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3101AFE Accounting Theory and Paractice

Question

Answered

PART A: GENERAL QUESTIONS

QUESTION 1:

If a reporting entity has a choice of either expensing or capitalising an item of expenditure, and if the entity is subject to a high degree of political scrutiny, then what choice would be predicted by the political cost hypothesis of Positive Accounting Theory? Explain your answer.

QUESTION 2:

If senior managers within a company were rewarded by way of accounting-based bonus plans then would they, or the owners/shareholders (or both), prefer the use of conservative accounting methods? Explain the reasoning for your answer.

QUESTION 3:

Read Accounting Headline 7.7 and answer the following questions:

  1. Do you think that parties such as investors and analysts can properly determine the risk of investing in an organisation if they do not have information about the various debt covenants a company has agreed to?
  2. Can ‘price protection’ properly function if potential investors are unaware of the existing debt covenants in a company’s lending agreements?
  3. While debt covenants reduce the risk of the debtholders that negotiated the covenants, would they increase the risk borne by other creditors?
  4. While the article suggests that companies do not disclose, would the theory provided within this chapter suggest that companies should publicly disclose information about existing debt covenants? Clearly explain your answer.

QUESTION 4:

Applying Positive Accounting Theory, and after reading Accounting Headline 7.10, which relates to an article published in the United Kingdom, answer the following questions:

  1. From an efficiency perspective, why could the introduction of new rules on share option accounting be costly for an organisation?
  2. Why could the introduction of the new rules on share option accounting be costly for a manager?
  3. What would motivate the regulators to develop the new rules?

PART B: ANALYSIS QUESTIONS

QUESTION 5:

Within annual reports, companies frequently disclose information about how their managers are rewarded in terms of the components of their management compensation plans. For example, within IAS 24 (and AASB 124 within Australia) there is a requirement that information about the components of rewards paid to key management personnel be disclosed within a company’s annual report.

Required

PART A: GENERAL QUESTIONS

QUESTION 1:

If a reporting entity has a choice of either expensing or capitalising an item of expenditure, and if the entity is subject to a high degree of political scrutiny, then what choice would be predicted by the political cost hypothesis of Positive Accounting Theory? Explain your answer.

QUESTION 2:

If senior managers within a company were rewarded by way of accounting-based bonus plans then would they, or the owners/shareholders (or both), prefer the use of conservative accounting methods? Explain the reasoning for your answer.

 QUESTION 3:

Read Accounting Headline 7.7 and answer the following questions:

  1. Do you think that parties such as investors and analysts can properly determine the risk of investing in an organisation if they do not have information about the various debt covenants a company has agreed to?
  2. Can ‘price protection’ properly function if potential investors are unaware of the existing debt covenants in a company’s lending agreements?
  3. While debt covenants reduce the risk of the debtholders that negotiated the covenants, would they increase the risk borne by other creditors?
  4. While the article suggests that companies do not disclose, would the theory provided within this chapter suggest that companies should publicly disclose information about existing debt covenants? Clearly explain your answer.

 

QUESTION 4:

Applying Positive Accounting Theory, and after reading Accounting Headline 7.10, which relates to an article published in the United Kingdom, answer the following questions:

  1. From an efficiency perspective, why could the introduction of new rules on share option accounting be costly for an organisation?
  2. Why could the introduction of the new rules on share option accounting be costly for a manager?
  3. What would motivate the regulators to develop the new rules?

PART B: ANALYSIS QUESTIONS

QUESTION 5:

Within annual reports, companies frequently disclose information about how their managers are rewarded in terms of the components of their management compensation plans. For example, within IAS 24 (and AASB 124 within Australia) there is a requirement that information about the components of rewards paid to key management personnel be disclosed within a company’s annual report.

Required:

  1. Select two large companies listed on the Australian Securities Exchange (ASX) and identify the components of their management remuneration plans indicated in their 2020 Annual report. For each company, indicate the ticker code, a brief summary of the components of management remuneration and include extracts of the relevant sections of the annual report as evidence of your summary (you may wish to use the snipping tool).
  2. You are then required to explain how the respective components would be expected to align the interests of the managers with those of the owners, and to minimise the contracting costs of the organisation. 

3101AFE Accounting Theory and Paractice

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