DEPARTMENT OF ACCOUNTING & OIS Accounting 416/616
Accounting Theory Term I 2011 Course Outline
Instructor: Professor James Gaa Office: 3-20D Business Building
Email: Phone: 492-5388
Office Hours: Tuesday and Thursday, 1:30-2:30
and by appointment at other mutually convenient times Texts
William Scott, Financial Accounting Theory, 6th Canadian Edition, 2011. Pearson Additional Readings available via the UofA Library and the internet
Office Hours and E-mail
Office hours are designed to overlap two 80-minute time slots, with the intention of minimizing class conflicts. Please feel free to make an appointment if the scheduled times are not possible.
The primary means of communication in this course is class and office hours. The primary purpose of email, in the context of this course, is to communicate short messages, such as to make an announcement to the class, to make an appointment, to ask a simple question, or to provide information. Questions that require long or involved answers, or which would benefit more from a face-to-face discussion cannot be answered via email. In such cases, the questioner will be asked to discuss the matter directly with the instructor. Emails will be answered as soon as is feasible, as quickly as a few minutes and normally within two working days. Email is not necessarily checked on evenings or weekends.
For reasons of security, all email communication between students and the instructor must originate from their official University of Alberta email accounts. This policy protects the confidentiality and sensitivity of student information and confirms the identities of both the student and instructor. Messages that do not originate from University of Alberta email accounts, and that do not contain the student’s name and student number, will be deleted unread.
Course Webpage
Accounting 416 has a webpage on the Ulearn system. It contains copies of the lecture materials, solutions to assigned quantitative problems, and sample questions from old examinations, and check figures for selected self-study problems from the textbook. It will also contain occasional announcements (such as adjustments to the assignments, exam information, etc., that supplement the printed course outline). It should be checked periodically, particularly if a class is missed. For particularly important items, an email will be sent via the Ulearn system.
Objectives of this Course
Accounting 416 is a course in accounting theory. The focus of accounting theory is the foundations of financial accounting and reporting, the fundamental issue of which is why accounting is valuable, and how it can best describe the economic value and economic performance of enterprises.
The primary objective is to develop your understanding of accounting, both as a technical discipline and as a social institution. In this way, it rounds out your professional education, by adding a fundamental perspective to the technical training provided in more procedurally oriented courses. This means that this course is very different from other accounting courses you have taken, because of both its subject matter and its approach: It is primarily about accounting and the accounting profession. The focus is on the “why” questions of accounting, rather than on the
“what” and “how” questions that are emphasized in most other accounting courses.
The statement of course learning goals for this course, in the context of the learning goals of the business program, is available on the course webpage.
The technical concepts and procedures that you learn in your other courses are necessary; but they are not sufficient for your career to progress to positions of greater interest and
responsibility. An important committee report of the Canadian Institute of Chartered Accountants put it this way:
If all that accountants are expected to do is to follow the prescriptions contained in a book of rules, they are not acting as professionals. They are merely practicing a trade. … It is of the essence of a profession that a high degree of judgment is required in its practice.”
(CICA: Corporate Reporting: Its Future Evolution)
This course aims to start you down this path – which is also the beginning of a life-long task. If you approach accounting as a trade (no offense against trades – they are crucial in society and deserving of everyone’s respect), then this course is probably not for you.
Although “theory” is by its nature somewhat abstract, learning in this course will take place in large part by seeing how the theory helps us to understand many features of current – and future – accounting practice. The concepts and principles developed in this course will be used to explain situations found in “the real world” in newspaper and magazine articles. In addition, a number of technical accounting topics addressed in this course are not given much attention in other courses.
(We will not, however, focus on the details.) Examples include the following: reserve recognition accounting, financial instruments and a variety of other fair-value-based standards. Many of these standards relate to emerging issues in the practice of accounting today.
This course is offered because the Accounting and OIS Department feels that understanding the foundational ideas underlying financial accounting is an important part of the education of accounting students. Other courses (such as 414, 415, 418, 467 and 468) concentrate on the technical details addressed by professional entrance examinations. While the technical topics in those other courses occupy much of the professional certification examinations, the topics in this course are also part of the examinable material for these examinations: CGA Canada requires a course in accounting theory, and the CICA includes many of the topics in this course in its competency map for the UFE. (See the competencies of the CICA’s “UFE Candidates’
Competency Map” at
“Performance Measurement and Financial Reporting Concepts and Framework” on pg. 48. See
also pp. 5-6 and 17-26 for non-technical competencies, some of which are addressed in this course, and not addressed in most or all other accounting courses.)
When you graduate, your employers will presume that you have a minimal level of basic technical/ procedural knowledge, which you will have learned in other courses, such as those named above. Their possession will help you to gain an entry position, in part because they suggest that you are technically competent; and they will continue to be valuable to varying degrees in your career. However, unless you continue to work in a highly technical position, you will find that detailed techniques will become less important as your career progresses. Instead, the pervasive skills, including the ability to understand and deal with complex issues – in a rapidly changing world – will become more important. This means that the most important skills required of accountants now -- and even more in the future -- are the higher cognitive skills and a deeper understanding of the basic ideas underlying the practice of accounting.
To put it bluntly, the development of technical knowledge and skills is crucial to your career; but ultimately, real success depends on broader, more pervasive knowledge and skills. In more concrete terms, if your career is on an upward trajectory five years from now, it almost certainly won’t matter all that much whether you once had mastered the intricacies of, for example, income taxes (unless you are a tax specialist), consolidations or pension accounting (unless you actually deal with them) – and (unless you actually work with them on an ongoing basis) you will likely have forgotten most of the arcane details that you focused on in preparing for professional entrance examinations. Your ability to identify, understand and deal with basic issues of information and accounting will matter more and more as your career progresses.
Prerequisites: This course has two prerequisites: Accounting 414 and Finance 301. The material in these courses will be relied upon heavily in this course. More specifically, students are expected to be able to deal with the basic concepts and principles of both courses.
For financial accounting and reporting, as contained in Accounting 311 and 414, they include but are not limited to the following:
the role of transactions as a basis for accounting and the principle of conservatism cash-basis vs. accrual accounting
deferred charges, deferred credits basic allocation methods
lower of cost-and-market
the relationship between the income statement and balance sheet the ability to prepare simple income statements and balance sheets The same holds for Finance 301, including familiarity with the following:
basic concepts of economic value (e.g., discounting cash flows, pricing and re-pricing of simple financial instruments)
basics of investment decision making risk and diversification
efficient market theory, the capital asset pricing model, and market inefficiency
Students who lack a solid grounding in any of these basic topics or who have forgotten them should expect to do additional work, as needed, to bring themselves up to speed – they will be used in this course, and will most likely appear, either directly or indirectly, on
examinations. They will be reviewed in class, as appropriate, but they will not be taught again.
Assignments, Examinations and Student Evaluation
Readings and questions/problems. Assigned readings and problems are from the textbook, the course website, and the internet. Unless stated otherwise and regardless of whether scarce class time is devoted to them, assigned readings are expected to have been read by their due date, and are examinable. Advance preparation of questions and problems for classroom discussion is expected. Without adequate preparation, discussion of issues will not be productive – and students will lose out.
Lecture notes will be available on the course website as the term progresses. You should think of them as a table of contents, a guide, and brief notes for the assigned course material, rather than the course content itself. They are intended to provide explanations of some important matters, and complement the assigned readings. They are not a substitute for the assigned readings, all of which are subject to examination.
Components of course grade. Course grades will be determined as specified further below, on the basis of the following formula. There will be one midterm and one final examination, scheduled as shown below.
Midterm Exam 35%
Final Exam 50
Class Participation 10
Class attendance 5
100%
The examinations will be primarily short essay and short-answer questions; numerical problems will be included as appropriate to reflect course topics. The examinations may contain questions that are based on material, such as newspaper and magazine articles and other documents that might or might not be assigned in advance. The final examination is cumulative, with emphasis on the portion of the course not covered on the midterm exams.
A sample of previous examination questions is available on the course website. The purpose for making them available is to provide all students information about the nature and format of examination questions. They do not provide a strict template for future examinations, and
“solutions” will not be provided.
Absence from Examinations. Examinations must be written at the time scheduled. In accordance with university policy sec. 23.5.6 (Absence from Exams), granting of an excused absence is a privilege and not a right. An excused absence may be granted for medical or other compelling reasons, such as severe domestic affliction and religious conviction. Special arrangements for missing an examination can be made only for very clear, exceptional, and compelling cases, and (barring an emergency) only well in advance.
Excused absence for a missed exam is not automatic and is granted at the discretion of the instructor (in the case of term exams) or the student’s Faculty (in the case of final exams).
Instructors and Faculties are not required to grant excused absences for unacceptable reasons that
include, but are not limited to personal events such as vacations, weddings, or travel
arrangements. (According to the OOPS office and the Associate Dean for Undergraduate Programs, the following do not constitute valid excuses for missing a scheduled
examination: job interviews, weddings, conflicting travel arrangements, and conflicts with examinations in other programs (such as CASB).) When a student is absent from a term or final exam without acceptable excuse, a final grade will be computed using a raw score of zero for the exam missed. Any student who applies for or obtains an excused absence by making false statements will be liable under the Code of Student Behaviour.
Class attendance. Course credit is given for attending class. Attendance will be recorded during every class period. Students are allowed three absences without penalty for any reason, including illness. If you use up your no-fault absences early in the term, do not ask for special consideration later on, except that significant special circumstances affecting attendance will be considered, but only if discussed with the instructor in advance. Since (active) participation is a separate part of the course mark, attendance does not count towards the participation mark.
Class participation. Because of the nature of the course, with its emphasis on conceptual understanding of the foundations of accounting, and because students are about to embark on a career in which the ability to speak to a group is critical to their success, class participation is a required part of the course. Preparation for class is essential. In addition to the effect on the participation mark, past experience clearly shows that lack of preparation has a major impact on students’ examination performance. There is no provision for alternative assignments in lieu of participation.
If you have difficulties speaking in public, please talk with the instructor as early as possible in the course. If you have difficulty speaking in public, or want to improve your ability, you are strongly urged to look into the Business & Beyond Toastmasters Club, which is a student club in the Business School. For more information, go to its website at:
webpage: “We meet every Monday from 6:30pm - 8:00pm (except Stat Holidays) and are located at the For information on speaking anxiety, you might do an internet search for “public speaking anxiety”.
Based on records kept during the term, participation will be assessed on the instructor’s judgment of the quality, quantity and regularity of comments made.
The following verbal descriptors will be used for the assignment of class participation marks:
0 Non-existent or nearly non-existent participation 20-30 Minimal participation without substantial value 40
50 Minimally acceptable participation: occasional contributions of small value 60
70 Marginal: a small number of valuable contributions or a larger number of less valuable contributions
80 Good: the degree of participation expected if many students were to take part in discussion, with insightful and pertinent contributions; carries one’s own weight in class discussion; a significant number of valuable contributions
90
100 Excellent: Many insightful and useful comments and questions throughout the term; provided substantial value to the class
Courtesy to the instructor and to other students. Courtesy is an important part of life, and is expected of students embarking on a professional career. Because some kinds of behaviour are distracting to both the instructor and other students, it is expected that students:
a) will arrive in class before it begins, and will stay until it is over;
b) will not engage in side conversations with other students, in oral, written or electronic form;
c) will not read non-course materials; and
d) will not use personal communication or entertainment devices in class. This includes computers used for those purposes, mp3 players, cell phones, blackberries, etc.
If you need to arrive late or leave early on a specific day, please inform the instructor in advance.
Discourteous behaviour may be reflected in the class participation mark.
Assignment of Course Grades. Course grades will be assigned in the following manner, using one of the methods specified by the University grading policies. Raw scores for each component of the course grade will be recorded as the course progresses. Although feedback about standing and potential course grades will be provided, ranking and grading will be deferred until all
assignments, including the final examination, have been marked. At that time, it will be
determined whether the class is average, above average or below average, and what proportion of the class should fall into each of the grade ranks. As required by University policy, grades will be determined on the basis of absolute achievement and relative performance in a class, with due attention to the official verbal descriptions of the various grades to serve as a guide for the assignment of grades. (The descriptors are: excellent: 3.7-4.0; good: 2.7-3.3; satisfactory: 1.7-2.3;
poor: 1.3; minimal pass: 1.0.)
The instructor reserves the right to increase a student’s grade on the 4-point scale, in those cases where it is evident that the grade calculated on the basis of total examination performance does not accurately measure performance in the course. Two examples of this are the following: (1) where a course grade is very near the borderline between grades and where, in the instructor’s judgment, the student has demonstrated that the higher grade is appropriate, and (2) where a student’s examination performance through the term demonstrates that an early low exam score is not indicative of his or her eventual mastery of the course. Grades will not be adjusted for any other reason, such as a need to avoid academic probation, to please an employer, to
graduate, or to go to graduate school.
Grades for the course will be posted on Beartracks, and will not be available by phone or email for security (privacy) reasons.
Academic Misconduct
The University of Alberta is committed to the highest standards of academic integrity and honesty. You are expected to be familiar with these standards regarding academic honesty, and are particularly urged to familiarize yourself with the provisions of the Code of Student
Behaviour (online at could potentially result in suspicions of cheating, plagiarism, misrepresentation of facts and/or participation in an offence. Academic dishonesty is a serious offence and can result in suspension or expulsion from the University. Your attention is drawn especially to sec. 30.3, Inappropriate Academic Behavior, including sec. 30.3.2 and 30.3.6(5). Suspected infractions will be pursued to the greatest extent provided for by the policy and guidelines.
Signing for class attendance for a classmate is academic dishonesty. In the case of excuses for missed examinations, a student may be required to make a statutory declaration about the reasons for his or her absence.
In this course, discussion among students outside of class is encouraged. This includes any material that might be specifically assigned in advance as the basis for examination questions.
University policy about course outlines can be found in Recording of class sessions
The University of Alberta policy regarding recording of class sessions is the following:
"Recording is permitted only with the prior written consent of the professor or if recording is part of an approved accommodation plan."
COURSE SCHEDULE
This schedule is subject to change. When possible, changes will be announced in advance and on the course webpage, and (when appropriate) by email.
It is possible that assigned readings located on the internet may disappear without warning. They were all available as of the date this course outline was completed. If links are available on the day for which they are assigned (with either the url provided or a substitute url that can be found by searching the website), students are responsible for them even if they disappear at a later date.
(Where possible, permalinks to the University library are provided.) Waiting to obtain a reading until a later date runs the risk that it will not be available. Broken links should be brought to the attention of the instructor by the due date for the reading; otherwise, they will be presumed to have been available on that date.
Answers to numerical problems will be posted on the course website as the course progresses.
“Conceptual” (i.e., non-numerical) questions are for class discussion and for the
development of understanding through discussion; therefore, “solutions” to non-numerical questions will not be posted. Students who are not present during the discussion of such questions may be able to obtain notes and information from another student.
Sept. 8 Introduction to Course
“Divine Intervention”, the Economist 7/18/09
Sept. 13 Part I – Introduction / Accounting under Ideal Conditions
Scott, Ch. Note: do not skip this chapter; it contains important material. Be sure to read 1.5-1.8, 1.13
Scott, Ch. 2 (Skip section 2.3)
Sept. 15 QP 2-1,13, 16 (For QP2-1, before preparing the economic income-based
statements, prepare historical cost income statements [with revenue and expense lines] and balance sheets for Example 2.1 in the text and for QP2-1; then make a comparison between economic income and historical cost income)
Sept. 20 Additional Problem 1 (see course webpage), QP2-20, 24
Part II – Decision Usefulness Approach to Financial Reporting Sept. 22 Ch. 3 (3.5-3.7 are reviews of parts of Finance 301; you should review this
material to the extent that you need to remind yourself of the main points; you are not responsible for being able to make calculations in sec. 3.7.2 and 3.7.3) Sept. 27 IASB/FASB conceptual framework SFAC 8 (2010)
http://www.fasb.org/jsp/FASB/Page/SectionPage&cid=1176156317989 Read: OB1-OB21, BC1.14-1.23; QC1-39, BC3.20-3.25
Note: the textbook discusses an exposure draft of this document, dated 2008.
Notice that the concept of reliability, which is discussed in the textbook, has been replaced in the final statement. Also, the “trade-off” between relevance and reliability, discussed in the textbook is rejected. You are responsible for the new version of these parts of the Conceptual Framework)
Sept. 29 QP3-1, 10, 12, 11 Your answers to QP 2-11 should focus on the qualitative characteristics in the FASB/IASB Conceptual Framework (2010) (so, not including reliability)
Part III – Efficiency of Capital Markets and the Information Approach to Decision Usefulness
Oct. 4 Ch. 4, Ch. 5. For chapter 4, you are expected to have learned about capital market efficiency (information efficiency) in Finance 301. We will focus here on its implications for accounting; in Part IV, we will examine the implications of the view that capital markets are not perfectly efficient.
Oct. 6 QP 4-1, 3, 9, 10, 15 Oct. 11 QP 5- 3, 8, 13, 16, 18
Part IV – Inefficiency of Capital Markets and the Measurement Approach to Decision Usefulness
Oct. 13 Ch. 6; skip sec. 6.5 and 6.7
Knowledge @ Wharton, "Is that a $100 bill lying on the ground? two views on capital market efficiency."
Or search on Knowledge @ Wharton
You may have to go to the Knowledge @ Wharton School website and subscribe. Then download and read the article.
“The Myth of the Rational Market”
Oct. 18 , 20 Meeting of the International Ethics Standards Board for Accountants. For information about the IESBA, see:
instructor.
Oct. 18 QP 6- 5, 6, 13, 16
Part V – Fair Value Accounting
Oct. 20 Ch. 7 – Measurement Perspective Applications / Fair Value Accounting. Skip sec. 7.8.3. Note that the discussion of IAS 39 on pp. 245-6 has been superseded.
Oct. 25 MIDTERM EXAM – covers through part IV
Oct. 27 Mary Barth, “Including Estimates of the Future in Today’s Financial Statements”
Accounting Horizons 2006 20(3): 271-285.
Nov. 1 Additional Problems 2, 3; QP 7-2, 8 (answer 7-2 in relation to the published IASB/FASB Conceptual Framework)
Nov. 3 Additional Problem 4, QP 7-10, 17 Part VI – Economic Consequences Nov. 8 Ch. 8
Floyd Norris, “The Problem for Bankers? The Rules”, NY Times, March 13, 2009
“Divided and Overruled” The Economist Nov. 14, 2009 vol 393, iss. 8657, pg.
88
Note: Nov. 10: Meeting of the conflict of interest task force of the International Ethics Standards Board for Accountants. For information about the IESBA, see:
a substitute instructor.
Nov. 10 QP 8- 4, 7, 9, 10
Part VII – Earnings Management
Nov. 15 The Economics of Earnings Management and Fraud Ch. 11
McEnally and Walters, “The Critical Nature of Neutral Financial Reporting”
IASB Exposure Draft Snapshot: Leases
(Since lease accounting is a topic for Accounting 415, you are not responsible for the technical details of the current or proposed standards beyond what is assigned or discussed in class.)
Nov. 17 The Ethics of Earnings Management and Fraud
“SEC Charges Dell and Senior Executives with Disclosure and Accounting Fraud”
“SEC Charges Ernst & Young and Six Partners for Roles in Accounting Violations at Bally Total Fitness”
Satyam Computer Services
Nov. 22 QP 11- 4, 5, 9, 10, 12; 6-12
“Magic Numbers: The SEC Fines GE” The Economist Aug. 8, 2009 pg. 57
“SEC Charges General Electric with Accounting Fraud”
Part VIII – Standard Setting Nov. 24 Ch. 12 – Economic Issues Nov. 29 QP 12- 6, 9, 15, 17 Dec. 1 Ch. 13 – Political Issues
“Blame the Accountants,” New York Times March 12, 2009
“Messenger, Shot”, the Economist, 4/11/09
Dec. 6 QP 13- 7, 10, 12, 13, 15
FINAL EXAMINATION
Cumulative coverage, with emphasis on post midterm topics Review/overview materials:
Foster (FASB), “The FASB and Capital Markets”
therefore contains examinable material); it provides a good summary and review of many issues in the course, but does not introduce new material.
Tentative dates
Section A1(930am) Section A2 (330pm)
Wednesday Monday
Dec. 14 Dec. 12
9:00 am 2:00pm
Deferred Final Exam January 13
2012 9:00am