BKAR3053 FINANCIAL ACCOUNTING AND REPORTING V (K)
SEMESTER A231 SESSION 2023/2024
MINI CASE 2
PREPARED FOR:
DR. MUHAMMAD SYAHIR BIN ABD. WAHAB
PREPARED BY:
UMMI NAJATUL SUHADA BINTI SABRI
SUBMISSION DATE:
31 DECEMBER 2023
Which approach is suitable to explain the above statement in relation to the
development of accounting theory? Briefly explain the approach.
The approach that suitable to explain the above statement in relation to the development
of accounting theory is normative theory. The normative approach is concerned with
prescribing what accounting principles and practices ought to be, based on a set of normative
criteria or objectives. In this case, the emphasis is on determining basic principles that will
lead to a fair presentation of financial information in the form of accounting and financial
reporting. There are a few key features of the normative approach including:
a. Prescription of Principles
In the normative approach to accounting theory, the prescription of principles
involves establishing and recommending guidelines or rules that dictate how financial
accounting and reporting should be conducted. This approach is concerned with
developing a conceptual framework that outlines the principles and standards that
entities should follow to ensure the fair presentation of financial information.
Normative accounting theorists begin by identifying the fundamental objectives of
financial reporting. These objectives often include providing relevant, reliable,
comparable, and understandable information to users for decision-making. Once the
objectives are identified, the next step is to establish accounting principles that align
with these objectives. These principles serve as the foundation for accounting
standards and practices.
Furthermore, normative theorists aim for consistency and coherence in the
accounting principles. Consistency ensures that similar transactions are accounted for
in a similar manner over time, while coherence ensures that the principles collectively
form a logical and cohesive framework. Normative theorists often emphasize ethical
considerations in the prescription of principles. Principles should promote
transparency, honesty, and fairness in financial reporting to meet ethical standards and
build trust among stakeholders. While prescribing principles, normative theorists may
recognize the need for some degree of flexibility to accommodate changes in business
practices and economic environments. The principles should be adaptable to evolving
circumstances.
In summary, the prescription of principles in the normative approach involves
systematically identifying objectives, establishing fundamental principles, creating a
conceptual framework, and considering ethical and stakeholder-related factors. The
goal is to guide the development of accounting standards that result in the fair
presentation of financial information.
b. Ethical Considerations
Ethical considerations play a significant role in the normative approach to
accounting theory. The normative approach is concerned with prescribing what
accounting principles and practices should be based on a set of normative criteria or
objectives. Ethical considerations are woven into the fabric of the normative
approach, influencing the formulation of principles and standards. Ethical accounting
practices, as prescribed by the normative approach, emphasize transparency and full
disclosure. Financial statements should provide a true and fair view of the financial
position and performance of an entity, ensuring that all material information is
disclosed to stakeholders. Normative theorists emphasize the importance of fair
presentation in financial reporting. This includes the fair and unbiased representation
of financial information, without intentional manipulation or distortion. Ethical
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considerations guide the formulation of principles that promote honesty and accuracy
in reporting.
Other than that, ethical norms in accounting call for impartiality and neutrality
in decision-making. Normative principles should be designed to minimize bias and
ensure that accounting practices are not unduly influenced by the interests of specific
stakeholders. Maintaining integrity and objectivity also one of the ethical behaviours
in accounting. Normative principles are expected to guide accountants in their duty to
provide reliable and unbiased information. This includes avoiding conflicts of interest
and refraining from actions that compromise professional integrity. Last but not least,
ethical considerations within the normative approach emphasize the accountability
and responsibility of entities and their management. Accounting principles are
designed to promote accountability by establishing clear guidelines for reporting
financial performance and ensuring that responsible parties are identified.
In summary, ethical considerations within the normative approach to accounting
theory are integral to the formulation of principles that guide fair, transparent, and
accountable financial reporting. These considerations help establish a framework that
promotes trust, integrity, and the ethical conduct of accounting professionals in
serving the interests of stakeholders.
c. Ideal Standards
In the normative approach to accounting theory, ideal standards refer to the
conceptual framework and principles that are deemed optimal for guiding financial
reporting and accounting practices. These ideal standards are designed to provide a
theoretical foundation for the development of accounting principles, ensuring that
financial information is presented in a manner that aligns with normative criteria or
objectives. Ideal standards in normative approach must be relevance and reliability.
Ideal standards in the normative approach emphasize the importance of both
relevance and reliability in financial reporting. Financial information should be
relevant to the decision-making needs of users, and it should be reliable, accurate, and
free from bias or material error. Ethical principles, such as honesty, integrity, and
accountability, are integrated into the ideal standards. The normative approach aims to
establish standards that reflect ethical conduct in financial reporting, promoting trust
and transparency.
Furthermore, ideal standards in normative approach also must be in comparability
and consistency. Normative ideal standards advocate for the comparability of
financial information across different entities and periods. Consistency in the
application of accounting principles is also emphasized to ensure that similar
transactions are treated in a uniform manner over time. The concept of fair
presentation is a fundamental ideal standard. Financial statements should fairly
represent the financial position, performance, and cash flows of an entity. This
involves the unbiased presentation of information without intentional distortion or
manipulation. The normative approach typically includes the going concern
assumption as an ideal standard. Financial statements are prepared under the
assumption that the entity will continue to operate in the foreseeable future, providing
a basis for reporting assets and liabilities at their historical cost.
In summary, ideal standards in the normative approach set the benchmark for the
formulation of accounting principles that are theoretically sound, ethically grounded,
and aligned with the objectives of providing relevant and reliable financial
information to users. These standards contribute to the development of a robust and
coherent framework for financial reporting.
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d. Conceptual Framework
In the normative approach to accounting theory, the conceptual framework serves as
a fundamental and theoretical structure that guides the formulation of accounting
principles and standards. The conceptual framework provides a set of interrelated
concepts and objectives, helping to ensure consistency, coherence, and logical reasoning
in the development of accounting rules. The conceptual framework outlines the primary
objective of financial reporting. In the normative approach, this objective typically
involves providing information that is relevant, reliable, comparable, and understandable
to users for decision-making. Conceptual framework should be in qualitative
characteristics of financial information. The framework defines qualitative characteristics
that financial information should possess. These characteristics often include relevance,
reliability, comparability, and consistency. The conceptual framework sets the ideal
standards for the quality of financial reporting.
Furthermore, it should be usefulness to different users. The conceptual framework
acknowledges the diverse needs of users and aims to ensure that financial information is
useful to various stakeholders, including investors, creditors, analysts, and regulators.
Next, the framework promotes consistency and coherence in the application of accounting
principles. It aims to provide a unified and logical basis for standard-setting, ensuring that
principles work together harmoniously. The conceptual framework also recognizes the
importance of professional judgment in applying accounting principles. It provides a
framework for exercising judgment within the bounds of conceptual guidance.
In summary, the conceptual framework in the normative approach establishes the
theoretical underpinnings for the development of accounting principles and standards. It
provides a structured and comprehensive basis for understanding the objectives of
financial reporting and the principles that guide the preparation of financial statements.
The goal is to create a coherent and consistent set of standards that align with the
normative criteria of relevance, reliability, and usefulness to stakeholders.
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Discuss THREE (3) accounting theory approaches that are relevant to explain the
reaction. Support your answers with suitable examples.
a. Positive Accounting Theory
Positive accounting theory focuses on explaining and predicting accounting
practices based on empirical observations. It assumes that individuals and entities are
motivated by self-interest and seeks to understand how accounting policies are chosen
to serve the interests of different stakeholders.
In the case of Marvello Berhad, positive accounting theory could be applied to
analyse the market reaction by considering how the company's reported financial
results and dividend policy align with the interests of shareholders. It seeks to
understand whether the company's actions are consistent with what might be expected
based on its economic incentives and the prevailing market conditions. In this context,
shareholders may interpret the decrease in net income slightly from RM839 million to
RM818 million as a potential signal of future challenges or a slowdown in the
company's performance. The positive accounting theory suggests that market
participants react to information in a way that aligns with their economic interests.
The increase in share price could be a result of investors reassessing the company's
performance and anticipating future positive developments, even in the face of a
slightly lower net income.
For example, investors might interpret the decrease in net income as a negative
signal, which could impact their expectations of future profitability. The increase in
share price could be influenced by the company's dividend payment, as a dividend is
often seen as a positive signal of financial health. Positive accounting theory helps in
examining how financial reporting choices, like dividend payments, align with the
interests of shareholders and affect market reactions.
b. Normative Accounting Theory
Normative theory focuses on prescribing what accounting principles and practices
should be based on a set of normative criteria or objectives. In this case, we can apply
normative theory to evaluate whether Marvello Berhad's financial results and the
subsequent market reaction align with the ideal standards of financial reporting. For
example, the increase in Marvello Berhad's share price might be attributed to the
market's perception of the company meeting normative criteria for financial reporting,
such as presenting relevant and reliable information. Investors may interpret the slight
decrease in net income alongside the dividend payment as acceptable within the
normative framework.
Other than that, according to the normative conceptual framework, financial
information should possess the qualities of relevance and reliability. Relevance
implies that the information has predictive or confirmatory value for users, while
reliability ensures that the information is faithfully represented, verifiable, and free
from material error. Investors might perceive Marvello Berhad's financial results as
relevant, especially if the net income decrease is in line with expectations or if there
are other positive indicators in the financial statements. The reliability of the
information is crucial for investor confidence. If the financial results are perceived as
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accurate and faithfully represented, investors may react positively by buying shares,
leading to the observed increase in share price.
Finally, the normative approach to dividend policy emphasizes the relevance of
dividends in financial decision-making. According to this approach, companies should
consider the impact of dividend decisions on shareholder value and make informed
choices based on a comprehensive evaluation of financial performance. Marvello
Berhad's announcement of a dividend payment and the CEO's statement about
evaluating the dividend policy annually align with the normative approach to dividend
policy. The company's consistent declaration of good dividends over the last three
years may be viewed positively by investors who consider dividends as a crucial
factor in their investment decisions. The positive historical dividend performance
could contribute to the market's favourable reaction.
c. Ethical Accounting Theory
Ethical accounting theory is a branch of accounting theory that explores the
ethical principles, values, and considerations that guide accounting practices and
financial reporting. This theory provides a framework for understanding how
accountants and financial professionals should approach their work, make decisions,
and fulfil their responsibilities to stakeholders. Several ethical accounting theories
contribute to shaping the ethical landscape within the accounting profession. The
scenario of Marvello Berhad's share price increase and the CEO's comments involves
elements that can be analysed through ethical accounting theory approaches. One of
the ethical accounting theory approaches that a relevant to capital market reaction is
fairness and transparency. Fairness and transparency emphasize the importance of
duty, fairness, and adherence to moral principle. In the context of financial reporting,
it would be stressing the duty of companies to provide fair and transparent financial
information to their stakeholders. For example, Marvello Berhad's CEO expressing
surprise at the share price increase and the commitment to research the phenomenon
aligns with the deontological emphasis on transparency. If the company discovers any
material information during their research, they have an ethical obligation to disclose
it to the market promptly, ensuring fair and equal access to information for all
investors.
Other than that, stakeholders’ theory also one of the ethical accounting theories
that related to the capital market reaction. Stakeholder theory considers the interests
and well-being of all stakeholders, not just shareholders. Ethical decisions should take
into account the impact on various groups affected by a company's actions, including
employees, customers, and the wider community. For example, Marvello Berhad's
dividend policy is an example of considering stakeholders. By paying consistent
dividends over the last three years, the company acknowledges its commitment to
providing returns to shareholders. However, the CEO's statement about evaluating the
dividend on an annual basis reflects a responsible approach, considering the
company's financial health and the interests of other stakeholders. This aligns with the
ethical principle of balancing the needs of different stakeholder groups.
