Lecture 01ACCT 332 Accounting Thought and PracticeACCT 332 Accounting Thought and Practice

Introduction and Overview

- Course syllabusy- Overview of Chapter 1

Course Objective

This course builds on the knowledge you obtained in your introductory and intermediate accounting coursesintroductory and intermediate accounting courses.

Course pre-requisites: ACCT 201/222 Corporate Reporting and Financial Analysis or ACCT 224 Financial Reporting and Analysisy p g y

The objective of ACCT 332 is to help you understand the theoretical foundations of corporate financial reporting.

After completing this course, you will have acquired an understanding of both the how of accounting procedures and the underlying reasons why these practices are adopted.

Hopefully, this course will also help you to develop skills to think independently and critically about various accounting standard-setting issuesissues.

Course Organization (1)

Instructor:Professor Holly YangProfessor Holly YangAddress: 4021 School of AccountancyPhone: 6808-5447e-mail: hollyyang@smu.edu.sgCourse Website: http://elearn.smu.edu.sgOffice Hours:Wednesday, 23 p.m. or by appointment.

Course Organization (2)

Course Materials:- Textbook: Financial Accounting Theory by W R Scott Prentice HallTextbook: Financial Accounting Theory by W.R. Scott, Prentice Hall,

2015 (7th Edition) Available at SMU Booklink Where can I find solutions to the end of chapter problems? Where can I find solutions to the end-of-chapter problems?

- Journal articles, FASB/IASB opinions, and other supplementary i l ( il bl h b i )articles (available on the course website)

Course Organization (3)

Grading:Classroom Professionalism 5%Classroom Contributions (individual and group) 10%Midterm Exam 15%Term Paper 10%Term Paper 10%Term Paper Presentation 10%Final Exam 50%

100%100%9What is classroom professionalism?

99How do I contribute to the learning environment?

9Midterm is on Feb 14th 1:00-3:30pm (Sat) in Ngee Ann Kongsi Auditorium9Midterm is on Feb. 14 1:00-3:30pm (Sat) in Ngee Ann Kongsi Auditorium. Unauthorized absences result in grade of zero.

9Final exam is on April 20th 1 4pm (Mon) (Cumulative)9Final exam is on April 20th 1-4pm (Mon). (Cumulative)

Course Organization (3)

Class sessions will typically consist of two parts: lecture and group exerciseslecture and group exercises.

Groups:- Form your group and sit with them for the remaining- Form your group and sit with them for the remaining

term. (Max 6 people)

- Submit the names of each person in your groupSubmit the names of each person in your group. Tell me a little about yourself. (Why accounting?

Where do you see yourself after graduation?) y y g )

- Each week, one group will be assigned to lead the group discussions as we go over the exercise problems together during the second half of class.

Course Organization (4)

Term Paper and Presentations S id li f t b it See guidelines for term paper on course website. Important dates:

- Week 1: Groups are formed- Week 3: Term paper topics assigned- Weeks 3 to 9: Group meeting with professor- Week 9: Submit hard copies of paper outlines- Week 13: Final paper and in-class presentation due

How do I succeed in this course?

Before classR d th i d di- Read the required readings

After class- Review lecture material- Review group exercise problems- Take advantage of office hours- Understand and digest, do not memorize.

Academic Integrity

All acts of academic dishonesty (including, but not limited to plagiarism cheating fabrication facilitationlimited to, plagiarism, cheating, fabrication, facilitation of acts of academic dishonesty by others, unauthorized possession of exam questions, or tampering with the

d i k f th t d t ) i ffacademic work of other students) are serious offences. All work (whether oral or written) submitted for purposes of assessment must be the students own p pwork. Penalties for violation of the policy range from zero marks for the component assessment to expulsion depending on the nature of theexpulsion, depending on the nature of the offense. When in doubt, students should consult the instructors of the course. Details on the SMU Code of Academic Integrity may be accessed at http://www.smuscd.org/resources.html.

Overview of the Scott Book

Ideal Conditions

What are the ideal conditionsP f t d l t k t- Perfect and complete markets

- No information asymmetry- Accounting reports in this setting are both relevant

and reliable.

Thi i th fi t b t tti This is the first-best setting - as we will see, a setting where there is little role for

accounting standardsaccounting standards.

Amos LimPerfect: No one has information advantage, no trading frictions. Information obtained w/o cost.Complete:

Amos LimAdverse selection & Effort (moral hazard)

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Information Asymmetry

R l id l ti i f ti l t t Relax ideal assumptions information relevant to evaluate the firm is not costlessly available.

Two potential issues:- Adverse Selection: users do not have the information

necessary to separate good from bad investments.

- Moral Hazard: unobservability of an agents effort.

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Adverse Selection - Intuitions

Jeremy Scott Adidas Panda Shoes where to buy them?? Assuming that I have no way of distinguishing authentic items ($400) from

counterfeits ($50), what is likely to happen in an online auction?

I will bid no more than $225 (0.5*400+0.5*50) for a pair of these shoes.

O f f Only sellers of counterfeits will list their items since the authentic sellers will incur a loss.

This is the consequence of the adverse selection issue (aka lemons q (problem by economics Akerlof 1970)

What can be done to circumvent this problem? Voluntarily provide more information!! (e.g. pictures, ratings,

descriptions guarantees etc )descriptions, guarantees, etc.)

Amos LimDisagree (logic)

Moral Hazard - Intuitions

Un-observability of actions Consequences of moral hazard problems

- How hard would the seller attempt to satisfy the buyers t if th k th ill t S$290 dl ? (requests if they know they will get S$290 regardless? (e.g.

no exchanges or refunds)

- Moral hazard can lead to the problem that a party insulatedMoral hazard can lead to the problem that a party insulated from risk may behave differently from the way it would behave if it were fully exposed to the risk.

What are some other examples of moral hazard?

Amos Lim$225

Role of Information in a Market Economy

To improve operation of capital marketsAd l ti bl- Adverse selection problem

To improve operation of managerial labour markets- Moral hazard problem

Both roles are crucial- Turmoil of last few years shows the importance of both

Reckless lending, extravagant compensation (moral hazard issues)

Investors and lenders stay away from markets so stock markets drop and credit tightens (adverse selection)

Has resulted in more regulation which tries to address both moral hazard and adverse selection issuesmoral hazard and adverse selection issues

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Amos Limi.e. Non-ideal

Role of Financial Reporting in a Market Economyy

Control adverse selection- Convert inside information into outside information- Provide more useful information to investors- Assumes a rational market in which accounting reports are

useful in assessing the amounts, timing, and uncertainty of future cash flows (decision usefulness).

- Two prominent theories in this area: Information Perspective Measurement Perspective

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Best Annual Report

Objectives of the Award To encourage excellent financial reporting presentation and a

wider scope of disclosures beyond the minimum regulatorywider scope of disclosures beyond the minimum regulatory requirements that are in tandem with the needs of investors and other stakeholders such as employees, creditors and the general public; p ;

The Best Annual Report Award was introduced to increase awareness, through the encouragement of social responsibility reporting that businesses and organisations are responsible to thereporting that businesses and organisations are responsible to the community both as employers and corporate citizens;

The Best Annual Report Award also gives recognition to maiden annual reports of First-Year Listed companies that show anannual reports of First Year Listed companies that show an excellent standard of disclosure. The Committee hopes that this will encourage First-Year Listed companies to raise the standard of their annual report disclosures;

Role of Financial Reporting in a Market Economy (contd)y ( )

Control moral hazard- Control manager shirking and improve corporate

governance

Accounting reports can be used in contracts. In contrast to the adverse selection setting, accounting

choices and policies can matter because they can affect the payoffs in these contracts.

E i C Economic Consequences - As we will learn later, this is a role not considered by the

conceptual frameworkconceptual framework.

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The Role of Accounting Standards

The demand for regulationM k t f il- Market failures

The challenge- It does not take too much reflection to conclude that

the conflicting objectives of accounting reports used in the adverse selection setting versus the moralin the adverse selection setting versus the moral hazard setting creates difficult challenges for accounting policy-makers.

e.g., the most reliable numbers are better for contracting, but they do not provide relevant information needed to address the adverse selection problem.

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