ACCOUNTING POLICY ON MEASUREMENT AND VALUATION

1. Issues on accounting measurement and valuation of:

a. Income and Expenses
b. Assets and Liabilities
2. Emerging issues on accounting measurement and valuation.
a. Intangibles
b. Cultural capital

AUTHOR MAIN FINDINGS

Ohlson (1995) 1. Author develops & analyzes a model of a firm’s MV
What?
C = equity
Eg= earning
₫ = dividend

A=L+C
A–L=C
Net Asset at BV = C
∆BV = ∆C <C + Eg - ₫>

BVt – BVt-1 = C + Eg - ₫
BVt – BVt-1 = Eg - ₫ + C

Clean surplus relationship

₫ = Eg + BVt-1 – BVt
Assumption : FV = PV of ₫

How s/h value firm? S/h concern how much value dividend (₫)

FV = PV of ₫

MV = ∑ ₫ n
∑ (1+i)n
= ∑ (Eg + BVt-1 – BVt)n
∑ (1-i)n

MV = f(abnormal earnings, BV)

= f(Eg, future earnings, BV)
MV = Eg + BV <acctg. no.> + Other info.

Research in past, forecast future value, accounting no not beneficial to invest.

However, Ohlson link accounting no with MV.
 Why? Relates to current & future earnings, BV & dividends.
How? 2 owners’ equity accounting constructs:
a. Clean surplus relation
Shift e value analysis away frm PVED to BV + e present value of xpectd abnormal
earnings.
Assume abnormal earnings satisfy autoregressive process-analytical simplicity

b. Dividend reduces current BV, but not affects current earnings.

Benefit of the model

Benchmark – MV relates to actg data & othr info.

Barton (1973) 1. Both ex-ante&ex-post concept of income and assets valuation are required
2. Ex-ante&ex-post are separate concept
3. Both serve different purposes

Prove?
Test r/ship bet:
a. current market price of A & their PV for validity of indirect measurement hypothesis –
REJECTED
b. PV concept of income & ex-post income & realization convention – NOT MAJOR
REASON
c. Necessary condition bet equality of PV and ex-post magnitudes – UNREALISTIC
d. Role of each set of concepts – BOTH NECESSARY FOR FIRM OPERATING IN
UNCERTAINTY AS BOTH SERVE DIFFERENT FN.

Bernard (1995) Avocation and reemphasizing on past research by Ohlson (1995) and Feltham and Ohlson
(1995)
Liang (2001) 1. Synthesis on recognition research.
a. Historical evolution of accounting thought;
- HC as the assets valuation basis
- Realization as income determination test basis
b. Shift frm traditional measurement perspective to information content perspective
- Early writer adopt measurement perspective (measure of some underlying stock or
flow). Lack of concern on demand for accounting measures in research. Concern on
measures themselves. So, management function of accounting is assumed not
derived.
c. Proposed combined perspective – explicit & implicit theme of recognition

Khurana & Kim 1. Study the value relevance of HC vs. FV

(2003) a. Compare explanatory power of FV & HC in explaining equity values
b. Result
- Small BHC: HC > informative in measure loan & deposits (not actively traded & less
subjective)
 - FV > informative for available-for-sale securities (actively traded in well established
market)
Thompson Not include in exam sem1 2010/2011
(1998)
Berry & Wright 1. Relevance of reserve disclosures in oil & gas companies in DM
(2001) 2. The need of supplementary quantity disclosures
3. To what extent those disclosures convey information
4. 2 hypothesis:
H1 – MV of a firm related to the effort that it expands to discover and extend proved
reserves - POSITIVELY RELATED at differing level of significance
H2 – MV of a firm increases with the increases in firm’s ability to discover and extend
proved reserves – SUPPORTED FOR FULL COST FIRMS (proved reserves contain value-
relevant information)
5. Result:
a. Full cost firms information regarding effort and ability to discover reserves are value
relevant
b. Successful effort firms are more value relevant fro developed reserves than effort and
ability
c. Regardless of firms’ characteristics or accounting methods, HC information regarding
book values and earnings is value relevant
Tollington 1. Examine existing assumption (derived from definition of assets) in accounting recognition
(2000) of assets
2. Definition of assets (resources or rights controlled by enterprise, results from past events
and future economic benefits are expected)
3. Basic assumptions:
a. Only assets that produce future economic benefits are recognized
b. The definition of assets comprise of interconnected set of idea
c. Certain group of society unable to accept the economic-based picture of reality
d. The definition are functional
e. The definition contain statements of facts and / or statements of a normative nature
f. The definition concerned with man and his place in society
g. Facilitates choice and / or decision
h. The definition may contain unverifiable or mistaken statements
i. The proponents seek to justify and legitimize their definitions

ACCOUNTING POLICY AND REGULATION

 1. Regulatory theories and accounting standard setting process
2. The needs and myths of accounting conceptual framework
3. Accounting policy issues on recognition and disclosure

AUTHOR MAIN FINDINGS

Peasnell (1982) 1. Ways ‘statement of financial reporting objectives’ or CF improves quality of financial
reporting.
2. History and literature of CF
a. Other effort attempt but none call as CF
b. 5 attempts:
- AICPA monographs (Moonitz,1961 & Sprouse and Moonitz, 1962)
- AICPA Trueblood Report*
- Accounting Standards Steering Committee Corporate report (UK)*
- FASB
- CICA Stamp report (Canada)
3. Standard setting process in operation (view social conflict resolution mechanism –
Boulding, 1965)
a. Process of negotiation between standard setters and companies
b. Because no authority
c. Likened a wage-labor negotiation
4. Develop premise for CF to major contribution in different organized and policed corporate
financial reporting (reference to diff. actg environment: laissez-faire, state control &
delegation to profession)

Lev (1987) 1. Initiative: Inequity in capital markets, inequality of opportunity, existence of information
asymmetries leads to high transaction costs, thin markets, lower liquidity of securities,
decrease gain from trade. All can be solve by public policy mandating the disclosure of
financial information to reduce info assym.
2. Equity-orientation of disclosure regulation=moralistic concepts of equity in accounting
maintaining fairness, eliminating fraud & protecting uninformed investors against
exploitation by insiders.
3. The equity concept is state of the art and operational linked directly to the recent
theoretical developments in economic and finance.
4. Provides
a. economically sound justification for disclosure regulation
b. to policymakers and operational ‘public interest’ criterion for disclosure choices
c. open up to researchers a rich agenda for evaluating regulation n consequences
Dopuch & 1. Critical review of FASB’s Statement on Objectives and of its Exposure Draft on the elements
Sunder (1979) of financial accounting.
2. Compare FASB statement with previous authoritative bodies
3. See the lack of aid from the statement in answering accounting issues
4. Reason of a failure of previous authoritative bodies
5. Answering the reason of accountant seeking authoritative definition of objectives
6. Proposing modest proposals for the ‘objectives of FASB’
 a.
b.
c.

CRITICAL AND RADICAL ACCOUNTING THEORY

1. Foundation of critical and radical school of thought
2. Development of critical and radical accounting theory
3. Socio-political economy approach to accounting theory development
Chua (1986) 1. Comparing and contrasting mainstream accounting and other alternatives thought in its
characteristics, assumption, ideologies (assumption about knowledge, empirical world,
relationship between theory and practical), advantage and limitations
*see Appendix A
2. 2 main alternative out of 4 discussed; interpretive and critical
3. Burrel & Morgan Classify Accounting literature to:
a. Social science
- Ontology of social world (realism vs. nominalism)
- Epistemology (positivism vs. anti-positivism)
- Human nature (determinism vs. voluntarism)
- Methodology (nomothetic vs. ideographic)
b. Society - orderly or subject to fundamental conflict
4. Difficulties in Burrel & Morgan Framework:
a. Strict dichotomies – the use of mutually exclusive dichotomies and the derivation of
paradigms that cannot be synthesized fails to locate philosophical attempts to
overcome such unsatisfactory dichotomies.
b. Strongly relativistic notion of scientific truth and reason
c. Latent relativism – self referential and paradoxical
d. Separation of the radical structuralist from the radical humanist paradigm
5. Chua differentiates accounting perspectives:
a. Understanding about knowledge
b. Physical / Empirical phenomenon & social reality under study
c. Relationship between theory and practical world of affairs
Cooper &
Sherer (1984)

APPENDIX A Compare and Contrast Mainstream, Interpretive & Critical Approach

 Mainstream Approach Interpretive Approach Critical Approach

A1: Belief About Knowledge

Epistemological
Theory is separate from
observations.
Observations are used to verify or
falsify theory.
Accounting researchers believe in
empirical testability of scientific
theory (positivist)
- Incorporate 1 or > general
principles or laws theory
- Must be some prior condition
hypothesis
- Statement describing whatever
is explainedconclusion
Methodological
Quantitative methods of data
analysis and collection
Allow generalizations

A2: Belief about Physical & Social Reality

Ontological
Empirical reality is objective and
external to the subject.
Human beings are also
characterized as passive objects,
not makers of social reality
Human Intention & Rationality
Bounded rationality*
Utility-maximization assumed for
individuals and firms
Social Order / Conflict
Societies and organizations are
essentially stable
Dysfunctional conflict may be
managed trough design of
appropriate accounting control
State of equilibrium will be
achieved
 A3: Relationship between Theory and Practice

What is the purpose of knowledge in the world of practice?

How k/l can improve people’s welfare?
Is it intended to free people from suppression or to provide technical answer
to pre-given goals (or set objectives)?

Accountants should deal with

observations of efficient &
effective ways to meet
informational needs without
involving themselves with moral
judgments about the users’ goals
 Means-end dichotomy
Value-free is a value laden position
(it is a bias)

LIMITATIONS
1.Mean-end dichotomy focus on
markets & organizations, not goals
of user and society, distribution
and allocation of wealth.
2.Assumption of human purpose
and rationality utility
maximization  focus on
shareholders others(public
good)
3.Action goal, Hypothe theory
>possibilities of rationality,
organization > complex*
4.Lack of awareness of
controversies within social science
INTRODUCTION TO ACCOUNTING THEORY
1. The images of accounting as a discipline and body of knowledge
2. Development of accounting history
3. Theory constructions and methodologies
4. Foundation of accounting theory

Morgan (1988) 1. Accounting construct reality rather than appraiser reality

2. Objectivity of accounting is a myth
3. Metaphorical nature of knowledge
4.