Question

In: Accounting

A. in your own words i. discuss the contributions of Paton and Canning to the development...

A. in your own words

i. discuss the contributions of Paton and Canning to the development of accounting theory.

ii. discuss the contribution of DR Scott to the development of accounting theory.

iii. discuss the objectives of accounting as outlined by the Trueblood Committee.

iv. According to kuhn, how does scientific progress occur?

v. discuss the issue of principles based vs. rule based accounting standards.

vi. discuss how the FASB and the IASC acted to improve comparability under the Norwalk Agreement.

CLOSED QUESTION.

Solutions

Expert Solution

1)  The contributions of Paton and Canning to the development of accounting theory.

Answer -

The first attempt to develop accounting theory in the united states have been attributed to William A. Paton and John B. Canning. Paton's work based on his doctoral dissertation, was among the first to express the view that all changes in the value of assets & liabilities should be reflected in the financial statements, and such changes should be measured on current value basis.

He also mentioned that all returns to investors were distributions of income, and consequently he espoused the entity concept rather than the prevailing proprietary concept. An additional contribution of this work was an outline of what Paton believed to be the basic assumptions underlying the accounting process. Patons basic assumptions and postulates can be viewed at the first step in the development of the conceptual framework of accounting. Cannings work suggested a framework for asset valuation and measurement based on future expectations as well as a model to match revenues and expenses. At this time, the balance sheet was viewed as the principal financial statement and the concept of capital maintenance was just emerging.  

2) Discuss the contribution of DR Scott to the development of accounting theory

Answer

The objective of this study is to trace the influence of DR1 Scott’s writings on the development of accounting theory and standard setting. Scott’s deductive approach to the development of a conceptual framework for financial accounting and reporting was adopted by accountants on a piecemeal basis from the 1930 to the 1970. This study traces authoritative pronouncements from the 1930 to provide evidence on Scott’s forward looking ability and the influence of his ideas on the subsequent development of accounting theory. The social, economic, and political environment of the 1930 is described to show why a change in accounting standard setting was needed. The authors show that Scott envisioned the function of accounting as extending beyond mere record keeping, to include control of organizations relative to their cultural environment. Further, Scott’s broad educational background is presented to show the breadth of Scott’s ability to see accounting issues beyond bookkeeping issues. The findings show that Scott [1941] was among the first to develop a theoretical, deductive, normative framework to serve as the basis for accounting principles.

The purpose of this study is to examine the role of DR1 Scott as a catalyst in the development of a conceptual framework for accounting. Although accountants are often criticized as being overly conservative and defensive of the status quo, Scott was very perceptive and willing to adapt to his environment. Scott contributed to the development of accounting theory through his early recognition of several concepts not generally understood in his time but widely accepted today. For example, he envisioned the need for a normative theoretical base to provide unity and coherence to accounting principles. He articulated the importance of a deductive approach to the successful development of a theoretical foundation. He also espoused the important role of accounting and financial reporting in the economic control of organizations.

When Scott published his conceptual framework for accounting, there was wide recognition that a crisis existed in the social control of large industrial organizations. The speculative fever and unbridled optimism of the 1920 were gone as the nation struggled to deal with the aftermath of the stock market crash of 1929 and the financial devastation of the continuing depression. The accounting profession sought to convince financial statement users that a publication of generally accepted accounting principles, enforced via independent audits, could reduce future stock market abuses. The Securities Act of 1933 and the Securities Exchange Act of 1934 required certification of financial statements of listed companies, which provided a powerful incentive for the profession to specify what constituted “generally accepted accounting principles.”
Many practicing accountants and accounting theorists, as well as outside critics, recognized that the profession was in a period of upheaval. User needs were not clearly understood, practice was not standardized, and authoritative pronouncements tended to focus on individual issues in a piecemeal, often inconsistent, fashion. Dissatisfaction with the state of financial accounting resulted in users supporting a proposal that the Federal government control the profession directly through the creation of a national institute of accountancy with power to define theory and prescribe acceptable accounting and auditing practices. The accounting profession was further weakened by internal conflict, as the American Institute of Accountants and the American Society of Certified Public Accountants feuded bitterly, and practitioners and academics regarded each other with distrust and lack of respect. The authors contend that despite widespread public criticism, few accounting practitioners or theorists understood either the causes or implications of the failure to develop a set of generally accepted principles. DR Scott was insightful both in recognizing the root of the problem, and in proposing a solution. In Scott’s view, the “invisible hand” of the competitive marketplace was no longer effective in regulating business activity. Scott foresaw that the role of accountants needed to be expanded to assume the control function previously presumed to be provided by the forces of the open market.

Scott recognized the potential of a theoretical framework to ameliorate the problem. By serving as the basis for an integrated, internally consistent set of accounting principles, such a framework could facilitate the social control of organizations. He envisioned a framework as interfacing with its environment and including a statement of the objectives of accounting and financial reporting, with a set of general principles to be used not only in reconciling inconsistencies in current standards, but also in evaluating the appropriateness of proposed future standards. He was an early proponent of the deductive approach to theory development, understanding fully the weakness of an adhoc or inductive approach to the development of a body of authoritative standards.

3) The objectives of accounting as outlined by the Trueblood Committee

Answer -

The Trueblood Committee report specified the following four information needs of users:

1.Making decisions concerning the use of limited resources

2.Effectively directing and controlling organizations

3.Maintaining and reporting on the custodianship of resources

4.Facilitating social functions and controls.

Like its predecessors, the Trueblood Committee had difficulty agreeing on the answers to the questions proposed by the AICPA. As a result, it indicated that its final report be regarded as a first step in the process. The report listed the following objectives for financial reporting:

1. The basic objective of financial statements is to provide information useful for making economic decisions.

2. An objective of financial statements is to serve primarily those users who have limited authority, ability, or resources to obtain information and who rely on financial statements as their principal source of information about an enterprise’s economic activities.

3. An objective of financial statements is to provide information useful to investors andcreditors for predicting, comparing, and evaluating potential cash flows in terms of amount, timing, and related uncertainty.

4. An objective of financial statements is to provide users with information for predicting, comparing, and evaluating enterprise earning power.

5. An objective of financial statements is to supply information useful in judging management’s ability to use enterprise resources effectively in achieving its primary enterprise goal.

6. An objective of financial statements is to provide factual and interpretative information about transactions and other events that is useful for predicting, comparing, and evaluating enterprise earning power. Basic underlying assumptions with respect to matters subject to interpretation, evaluation, prediction, or estimation should be disclosed.

7. An objective is to provide a statement of financial position useful for predicting, comparing, and evaluating enterprise earning power.

8. An objective is to provide a statement of periodic earnings useful for predicting, comparing, and evaluating enterprise earning power.

9. Another objective is to provide a statement of financial activities useful for predicting, comparing, and evaluating enterprise earning power. This statement should report mainly on factual aspects of enterprise transactions having or expecting to have significant cash consequences. This statement should report data that require minimal judgment and interpretation by the preparer.

10. An objective of financial statements is to provide information useful for the predicting process. Financial forecasts should be provided when they will enhance the reliability of the users’ predictions.

11. for governmental and not-for-profit organisations an objective is to provide information useful for evaluating the effectiveness of the management of resources in achieving the organisation's goals. Performance measures should be quantified in terms of identified goals.

4) According to kuhn, how does scientific progress occur?

Answer -

The Structure of Scientific Revolutions is a book about the history of science by the philosopher Thomas S. Kuhn. Its publication was a landmark event in the history, philosophy, and sociology of scientific knowledge. Kuhn challenged the then prevailing view of progress in "normal science". Normal scientific progress was viewed as "development-by-accumulation" of accepted facts and theories. Kuhn argued for an episodic model in which periods of such conceptual continuity in normal science were interrupted by periods of revolutionary science. The discovery of "anomalies" during revolutions in science leads to new paradigms. New paradigms then ask new questions of old data, move beyond the mere "puzzle-solving" of the previous paradigm, change the rules of the game and the "map" directing new research.

For example, Kuhn's analysis of the Copernican Revolution emphasized that, in its beginning, it did not offer more accurate predictions of celestial events, such as planetary positions, than the Ptolemaic system, but instead appealed to some practitioners based on a promise of better, simpler solutions that might be developed at some point in the future. Kuhn called the core concepts of an ascendant revolution its "paradigms" and thereby launched this word into widespread analogical use in the second half of the 20th century. Kuhn's insistence that a paradigm shift was a mélange of sociology, enthusiasm and scientific promise, but not a logically determinate procedure, caused an uproar in reaction to his work. Kuhn addressed concerns in the 1969 postscript to the second edition. For some commentators The Structure of Scientific Revolutions introduced a realistic humanism into the core of science, while for others the nobility of science was tarnished by Kuhn's introduction of an irrational element into the heart of its greatest achievements.

5)  The issue of principles based vs. rule based accounting standards

Answer -

Principles-based accounting seems to be the most popular accounting method around the globe. Most countries opt for a principles-based system, as it is often better to adjust accounting principles to a company’s transactions rather than adjusting a company’s operations to accounting rules.

The international financial reporting standards (IFRS) system—the most common international accounting standard—is not a rules-based system. The IFRS states that a company’s financial statements must be understandable, readable, comparable, and relevant to current financial transactions.

Rules-based accounting is basically a list of detailed rules that must be followed when preparing financial statements. Many accountants favor the prospect of using rules-based standards because, in the absence of rules, they could be brought to court if their judgments of the financial statements were incorrect.

The Generally Accepted Accounting Principles (GAAP) system is a rules-based accounting method used in the United States. Companies and their accountants must adhere to the rules when they compile their financial statements. These allow investors an easy way to compare the financial information of different companies.

There are 10 principles of the rules-based GAAP accounting system:

  1. Regularity
  2. Consistency
  3. Sincerity with an accurate representation of the company's financial situation
  4. Permanence of methods
  5. No expectation of compensation
  6. Prudence with no semblance of speculation
  7. Continuity
  8. Dividing entries across appropriate periods of time
  9. Full disclosure in all financial reporting
  10. Good faith and honesty in all transactions

6) How the FASB and the IASC acted to improve comparability under the Norwalk Agreement.

Answer -

In October 2002, the IASB and FASB signed a memorandum of understanding that has come to be known as the “Norwalk Agreement.” The two boards pledged to use their best efforts to (a) make their existing financial reporting standards “fully compatible as soon as is practicable” and (b) “to coordinate their future work programs to ensure that once achieved, compatibility is maintained.” “Fully compatible” was generally understood to mean that compliance with U.S. GAAP would also result in compliance with IFRS. That is, the standards would be aligned though not identical.

With the Norwalk Agreement, the boards launched a series of both short-term and longer-term convergence projects aimed at eliminating differences in the two sets of standards. The two boards agreed that where either IFRS or U.S. GAAP had the clearly preferable standard, the other board would adopt that standard. And where both boards’ standards needed improvement, the boards would work jointly on an improved standard.

The Norwalk Agreement has been updated several times since 2002, but always with the objective of two sets of standards that were converged in principle if not in words. The IFRS-U.S. GAAP convergence approach has been repeatedly endorsed by global financial leaders such as the G-20 as an important step on the path toward a single set of global accounting standards.


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