Flashcards
Financial Accounting Theory - Module 3
Cards in this deck (7)
- 1What is the Free-Market Perspective?Argues that accounting information should be treated like other goods and services and left to demand and supply forces. Supply and demand will determine the optimal amount of accounting information that should be provided if there is no regulation in place. Argues that is managers do not provide credible accounting information then finance providers and shareholders will assume the manager is running the company for their own personal gain rather than that of the investors and this will increase the cost to the company of obtaining finance and shareholders will require a higher return. Therefore, to minimise the costs managers will provide the optimum amount of information to outsiders. This is a "Private-contracting" view as it is based on the "contacts" between managers and those who fund the company.
- 2What is market-related incentive?The market for managers, market for corporate takeovers, market for lemons are all market-related incentives. These are based on the idea that there are “markets” that exist and that these “markets” motivate managers to disclose information even in the absence of regulation.
- 3What is market for manager?This argument asserts that there is an efficient market for managers and that a manager’s future remuneration will be based on past information about their performance. Managers will therefore adopt strategies such as providing the optimal amount of accounting information. Assumptions include managers knowing what the “optimal” amount of information is, that the market is efficient and that all of the manager’s past performance information will be incorporated into future remuneration and that the share market truly reflects management performance. Ignores the idea that managers who are about to retire may not care about future remuneration.
- 4What is market for corporate takeover?This argument asserts that poor performing companies will be taken over by better performing companies and the board of the poor performing company will be replaced by the takeover board. This provides an incentive for managers to maximise firm value to prevent a takeover and to do so by minimising the cost of capital and increasing the company’s value. One way to reduce costs is to provide an optimal amount of accounting information voluntarily to the market. It also assumes also that managers know the marginal costs and benefits of providing the accounting information which could be quite a difficult thing for all managers to be able to do.
- 5Market for lemons?Asserts that companies will be motivated to provide good and bad news to the market as, in the absence of information, the company might be seen as a “lemon”. Failure to provide information is perceived as the company having something to hide so managers are motivated to disclose both good and bad information so the market does not perceive the company as hiding (what could be very bad information) from the market. It is also argued that if a company does hide information that once the information does come to light the company will be punished for the bad information and also for “hiding” it in the first place.
- 6What is Pro-Regulation perspective?This view argues for increased accounting regulation on the basis that the market is not efficient and that there are a number of flaws with the various free market and market incentives arguments. Also argues that accounting information is a public good which means that once it is published it becomes available to anyone (even if they did not originally demand it and they certainly do not pay for it). This existence of “free riders” suggests that supply is understated and accounting regulation is needed meet the shortfall.
- 7What is accounting-standards overload?This occurs when we have too much accounting regulation. The overload occurs, for example, when users or particular user groups lobby for more accounting information than they really need. The more regulation that exists, the greater the cost to companies of complying with that regulation. Take for example, the increasing amounts of greenhouse and carbon-emission related regulations. This has resulted in a lot of companies and organisations having to spend extra to meet the needs of those regulations (not just the additional cost of reporting).
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- Skills for Life w Flashcards on Financial Accounting Theory - Module 3 , created by tusken13 on 24/05/2016.
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