Tut 1 Solutions 3101AFE Sem 2 2013 250713
3101AFE
TUTORIAL 1 - Semester 2 2013
Deegan Topic 1:
Introduction to financial accounting theory
1.1 What is the difference between a positive theory of accounting and a normative theory of accounting?
Broadly speaking, a positive theory seeks to explain and/or predict particular phenomena whereas a normative theory seeks to prescribe what should be done in particular circumstances based on particular assumptions made by the researcher. In relation to accounting, these assumptions might relate to such things as what motivates people or what is the central objective of accounting. Positive theories are typically evaluated by considering how well the explanations or predictions relate to actual observations. Normative theories are not evaluated on the basis of their correspondence with observations of real world phenomena. For example, a researcher may develop a theory that prescribes a particular approach to asset valuation. The theory should not be considered as invalid if people currently do not adopt the prescribed approach to asset valuation.
1.6 The IASB and the FASB are currently developing a revised conceptual framework of financial reporting. If you have been asked to review the framework—which is an example of a normative theory of accounting—why would it be important for you to pay particular attention to how the objective of financial reporting is defined within the framework?
If the revised conceptual framework (which is an example of a normative theory) is based upon, or built upon, a particular objective (or, ‘assumption’) then, before we are likely to accept the prescriptions provided by the revised framework we would need to satisfy ourselves that we accept the central assumption. If we reject the central assumption, then no matter how logically developed the theory might be we will reject its prescriptions.
Within the exposure draft released in 2008 as part of the development of the revised framework it was stated:
The objective of general
TUTORIAL 1 - Semester 2 2013
Deegan Topic 1:
Introduction to financial accounting theory
1.1 What is the difference between a positive theory of accounting and a normative theory of accounting?
Broadly speaking, a positive theory seeks to explain and/or predict particular phenomena whereas a normative theory seeks to prescribe what should be done in particular circumstances based on particular assumptions made by the researcher. In relation to accounting, these assumptions might relate to such things as what motivates people or what is the central objective of accounting. Positive theories are typically evaluated by considering how well the explanations or predictions relate to actual observations. Normative theories are not evaluated on the basis of their correspondence with observations of real world phenomena. For example, a researcher may develop a theory that prescribes a particular approach to asset valuation. The theory should not be considered as invalid if people currently do not adopt the prescribed approach to asset valuation.
1.6 The IASB and the FASB are currently developing a revised conceptual framework of financial reporting. If you have been asked to review the framework—which is an example of a normative theory of accounting—why would it be important for you to pay particular attention to how the objective of financial reporting is defined within the framework?
If the revised conceptual framework (which is an example of a normative theory) is based upon, or built upon, a particular objective (or, ‘assumption’) then, before we are likely to accept the prescriptions provided by the revised framework we would need to satisfy ourselves that we accept the central assumption. If we reject the central assumption, then no matter how logically developed the theory might be we will reject its prescriptions.
Within the exposure draft released in 2008 as part of the development of the revised framework it was stated:
The objective of general