The Change From Normative Accounting Theory to Positive Accounting Theory - Essay Example

Compare and contrast the change from normative accounting theory to positive accounting theory with the change from the geocentric model to the heliocentric model of the solar system. Basic Definitions – Normative and Positive Accounting Theories A normative accounting theory “seeks to prescribe some basis of accounting measurement, particular accounting procedures and the contents of financial reports” (Ijiri, 1975; Watts and Zimmerman, 1986; as quoted by Kabir, 2005). On the other hand, positive accounting theory aims to “explain why accounting is what it is, why accountants do what they do, and what effects these phenomena have on people and resource utilization” (Jensen, 1976; 13, as quoted by Melis, 2005). Basic Definitions – Normative and Positive Accounting Theories The geocentric model of the solar system was developed as an explanation for the then belief that all the celestial bodies revolved around the Earth. On the other hand, according to the heliocentric model of the solar system (the current model being used) the Earth rotates around the sun, the Earth is the third planet from the sun and it is actually the moon that goes around the Earth. Comparison and Contrasting of the Change between the Two Accounting Theories And the Two Models of the Solar System The following compare and contrast the change from normative to positive theory of accounting and from geocentric to heliocentric model of the solar system: 1. First of all, prior to the surfacing of the positive accounting theory, normative theory was the predominant accounting theory. Likewise, prior to the advent of the heliocentric model, the predominant model then was the geocentric model. Both normative theory and the geocentric model have survived for many years before the introduction of the positive theory and the heliocentric model, respectively. 2. Both normative theory and the geocentric model were more concerned with what was the ideal, rather than what was actual. They were both results of observations made throughout the years, rather than from results of scientific studies. The inability to apply scientific studies to prove both of them resulted to the advent of the positive theory and the heliocentric model, as the people want to have more concrete scientific proof. 3. Both normative theory and the geocentric model were widely accepted during their time. However, in the geocentric model’s case, this model was being backed up even by non-scientific people (i.e., the Catholic Church), making it more difficult to go against such a model. In the normative theory’s case, the accounting world embraced it; however, the accountants were more open to other theories, making it easier to shift from normative theory to positive theory. 4. The normative theory was criticized due to it being unscientific or, even if it is scientific, it did not lend itself to falsification. This realization was what made the accounting experts call for the replacement of the normative theory to the positive theory. On the other hand, the change from geocentric model to heliocentric model did not come out from the fact that the scientists during that time realized that the geocentric model cannot be falsified. Rather, it came out from the fact that that these scientists uncovered new (scientific) evidence that the geocentric model is not accurate. 5. The change from geocentric to heliocentric model was brought about by results of new scientific research, which until today are still the basis for the study of the solar system and the universe. This means that there is hardly any objection now to the facts put forward by the heliocentric model. On the other hand, the change from normative to positive is still, up to now, very much the subject of debate, which means that the positive theory is still not as completely accepted as the heliocentric model. 6. What we have now is the heliocentric model, completely replacing the geocentric model. However, in accounting, both theories are still very much alive. In fact, some even contend that positive theory is just another form of normative theory. It may take quite some time (may in fact be never) before positive theory completely replaces the normative theory. Will the International Accounting Standards Board (IASB), within the next ten years, release an International Financial Reporting Standard or IFRS requiring extensive disclosure of a corporation’s environmental and social impacts? Yes, ten years from now, we might very well see the IASB issuing an IFRS that requires the extensive disclosure of the impacts a company has on the environment and society. The following is a discussion on why this is believed to be the case. Current Situation Currently, there is no IFRS that specifically requires the disclosure of a company’s environmental and social impact. This is due to the fact that: 1. The benefits or the costs to the environment and the society are not readily quantifiable. 2. The impacts pertain more to external parties that the company did not actually transact with; hence, these are not recorded or disclosed by the company. 3. More often times than not, the costs are hidden in the sense that they are not as easily perceived as opposed to the usual expenses a company incurs in its normal operations. Hence, they remain off-books and, consequently, off the financial statement disclosures. 4. Disclosures are still governed by the materiality rule; hence, if the quantified amounts are not deemed ‘material’ to the company’s balances, these are not separately disclosed. How the Impacts Are Currently Recorded Despite the above, the following are the instances when these social and environmental impacts are recorded in the company’s accounting books and are accordingly disclosed: 1. If a company is required to make provisions for cleaning up a certain place or location after it ceases operations in that place (as mandated by its contractual obligation or by law), IAS 37 requires that the company’s liability for such a clean-up be recognized in the accounting books of the company and accordingly disclosed. 2. If the company is sued due to certain actions that negatively affects the environment or the society, under IAS 37, the company is also required to disclose the case and/or the related obligation for the case. 3. If the company is levied substantial fines and penalties for its negative effects on the environment and the society, the company is also required to record and to disclose such fines and penalties. 4. Tax benefits or tax exemptions enjoyed by the company for its positive environmental impact are also reflected in the company’s financial statements. Basis for the Answer The following are the basis for the answer to the question: 1. There is a growing awareness on the businesses’ increasing role and impact on the environment and society. This growing awareness has already resulted to government requirements for additional reports from public companies – called corporate sustainability reporting or CSR. In addition, companies (even private ones) are realizing the need to present themselves as responsible corporate citizens to the public and are thus voluntarily adopting the disclosure requirements. 2. Investors are increasingly demanding companies to disclose more and more their activities and the results of such activities related to corporate responsibility, which gives more pressure to the companies to disclose the needed information. 3. The IASB and the IASC Foundation are collaborating with the Global Reporting Initiative (among others) to come up with taxonomies that properly classify financial data and other information of various companies and to produce a better means of efficiently communicating such financial data and other information to other businesses and entities around the world. 4. With IASB’s support of such a move in number 3, IASB will be able to better analyze the impact of the contents of the CSR reports on the companies’ financial statements, balances and disclosures. This analysis can be used by IASB to come up with future requirements on the disclosures of the activities found in the CSR. Such requirements will come in the form of new IFRS or interpretations. With the current speed of the production of such taxonomies, there is the possibility that IASB will be in a better position to come up with the new IFRS or interpretations on CRS disclosures in the very near future. Works Cited 1. Cessna, Abby. “Geocentric Model.” http://www.universetoday.com/guide-to-space/the-solar-system/geocentric-model/ (accessed November 6, 2009). 2. Cessna, Abby. “Heliocentric Model.” http://www.universetoday.com/guide-to-space/the-solar-system/heliocentric-model/ (accessed November 6, 2009). 3. Financial Reporting Taxonomies. XBRL.org. http://www.xbrl.org/FRTaxonomies/ (accessed November 5, 2009). 4. International Accounting Standards Board. “XBRL”. http://www.iasb.org/XBRL/XBRL.htm (accessed November 4, 2009). 5. Kabir, Md. Humayun (2005). “Normative Accounting Theories.” http://papers.ssrn.com/sol3/papers.cfm?abstract_id=765984 (accessed November 5, 2009). 6. Melis, Andrea (2005). “Financial Statements and Positive Accounting Theory. The Early Contribution of Aldo Amaduzzi.” http://papers.ssrn.com/sol3/papers.cfm? abstract_id=695041 (accessed November 6, 2009). 7. The Future of Financial Reporting: A Market Perspective. An Oracle White Paper (July 2008). http://www.oracle.com/appserver/business-intelligence/hyperion-financial-performance-management/docs/hyperion-wp-futurefinance.pdf (accessed November 4, 2009). Read More