1 Where only a proportion of a subsidiary's shares are owned by a parent entity, what proportion of the intragroup transaCtlons between the
parent entity and the subsidiary will need to be eliminated on consolidation? 2&2
2 What is a nonecontrolling
Overview of Accounting Theory
What is a theory?
the coherent set of hypothetical, conceptual and
pragmatic principles forming the general
framework of reference for a field of inq
the IASB and FASB have undertaken a project which aims to provide a comprehensive set
of principles for revenue recognition and measurement.
Standard setters are making greater use of fair value measurement in recent standards
such as IAS 39/AASB 139. Fai
Income isis increases
pronouncements by authoritative bodies, conventions, conservatism and expediencypl
an important role. Some rules are very specic, such as expensing research costs; 0the
are vague, such as recording a loss if it is probable that a liability has been incurr
How positive theories are constructed
From the early 1970s, accounting theory became more involved in empirical or
positive theory development and testing. Positive accounting theorists concentrate
on understanding the assumptions that normative theorists
248 PART 2 Theory and accounting practice
have argued that effective decision making requires relevant information and
some cases, historical cost measures of assets are simply not adequate. Fm exa
relation to nancial instruments, market v
206 PART 2 Theory and accounting practice
. What are the three types of decisions managers are faced with in running a
. Explain the Edwards and Bell concept of business prot.
. What are the benets
include: measurement is based on unspecied rules, the logic is circular, there is no
prior agreement on objectives, and the denitions of the elements are unworkable and
provide no guidance to practising accountants.
Others debate the importance of these c
Chapter 2 - Accounting theory construction
A theory that is purely syntactic is sterile. Is this true? How can this statement
relate to accounting?
Syntactical: This represents the logical relations in the theory. This concerns the rules of t
The institutional structure for setting accounting and auditing standards
In the nal section of this chapter we provided an overview of the development of
international bodies that provide accounting and auditing standards. We discussed the
0 Information asymmetry (which is affected by rm size) affects the responsiveness of
price changes, the nature of price changes, and the volume of trade following prot
0 There is a continuous information set which is used by the market and,
measurement risk and there is considerable debate in accounting as to what constitutes
fair value and what are the acceptable distribution ranges. An understanding of the
concepts of risk and uncertainty help us to understand the valuation problem.
The fact that organisations are complex environments and accounting disclosures are
trade-offs between competing perspectives and interests
Accounting exists as a direct function of the activities of individuals or groups of
individuals (dened as accounti
Evaluating the theory key criticisms of contracting theories of accounting Choic
Positive accounting theories have been criticised on the grounds of their usefuln
their methodological and statistical rigour, and their philosophy. In response, posi
TUTORIAL SOLUTIONS CHAPTER 6
According to the historical cost system, what is the objective of accounting and the
role of profit? What criticisms are made of profit calculated under the historical
Stewardship is emphasised as the objective
on improved guidance to assist an informative and useful classication of these
instruments. The determining factor should be the economic substance associated with
the riskreturn relationship established by the nancial instrument. The debt/ equity
TUTORIAL SOLUTIONS CHAPTER 5
Technically, what do we mean when we say X was measured?
First of all, we know that properties or characteristics of things are measured. That is, we do
not measure people, but we might measure their weight or height. When
TUTORIAL SOLUTIONS CHAPTER 12
What is positive accounting theory? How does it differ from normative accounting
theory? What was/were the major dissatisfaction(s) with normative accounting
theory which led to the development of a positive theo
TUTORIAL SOLUTIONS CHAPTER 13
Most human judgement research is undertaken in an experimental setting. How
would you respond to the assertion that experiments cannot be generalised to the
real world? What are the weaknesses and strengths of this researc
TUTORIAL SOLUTIONS CHAPTER 4
1. How do conceptual frameworks of accounting attempt to create a theory of
accounting? Describe the components of the IASB Framework and how they
contribute to a theory of accounting.
Conceptual frameworks (such as those deve
TUTORIAL SOLUTIONS CHAPTER 11
What is the difference between normative and positive accounting theory? Give
examples of each.
Positive accounting theory (PAT) is concerned with explaining and predicting current
accounting practices. This mean
Questions Chapter 10
How is the cash outflow of an entity related to expenses?
In the ideal case, liabilities are payables whose value is the present value of the future
cash outflow of the firm, and expenses are the increase in value of the liabilities
TUTORIAL SOLUTIONS CHAPTER 3
General acceptance of accounting standards is important to the accounting
profession. By whom does the profession require general acceptance of the
standards, and why is it important to the profession?
Until the establishme
Pursuant to AASB 117 we should capitalise a lease transaction (meaning that
the leased asset and lease liability will be included within the statement of
financial position) when substantially all the risks and rewards of ownership
pass to the lessee
Revaluations and impairment testing of non-current assets
If an upward asset revaluation has been undertaken for a depreciable asset, then
depreciation in subsequent periods will increase, as the depreciation will be based o
Accounting for intangibles
This question has been asked to stimulate debate. Certainly, in recent times it would
appear that a greater proportion of corporate assets are often found to be in assets that
are classified as int
Where the carrying amount of an asset or liability (the carrying amount is
determined using accounting rules) is different to the tax base (which is
determined by applying taxation rules) then a temporary difference can arise.
Paragraph 5 of AASB 112
We have a separate accounting standard, AASB 138, that specifically deals with intangible assets and it provides different
requirements from those for property, plant and equipment (the rules for which appear in AASB 116). What is it about
Depreciation of property, plant and equipment
No. Depreciation is an allocation of the cost (or revalued amount) of an asset, less its
residual amount, over the period in which the benefits of its use are expected to arise.
The market value
What is a general purpose financial statement?
What is a reporting entity, and what factors would you consider in determining whether an entity is a reporting entity?
What is the objective of having a conceptual framework?
What effect will an asset revaluation have on subsequent periods' profits? Explain your answer.
Explain the difference in the accounting treatment for revaluation increments and revaluation decrements. Do you consider
that this difference is '
1. Does depreciation reflect a change in the market value of an asset?
4. An item of plant is acquired at a direct cost of $110000. It requires installation and modifications amounting to $20000 and $10000,
respectively, before it is efficiently