Prepared by Arabella Volkov University of Southern Queensland

References Text – Chapter 5 Adopting an accounting perspective IAS 7/AASB 107 AASB 1025 and IFRS 3/AASB 3 SACs

Learning Objectives At the conclusion of this lecture, you should have an appreciation of: the several prevailing viewpoints that can be adopted in recording, measuring and reporting accounting information and that each viewpoint has certain embedded assumptions that should be considered when comparing alternative viewpoints

Learning Objectives At the conclusion of this lecture, you should have an appreciation of: the factors determining the adoption of a viewpoint are not clear-cut and often relate to the main objective of those in control of accounting policy the reporting boundary issue, and the need for reporting boundaries to be defined in order to report on the economic and associated activities of an entity

Learning Objectives At the conclusion of this lecture, you should have an appreciation of: the relationship between activities of key stakeholders, namely shareholders, debtholders and government, and the activities of accounting entities and the problems created by defining organisations as separate legal entities

Learning Objectives At the conclusion of this lecture, you should have an appreciation of: the physical capital concept and its relationship to reporting issues and perspectives the reporting entity concept adopted by the Australian accounting profession in accounting standards

Accounting viewpoints A function of a range of factors History Culture Societal values Nature of economic activity Objectives of those who –Prepare –Interpret –Apply

Accounting viewpoints A function of a range of factors Quantifiable logic –Government –Group –Individual Latham: Political perspectives in Australia –Left –Right

Accounting viewpoints A function of a range of factors Objective of accounting (SAC 2) –Measurement –Reporting –Economic activity Significant changes –Reporting entities –Public and private

The boundary assumptions Activities and means of supporting an entity’s activities need to be defined Set of assumptions or principles about boundaries of an entity –Process of creating a reality (Hines) Each viewpoint defines the boundaries to support perspective adopted

The boundary assumptions (Source: I. Ball, Definition of the Reporting Entity, Accounting Theory Monograph 8, Australian Accounting Research Foundation, 1988, p. ix.)

The boundary assumptions Ball’s universal definition of the reporting entity concept: Consistent with SAC 2 Entities defined with reference to ownership or control Ignores users without control Does not define entities who are not candidates for general purpose accounts

The boundary assumptions SAC 1 Definition of a Reporting Entity: Broader definition of a reporting entity Links the reporting entity to the reporting needs of users and the objectives of general purpose financial reports But: Definitions may be altered by organisations in response to organisational or external pressures Increasing external demands on organisations to expand reporting to include non-financial impacts

Proprietary theory Littleton: proprietorship –Substance of double-entry system –Purpose of the firm Goldberg: –Instances where double-entry system used but proprietorship is not underlying objective

Proprietary theory Balance sheet accounts Assets – Liabilities = Proprietorship Profit –Owner’s net worth primary concern (balance sheet) –Income earned and expenses incurred due to actions of the owner

Proprietary theory Effect on practice –Present accounting essentially based on proprietary theory Financial capital concepts

Proprietary theory Limitations –Developed when businesses small –Increasing separation of ownership and control –Corporate entity –Accountability

Entity theory Formulated to address separate legal status of company Accounts and transactions are classified and analysed from the viewpoint of the entity as an operating unit Accounting principles and procedures not formulated in terms of a single interest e.g. proprietorship

Entity theory Two Views of an Entity: Objective of accounting from entity position? 1.Business firm operates for the benefit of equityholders 2.Entity in business for itself From either view the stewardship role is of primary significance

Entity theory Balance sheet Assets = Equities Profit –Emphasis on the determination of profit –Income statement more relevant than balance sheet Effect on practice –Proprietary view has a greater impact on present procedures

Physical capital concept Under the entity view –Physical capacity of the entity to deliver goods and services is determined after taking into account changes in prices of assets and liabilities Financial capital concept –Changes in the monetary values of assets and liabilities are included in profit

Physical capital concept PROPRIETARY VIEW Sales revenue$ 1000 Current Cost of Sales800 Operating Profit200 Holding Gain100 Income$ 300 PROPRIETARY VIEW Sales revenue$ 1000 Current Cost of Sales800 Operating Profit200 Holding Gain100 Income$ 300 ENTITY VIEW Sales revenue$ 1000 Current Cost of Sales800 Income200 Capital Maint. Adj.$ 100 ENTITY VIEW Sales revenue$ 1000 Current Cost of Sales800 Income200 Capital Maint. Adj.$ 100 Comparison of viewpoints

Fund theory/cash flow Vatter Impersonal ‘fund’ Assets = Restrictions on assets (equity, liabilities) Frame of reference for government and not-for-profit organisations Cash flows

Commander theory Goldberg Focus on control of resources Accounting functions carried out on behalf of commanders Financial position and performance statements Effect on practice

Investor theory Staubus Investor viewpoint Assets = specific equities + residual equity Emphasises needs of external users Cash flow information

Enterprise theory Suojanen Enterprise as a social institution Value-added income Implications Deprival value concepts Reporting entity concept Value-added profits

Enterprise theory

Key terms and concepts Proprietorship Commander Entity Enterprise Investor Funds/cash flow

Summary A range of different viewpoints exist Current thinking emphasises proprietary theory Historical cost is the model generally followed in practice Application of the reporting entity concept

Where to get more information Other courses List books Articles Electronic sources