Financial Accounting Theory

1. Introduction. The Objective of this Book. The Complexity of Information in Financial Accounting and Reporting. The Role of Accounting Research. The Importance of Information Asymmetry. The Fundamental Problem of Financial Accounting Theory. Regulation as a Reaction to the Fundamental Problem. An Historical Perspective. The Organization of This Book. Relevance of Financial Accounting Theory to Accounting Practice. 2. Accounting Under Ideal Conditions. Overview. The Present Value Model Under Certainty. The Present Value Model Under Uncertainty. Reserve Recognition Accounting. Historical Cost Accounting Revisited. The Non-Existence of True Net Income. Conclusion. 3. The Decision Usefulness Approach to Financial Reporting. Overview. The Decision Usefulness Approach. Single-Person Decision Theory. The Rational, Risk-Averse Investor. The Principle of Portfolio Diversification. The Optimal Investment Decision. Portfolio Risk. The Reaction of Professional Accounting Bodies to the Decision Usefulness Approach. Conclusions on Decision Usefulness. 4. Efficient Securities Markets. Overview. Efficient Securities Markets. A Capital Asset Pricing Model. Is Beta Dead? Efficient Securities Market Anomalies. The Informativeness of Price. Information Asymmetry. The Social Significance of Properly Working Securities Markets. Examples of Full Disclosure. Summary and Conclusions. 5. The Information Perspective on Decision Usefulness. Overview. Outline of the Research Problem. The Ball and Brown Study. Earnings Response Coefficients. Extraordinary Items. A Caveat about the Best Accounting Policy. The Information Content of RRA. Summary and Conclusions. 6. The Measurement Perspective on Decision Usefulness. Overview. Reasons for Increased Attention to Measurement. Longstanding Measurement Examples. More Recent Fair-Value-Oriented Standards. Financial Instruments. Reporting on Risk. Summary and Conclusions. 7. Economic Consequences. Overview. The Rise of Economic Consequences. Foreign Exchange Translation: Practice and Theory. The ERCs of Multinational Firms. Accounting for Government Assistance. Stock Market Reaction to Successful-Efforts Accounting in the Oil and Gas Industry. The Relationship Between Efficient Market Theory and Economic Consequences. 8. The Positive Theory of Accounting. Outline of Positive Acounting Theory. The Three Hypotheses of Positive Accounting Theory. Empirical PAT Research. Distinguishing the Opportunistic and Efficient Contracting Versions of PAT. Conclusions. 9. An Analysis of Conflict. Overview. Understanding Game Theory. A Non-cooperative Game Model of Manager-Investor Conflict. Some Models of Cooperative Game Theory. Implications of Agency Theory for Accounting. Reconciliation of Efficient Securities Market Theory with Economic Consequences. Conclusions. 10. Executive Compensation. Overview. Are Incentive Contracts Necessary? A Managerial Compensation Plan. The Theory of Executive Compensation. The Role of Risk in Executive Compensation. The Politics of Executive Compensation. Summary. 11. Earnings Management. Overview. Evidence of Earnings Management for Bonus Purposes. Other Motivations for Earnings Management. Patterns of Earnings Management. Is Earnings Management Good or Bad? Stock Market Reaction to Earnings Management. Summary and Conclusions. 12. Standard Setting: Economic Issues. Overview. Regulation of Economic Activity. Private Incentives for Information Production. Sources of Market Failure. How Much Information is Enough? Decentralized Regulation. Summary. 13. Standard Setting: Political Issues. Overview. Two Theories of Regulation. Standard Setting in Canada and the United States. The International Accounting Standards Committee. Relationship to Theories of Regulation Conflict and Compromise. Criteria for Standard Setting. Conclusions.