Contemporary Issues in Accounting 2e Customised 1st Edition by Craig Deegan Solution manual

Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd
Solutions Manual to accompany Deegan, Financial Accounting Theory 4e
3
1.6  If the revised conceptual framework (which is an example of a normative
theory) is based upon, or built upon, a particular assumption then, before we are
likely to accept the prescriptions provided by the revised framework we would
need to satisfy ourselves that we accept the central assumption. If we reject the
central assumption, then no matter how logically developed the theory might be
we will reject its prescriptions.
Within the component of the revised IASB Conceptual Framework for Financial
Reporting that was released in 2010 it was stated:
The objective of general purpose financial reporting is to provide financial
information about the reporting entity that is useful to present and potential
equity investors, lenders and other creditors in making decisions in their
capacity as capital providers.
Therefore, if we rejected the above belief about the objective of general purpose
financial reporting then we would probably reject the contents of most of the
revised conceptual framework; given that is has been developed from the
perspective of this underlying objective. For example, if we believed that general
purpose financial reporting should provide information about the financial
impacts an organisation has on a broad group of stakeholders beyond those that
hold, or intend to hold, a financial interest (that is, we take a broader
accountability-based perspective rather than one that focuses on providing
information to parties involved in resource allocation decisions) then we would
question the prescriptions provided by the framework.
1.7  Yes, we can reject a theory even though we believe that it is very logical. For
example, if we were to adopt an assumption that capital markets are efficient and
that individuals are motivated by self-interest tied to wealth maximisation (two
very important assumptions made in a great deal of economics literature) that
might lead us to make particular prescriptions about what information
organisations should produce. However, if we reject these assumptions (perhaps
we consider that markets are not efficient and that human behaviour is not based
upon self-interest) then we might consider that the prescriptions provided by the
theory are unsound – and potentially even damaging to particular groups within
Copyright © 2014 McGraw-Hill Education (Australia) Pty Ltd
Solutions Manual to accompany Deegan, Financial Accounting Theory 4e
4
society – even though we might nevertheless believe that the theory is logically
developed.
1.8  As explained in this chapter, theory that is developed through induction is
developed as a result of undertaking a series of observations of particular events,
and on the basis of these observations, a theory is developed. Early theories of
accounting (for example, in the 1960s) were often developed by observing what
accountants were actually doing in practice. This led to the formulation of
certain conventions and doctrines of accounting which were considered to be
theories. As we discussed however, developing theory on the basis of
observation typically does not allow us to address the issue of what would be the
most appropriate behaviour in particular circumstances (and determining
‘appropriate behaviour’ will in turn be influenced by particular assumptions or
value judgments made by the researcher). That is, it does not encourage us to
evaluate what the accountants are doing.
By contrast, developing theory on the basis of deduction does not rely upon
observation. Rather, it relies upon the use of logic to develop arguments and
related theory. Some theories developed through deduction—such as positive
accounting theories which are developed and then used to predict particular
behaviour—can be tested (but not initially developed) through subsequent
observation. Other theories developed through deduction—such as Chambers’
theory of accounting (Continuously Contemporary Accounting)—should not be
evaluated through subsequent observation as he was prescribing a particular
approach to accounting that was in stark contrast to what accountants were doing
at the time.
1.9  Some interesting answers should be given here. Some students might argue it is
a total waste of time. The perspective adopted by the author of your textbook,
and many other accounting academics, however, is that the outputs of the
accounting system are used in many decisions throughout society and hence it is
important to consider how particular accounting methods, or changes thereto,