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
Comparison of viewpoints
PROPRIETARY
VIEW
ENTITY VIEW
Sales revenue
Current Cost of
Sales
$ 1000
Operating Profit
Holding Gain
200
100
Income
800
$ 300
Sales revenue
Current Cost of
Sales
Income
Capital Maint. Adj.
$ 1000
800
200
$ 100
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
•
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Other courses
List books
Articles
Electronic sources