Why Is Positive Accounting Standards - 1162 Words

1. Introduction: This paper is a contribution made my Ross L. Watts and Jerold L. Zimmerman, titled as â€Å"Towards a Positive Theory of Determination of Accounting Standards† published by American Accounting Association. It explores the factors that have been influencing management’s attitudes in lobbying on accounting standards. It describes an attempt made by two in evolution and development of the Positive Accounting Theory by reasoning, factors like taxes, regulations, management compensation plans, book keeping cots, etc. The results concerned with the theory are consistent. 2. Summary of the Article To begin with it is important to understand why Positive accounting theory is incorporated by a Company. Commonly know as PAT, it†¦show more content†¦This theory has a precondition, which focuses on understanding the management incentives. The paper begins with introduction of the factors affecting management wealth which are listed as; i)Taxes, ii) Political costs, iii) Information Production Costs, and iv) Management Compensation Plans. Moving on, it gives description about various assumption that an organisation needs to consider before they start following the Positive Accounting Theory approach. Two main assumption the research paper is based on are: Individual act to maximise their own utility. (Article) This assumption is also used by Gordon (1964) in an early attempt to derive positive accounting theory. Gordon model and variants of it, were also tested know as the â€Å"smooth† literature. Management utility is a positive function of the expected compensation in future periods and decreases the firms reported earning. The Study 1978 corroborated the hypothesis that management is a determinant role in accounting standard and concretely pointed that firm size is the most consequential factor will influence managerial deportment, which has a paramount implicative insinuation for setting accounting standard. Furthermore, this conclusion of this paper convinced the feasibility of positive theory in accounting research which as a revolution in accounting research area. On the other hand, Study 1998 additionally gave us a paramount conclusion which