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Scott Accounting Theory CHAPTER 13

2. Ch. 13, Question 1. Contrast the public interest and the interest group theories of regulation with respect toA. The role of the regulatory bodyB. Their implications for the amount of the regulated commodity or service to be supplied. 3. Two Theories of Regulator Behavior. Public Interest The

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Scott Accounting Theory CHAPTER 13

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    1. 1 Scott – Accounting Theory CHAPTER 13 Standard Setting: Political Issues

    2. 2 Ch. 13, Question 1 Contrast the public interest and the interest group theories of regulation with respect to A. The role of the regulatory body B. Their implications for the amount of the regulated commodity or service to be supplied

    3. 3 Two Theories of Regulator Behavior Public Interest Theory A “first best” theory Interest Group Theory A “second best” theory

    4. 4 Regulation as Conflict Resolution Distribution of the costs and benefits of information production

    5. 5 Contrasting Perspectives INVESTORS Investors represented by OSC, SEC, IOSCO Want full disclosure, fair values, transparency Want high correlation with future firm performance MANAGEMENT Wants flexibility to control (manage) reported net income Wants high correlation with effort

    6. 6 Role of Standard-Setter No “True” Net Income The fundamental problem of financial accounting theory Mediation and Compromise Standards must be acceptable to both investors and management Text: Section 13.6.1 re SFAS 115

    7. 7 Criteria For a Successful Standard Theoretical correctness is NOT sufficient! Other desirable characteristics Decision useful Reduce information asymmetry No serious economic consequences Consensus

    8. 8 International Accounting Standards The IASB IASB & Canadian AcSB Cooperation FASB and Canadian AcSB SEC and IASB Enforcement of International Standards

    9. 9 http://www.iasplus.com/restruct/restruct.htm

    10. US Standard Setting Structure

    12. 12 FASB The new funding source is via SOX

    13. 13 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 6 To “kill” the FASB

    14. 14 Ch. 13, Question 9 A. Why does SFAS115 require unrealized gains and losses on available for sale securities to be included in OCI instead of net income? B. If securities markets are fully efficient, would a strategy of trying to disguise gains trading by reporting OCI in a statement of changes in owners’ equity instead of separate statement work? C. What is securities markets are not fully efficient?

    15. 15 Ch. 13, Question 9 - Ethics D. You are the auditor of a firm using this strategy (hiding gains trading). You object to it and management responds that the strategy is clearly in accordance with GAAP since SFAS130 allows OCI in statement of changes in owners equity. If you do not accept, you will be forced to RESIGN as auditor and you will also lose systems and tax consulting work for the client. Would you resign?

    16. 16 Other Comprehensive Income Presented with Income Statement Net income from operations xxx Extraordinary items xxx Net income xxx Other comprehensive income xxx Comprehensive income xxx Alternative Presentation Separate statement (FASB’s preferred method) As part of statement of changes in shareholders’ equity Less transparent, especially if securities markets not fully efficient

    17. 17 OCI, El Paso Electric Chapter 13 Problem 7

    18. 18 OCI, El Paso Electric Chapter 13 Problem 7 B. As an investor, which earnings measure is most useful to you in deciding whether to buy, hold or sell El Paso shares? C. As a member of the Compensation Committee of the board of directors of the company, which measures is most useful to you in deciding on amount of cash bonus for senior officers?

    19. 19 OCI, El Paso Electric Chapter 13 Problem 7 D. A former member of FASB stated that if unrealized gains and losses on available for sale securities had to be included in net income, FASB No. 115 would not have been viable. Explain using the 4 criteria for standard setting in Section 3.8

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