Pertemuan 1 – Introduction to Accounting Theory (Chapter 1)

 PSAK 19, 57, 71, dan 73

 Accounting theory: learns about the theory of behavior of an individual or company (who)
that regard to financial reporting and the impact to financial reporting. It’s all about why
and how. Not about “what”.
 Why dont we learn the accounting theory at the first semester? Because we need to
understand the rules and standards first, then observe the behavior.
 To learn about the behavior of a manager/company/institution/organization, there are 2
types of behaviour:
1. Opportunistic perspective behavior
 “Managers are unethical.”
 Managers tend to report an increase profit when they are close to retirement
2. Efficiency perspective behavior
 Opportunistic but they do not behave on behalf of their own pockets but the
company as a whole
 If do not have a steady profit/growth: the market share will volatile and difficult
to ask for a loan
We can’t learn about behavior without knowing the practices first
 Theory (Hendriksen’s definition) is a coherent of set hypothetical (usulan yang diuji),
conceptual, pragmatic principles forming the general framework of reference for a field of
inquiry (need to be observed; can be evaluated and proposed guidance).
 Theory is an abstraction (summary) of reality.
 A theory is accepted depends on how:
- Well it explains and predicts reality
 A theory is something that can be explain and predicted, explanation comes first
then predictions.
- Well it is constructed both theoretically and empirically
 It has to be tested through hypothetical analysis
- Acceptable its implications are
 Accounting theory (Chambers’ definition) is to be a response to practical needs rather than
by deliberate and systematic thinking. (Bukan ngedebet amort expense and ngekredit acc
amort but comparing the lower value the carrying amount and NRV, if the NRV is lower,
then it needs to be impaired)
 Types of Accounting Theory:
1. 1st Theory: Positive Accounting Theory
 PAT is about observation the behavior.
1. 10th Theory: Bonus Plan Hypothesis
 Behavior of managers are opportunistic, they tend to adopt accounting
methods that will lift up/increase reported earnings, so they can get higher
bonus by using assumptions.  menghindari expense
2. 11th Theory: Debt-equity hypothesis
The higher debt ratio, more reliance to the creditor.
If the debt leverage is high, manager tend to increase the earning so the total
asset will increase, and debt ratio (D/TA) becomes lower.
Goals: To get new partner, dont want to be seen as a risky business
3. 12th Theory: Political cost
Goals: Decrease the equity
Manager tend to decrease profit, when in the middle of security
(pengawasan) because of political pressure (biar dikasihani)
Condition when company under political pressure:
a. Large-sized of asset
b. Unusual/large profit
c. Mining company  perusak lingkungan
d. Huge number of labor force  semua mata akan tertuju pada
perusahaan
e. Strong union
 Predict the reactions of “players” such as shareholders, to the actions of
managers and to reported accounting information
 Major deficiencies are:
 PAT is based on assumptions.
The main assumption is the managers are unethical (opportunist) because
they would like to maximize their wealth. “Wealth maximization” has
become the answer to explain all accounting practices and reported
information.
 Relies excessively on agency theory and dubious assumptions about the
efficiency of capital markets. (There might be hidden information if the
market is inefficient; kasus Lapindo. Yang punya saham lapindo saat itu
adalah 40% PT Medco, 40% PT Lampindo, dan 18% PT Santos. Saham PT
Santos yg HQ nya di Adelaide, harganya turun saat mereka mengumumkan
soal kasus ini. Tapi the 2 remaining owners, nilainya masih baik2 aja)

4. 2nd Theory: Normative Accounting Theory

 Focused on the ideal things.
 Two groups dominated: conceptual framework proponents and critics of
historical cost
 Historical cost is reliable but irrelevant for decision making
 Major deficiencies are:
 Do not necessarily involve empirical hypthesis testing
  No observation and based on value judgement.

No Positive Accounting Theory Normative Accounting Theory

“what is happening?” “ought to/should be done”
1. Observation/empirical testing No observation/scholar’s opinions
2. Explain/describe Prescribed/suggest (mengusulkan), advice
3. Predict/forecast (meramalkan) Personal opinions
4. More objective More subjective
Descriptive, explanatory/predictive (-) does not based on observations, dont
(-) does not prescribed, don’t free free from value judgement (bias)
from value judgement
*kenapa butuh dua2nya karena masing2 punya kelemahan. Walaupun udah sesuai
observasi, tapi ga memberikan solusi. Makanya butuh teori kedua
*PSAK kombinasi dari kedua teori. Some of them are PAT and all of them are NAT
 Conceptual framework is a guideline for the standard centers.
 Why do standard centers need a guideline? Because standard centers have poilitcal
pressure, so the framework is needed to protecting the interest of the standard centers.

Pertemuan 1 – Accounting Theory Construction (Chapter 2)

3rd Theory: Pragmatic Theory

 Pragmatic theory  teori berdasarkan kenyataan yang ada; pendekatan yang memudahkan
dan based on description
 Descriptive pragmatic approach:
*A simple way to describe what is going on.
- Based on observed behavior of accountants
- Theory developed from how accountants act in certain situations
- Tested by observing whether the accountants do act in the way the theory suggests
- Is an inductive approach  observe a company (small sample) and then, take a big
picture (generalised conclusion). (Kalo deductive kebalikan inductive)
*Disadvantages of descriptive pragmatic approach:
- Doesn’t consider the quality of an accountant’s action
- Doesn’t provide for accounting practices to be challenged
- Focuses on accountant’s behavior not on measuring the attributes of the firm
 Psychological pragmatic approach:
*Not only describe, but need to give further explaination. “What is the effect? What is the
next step?”
- Theory depends on observations of the reactions of users to the accountant’s output
- A reaction is taken as evidence that the outputs are useful and contain relevant
information
 - The next step of descriptive pragmatic approach
*Disadvantages of psychological pragmatic approach:
- Some users (such as: the readers of financial report) may react in an illogical manner
(Tidak masuk akal  ex: Udah tau kondisi perusahaan turun, sahamnya masih aja
dibeli)
- Some users might have a preconditioned response (Menjadi penyebab dari illogical
manner)
- Some users may not react when they should
 Therefore, pragmatic theories need to be tested using large samples and in longer periods.

4th Theory: Syntactic and Semantic Theories

 Semantic inputs are the transactions and exchanges recorded in vouchers, journals, &
ledgers.
 The inputs are then manipulated on the basis of the premises and assumptions of historical
cost accounting.
 The accounting cycle was disrupted by the concept of historical cost.
 You record (syntactic  clerical work) and make conclusion (semantic  explain what’s
going on)
 Criticized because there is no independent empirical verification of the calculated outputs.
 The outputs may be criticized for poor syntax inaccurate (contoh: different types of
monetary measure are added together)
 The outputs may be syntactically accurate but nevertheless be valueless due to lack of
semantic accuracy.  Garbage in, Garbage out
 Historical cost may produce “accurate” outputs but which nevertheless have little or no
utility. Because historical cost is reliable but irrelevant for decision making process, that’s
why it has to be adjusted.

Normative Theory
 About what ought to be done, what should we do
 NT basically cover 2 different things:
1. True income theory
- A single measure for assets  it has to be true, accurate, precisely correct
- A unique and correct profit figure  don’t mark around
2. Enhancing the decision-usefulness
- Basic objective of accounting is to aid the decision making process of certain
users of accounting reports by providing useful accounting data.
- Enhancing the true decision usefulness for others to make decision
 Decision process:
Accounting system of company x  prediction model of user  decision model of user

Positive Theory
 Expanded during the 1970s, when researchers in FAMA found that in USA, a huge data is
available in capital market.
 The data needs to be developed:  PAT
1. Based on ‘experiences’ or ‘facts’ of the real world
2. Explain the reasons for current practices
3. Predict the role of accounting information in decision making

Scientific Approach
 Proven, but:
- It has an inherent assumption that the world to be researched is an objective reality
- Is carried out by incremental hypotheses
- Has an implied assumption (which has to precise, perfect) that a good theory holds
under circumstances that are constant across firms, industries, and time <- further
explanation of the abstraction of reality
 Criticism:
- Large-scale statistical research tends to lump everything together
- It is conducted in environments that are often remote from the world of or the
concerns of accountants
 Misconceptions of purpose:
- Make scientists out of accounting practitioners
- Researchers = practitioners
- The desire for ‘absolute truth’

Naturalistic Approach
 Implies that there are no preconceived (pertimbangan sebelumnya) assumptions or theories
 Focuses on firm-specific real world problems (about one company  contoh: share prices
for cocacola are affected by announcements made by cocacola)
Firm specific: Increase in ANZ  increase in all commonwealth bank; karena bank itu highly
regulated sehingga satu industry bisa kepengaruh vs Marketwide movements: donald trump
collapse, interest rate, forex rate, trade war.