Ahmed Riahi-Belkaoui University of Illinois at Chicago Illinois, USA

1 Fifth Edition

ACCOUNTING THEORY

; \ SOUTH-WESTERN 1 % C E N G A G E L e a r n i n g -

Australia • Brazil • Japan • Korea • Mexico • Singapore • Spain • United Kingdom • United States

Contents

Preface ix

The history and development of accounting 1 1.1 Introduction 1 1.2 Evolution of double-entry bookkeeping 2 1.3 The development of accounting principles in the USA 6 1.4 Accounting and capitalism 12 1.5 Relevance of accounting history 13 1.6 International accounting issues 14 1.7 Conclusions 19

Appendix 1 .A: Major studies of the accounting profession from 1972 19 through 1995

Notes 31

References 34

The nature and uses of accounting 37 2.1 Definitions and role of accounting 38 2.2 Measurement in accounting 42 2.3 The rationale behind double-entry accounting 45 2.4 Generally accepted accounting principles (GAAP) 46 2.5 Accounting policy and changes 53 2.6 Designed accounting 54 2.7 Technical and ideological proletarianization of accountants 65 2.8 The manufactured consciousness of users 67 2.9 Ethical perspective in accounting 68 2.10 Conclusions 71

Notes 71

References 76

The elements and structure of an accounting theory 79 3.1 Notions of a theory 79 3.2 Notions of concepts 84 3.3 The handling of hypotheses 86 3.4 Context of discovery 92 3.5 Conclusion 93

Notes 93

References 95

The traditional approaches to the formulation of an 97 accounting theory 4.1 The nature of accounting: various images 98 4.2 Theory construction and verification 107 4.3 The nature of an accounting theory 108 4.4 Methodologies for the formulation of an accounting theory 109 4.5 Approaches to the formulation of an accounting theory 110 4.6 The eclectic approach to the formulation of an accounting theory 116 4.7 Conclusions 116

Notes 116

References 120

The regulatory approach to the formulation of an 123 accounting theory 5.1 The nature of accounting standards 124 5.2 Goals of standard-setting 125 5.3 Entities concerned with accounting standards 127 5.4 Who should set accounting standards? 135 5.5 Legitimacy of the standard-setting process 144 5.6 Accounting standards overload 146 5.7 Accounting choice 149 5.8 Standard-setting strategies for the developing countries 150 5.9 Conclusions 153

Appendix 5.A: Members of International Accounting Standards Board 153

Notes 155

References 158

A conceptual framework for financial accounting and reporting 163 6.1 Classification and conflicts of interests 164 6.2 Toward a formulation of the objectives of financial statements 165 6.3 Toward a conceptual framework 173 6.4 The other reports 190 6.5 Taxonomy of normative characteristics that accounting 197

pronouncements should reflect 6.6 Discussion and conclusions 197

Notes 202

References 205

The structure of accounting theory 209 7.1 The nature of the structure of an accounting theory 210 7.2 The nature of the accounting postulates, theoretical concepts and 211

principles 7.3 The accounting postulates 212 7.4 The theoretical concepts of accounting 215 7.5 The accounting principles 217 7.6 Truth in accounting 230 7.7 Conclusions 236

Appendix 7. A: The basic postulates of accounting (ARS 1) 237 Appendix 7.B: A tentative set of broad accounting principles for business 238 enterprises (ARS 3)

Notes 241

References 245

Fairness, disclosure and future trends in accounting 249 8.1 Introduction 249 8.2 Fairness in accounting 250 8.3 Fairness in distribution 253 8.4 Fairness in disclosure 261 8.5 Conclusion 285

Notes 285

References 291

Research perspectives in accounting 299 9.1 Introduction 299 9.2 Perspectives on accounting researchers 300 9.3 Perspectives on accounting methodologies: ideography versus 304

nomothesis 9.4 Perspectives on accounting knowledge 308 9.5 Perspectives on accounting research 314 9.6 Intellectual foundations in accounting 319 9.7 Conclusions 322

Notes 322

References 326

Accounting: a multiple paradigm science 329 10.1 Introduction 330 10.2 The concept of a paradigm 331 10.3 The anthropological/inductive paradigm 337 10.4 The true-income/deductive paradigm 339 10.5 The decision-usefulness/decision-model paradigm 341 10.6 The decision-usefulness/decision-maker/aggregate-market-behavior 343

paradigm 10.7 The decision-usefulness/decision-maker/individual-user paradigm 345 10.8 The information/economics paradigm 346 10.9 The science of accounting 348 10.10 Deconstruction 350 10.11 Academic accountants: a flawed universal class 351 10.12 Conclusions 352

Notes 354

References 360

The events and behavioral approaches 363 11.1 The events approach 364 11.2 The behavioral approach 367 11.3 The human information processing approach 372 11.4 Evaluation of the behavioral approach 383 11.5 Conclusions 383

Notes 384

References 390

VIII

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12 The predictive approach 397 12.1 The nature of the predictive approach 398 12.2 Prediction of an economic event 398 12.3 Prediction of market reaction: market-based research in accounting 408 12.4 Conclusions 433

Notes 433

References 439

13 The positive approach, income smoothing and earnings management 13.1 The positive approach 13.2 Income smoothing hypothesis 13.3 Earnings management 13.4 The paradigmatic status of accounting 13.5 Conclusions

Notes

References

441

441 449 456 463 465

465

472

14 Current-value accounting 14.1 The relevance of the income concept 14.2 The traditional accounting concept of income 14.3 The nature of the economic concept of income 14.4 Concepts of capital maintenance 14.5 Concepts of current value

14.6 Conclusions

Notes

References

477 478 480 482 483 484 505

505

508

15 General price-level accounting 15.1 15.2 15.3 15.4 15.5 15.6 15.7 Notes

References

General price-level restatement of historical-cost financial statements Adjusting specific items for general price-level changes The monetary-nonmonetary distinction Price-level indices A simplified illustration of general price-level indexing Evaluation of general price-level accounting Conclusions

511 512 513 517 520 522 524 529

529

530

16 Alternative asset-valuation and income-determination models 533 16.1 The nature of the differences 534 16.2 Basis for comparison and evaluation 535 16.3 Illustration of the different accounting models 537 16.4 Toward a solution to the problem of financial reporting and 547

changing prices 16.5 Conclusions 552

Notes 553

References 553

Index 555