Submitted By:-

Submitted To:-
Ankita Singla ,
Prof. Meena
Roll No.03
Sharma
M.com (Hons.)

UNIVERSITY BUSINESS SCHOOL

 REGULATORY
APPROACH
This is your IN
DEVELOPMENT
presentation OF
title
ACCOUNTING
THEORY
 Accounting Theory
Branch of accounting
Set of assumptions, framework and methodologies
Used in application of financial reporting principles
Underlies practices, explains and attempts to predict them
E.g. An accounting theory should explain why certain firms use LIFO
method of inventory rather than FIFO method
Terms
Regulation :- Rules
Regulatory body :- which makes rules
Issue paper :- document published before
finalizing Accounting Standard to invite public
Comments
 Meaning: Serving or intended to regulate accounting profession
 The regulation of accounting became an issue, after the economic crash of
the 1920-30s which, led to the search for accounting principles and theories
 It can be also known as embodiment of accounting standards or in other
words establishment of various regulatory bodies
 This approach recognizes solutions to difficulties that have occurred in
financial reporting
 Public Interest
theory

Interest group
THEORIES theory
OF
REGULATION Capture theory
 PUBLIC INTEREST THEORY Regulatory
Body

 Developed by A.C. Pigou (1932) Legislations

 Regulations are prepared in the public interest
 For correcting inefficient practices
Mandatory
 Determinant view until 1960 Disclosures
 Scott (2003), the public interest regulator ‘does its best to
regulate so as to maximize social welfare’
PUBLIC
INTEREST
1. The theory forms the base of introduction of regulation
into the financial accounting system
2. Corporates to disclose the impact of their activities on
the society and environment and also disclose the
initiatives taken by them to protect the society
3. Allocation of scarce resources and symmetric distribution
of information
4. New
Regulation is
often established
in response to
high profile
Accounting
failures where it
is argued that
such regulation
will prevent a
repeat
 INTEREST GROUP THEORY
 Extension of public interest theory
 Individuals form groups to protect their interests in regulation by
lobbying
 Interest group may lobby to accept or reject a particular AS
 Some interest groups are demanders of regulation and the Regulators
is the supplier of regulation
 The Regulator is also another interest group which “supplies”
regulation to those “demanders” who will help them retain power
 Examples
The structure of the standard setting processes in Canada and US
supports majority rule for a new standard
This makes standard setting conflict-based, therefore it is based on
interest group theory
General price level accounting in US faced lobbying
• IN INDIA (Case studies)
1. Limited Revision on AS 26 ‘Accounting for Intangibles’
2. Guidance Note on Leases
ICAI proposed a provision of charging Termination expenses of employees
when incurred

But INDIAN Industries got in disadvantageous position while applying this

provision

Industries demanded to exclude it from the scope

ICAI decided to amend and thus excluded

With the condition to put these expenses to recover in AS 15 (Accounting for

Employee Benefits )
2.LEASES

Disclose the
departure Action
taken by Case goes to
from
STATEMENT leasing and MADRAS REMOVED
on Guidance housing HIGH PROVISION
Notes on COURT
companies
LEASES
 CAPTURE THEORY
 Capture theory was introduced by George Strigler (1971)
 Firm or an industry can benefit from the Regulation if it captures the
related regulatory body
 Deal between the Regulatory body on a regulation with other companies to
generate revenues from public
 Regulations introduced aim to benefit the public at first.
 But the aim will eventually fail because as time flews regulator are
controlled by firms and then regulator will protect the firm
 IFRS 6
(Exploration for and Evaluation of Mineral Resources)
 Issue arises in extractive industries regarding charging
Pre-production Expenses
 Every company was having choice between two methods
 FULL COST METHOD :-
 All cost like acquisition ,exploration, drilling was capitalized
 Carry forward until written off against successful projects
 SUCCESSFUL EFFORTS METHOD :-
 Only cost directly relating to successful efforts was matched
against successful projects

IASB wants only successful method to follow

 Contd.
 Switch in methods from full cost to successful efforts accounting caused one
UK oil producer to restate its profits from $44 million to $22 million
 In the Issues Paper, the IASB made visible its preference for a successful
efforts method
 78 percent of respondents agreed
 Remaining 22 percent were against
 However, the accounting standard, IFRS 6 that was issued in 2004 and
effective from 1 January 2006, did not take any position on the successful
efforts and instead permitted a continuation of a choice between methods
The Chartered Accountants Act ,1949

Institute of Chartered Accountants of India

Accounting Standard Board (ASB)

National Advisory Committee on AS (NACAS)

After 2013- National Financial Regulation Authority (NFRA)

Ministry of Corporate Affairs(MCA)

Approved AS published in Gazette of India

 Free Private
Market sector
Approach approach

Public sector
approach
 The Free Market Approach
Assumption that accounting information is an economic good
Argues that the market and its mechanisms should determine the
production of accounting information, users and AS to govern financial
reporting
Agency theory
 Entities should have incentives to release accounting information
Less or no information high cost of capital
Information high confidence among stakeholders
 The Private Sector Approach
Assumption that public interest in accounting is best served if standard
setting is left to the private sector
They composed of various interest groups in addition to accounting
profession
 They relies on responses of interested constituents
 Attract people who possess the necessary technical knowledge to
develop MEASUREMENT and DISCLOSURE system .
 The Public Sector Approach
Public sector regulation has gained a high degree of legitimacy and became
part of international traditions and legal framework
To be effective regulation must follow certain principles :
• Regulation must not violate rights and statues
• Should be designed to prevent real and probable social changes
• Cost must not to exceed benefit
• Regulatory action should not ne used to correct the occasional law-
breaking
 REFERENCES
 Harry I. Wolk, James L. Dodd, John J. Rozycki, Conceptual issues in a Political
and Economic Environment, Accounting Theory
 Jawahar Lal, Accounting Theory
 M. Gaffikin, 2005, Regulation as Accounting Theory, University of Wollongong
 Helen J. Irvine , Queenland University of Technology, Corinne L. Cortese, 2010
University of Wollongong, Investigating international accounting standard setting:
the black box of IFRS 6
 http://www.mca.gov.in/Ministry/notification/pdf/AS_26.
 http://shodhganga.inflibnet.ac.in/bitstream/10603/156752/9/09_chapter%205.pdf
 https://www.researchgate.net/publication/264496195_1_Perspectives_on_the_role
_of_and_need_for_accounting_regulation/
 https://www.moneycontrol.com/news/business/companies/what-changed-in-the-
legal-landscape-post-satyam-scam-2480623.html
 Questions
1.Name theories of regulation .
2.Who gave public Capture Theory?
3.Where can we see application of public interest theory?
4.What are the approaches to regulations ?
5.IFRS 6 is influenced by which theory?