Topic 1: History and Development of Accounting and Accounting Theory PDF

TOPIC 1 Introduction to the Accounting Environment Part 2 The Financial Reporting Environment -Malaysia -overview of development in accounting concepts and principles SMA/UITM/PA 1 Malaysia’s Perspective...

TOPIC 1 Introduction to the Accounting Environment Part 2 The Financial Reporting Environment -Malaysia -overview of development in accounting concepts and principles SMA/UITM/PA 1 Malaysia’s Perspective SMA/UITM/PA 2 Financial Reporting Environment Regulators/ Legislative bodies and Enforcement Authorities Purpose Reducing information disparity Protecting public interest Concerns Standards setting Corporations/ Preparers Monitoring and Enforcement of Financial Statements (Through Companies Act Purpose and through its prescribed Public and Investor relations schedules. Compliance with (communicating Financial and stock exchange authorities operating performance) etc) Concern Maintenance Legal risks Confidentiality Users/ Capital Markets Purpose Decision Making Concerns Relevance and Reliability SMA/UITM/PA 3  4 SMA/UITM/PA Accounting Development in Malaysia Prior to 1957 – Companies Ordinance (and amendments) of 1940, 1946, 1956. 1958 – Malaysian Association of Certifies Public Accountants (MACPA) was formed. 1965 – Establishment of Companies Act, 1965. Companies ordinance were then repealed. Contain Ninth Schedule (disclosure requirements). 1967 – The Malaysian Institute of Accountants (MIA) was established under the Accountant Act, 1968 – MACPA issued first accounting guidance SMA/UITM/PA 5 Accounting Development in Malaysia 1968 – MACPA issued first accounting guidance which dealt with specimen company accounts. 1978 – MACPA was admitted as a member of International Accounting Standards Committee (IASC) and began adopting IAS. 1984 – MACPA issued the first Malaysian Accounting Standard. 1985 – Companies Act 1965 was amended. New Ninth Schedule with more comprehensive disclosure requirements that includes the preparation of statement of source and application of funds SMA/UITM/PA 6 Accounting Development in Malaysia 1987 – Operation of MIA were activated. MIA began issuing accounting standards. 1993 – Securities Commission was established. Public listed companies are required to show full disclosure requirements as required by SC’s. 1997 – Financial Reporting Foundation (FRF) and Malaysian Accounting Standard Board (MASB) was established under the Financial Reporting Act, 1997 SMA/UITM/PA 7  Development of accounting concepts and principles The development of accounting practices over the 20th century have been identified by theorists: 1. Management contribution phase. 2. Institution contribution phase. 3. Professional contribution phase. 4. Overt politicization phase. SMA_UITM_PA_FAR661  …(A):Management contribution phase (1900-33) Arose from the increasing number of shareholders and the dominant economic roles played by industrial corporation after 1900 The diffusion of share ownership led to more pronounced separation of ownership (the shareholders) from the control(managers) of the organization. Impact; gave management more or less complete control over the format or contents of accounting disclosure. SMA_UITM_PA_FAR661..Management contribution phase (1900-33) There are five consequences of the dependence on management initiative: 1. Practices lacked theoretical support. 2. The focus was on the determination of taxable income and minimization of income taxes. 3. There was a desire to smooth earnings. 4. They avoided complex problems, and adopted expedient solutions. 5. There was no consistency as different firms adopted different accounting techniques for the same problem. SMA_UITM_PA_FAR661  …….Management contribution phase (1900-33) Some of the Issues arose/ debate 1. Improvement in standards of financial reporting 2. Protection of investors 3. Agree to publish annual financial statements 4. Question of accounting for interest cost 5. Calculation of taxable income on the basis of cash receipts and disbursements SMA_UITM_PA_FAR661 …(B): Institution contribution phase (1933-46) The creation and increasing role of institutions in the development of accounting principles In the United States, the developments included; 1. the creation of the Securities and Exchange Commission (SEC) in 1934 2. the approval by the American Institute of Accountants (AIA) of ‘six rules or principles’ 3. the new role of the Committee on Accounting Procedures. (Refer page 6&7 text book) SMA_UITM_PA_FAR661 …(C):Professional contribution phase (1959-73) Discontent with the Committee on Accounting Procedure (CAP) was expressed by the president of the AICPA. “ how successful we have been in narrowing areas of difference and inconsistency in the preparation and presentation of financial information” A Special Committee on Research Program was set up and proposed the dissolution of the CAP and its research department. The AICPA accepted the recommendations of the Committee and established the Accounting Principles Board (APB) and the Accounting Research Division. - Criticized and dissatisfaction ? SMA_UITM_PA_FAR661  D:Overt politicization phase (1973-present) Adoption of a more deductive approach (Normative theory) as well as an ever-increasing politicization of the standard-setting process. Generally accepted view: accounting numbers affect economic behavior and, consequently, accounting rules should be established in the political arena. The FASB’s and IASB’s conduct is to develop a theoretical framework and the general acceptance of new standards. SMA_UITM_PA_FAR661 …(D): Overt politicization phase (1973-present) The process of formulating accounting standards is becoming political; for instance: The US Senate Subcommittee released a report entitled The Accounting Establishment. Known as the Metcalf Report, it charged that the United States’ ‘big eight’ accounting firms monopolies the auditing of large corporations and control the standard-setting process. The passing of the Sarbanes-Oxley Act in 2002, also known as the Public Company Accounting Reform and Investor Protection Act of 2002, Sarbox or SOX. SMA_UITM_PA_FAR661  Academic and professional developments in accounting theory have tended to take different approaches Academic research focuses on capital markets, agency theory and behavioural aspects The profession has sought a more normative approach – what accounting practices should be adopted SMA_UITM_PA_FAR661  Conceptual framework – resurrected in 1980s states the nature and purpose of financial reporting Establishes criteria for deciding between alternative accounting practices SMA_UITM_PA_FAR661  Conceptual framework – Recent Developments Joint project between IASB & FASB International harmonisation of accounting practices through a single consistent set of international financial reporting standards (IFRS) SMA_UITM_PA_FAR661  The conceptual framework underpinning the IFRS favours a move toward accounting practices that provide information for enhancing decision making by investors and others recognising all gains and losses in the accounting periods in which they occur measurement using exit values SMA_UITM_PA_FAR661  The importance of accounting history (USE OF PPP) Pedagogy – to a better understanding and appreciation of the field of accounting and its evolution as a social science. (Instructional theory) Policy – instrumental to a better understanding of the accounting problems and the institutional contexts as well as the formulation of public policy (e.g tax accounting & policy) Practice – provide a better assessment of existing practices by comparing with the methods used in the past. SMA_UITM_PA_FAR661  Relevance of accounting history Accounting has a history which is usually discussed in terms of one seminal event, the invention and dissemination of the double-entry bookkeeping processes. The historical evolution of accounting provides clues and explanations of double-entry bookkeeping and the development of modern accounting. The history of accounting allows us to relate the past to what is practiced and to what ought to be practiced. It helps us to make a link between the historical state and both positive and normative states. The link supports the view within the full context of social, political, economic and temporal environments. SMA_UITM_PA_FAR661 Limitations of Accounting History Historical inquiry could either be narrative or interpretative and is conditional and not definitive – It may be incomplete. History may not reveal cause of an event as a certainty but can indicate probable factors affecting the event. Historians ‘explanation and causal analysis’ begin with searches for patterns of development – Attempts to proceed from determination (what happened) to a contingency (how it happened) basis – judgmental process constrained by time SMA_UITM_PA_FAR661 THE END SMA_UITM_PA_FAR661