Transcript CHAPTER 13

CHAPTER 13
Standard Setting: Political Issues
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Two Theories of Regulator
Behaviour
• Public Interest Theory
– A “first best” theory
• Goal is to maximize social welfare
• Interest Group Theory
– Implies conflict between constituencies
– A “second best” theory, since regulator takes own
interests into account, while balancing demands of
investors and managers
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Investors’ Demands On Standard
Setting
• Investors Represented by OSC, SEC,
IOSCO
• Want Full Disclosure, Fair Values,
Transparency
• Want to Predict Future Firm Performance
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Management's Demands on
Standard Setting
• Wants Flexibility to Control (Manage)
Reported Net income
• Wants Net Income to be Highly
Informative About Effort
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Role of Standard-Setter
• Role is Difficult
– No “true” net income
– The fundamental problem of financial
accounting theory
• Implies conflict between investors and managers
• Mediation and Compromise
– Standards must be acceptable to both
investors and management
– Text: Section 13.6.1 re SFAS 115
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Structure of Accounting
Standard-Setting Bodies
• Most Consistent with Interest Group
Theory
– Broad representation
– Exposure drafts
– Super-majority voting
• The Interest Group Theory in Action
– See Chapter 13, Question 5
• To “kill” the FASB
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Rules-Based v. Principles-Based
Accounting Standards
• Rules-Based Standards
– Lay down detailed rules
– Possible?
• Principles-Based Standards
– Lay down general rules
– Auditor professional judgement to prevent
opportunistic manager behaviour
– Possible?
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Criteria For a Successful
Standard
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•
•
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Decision Useful
Reduce Information Asymmetry
No Serious Economic Consequences
Consensus
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Other Comprehensive Income
• Presented with Income Statement
–
–
–
–
–
Net income from operations
Extraordinary items
Net income
Other comprehensive income
Comprehensive income
xxx
xxx
xxx
xxx
xxx
• Alternative Presentation
– As part of statement of changes in shareholders’
equity
• Less transparent, especially if securities markets not
fully efficient
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International Accounting
Standards
• The IASB
• IASB-AcSB Cooperation
– AcSB proposal to move to IASB standards
• FASB and AcSB
– Moving towards standards harmonization
• SEC and IASB
– Should SEC allow IASB standards without
reconciliation?
• Enforcement of International Standards
– Enforcement up to individual jurisdictions
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