Governmental Financial Accounting European -Myassignmenthelp.Com

Question: Discuss About The Governmental Financial Accounting European? Answer: Introduction Accounting theories that govern the fundamental principles of accounting are constantly being modified and evolved in order to enhance the suitability and adoptability of the accounting principles in relation to the global standards. The topic that has been chosen for the purpose of the study is that a journal article that depicts the implications of the positive accounting theories hypotheses. The particular journal article that has been chosen for the purpose of the study is the The opportunistic approach of the Positive Accounting theory fails to explain a case study: An anomalous situation? by Adolfo Henrique Coutinho e Silva, Moacir Sancovschi and Ariane Gabriela Chagas dos Santos The journal article reviews particular literature that seeks to establish evidence that supports the positive accounting theory of corporate social disclosures. In this particular article focus has been put upon the Watts and Zimmermans reference to social responsibility. Furthermore, the high degree of revenue that have been displayed by the organizations to decrease and the unprecedented rise in the political costs make the disclosures related to social theories, confusing. This particular study also lists the potential problems that are reflected by the companies while adopting the positive accounting theory (Williams 2014). Case Study Analysis There have been numerous accounting theories in use like the legitimacy theory, stakeholder theory and the critical or political economic theory. Along with these traditional theories, the new accounting theory that has come up in the new age, political accounting theory or the political cost hypothesis that effectively justifies the voluntary social disclosures. The article depends on the studies conducted by Watts and Zimmerman and other related literature. There have been enough literature supporting the fact that the positive accounting theories are not about how a social report should be but the what a social report is. It has been argued by the experts that the positive accounting theories contribute in no way for the improvement of social reporting based on the corporate standards (Li 2015). The view that has been proposed in the journal has been that the managers in an organization make use of the accounting systems for performing the opportunistic voluntary changes in the accounting practices for affecting the external contracts or maximizing their own compensations. The Positive Accounting Hypothesis explains the opportunistic accounting choices without taking into consideration that the estimations in regards to this theory (McLellan 2014). The three major hypotheses of this theory are as follows: Bonus Plan Hypothesis Debt Covenants Hypothesis Response to the regulatory constraints or political costs Other experts argue that the justification in relation to as to why companies provide voluntary disclosures in the financial reports, the role of positive accounting theories cannot be demeaned. However, the critiques have provided enough argument stating that the social disclosures depend on a number of material factors like the size of the firm and the nature of industry in which the business is established. Thus, in order to reject the positive accounting theory on the basis that it does not provide enough justification in the firms providing voluntary disclosures, the implications of the voluntary disclosures have to be understood properly. This can be achieved by the proper understanding of the works conducted by Watts and Zimmerman on social responsibility (Biondi 2017). The organization that has been selected in the journal is the largest private oil and gas explorer in the recent history of Brazil. The case study that has been presented in the journal suggests that the company had made use of the incentives in order to perform the accounting choices similar to the ones that have been forecasted by the positive accounting theory hypothesis (Samaha and Khlif 2016). The company had also gone through a phase of decline and growth that motivated the organization to perform the voluntary disclosures in regards to the accounting choices such as the voluntary management changes; restructuring of the corporate governance hierarchy; execution of the initial public offering; issuance of debt notes. Thus, this evidently states that the positive accounting theory hypothesis has not properly justified the voluntary disclosures in the financial report of the company. In order to understand the implication of the positive accounting theory with much more clarity, the concept of Positive Accounting Theory should be discussed in accordance to the theories that has been proposed by the founders of the Positive Accounting Theory, Ross Watts and Jerold Zimmerman The founders of the theory suggests that managers in an organization have greater incentives for the purpose of lobbying for the accounting standards that evidently increases the earnings and in turn increase the wealth of the mangers. The cash flows and stock prices can decrease due to the taxes, procedures that are regulatory in nature and information and political costs. However, the managers also have to keep in mind the impact of the earnings that have been reported as the costs might have been imposed on the firm (Oulasvirta 2014). Watts and Zimmerman in their accountancy paper have mentioned that the positive accounting theory helps the understanding of the focus points that the accounting principle setters refer. The positive accounting theory also focuses on the effects that the various accounting standards bring about on the different groups of entities that belong to the society (Oulasvirta 2014). The theory proposed by Watts and Zimmerman indicates that the firms result in proper organization of its activities for the maximizing their chances of survival in this market. It has been indicated that the management of the earnings becomes economically efficient when the value of the firm has been maximized and the earnings become opportunistic when the value does not increase (Oulasvirta 2014). Furthermore, the three hypotheses that have been developed by Watts and Zimmerman for analyzing the fact that why managers choose certain accounting practices. These three hypotheses are as follows: Debt Covenant Hypothesis Bonus Plan Hypothesis Political Costs Hypothesis The Bonus Plan Hypothesis has stated that the managers should opt for the accounting policies that lead to the increase in income. This leads to the shift in the reported earnings from the upcoming period to the current period for improving the financial benefits in case the bonus plan is linked with the income obtained by the organization . The Debt Covenant hypothesis states that the managers can effectively choose any practices in regards to the accounting procedures which will increase the income or improve the returns from the assets or reduce the liabilities of the firms. This will facilitate the reflection of the debt-equity level to be the lowest and also avoid violating accounting covenants stated in contracts (Donelson, McInnis and Mergenthaler 2016). The Political Costs Hypothesis evidently suggests that the managers should opt for the accounting practices that lead to the decrease in income for reducing the governmental intervention in their business. This hypothesis further suggests that choosing the accounting policy by the managers who are provided with an incentive may lobby with politicians for accounting procedures that decrease the net income that has been reported in the financial statements (Donelson, McInnis and Mergenthaler 2016). Thus, the inference that can be drawn from the above discussed literature is that the managers can opt for the Debt-equity hypothesis that are less conservative in nature, Political Costs Hypothesis that is more conservative in nature or the Bonus Plan Hypothesis that is less volatile in nature. The Positive Accounting theory can also be executed from the perspective of efficient contracting. The experts accept the fact that it is difficult to determine whether opportunism or efficient contracting can properly drive the accounting policy of the firms. However, the positive accounting theory suggests that efficient contracting should be the sole driver (Donelson, McInnis and Mergenthaler 2016). PAT and the effects of the theory The Positive Accounting Theory efficiently predicts the happenings and interprets them in terms of accounting transactions. The theory also predicts the way in which the firms should behave in the environment of the newly proposed accounting standards.Thus, the implications of the Positive Accounting Theory that can be deduced from the literature that has been discussed in the preceding paragraphs are as follows: The positive accounting theory intends to understand and simplify the choices that the managers have in regards to the different accounting polices across the different firms. It further acknowledges the existence of the economic consequences The firms following the positive accounting theory maximize the chances of their survival in a highly competitive market, thus they organize themselves properly The major perspective that is adopted by this theory is that the firms are looked upon as the accumulation of the contracts that they are a part of. In regards to the positive accounting theory, the firms will efficiently reduce the costs that are associated with the contracts. The costs related to the contracts involve the accounting variables. The firm adopting the positive accounting theory, the firm will opt for the accounting policies that best realizes the need for reducing the contracts related to the costs. The positive accounting theory realizes and takes in consideration the circumstances that are constantly changing, in order to increase the flexibility of the managers for choosing the apt accounting policies The proposed theory also puts forward the issue of opportunistic behavior. The managers who look into the satisfaction of their own personal interests may display an opportunistic behavior Achievement of the Positive Accounting theory The achievement of the positive accounting theory or the implementation of the proposed theory can be done by following the listed procedures: The theory can be adopted by the changing the accounting policies The management of the accruals that are discretionary in nature The theory can also be adopted at the time of adoption of the new accounting standards or change in the current accounting standards In case of the particular case study that has been presented in the selected journal, the company had been experiencing rapid phases of growth and decline which led the managers to make necessary changes that are voluntary in nature like corporate restructure and initial public offering. In addition to that the company had been under serous distress which further resulted in debt covenant violations and reduction in the life cycle of business. The initial years of the company had been successful but later it ran into extreme financial difficulties that led to bankruptcy. This could be evident enough to support the opportunistic accounting choices that would have affected the internal and external contracts. To be more precise, no evidence is available that the company in the selected journal has made opportunistic increasing income accounting changes. Thus, there has been no impact in regards to the debt-covenants and bonus plan or reflection of the decreased income to avoid unnecess ary intervention by the government (Di Pietr, Art, and Ronen 2015). Conclusion The particular conclusion that can be drawn from the above discussed literature and deduced perspectives is that in the case of the absence of an opportunistic approach, the positive accounting theory does not contribute to the accounting choice in the case of this case study. However, in terms with the general perspective, the positive accounting theory returns to the similar conclusion as the ones that had been drawn in the beginning of this particular study. This means that in the absence of particular evidence, the management of the companies makes use of the social disclosures that are presented in the financial reports of the company. Furthermore, it can be stated that the companies adopting positive accounting theories have failed to evidently follow the arguments that have been provided by the founders of the positive accounting theory in their original thesis document. References Williams, P.F., 2014. The myth of rigorous accounting research. 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