Accounting standard and theory Students must submit a critique of an academic article deemed to be seminal to their main area of research. Details about the format, structure and assessment criteria...

Accounting standard and theory
13
Accounting standard and
theory
Critics
XYZ
POSITIVE ACCOUNTING THEORY
Introduction :
This paper deals with the generally accepted theory of positive accounting i.e. PAT and provides
the usual grounds to criticize it and compare it with normative accounting theory. It helps in
understanding the relevance of accounting theories in the corporate world and to judge them as
per the requirement of the organization. The theory has made a significant contribution to the
financial reporting standards as it provides direction to financial reporters of an organization.
Before the emergence of Positive accounting theory normative accounting theory was the
dominant one. But both having separate importance and features have their own importance in
the industry. Therefore the paper here
ings out the basic features, concepts and assumption
involved in the theory and limitations of the same.
Summary of the article:
Positive accounting theory predicts and explains the phenomenon and is developed on the basis
of experiences.The basic view behind is that on the basis of observation one is in a better
position to predict future and can save the organization from future problems. Positive
accounting theory also focuses on relationship between various individuals who are involved in
providing resources in the organization. This can be a relationship between managers and owners
of the organization. It helps in providing a better view as to how decision making can be
delegated from one position to another which ultimately helps in reducing the possibility of loss
due to wrong decision and delegation.
The theory further explains as how the self interest of the employess can be achieved. Managers
are responsible for preparing financial statements and thus this theory helps them to present the
same with atmost accuracy and co
ectness.
Positive Accounting Theory typically adopts either efficiency perspective or opportunistic
prospective. From the view of Efficiency perspective it explains as to how various contracting
mechanism can be used to reduce the agency cost. It is usually called ex ante perspective. It has
een further observed that in order to be consistent in financial results the firm sometimes adopts
a consistent accounting method which shows its best position. Many theorists assumes that the
management is capable enough in deciding appropriate methods in given circumstances and
don’t need any government interference to decide the same.
On the opportunistic perspective, the theory states that on being given with the necessary
contractual a
angements of the firm what opportunistic behavior will occur in the future. It is
efe
ed as ex post perspective. Once a contractual agreement has been entered the management
can decide a particular accounting method that increases profit and size of bonus. Keeping it in
mind they can often manipulates the methods for their particular purpose. The theory further
specifies that the practice of remuneration of managers on accounting numbers will tend them to
show vague accounting numbers in the financial statement which in true will increase their
personal wealth. Thus this practice of remuneration should not be adopted. It should also be kept
in mind that there is always a scope of opportunism.
Positive accounting theory also has a debt hypothesis which states that when a party lends funds
to some external party the receiver may try to eliminate or even try to not to repay the funds. The
cost relating to this behavior of receiver is refe
ed as agency cost of the debt. Thus to safeguards
the lender the firm may have better contractual a
angements. The firm must contractually agree
that the debt to tangible asset will be maintained at certain level.
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