Week 1_PAT - ACCT 3563 - IFRA Week 1 Welcome Associate...

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1 ACCT 3563 - IFRA Week 1 Welcome Associate Professor Richard Morris (Course Coordinator) Welcome to IFRA • Note: – Textbooks • Deegan - buy it now • Picker et al. – your ACCT 2542 textbook – Midsession test (20%) Friday 24 April week 7 – Project (20%) due Friday 15 May week 9 – Final exam: (60%)
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2 Lecture plan - week 1 • The Conceptual Framework – Covered in Week 1 tutorials • Positive Accounting Theory – Separation of ownership and control – Agency conflicts – Agency costs – Reading – see Course Outline Positive Accounting Theory • Tries to explain (or predict) existing accounting practices • Does not necessarily deal with what should occur according to accounting standards and the Conceptual Framework
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3 Positive Accounting Theory 4) 1) Most large businesses in the USA have separation between (i) management and (ii) providers of equity and debt financing. 2) In other countries, there is separation between (i) inside shareholders and (ii) outside equity and debt holders. 3) For example, in Asia many companies are controlled by family groups, but also have many outside shareholders . Positive Accounting Theory • Assumptions: – All persons try to maximize their own self- interest – Rational behaviour – Efficient markets – Price protection – markets accurately adjust prices to reflect the actions of managers
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4 Positive Accounting Theory Conflicts of interest arise between insiders and outside equity holders: ± 1. Differences in risk aversion 2. Shirking 3. Insiders tunnel firm’s funds to themselves. How? Non-arms length transactions. Fraud. 4. Insiders consume excessive perquisites 5. Horizon problem – insiders have short term focus; outsiders have long term focus 6. Over-retention of profits Positive Accounting Theory • Conflicts also arise between insiders and creditors. In essence insiders try to maximise value of equity rather than value of firm (debt + equity). • Examples: – Excessive dividend payments – Claim dilution – Asset substitution – Underinvestment
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5 Positive Accounting Theory • Excessive management perquisites and shirking can also be considered agency costs of debt if they lead to debt default. Positive Accounting Theory
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This note was uploaded on 05/02/2010 for the course ACCT 3756 taught by Professor Leung during the Three '09 term at University of Sydney.

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Week 1_PAT - ACCT 3563 - IFRA Week 1 Welcome Associate...

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