IAF510 - Accounting Theory

Subject Title
Accounting Theory

Subject Description
In this advanced level course, students explore various theories that underlie financial accounting and reporting. The concept of present value accounting in ideal conditions and the theory of decision making under uncertain conditions is examined. Securities market efficiency is considered and related to capital asset pricing models. Problems related to information advantage and a manager's motivation are given close attention. An attempt is made to reconcile the potentially conflicting roles of financial reporting in meeting the needs of investors and managers. The concept of economic consequences is explained and related to decision usefulness and efficient securities market theory. Conflicting versions of positive accounting theory are compared and related to management behaviour. Conflicts between parties to executive compensation and debt contracts are examined and related to earnings management issues. Accounting standard setting processes are examined from the perspective of both economic issues and political issues, including the trend towards convergence of differing accounting standards internationally.
Pre-requisite: IAF410

Credit Status
This subject is a required subject credit in the Bachelor of Commerce, degree programs.

Learning Outcomes
Upon successful completion of this subject the student will be able to:

Accounting under Ideal Conditions

1. Illustrate the concept of ideal conditions and assess the necessary assumptions that underlie the definition.
2. Use the present value model, under conditions of certainty and uncertainty, to prepare an articulated set of financial statements for a simple firm.
3. Explain the trade off between relevance and reliability and draw conclusions about how professional judgement must be exercised in providing useful information to statement readers.
4. Critically evaluate why measures of the true economic value and true economic income of a firm do not exist.

Decision Usefulness Approach to Financial Reporting

1. Evaluate the concept of decision usefulness.
2. Perform calculations in accordance with the single person theory of decision making under uncertainty and draw conclusions about the results.
3. Evaluate financial statements as an information system and develop a precise definition of information.
4. Illustrate the basic concepts of portfolio theory and the optimal investment decision.
5. Calculate expected return and variance of a portfolio, and its covariance with other portfolios and assess the results.
6. Relate decision theory to the conceptual frameworks of standard-setting bodies.

Efficient Securities Markets

1. Evaluate the concept of an efficient securities market and the implications for financial accounting and reporting.
2. Assess the implications for securities pricing of the Sharpe-Lintner capital asset pricing model.
3. Illustrate the extent that securities market prices act as a source of information to investors.
4. Explain the significance of information asymmetry and, in particular, the adverse selection problem, to financial accounting theory.
5. Analyze the information content of management decisions and analysis and of future-oriented financial information.

Information Perspective on Decision Usefulness

1. Evaluate the information perspective on financial reporting, which recognizes investor responsibility for investment decision making and the role of accountants in supplying useful information.
2. Justify why a securities market responds to information that investors find useful, in light of the efficient securities market and decision usefulness theories.
3. Define the concept of an earnings response coefficient, identify the factors that explain its magnitude and relate it to decision usefulness.

Measurement Perspective on Decision Usefulness

1. Analyze and evaluate why financial reporting is moving from an information perspective towards a measurement perspective on decision usefulness.
2. Illustrate Ohlsons clean surplus theory and its role in firm valuation.
3. Apply measurement-oriented accounting standards to accounting for financial instruments, intangibles and reporting on risk.

Economic Consequences

1. Explain the concept of economic consequences and apply it to various current accounting topics.
2. Draw conclusions between efficient securities market theory and the concept of economic consequences.
3. Analyze the concept of positive accounting theory and evaluate its predictions about manager reaction to compensation contracts, debt covenants and political pressures.

An Analysis of Conflict

1. Explain the basic principles of game and agency theory and analyze the important implications for financial accounting.
2. Justify how agency theory serves to reconcile efficient securities market theory and economic consequences.

Conflict Between Contracting Parties

1. Examine how necessary contracts can align the interests of the manager with those of shareholders.
2. Analyze and assess the theory and evidence pertaining to executive compensation.
3. Draw conclusions about the political ramifications of executive compensation.
4. Compare and contrast the various motivations and patterns of earnings management and their impact on the market.
5. Evaluate the evidence of earnings management and its effect on share prices.

Standard Setting: Economic Issues

1. Explain the concept of information as a commodity that has value and that can be produced by firms at a cost.
2. Analyze and assess private incentives for information production.
3. Critically evaluate sources of market failure in the private production of information.

Standard Setting: Political Issues

1. Compare and contrast the public interest theory and the interest group theory of regulation.
2. Compare and contrast standard-setting processes in Canada, the United States, and internationally.
3. Illustrate the ethical issues related to standard setting.
4. Assess the criteria for a successful standard.

Academic Integrity
Seneca upholds a learning community that values academic integrity, honesty, fairness, trust, respect, responsibility and courage. These values enhance Seneca's commitment to deliver high-quality education and teaching excellence, while supporting a positive learning environment. Ensure that you are aware of Seneca's Academic Integrity Policy which can be found at: http://www.senecapolytechnic.ca/about/policies/academic-integrity-policy.html Review section 2 of the policy for details regarding approaches to supporting integrity. Section 2.3 and Appendix B of the policy describe various sanctions that can be applied, if there is suspected academic misconduct (e.g., contract cheating, cheating, falsification, impersonation or plagiarism).

Please visit the Academic Integrity website http://open2.senecac.on.ca/sites/academic-integrity/for-students to understand and learn more about how to prepare and submit work so that it supports academic integrity, and to avoid academic misconduct.

Discrimination/Harassment
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Accommodation for Students with Disabilities
The College will provide reasonable accommodation to students with disabilities in order to promote academic success. If you require accommodation, contact the Counselling and Accessibility Services Office at ext. 22900 to initiate the process for documenting, assessing and implementing your individual accommodation needs.

Camera Use and Recordings - Synchronous (Live) Classes
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