Accounting Theories Overview

Accounting theories that prescribe how accounting should be practiced based on theoretical frameworks.

Major criticism is the lack of empirical evidence because they are based on prescribed practices rather than observed ones.

A framework that guides the creation and interpretation of accounting standards.

Two essential traits of financial information: relevance and faithful representation.

An enhancing qualitative characteristic but not fundamental according to IASB.

An asset is a present economic resource controlled by the entity due to past events.

To prescribe how accounting should be practiced rather than describing current practices.

Essential traits for information include relevance and faithful representation; comparability and timeliness are enhancing.

PAT assumes that individuals act in their own self-interest to maximize financial benefits.

PAT describes actual accounting practices, while normative theories prescribe what should be done.

Explains why managers choose accounting policies that lower reported profits to avoid scrutiny.

Describes conflicts between shareholders and managers due to differing risk preferences and incentives.

Suggests accounting choices are influenced by management compensation plans.

Indicates that managers may choose accounting policies to manage debt levels.

PAT posits that individuals will act for personal or financial gain.

PAT relies on real-world data to explain accounting decisions.

A company’s voluntary commitment to social and environmental concerns beyond legal obligations.

A report focused on a company's social impacts and efforts in addressing social issues.

A broader report that includes economic, social, and environmental performance metrics.

Sustainability reporting is broader, covering economic, social, and environmental aspects, while CSR reporting focuses primarily on social issues.

To enhance corporate reputation and build stakeholder trust.

The practice of presenting an organization’s products or policies as environmentally friendly when they are not.

A major criticism is that it can be used as a marketing tool without real environmental or social impacts.

The confidence that stakeholders have in a company’s actions and integrity.

A theory explaining how organizations align actions with societal expectations to maintain legitimacy.

The difference between public expectations and a company’s actual actions.

A theory emphasizing ethical treatment and fairness towards all stakeholders.

Stakeholder Theory emphasizes fairness, while Legitimacy Theory focuses on societal approval.

A theory stating that organizations adopt similar practices to gain legitimacy and social acceptance.

The obligation of organizations to act in the best interest of society.

The act of providing accurate financial information to stakeholders.

Fair and just handling of all parties involved with an organization.

A theory that argues regulation is needed to correct market failures and prevent inefficiencies.

Regulation is criticized for limiting companies in choosing their accounting methods, potentially reducing flexibility.

The key difference is that IFRS is more principles-based while US GAAP is more rules-based.

A major challenge involves differences in tax laws and economic structures among countries.

The US has not fully adopted IFRS because it prefers the strict, rules-based approach of GAAP.

High uncertainty avoidance in a country influences its preference for strict accounting standards.

Regulation is intended to prevent inefficient practices that can arise in unregulated markets.

Economic structures and tax law differences are significant challenges to adopting IFRS in various countries.

The obligation of an organization to report its decisions and actions to stakeholders.

Traditional corporate accountability models prioritize shareholders because they provide capital.

Emphasizes identifying responsibilities, determining reporting obligations, deciding what to report, and how to report it.

Engagement in practices beyond legal requirements to maintain legitimacy and build stakeholder trust.

Designed to assist external users in making informed financial decisions.

The perception that a corporation operates within societal norms and values.

Individuals such as investors and creditors who use financial reports for decision-making.