Financial Statements and Profits

2206 words 9 pages

TUTORIAL 2 - Semester 2 2013

Deegan Topics 2 and 3:

The financial reporting environment and Regulation of financial accounting

2.1 What expectations do accounting standard-setters have about the accounting knowledge of financial statement readers?

Accounting standard-setters have an expectation that the readers of general purpose financial reports have a ‘reasonable knowledge’ of accounting. Specifically, the IASB Framework states that ‘users are expected to have a reasonable knowledge of business and economic activities and accounting and a willingness to study the information with reasonable diligence’. Hence, there is an expectation that financial statements are not tailored to meet the needs of people
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(b) the capture theory of regulation?
 (c) the economic interest theory of regulation?

(a) In the public interest theory of regulation the regulators are assumed to act in the interests of the public and will only introduce regulation if the benefits to the public are believed to be greater than the costs. Regulation is not introduced to support particular vested interests and the regulators are not assumed to be driven by their own self-interests.

(b) Advocates of capture theory also typically assume that regulation is also initially introduced with the public’s best interests in mind. However, once regulation is introduced, the parties that had been subjected to the regulation tend to be able to capture the regulatory process. The regulated parties typically do this for their own benefit. Hence, while it is assumed that the regulators might act in the public interest, it is typically assumed that those subjected to regulation act in their own self-interest. We can debate whether it is consistent to believe that some people act in their own self-interest whereas others (for example, the regulators) do not.

(c) Economic interest theories of regulation assume that everybody acts in their own self-interest, including regulators and those people that are regulated (perhaps not an overly pleasant view of human nature). Regulators will only propose and support regulation which leads to favourable


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