Solutions to additional practice questions
Deegan & Unerman – Financial Accounting Theory 2e

Chapter 1
Answer 1.1: A conceptual framework, such as the International Accounting Standards Board (IASB) Framework, provides some fundamental assumptions about the role of general purpose financial reporting and the attributes that financial information should possess for it to be useful in assisting the resource allocation decisions of financial statement readers. As indicated in this chapter, the United States’ Financial Accounting Standards Board (FASB) defined a conceptual framework as ‘a coherent system of interrelated objectives and fundamentals that can lead to consistent standards’.
Since conceptual frameworks provide perspectives about such issues as: the qualitative characteristics that financial information should posses; the identification of the types of entities that should produce general purpose financial reports; the way in which the elements of financial accounting should be defined and recognised, and so forth (note the emphasis on ‘should’), the conceptual frameworks—in providing prescription—are considered to be normative in nature. Positive research, on the other hand, might simply attempt to describe or predict the behaviour of those people in charge of producing general purpose financial reports, or the behaviour of financial report readers

Answer 1.2: Yes, we can reject a theory even though we believe that it is very logical. For example, if we were to adopt an assumption that capital markets are efficient and that individuals are motivated by self-interest tied to wealth maximisation (two very important assumptions made in a great deal of economics literature) that might lead us to make particular prescriptions about what information organisations should produce. However, if we reject these assumptions (perhaps we consider that markets are not efficient and that human behaviour is not based upon self-interest) then we might consider that the prescriptions provided by the theory are unsound – and potentially even damaging to particular groups within society – even though we might nevertheless believe that the theory is logically developed.

Answer 1.3: It can be argued that before we can seek to improve the practice of financial accounting we need to know what methods of accounting are currently being used. Research which describes what is currently being done as well as describing the generally accepted conventions is therefore useful to the overall process of improving financial accounting.
What might not be constructive, however, is where theories are developed through observing current practice and these observations/theories are then used to prescribe what all other people should do. Just because the majority of people are doing something does not necessarily mean that it is the best or most efficient thing to do. As the chapter emphasises, studying what is does not mean the same thing as studying what should be. As Gray, Owen and Maunders (1987, p. 66) indicate, an approach to developing theories on the basis of observing what is “concentrates on the status quo, is reactionary in attitude, and cannot provide a basis upon which current practice may be evaluated or from which future improvements may be deduced”.
As the chapter explains, research that provides prescription on the basis of what is already being done does not tend to be very controversial (for example, the work of Grady, 1965) and will not tend to generate opposition from the accounting profession. But again, assuming that what is being done is the best approach (perhaps on the basis that only the ‘fittest’ survive) such research is not really that logical.

Answer 1.4: Value judgements have a great deal to do with what theory a researcher might elect to use to explain or predict particular phenomena. To demonstrate this, we can consider the alternative theories accounting researchers might use to explain why companies elect to voluntarily produce information about their social and environmental performance. If I believed that corporate managers are motivated by self-interest then I would embrace an economics-based theory—such as Positive Accounting Theory—that has self-interest (tied to wealth maximisation) as one of the fundamental assumptions about what drives human behaviour. These people would have a predisposition towards believing that all human activity—including the disclosure of social and environmental information—is undertaken to the extent that the activity can somehow be related back to positively impacting the managers’ wealth.
By contrast, if I was a researcher who embraced a vision of sustainable development—which in itself typically requires people of current generations to sacrifice current consumption to the extent it is in the interests of future generations—then I would reject Positive Accounting Theory as self-interest and sustainable development are to a great extent, mutually exclusive. Such a researcher would embrace another theoretical perspective (perhaps such as legitimacy theory or stakeholder theory). It is interesting to note that almost no researchers in the area of social and environmental accounting embrace Positive Accounting Theory

Answer 1.5: Of importance is how the sample was selected. Generally speaking, to generalise the results of a particular sample to a larger population the sample must be representative of that larger population. This will generally require that the sample was of a reasonable size and that the selection process was of a random nature such that each item in a population has an equivalent chance of being selected. If a sample is not randomly selected then any efforts at generalising will generally be criticised.
When selecting a sample it is also important that the items in the ‘population’ have similar attributes (which in itself is the essence of a ‘population’). Some researchers from more of an ‘interpretive’ perspective question whether different organisations are actually that similar. They consider that because of differences in personalities, social and organisational structures and cultures, and so on, then large scale research (which relies on sampling) is inappropriate because it is not valid to generalise across organisations, that in essence, are very different. Researchers working within an ‘interpretive paradigm’ generally do small-scale, in-depth research.