The Learning Objectives for this lecture:
Regulatory framework Role of a conceptual framework Current state of play of conceptual framework for international standards
Different approaches to accounting regulation
EMH Agency theory
market mechanisms will not be able to achieve a socially optimal equilibrium price for accounting information
Theory of efficient markets
• The forces of supply and demand influence market behaviour and help keep markets efficient This applies to the market for accounting information and should determine what accounting data should be supplied and what accounting practices ...view middle of the document...
g. a shareholder or creditor
Public Interest Theory
• Argues signalling theory relies on the function of a perfect, free-market economy.
Public interest theory assumes:
Economic markets are generally not perfect. Regulation is virtually costless.
Concludes that regulation is supplied in response to the demands of the public for the correction of these inefficient or inequitable market practices.
Public Interest Theory Cont
• Government regulation is required in the „public interest‟ whenever there is market failure (inefficiency) due to: lack of competition barriers to entry
Regulatory Capture Theory
• Capture theory holds that regulation is supplied in response to the demands of self-interested groups trying to maximise the incomes or interests of their members. e.g. Capture of standard setting by accounting profession People are rational utility maximisers. The coercive power of government can be used to give valuable benefits to particular groups. Regulation can be viewed as a product that is governed by the laws of supply and demand.
Private interest theory
• Governments are not independent arbiters, but are rationally self-interested
They seek re-election
They will „sell‟ their power to coerce or transfer wealth to those most likely to achieve their reelection (if they are elected officials) or increase their wealth (if they are appointed officials) or both
Recent events in Australia
Corporate Law Economic Reform Program Financial Reporting Council (FRC) to oversee standard setting New accounting standard setting board (AASB)
• Australia adopted international accounting standards (IFRS) on 1 January 2005
International Accounting Standards
• • 2002 Norwalk Agreement IASB and FASB Convergence Program:
review available solutions Australia has pursued one set of standards that can be used by both public and private sector entities (Harmonisation)
Three main benefits have been identified
International comparability Reduced cost of capital Reduced conflicting reporting requirements
The Role Of A Conceptual Framework
• A Conceptual framework is a group of ideas or principles used to plan or decide something.
It is a normative theory
It prescribes the basic principles that are to be followed in preparing financial statements
It is a coherent system of concepts, which are guidelines to the accounting standards used for financial reporting
Conceptual Framework Versus Accounting Standard
• The Conceptual Framework is designed to provide guidance and apply to a wide range of decisions. Accounting standards Specific requirements for a particular area
May go beyond the framework
Are mandatory Sometimes conflict with the framework
History And Evolution Of The Conceptual Framework
• 1920s and 1930s attempts to draft statements of principles to guide accounting.