has frozen employee salaries and non-executive directors' fees but has softened the blow for senior executives by offering $1 million long-term retention payments.
The .
.
. retention offers are conditional on achieving a compound 8 per cent increase in earnings per share over the next five years while the previous offers, entered into in 2006 and conditional on achieving earnings per share growth of 12.5 per cent and per cent respectively.The declining hurdle rate for retention bonuses reflects the slowing growth outlook for after its $900 million acquisition of Foodland's Australian operations in 2005
.
..
"Post that acquisition there was quite a lot of access to potential synergies .. .
to an extentmost of that has flowed through," said Deutsche Bank analyst Kristan Walker.
increased earnings per share by 13.3 per cent in 2009 and is forecasting more growth this year, driving sales and earnings through a combination of organic growth and acquisitions.
shares rose to close at $4.29 yesterday.
Source: The Australian Financial Review, 31 July 2009, www.afr.com.
Questions
1 . The article describes a market reaction to accounting news. This description provides an example of which approach to theory?
(a) pragmatic syntactic (c) semantic
Explain your answer.
2. Consider the following syllogism:
When a company reports better prospects than previously, investors force that company's share price to increase.
is a company that has reported better earnings per share than previously. Investors forced share prices to increase.
(a) Is there a flaw in the syntax or semantics within the syllogism that means its conclusion is not true? If so what is the flaw? (Hint: whether the general premise at the start of the syllogism must always be true.)
What is the practical significance of this theory being invalid and its conclusion false?
Historical cost accounting has also been criticised o n the basis of its syntactic element, for example with respect to the practice of summing several different money amounts assigned to specific assets:
The sum of two weights means nothing unless they are measured by the same rules .
. .
What, then, about the procedure of adding the amount of cash held by a company today to the amount of cash paid years ago for a piece of freehold land which the company still holdsChambers adds further criticism:
The impression one gains from the internal inconsistency of many of the arguments upon which the justification of conventional accounting is made to rest is strongly reminiscent of the underlying philosophy of the rulers of Oceania in George
Nineteen Eighty-Four. The distinctive feature of this philosophy is doublethink. Doublethink means the power of holding two contradictory beliefs in one's mind simultaneously, and accepting both of
Chambers goes on to give some examples of accounting doublethink:
Valuations are incorporated in balance sheets . .
.
but the balance sheet is not a valuation statement.Fixed assets should be carried at cost . . . in historical accounts, unless such cost is no longer
Questions have been raised also about the imprecision of definitions in accounting. In terms of a Popperian approach to science, many of the propositions of conventional accounting are not falsifiable. Take, for example, the following criticism of a definition of depreciation:
Definitions are unacceptable which imply that depreciation for the year is a measurement, expressed in terms, physical deterioration within the year, or the decline in monetary value within the year, or, indeed of anything thai actually occurs within the
Sterling takes this point further by stating that the problem lies in the way accountants have defined the determination of costs and profit as a choice among conventions, which are in turn defined so that a present magnitude depends on a future magnitude. For example, depreciation depends on allocation, which in turn depends on a future sale (disposal value) and the expected useful life of the asset. The same is true for profit. Under this logic, true profit cannot be determined until the firm has been liquidated.
Theories based on historical cost conventions lead to cautious hypotheses. The hypotheses therefore are unable to be tested and, as per the falsificationist approach (in which a hypothesis is not informative and does not add to scientific progress if it is not worded or proposed so that it is falsifiable), they are not useful for financial decision making except to verify accounting entries. Hence, they are uninformative and do not add to knowledge or progress in accounting. The above criticisms of historical cost are essentially criticisms about measuring current values and were the forerunner of the current move of International Financial Reporting Standards (IFRS) towards 'fair value' accounting.
In defence of the historical cost system, accountants argue that there is no requirement that accounting outputs should have any semantic content (correspondence with current real-world events, transactions, or values) or be subject to falsification They counter by using the argument that the role of accounting is to allocate the historical cost of resource usage against revenue - the matching concept to determine the surplus secured from economic activity. In this case, assets, liabilities and equity are
residuals from this process; they are not meant to measure or say anything about entity value or about the entity's financial of affairs. If we adopt this allocation approach, the definition of depreciation is then in accordance with the matching concept. Although it may be syntactic, this cost allocation assumption can conflict with