Question

Explain what ‘equity’ is and why the conceptual framework does not prescribe any recognition criteria for equity. b) What is the relationship of corporate social responsibility and the following theories.(i)Institutional Theory(ii)Legitimacy Theory(iii)Positive Accounting Theory (iv)Stakeholder Theory.

Answer 1

A.

1. Equity is the amount of funds contributed by the shareholders on a company's balance sheet plus/minus any retained earnings or losses thereby in that year. This is alo known as book value of the company. It can be private or public depending on the source of raising the funds.

It is the amount of capital contributed by the owners of the company i.e its shareholders.

Equity = Total Assets - Total Liabilities

2. Equity = Total Assets - Total Liabilities

This is the sole reason why the conceptual framework does not prescribe any recognition criteria for equity. The above formula shows that equity is a residual amount after subtracting total liabilities from total assets. It has been defined as the residual interest in the assets.

Therefore, no special recognition criteria is required for equity.

B.

Corporate Social Responsibility states that a business is accountable to its stakeholders and public at large. A business is affecting economic, social and environmental conditions of the place of business. So, it is morally responsible to return to the society by various CSR activities.

1. Corporate Social Responsibility and Institutional Theory -

This theory states that the role and functions of the institution are governed by the institutional environment.  It brings uniformity in business practices through coercive, mimetic and normative mechanisms. Coercive mechanism is using pressure to bring business practices in line with societal expectations. Mimetic practice is when there is peer pressure on firms to conform and mandate certain behaviors. Normative practices is internalizing beliefs about behaviors.

Institutional theory explains national-level differences in corporate governance, including CSR. The above mechanisms lead to the fulfillment of CSR practices. These promote CSR Reporting guidelines to be followed by all the institutions.This theory promotes CSR reporting and alignment of CSR with business strategies.

2. Corporate Social Responsibility and Legitimacy Theory -

Legitimacy is conforming to the law or to rules. This theory says that organisation seek that they operate within the guidelines and bounds by the norms of the socities. It states that actions of the entity are desirable, proper and valid withing some socially constructed norms, values, beliefs and systems. It is confroming that the rules and guidelines for reporting and doing business are being met and entity is also doing or the society. By following the rules of the society, entity is ultimately following its duties and doing good to the society at large and fulfillinf its CSR objectives. CSR is being followed by almost all organisations these days and following this theory ensures the goals are being met.

3. Corporate Social Responsibility and Positive Accounting Theory -

This theory is concerned with the use of accounting practices that which firms will use a specific accounting practices. It predicts and does not mandate the accounting practice to be used. Stakeholders will always select accounting practices which benefits them the most, that means they are ration in decision making. PAT says that managers need to change according to the changing business environment. This may be beneficial for CSR activities as it focuses on minimising costs and maximising profits for shareholders but at times while maximising profits, there may be a loss to the economic, social or enivironment factors.

4. Corporate Social Responsibility and Stakeholder Theory -

It is somewhat the mirror image of the CSR. Stakeholders means the group of people internal or external to the organisation that will be affected in the course of business. They have a right to take interest in the business and its running as their lives are affected directly or indirectly by business. CSR perspective attaches a responsibility to the business for the stakholder's interest. So, Stakeholder theory and CSR practices of an entity go hand in hand so that no party is affected by the business.