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   Normative Accounting Theories Md. Humayun Kabir  *  Abstract This paper reviews five important works on normative accounting theory – MacNea ! #$#%&'aton and (itteton ! #)%& (itteton ! #+$%& ,hambers ! #--%& and /iri ! #0+% – with emphasis onrecognition and measurement issues in accounting. t shows that there is a ack of agreement amongthese theorists on basic assumptions and hypothesi1ed information needs of the users. 2ven where thereis agreement on an assumption& different impications have been drawn therefrom by the concernedtheorists. These differences ead to different recognition and measurement proposas. This paper asoshows that many of the ideas in accounting that seemed to be nove were anticipated by these earytheorists. 3inay& it assesses the present accounting practice in the ight of these theories.  Keywords :  Normative accounting theory& accounting recognition andmeasurement. Introduction This paper e4amines seect normative accounting theories. 5tarting with the twentieth century& normative accounting theorists had been preoccupied with deveoping6constructing accounting principes. The primary concern had been recognition and measurement issues. Hence the focusof this paper sha be on these theorists7 proposas on accounting recognition and measurementand the arguments6theoretica structures behind these proposas. t aso compares the worksreviewed.There are controversies among accounting academics regarding what an accounting theory is.8atts and 9immerman ! #:-; <% posit that accounting theory seeks to e4pain and predictaccounting practice. < 'ositivists ike 8atts and 9immerman !hereinafter 8 = 9 ony% cite * Md. Humayun Kabir& >.?.A.& is an Assistant 'rofessor in the >epartment of Accounting = nformation 5ystems&@niversity of >haka. The author is gratefu to 'rofessor 5anti Narayan hosh and 'rofessor 5aro/ Kumar 5aha of the @niversity of >haka and 'rofessor Hidetoshi Bama/i of Kobe @niversity of Capan for their hepfu suggestionson an earier draft of this paper. ,omments of an anonymous reviewer are appreciated. The debate about accounting principes did not start seriousy before the twentieth century !MacNea #$#; -#%.Accounting practice was primariy concerned with the deveopment of bookkeeping techniDues up to the beginning of the twentieth century. 2ary bookkeeping books seem to have been concerned with the methods of making bookkeeping entries. n fact& the eary books did not mention even such basic issues as the use andcacuation of depreciation. < They abe their theory as E'ositive Accounting Theory.7 They borrow the phrase Epositive theory7 from economics.3riedman ! #+$% popuari1ed this phrase. 8hat 8atts and 9immerman do actuay is propagate a specific version of accounting theory. Methodoogicay they subscribe to the Kuhnian ! #0% view of science. t is& however& to be noted that most of the research in economics& from which 8atts and 9immerman ! #:-% borrow their term positive& has normative conseDuences. 8hen economists anay1e a socia phenomenon& their anaysis contain in itnormative impications. 3or e4ampe& information economics deas with the impications of informationasymmetry and contains the suggestion that mechanisms shoud be devised so that the probem of informationasymmetry can be mitigated. Agency theory highights the agency probem arising from the separation of ownershipfrom contro in arge corporations and suggests that corporate governance mechanisms shoud be designed andimpemented to mitigate the agency probem. The same can be said of Adam 5mith7s the 8eath of Nations. The  8eath of Nations did not merey e4pain a capitaistic economy. n fact the 2ngish economy was hardy capitaisticin today7s terms when 5mith wrote the book. The Nation propagated the notion and benefits of a capitaisticeconomy. The book was written and used as an inteectua weapon by the bourgeois against the monarchy!Ashton #-:%. 'ositive accounting theorists have studied the incentives of earnings management and haveidentified situations when earnings management may be present. ?ut they hardy suggest a remedy to this probem.5tering ! ##% has righty attacked this position of the positivists. This note& however& shoud not be taken as anattempt to beitte the achievements of positive accounting research. t has yieded many interesting and usefuinsights into financia economics and natura science discipines such as physics& chemistry& etc. in the defense of their method and ca their method Ethe scientific method7 !8 = 9 #:-; <%& thus probabyimpying that there is ony one method in science. This is highy disputed by accountingacademics pursuing other strands of research !,hristensen #:$F ,hua #:-%. 5cience is not aunified structure. There is no a uniDue scientific method. 5cience knows many methods!3eyerabend ##$%. Hence& even if one wishes to study accounting as a scientific discipine&there is more than the method advocated by 8 = 9 ! #:-%. $ Gne ma/or criticism of 8 = 97sview of accounting theory is that it unnecessariy narrows the area of accountingresearch !,hua #:-F 8hittington #:0%. 3or our purpose& we adopt the foowing definition of accounting theory; III the business of accounting theory is to e4amine beiefs and customscriticay& to carify and e4tend the best from e4perience& and to direct attention to the genesisand outcome of accounting workJ !(itteton #+$; $<%. This definition accommodatesdifferent strands of accounting research such as research in normative accounting and empiricaaccounting as we as research in interpretative accounting.A normative accounting theory seeks to prescribe some basis of accounting measurement& particuar accounting procedures& and the contents of financia reports !/iri #0+F 8 = 9 #:-%. ) /iri views normative theories as a specia case of deductive theories. >eductive theoriesthat start with some goa assumptions and deduce accounting procedures therefrom are abeednormative theories. + Thus& there are two important eements of a normative theory; !a% goaassumption& and !b% deduction. A theorist may set his own goas that are not inherent to currentaccounting practice. ,hambers ! #--% fas in this group. Again& a theorist may inductiveyderive goas from accounting practice and use those goas to suggest improvements in current practice. /iri fas into this group. 5uch theories are aso categori1ed as normative in this paper.t is to be noted that not every theorist is e4picit on goa statement. 5ome state the basicassumptions and deduce accounting measurement from these. 'aton and (itteton ! #)% fa inthisgroup.5o far three approaches have been empoyed in normative accounting research. These are !a%inductive mode& !b% deductive mode& and !c% the decision usefuness approach. n induction& agenera statement !% is induced from some empirica observations& hypothetica phenomena&or nonIempirica concepts !G%. The impications of  incude and go beyond G. t may benoted that many s may be induced from G. The contribution of an inductive mode is incoming up with an  as an e4panation of G. Gn the other hand& the opposite process isfoowed in deductive modes. Here G is deduced from .  is a set of theories& or assumptionsthat have aready been accepted. n a deductive mode& G is a specia case of . n the decisionIusefuness& decision mode approach& Einformation reevant to a decision mode or criterion is accounting and reporting issues. The point this note intends to make is that normative accounting research has& andshoud have& a rightfu pace in accounting theory and research.  $ Accounting aso knows many methods. 'ositive accounting theory uses one of these methods. 5ee Hopwoodand Mier ! ##)% for a sampe of studies using methodoogica assumptions6word views different from those usedin positive accounting research. 5ee 5awabe and Bama/i ! ###% for a usefu discussion of various approachesempoyed in the research of accounting. 5pecificay& they discuss various research approaches faing under the broader umbrea of institutiona accounting research. ) 8atts and 9immerman do not use the phrase Enormative accounting theory7. Lather they !p.0% use the phraseEnormative propositions.7 + /iri differentiates between normative theories and poicies. n normative theory& the researcher does not commithimsef6hersef to the goa assumed. n accounting poicy& however& the researcher is committed to the goa. Normative theories can thus be scientificay verified& whie poicies are based on vaue /udgement of the researcher.As /iri recogni1es& this distinction is burred in accounting. Accounting theories and poicies are often interminged. isoated and various accounting aternatives are compared to the data presumaby necessary for impementing these decision modes7 !AAA #00; %.nductivists such as Hatfied ! #<0%& (itteton ! #+$%& /iri ! #0+%& etc. e4amine e4tantaccounting practice and have tried to rationai1e and& sometimes& /ustify ma/or eements of e4tant accounting practice. Among the inductivists& /iri ! #0+% is very e4picit in his adoptionof the inductive approach to accounting theory. He e4presses his preference for inductivemodes over deductive modes in the foowing words; This type of inductive reasoning to derive goas impicit in the behavior of an e4isting system is not intended to be proIestabishment or to promote the maintenance of the status Duo. The purpose of such an e4ercise is to highight where changes are most needed and where they are feasibe. ,hanges suggested as a resut of such as a study have a much better chance of being actuay impemented. oa assumptions in normative modes or goas advocated in poicy discussions are often stated purey on the basis of one7s conviction and preference& rather than on the basis of inductive study of the e4isting system. This may perhaps be the most crucia reason why so many normative modes or poicy  proposas are not impemented in the rea word. !/iri #0+; <:%. Gn the other hand& deductivists such as 'aton ! #<<%& ,anning ! #<#%& 5weeney ! #$-%&MacNea ! #$#%& ,hambers ! #--%& etc. deveop accounting modes of goba appication!AAA #00%. They are basicay reformers and suggest new bases of accounting measurement.Many of these deductive writers advocate current costs or vaues. They drew on neocassicaeconomic theory - and on their observations of economic behavior to suggest that accountingshoud report current costs instead of historica costs. !AAA #00%. These deductivists do notinvestigate the decision frameworks of specific casses of users. nstead they assume theincome figure generated by their mode woud be eDuay usefu to a types of users. 0 That iswhy their mode is caed Etrue income7 mode. !AAA #00%. n contrast& as noted earier& thedecision mode approach recogni1es that different decisions may reDuire different information.This approach has received varying degrees of emphasis in the accounting iterature since the #+s. : t has been used in A 5tatement of ?asic Accounting Theory !A5G?AT% issued byAmerican Accounting Association !AAA%. The conceptua framework for financia reportingissued by the 3inancia Accounting 5tandards ?oard !3A5?% is aso an e4ampe of the decisionmode approach.This paper reviews five important works within the tradition of inductive–deductive modes.These are;MacNea& Kenneth. #$# !Leprinted in #0%. Truth in Accounting  .  'aton& 8. A. and A. ,. (itteton. #).  An Introduction to Corporate Accounting Standards. (itteton& A. ,.& #+$. Structure of Accounting Theory .,hambers& L. C. #--.  Accounting, Evaluation and Economics Behavior. /iri& Bu/i. #0+. Theory of Accounting Measurement. Though we have mentioned inductive modes and deductive modes separatey& it shoud benoted that it is very difficut to cassify a work as being inductive or deductive ony. 5omeworks have used both modes simutaneousy. /iri7s ! #0+% work iustrates this. He induced - Many of the accounting academics !e.g.& Hatfied and 'aton% had doctorates in economics. 5ome of the most  prominent writers& such as ,anning and Ae4ander& were economists !AAA #00; -%. t is hardy surprising thatteachings of neoIcassica economics woud inform their accounting theories. 0 Ae4ander ! #+% is the e4ception. : 5ee AAA ! #00; I <% for a brief survey of accounting works empoying this approach. the goa underying current accounting practice and argues in a normative vein that this goashoud be retained. @sing deductive ogic& he then recommends particuar basis of measurement. MacNeal (1939) MacNea ! #$#% is a revoutionary. His work contains a vehement attack against the presentaccounting practice. He thinks that the function of accounting is to report economic truth. ?utfinancia statements& he argues& do not present truth. # They are miseading to the investors andcreditors. n particuar& he says that the historica cost principe and the conservatismconvention prevent financia statements from presenting true financia position and theoperating resuts of the firm.  He inks the deveopment of accounting principes to the business and economic conditionsobtaining in medieva 2urope and by reconstruction& he shows that accounting principes werethe natura outgrowth of the then conditions which have ceased to e4ist now. ?ut accounting principes have not kept pace with the changed conditions.MacNea evauates three /ustifications offered in favor of the cost principes. 3irst& costrepresents the vaue of a fi4ed asset to a going concern& caed Ethe going vaue7 theory. 5econd&it is impractica and e4pensive to revaue assets every year. Third& even if revauations of fi4edassets were done every year that woud not provide significant information to the users.The Egoing vaue7 theory states that cost represents the vaue of service of an asset to the owner at the time of the purchase. 5ince the service potentia of the asset can not change unessthere is any change in its physica condition& the vaue of the asset to the owner can not changeafter the purchase. Hence& fi4ed assets shoud be shown at costs in the baance sheet even after the purchase. 5ince fi4ed assets are purchased not for sae& but for productive use in the business& market prices are not reevant for the vauation of the asset. MacNea disagrees withthis position. To him& vaue means economic vaue that is determined by the interaction of demand and suppy in a free and competitive market. ,ost represents the economic vaue at the
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