Chapter 1 Introduction..................................................................................................1
Chapter 2 Accounting Under
... [Show More] Ideal Conditions ..........................................................7
Chapter 3 The Decision Usefulness Approach to Financial Reporting......................68
Chapter 4 Efficient Securities Markets ......................................................................129
Chapter 5 The Value Relevance of Accounting Information.....................................153
Chapter 6 The Measurement Approach to Decision Usefulness................................194
Chapter 7 Measurement Applications ........................................................................237
Chapter 8 The Efficient Contracting Approach to Decision Usefulness....................285
Chapter 9 An Analysis of Conflict ...........................................................................321
Chapter 10 Executive Compensation .........................................................................371
Chapter 11 Earnings Management .............................................................................425
Chapter 12 Standard Setting: Economic Issues..........................................................487
Chapter 13 Standard Setting: Political Issues.............................................................527
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Copyright © 2015 Pearson Canada Inc.
CHAPTER 1
INTRODUCTION
1.1 The Objective of This Book
1.2 Some Historical Perspective
1.3 The 2007-2008 Market Meltdowns
1.4 Efficient Contracting
1.5 A Note on Ethical Behaviour
1.6 Rules-Based v. Principles-Based Accounting Standards
1.7 The Complexity of Information in Financial Accounting and Reporting
1.8 The Role of Accounting Research
1.9 The Importance of Information Asymmetry
1.10 The Fundamental Problem of Financial Accounting Theory
1.11 Regulation as a Reaction to the Fundamental Problem
1.12 The Organization of This Book
1.12.1 Ideal Conditions
1.12.2 Adverse Selection
1.12.3 Moral Hazard
1.12.4 Standard Setting
1.12.5 The Process of Standard Setting
1.13 Relevance of Financial Accounting Theory to Accounting Practice
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LEARNING OBJECTIVES AND SUGGESTED TEACHING APPROACHES
1. The Broad Outline of the Book
I use Figure 1.1 as a template to describe the broad outline of the book. Since
the students typically have not had a chance to read Chapter 1 in the first course
session, I stick fairly closely to the chapter material.
The major points I discuss are:
• Accounting in an ideal setting. Here, present-value-based
accounting is natural. I go over the ideal conditions needed for such
a basis of accounting to be feasible, but do not go into much detail
because this topic is covered in greater depth in Chapter 2.
• An introduction to the concept of information asymmetry and
resulting problems of adverse selection and moral hazard. These
problems are basic to the book and I feel it is desirable for the
students to have a “first go” at them at this point. I concentrate on
the intuition underlying the two problems. For example, adverse
selection can be illustrated by asking who would be first in line to
purchase life insurance if there was no medical examination, or
what quality of used cars are likely to be brought to market. For
moral hazard I try to pin them down on how hard they would work in
this course if there were no exams.
• The environment in which financial accounting and reporting
operates. My main goal at this point is that the students do not take
this environment for granted. I discuss the procedures of standard
setting briefly and point out that this is really a process of
regulation. In the past, there have been well-known cases of
deregulation, such as airlines, trucking, financial institutions, power
generation. However, we are entering what is likely to be a period
of increasing regulation, at least for financial institutions. Instructors
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may wish to discuss briefly the pros and cons of markets v.
regulation (since this book tends to be market-oriented) of
economic activity.
2. The Concept of Information
By now, I will have referred to the term “information” several times. I suggest that
it is easy to take this term for granted, and call for definitions. This usually
generates considerable hesitation by the students. The purpose at this point is
simply to get them to realize that information is a complex commodity. Indeed, I
make an analogy between the financial accounting and reporting industry and a
stereotypical manufacturing industry such as agriculture or automobiles, and ask
what is the product of the accounting industry, why is it valuable, how is it
quantified? I do not go deeply into the answers to questions like these, since
some decision-theoretic machinery needs to be developed (Section 3.3) before a
precise definition of information can be given. Nevertheless, I try to end up with
the conclusions that information has something to do with improving the process
of decision-making, and that it is crucial to the operation of securities markets.
3. Relevance to Accounting Practice
My undergraduate accounting theory classes usually consist of a majority of
students who are heading for a professional accounting designation. There are
usually also some students heading for careers in management.
Since students who are facing professional accounting exams can be quite
focused in their learning objectives, it is essential that the nature of the course in
relation to these objectives be discussed up front.
I begin by pointing out that the book is intended to give the student an
appreciation and understanding of the financial reporting environment, which
should help with breadth questions on professional exams. I also argue that
one’s career continues well beyond attainment of a professional accounting
designation, and that the nature of the textbook is longer-run and designed to
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foster a critical awareness of the financial accounting environment which is
needed if one is to become a thoughtful professional.
Arguments such as these can only be pushed so far. Nevertheless, I think it is
important to make them. I also point out that the text includes coverage of major
accounting standards such as financial instruments, impairment, consolidations,
de-recognition, and that they will have the opportunity to learn about these
standards on the way through.
I also refer the students to Section 1.13, and emphasize that the text recognizes
an obligation to convince them that the material is relevant to their careers. To do
this, the text explains theoretical concepts in intuitive terms, and illustrates and
motivates the concepts based on a series of Theory in Practice vignettes, and
problem material based frequently on articles from the financial press and
relevant research findings.
For the management students in the class, and for the professional accounting
students who may some day be managers, I emphasize that the text does not
ignore them. Chapters 8 to 11 inclusive (the bottom branch of Figure 1.1) deal
with topics of interest to managers, including economic consequences, conflict
resolution, executive compensation and earnings management. All of these
topics demonstrate that management has a legitimate interest in financial
reporting. I also argue that Chapters 2 to 7 inclusive (the top branch of Figure
1.1) are relevant to managers since they give insights into how financial
accounting information is used by investors. Finally, since management is a
major constituency in standard-setting, a critical awareness of the need for
standard setting and the standard-setting process (Chapters 12 and 13) is useful
for any manager.
I have not had problems with student course evaluations as a result of using the
material in this book. In fact, I have constantly been surprised at how far one can
push the students in a theoretical direction providing that I rely on the textbook
material to give the students an intuitive understanding, and concentrate in class
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on illustrating, motivating and discussing the application of the concepts. For this,
I find that the financial media are helpful sources of current articles which I bring
to class to serve as a basis for [Show Less]