Another example cited by Thomas and Smith (1997) is that normative accounting theory are stimulated by the emergence of "orphan estates," as a political and media issue, leading to efforts to justify distributions more favorable to shareholders. A second consequence of normative theories' role as excises is that whether a theory proves true or false in the long-term may not be a particularly relevant factor in whether its originators prosper or not (Thomas & Smith, 1997).
Positive accounting theory appears to have the better position in the debate. This is because the first step in economics involves identifying the qualitative nature of a policy's consequences. Positive analysis allows for the assessment of the expected, objective outcomes. According to principles of economics, the distinguishing feature of positive analysis is that it deals with propositions that can be tested with respect to both their underlying logic and the empirical evidence. In other words, it deals with what is, or what might be, without deciding whether something is right or wrong, good or bad. Positive accounting theory supports logical research because it draws on accepted rules of logic and evidence, of both a qualitative and quantitative nature. Research indicates that a normative accounting theory is comparable to a value judgment that is not scientific, and cannot be proved right or wrong by facts, evidence, or logic. These value judgments stem from the value system of each individual making the judgment. Since individuals value judgments differ, they cannot be applied universally across the board. This is a significant problem within the realm of normative accounting theory.
Also revealed in the debate between positive and normative accounting theories is that some researchers have sought to combine the two theories. These researchers have analyzed the existence of one theory without the other, and have found that they operate together. Majone (1996) concludes that positive and normative theories of regulation should be viewed as complementary rather that mutually exclusive. However, neither include an explanation for the institutional framework of regulation; institutions were regarded as "black boxes" from which regulation emerged (Gaffikin, 2007). Such research has indicated that regulation needs the benefits that a combination of both theories has to offer the profession.
GAAP Analyzation and History in relation to Conceptual Framework.
Historically, the general approach of the GAAP was more of a principles-based standard with limited application guidance. This has changed to become more rules-based standards with specific application guidance. Historically, the use of volatility or industry index measurement for non-public entities when it is not practicable to estimate expected volatility was not permitted, but currently is permitted under the new GAAP principles. For the modification of a ward by change in performance condition, historically the GAAP would determine the expense based on the grant date fair value. The current GAAP determines the expense based on fair value at the modification date. Historically, under the GAAP, the definition of a discontinued operation continuing involvement was not addressed. In the current GAAP, the disposing entity should have no continuing cash flows representative of significant continuing involvement (Deloitte, 2007). Finally, for rights and obligations under insurance contracts, the historical GAAP addressed recognition and measurement in only a limited way, or an interim standard pending completion of a project. Under the current GAAP, several comprehensive industry accounting guidelines have been published.
The majority of the literature on the topic indicates that over the years there have been many arguments and debates over the necessity for regulation. For example, those who believe in the efficacy of markets argue that regulation is not necessary as market forces will operate to best serve society and optimize the allocation of resources (Gaffikin, 2007). However, there are many who point out that markets do not always operate in the best interests of societies so some form of intervention in the form of regulation is necessary. An analyzation of the conceptual framework indicates that the history of the accounting profession brought about the need for the GAAP. The GAAP emerged as a natural response to the scandals occurring in the profession and the need for regulation.
The conceptual framework as it relates to the GAAP indicates that there are a number of reasons for regulation. Regulation is considered desirable where there are "windfall profits" - where through some fortuitous event a firm is able to make...
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