arguments by positive- and normative-based
theory.
Critical perspectives of accounting.

Capital market and behavioural
reactions to financial accounting.
13

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International financial

Critical perspectives of accounting.

(c) Per-Ola Maneschild

Disclosure of information as:

Disclosure of information as:

(c) Per-Ola Maneschild

(c) Per-Ola Maneschild

Why produce/disclose non-mandatory

(c) Per-Ola Maneschild

(c) Per-Ola Maneschild

(c) Per-Ola Maneschild

(c) Per-Ola Maneschild

Sustainability accounting Social

Sustainability accounting Social

Lack of regulation to public disclosure of

Lack of regulation generate voluntarily

(c) Per-Ola Maneschild

(c) Per-Ola Maneschild

(c) Per-Ola Maneschild

(c) Per-Ola Maneschild

(c) Per-Ola Maneschild

Accounting disclosure policies and

(c) Per-Ola Maneschild

(c) Per-Ola Maneschild

System-oriented theory and Political

Political economy theory:

(c) Per-Ola Maneschild

System-oriented theory and Political

Bourgeois political economy:

Legitimacy- and Stakeholder theory

(c) Per-Ola Maneschild

(c) Per-Ola Maneschild

(c) Per-Ola Maneschild

(c) Per-Ola Maneschild

Ethical stakeholder theory:

Managerial stakeholder theory (positive

Disclosure of information as a strategy in managing

(c) Per-Ola Maneschild

Institutional theory discuss how

(c) Per-Ola Maneschild

(c) Per-Ola Maneschild

Institutional theory and isomorphism:

Disclosure subject to pressure to change/adopt

(c) Per-Ola Maneschild

(c) Per-Ola Maneschild

Motivation for disclosure (why?).

Ethical motivation (normative theory):

(c) Per-Ola Maneschild

Management develop/adopt new practices

(c) Per-Ola Maneschild

Whom to direct the information?

(c) Per-Ola Maneschild

(c) Per-Ola Maneschild

Ethical aspect generate information to all

What are information needs of

Given that they are affected by organisations

(c) Per-Ola Maneschild

(c) Per-Ola Maneschild

Identifying information needs through

(c) Per-Ola Maneschild

(c) Per-Ola Maneschild

Arguments for how to inform:

Arguments for how to inform: