Question

a) Is it appropriate to reject a Since normative theory prescriptions could not be confirmed through empirical observations, is it appropriate to reject it?•b)Why are financial accounting standards considered to be the outcome of a political process? Why is the process ‘political’? •c) How is a decision by a government regulator that all companies must separately disclose, in their annual financial reports, the amount of expense incurred in relation to the training of employees and that the companies must also spend at 5% of their reported profits on training employees related to the Public Interest Theory? •d) Explain the decision made by the government regulator in (c) above in terms of the Economic Interest Group Theory of regulation.

Answer 1

Ans. a)

Financial Accounting Theory.

In the financial accounting theory there two types of research. 1) Positive Research, and 2) Normative research.

1. Positive research

Research that seeks to presoc and explain particular phenomena is classified as positive research and the associated theories are referred to as positive theory.

2. Normative research.

While positive theories tend to be based on empirical observation, there are other theories based not on observation but rather on what the researcher believes should occur in particular circumstances. theories that prescribe particulare action sre clled normative theory.

Example :- Chambers Continuously contemporary accounting describes how financial accounting should be undertaken. It is presciptive and central to this theory is view that most useful information about an organization's assets for the purpose of economic decision is information about their current cash equivalent.

So, This is the way the normative theory worked, It is not appropriate to reject the since of normative theory without confirmation through empirical observations.

Ans. b)

Accounting Standard Process.

• Abstract Financial Accounting Standadars Board (FASB) is a seven-member board that consists of acouunting professionals who establishes and communicates financial accounting and reporting standards known as Generally Accepted Accounting Principles (GAAP) in United States. The standards' quest is to govern the preparation of the corporation of the corporate financial repots and hence ensuring transparency, credibility and understandability of the financial statements.
• To achive these, there is need to set guidelines that create uniformity inthe preparation of the statements across the region.
• This paper presents a simple game-theoretic analysis of the political process to identify situations where companies have incentives to lobby the political principal instead of participating inthe usual due process of accounting standard setting. Analysis of the model suggests that "political" lobbying is more likely to happen in the EU than in the US.

That's how the financial accouting standards considered to be the outcome of a oilitical process.

The process of campaigning is also a political process because it is a process where the people who want to be in government communicate with the people. In the campaign process, the people learn what candidates think and they respond.  

The process of lobbying is another political process.