AIT705 - Accounting Theory

Subject Title
Accounting Theory

Subject Description
Accounting Theory 1 examines the two primary objectives of external financial accounting and reporting: the provision of decision useful information to investors for investment purposes and to owners for stewardship purposes. In a world characterized by information asymmetry you will explore adverse selection and moral hazard, ideal and non-ideal conditions of certainty, qualities of financial information, decision theory, efficient market theorem, and portfolio diversification theory. Also covered are the information and measurement approaches to decision useful information, economic consequences and positive accounting theory, earnings management and the economic and political aspects of standard setting.

Credit Status
This subject is a required subject credit in the Accounting and Information Technology Program. To qualify for the exemption from the CGA Accounting Theory (AT1) subject, students must achieve at least a "C+" in the subject.

Learning Outcomes
Upon successful completion of this subject the student will be able to:

Accounting Under Ideal Conditions

1. Define the concept of ideal conditions and outline the necessary assumptions that underlie the definition.
2. Use the present value model, under conditions of certainty and uncertainty, to prepare an articulated set of financial statements for a simple firm.
3. Explain why relevance and reliability have to be traded off and how professional judgment must be exercised in providing useful information to statement readers.
4. Describe why measures of the true economic value and true economic income of a firm do not exist.

Decision Usefulness Approach to Financial Accounting

1. Define the concept of decision usefulness.
2. Perform calculations in accordance with the single person theory of decision making under uncertainty.
3. Describe financial statements as an information system and give a precise definition of information.
4. Define the basic concepts of portfolio theory and the optimal investment decision.
5. Calculate expected return and variance of a portfolio, and its covariance with other portfolios.
6. Relate decision theory to the conceptual frameworks of standard-setting bodies.

Efficient Securities Markets

1. Define an efficient securities market and explain its implications for financial accounting and reporting.
2. Explain the implications for securities pricing of the Sharpe-Lintner capital asset pricing model.
3. Describe the extent to which securities market prices act as a source of information to investors.
4. Explain the significance of information asymmetry and, in particular, the adverse selection problem, to financial accounting theory.
5. Analyze the information content of management discussion and analysis and of future-oriented financial information.

Information Perspective on Decision Usefulness

1. Explain the information perspective on financial reporting, which recognizes investor responsibility for investment decision making and the role of accountants in supplying useful information.
2. Explain why a securities market responds to information that investors find useful, in light of the efficient securities market and decision usefulness theories.
3. Define the concept of an earnings response coefficient, identify the factors that explain its magnitude and relate it to decision usefulness.

Measurement Perspective on Decision Usefulness

1. Explain why financial reporting is moving from an information perspective towards a measurement perspective on decision usefulness.
2. Explain Ohlson's clean surplus theory and its role in firm valuation.
3. Outline measurement-oriented accounting standards.

Economic Consequences

1. Explain the concept of economic consequences and apply it to various current accounting topics.
2. Explain the inconsistency between efficient securities market theory and the concept of economic consequences.
3. Describe the concept of positive accounting theory and its predictions about manager reaction to compensation contracts, debt covenants, and political pressures.

Analysis of Conflict

1. Explain the basic principles of game and agency theory and analyze the important implications for financial accounting.
2. Explain how agency theory serves to reconcile efficient securities market theory and economic consequences.

Conflict Between Contracting Parties

1. Describe how necessary contracts can align the interests of the manager with those of shareholders.
2. Comment on the theory and evidence pertaining to executive compensation.
3. Explain the political ramifications of executive compensation.
4. Explain the various motivations and patterns of earnings management and their impact on the market.
5. Evaluate the evidence of earnings management and its effect on share prices.
Standard Setting: Economic Issues
1. Explain the concept of information as a commodity that has value and that can be produced by firms at a cost.
2. Outline private incentives for information production.
3. Identify and explain sources of market failure in the private production of information.

Standard Setting: Political Issues

1. Compare the public interest theory and the interest group theory of regulation.
2. Compare and contrast standard-setting processes in Canada, the United States, and internationally.
3. Describe the ethical issues related to standard setting.
4. Assess the criteria for a successful standard.

Academic Integrity
Seneca upholds a learning community that values academic integrity, honesty, fairness, trust, respect, responsibility and courage. These values enhance Seneca's commitment to deliver high-quality education and teaching excellence, while supporting a positive learning environment. Ensure that you are aware of Seneca's Academic Integrity Policy which can be found at: http://www.senecapolytechnic.ca/about/policies/academic-integrity-policy.html Review section 2 of the policy for details regarding approaches to supporting integrity. Section 2.3 and Appendix B of the policy describe various sanctions that can be applied, if there is suspected academic misconduct (e.g., contract cheating, cheating, falsification, impersonation or plagiarism).

Please visit the Academic Integrity website http://open2.senecac.on.ca/sites/academic-integrity/for-students to understand and learn more about how to prepare and submit work so that it supports academic integrity, and to avoid academic misconduct.

Discrimination/Harassment
All students and employees have the right to study and work in an environment that is free from discrimination and/or harassment. Language or activities that defeat this objective violate the College Policy on Discrimination/Harassment and shall not be tolerated. Information and assistance are available from the Student Conduct Office at student.conduct@senecapolytechnic.ca.

Accommodation for Students with Disabilities
The College will provide reasonable accommodation to students with disabilities in order to promote academic success. If you require accommodation, contact the Counselling and Accessibility Services Office at ext. 22900 to initiate the process for documenting, assessing and implementing your individual accommodation needs.

Camera Use and Recordings - Synchronous (Live) Classes
Synchronous (live) classes may be delivered in person, in a Flexible Learning space, or online through a Seneca web conferencing platform such as MS Teams or Zoom. Flexible Learning spaces are equipped with cameras, microphones, monitors and speakers that capture and stream instructor and student interactions, providing an in-person experience for students choosing to study online.

Students joining a live class online may be required to have a working camera in order to participate, or for certain activities (e.g. group work, assessments), and high-speed broadband access (e.g. Cable, DSL) is highly recommended. In the event students encounter circumstances that impact their ability to join the platform with their camera on, they should reach out to the professor to discuss. Live classes may be recorded and made available to students to support access to course content and promote student learning and success.

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