Lesson Notes Lesson 11 Understanding Accounting Standards Learning Objectives 1. Understand the inherent limitation of accounting from trust perspective. 2. Appreciate how accounting standards contributes in trust developing and maintaining. 3. Get to know the main contents of accounting standards. 4. Understand accounting theory and its demand for and supply of. 5. Help students develop a concept of self-learning and critical thinking. Teaching hours Students major in accounting: 4 hours Other students: 2 hours Teaching contents This lesson consists of four parts of related topics. Accounting standards and trust maintaining Our opening story is the expense or capitalization of interest expenditure of YUTAIBAI, the abuse of 3% regulation in Enron SPE case. By discussing these cased, students are leaded to think about accounting choice and economic consequence. Investors will lose their confidence on accounting information if earnings manipulation is perceived by the market. Accounting standards is also discussed from the perspective of transaction cost. The core value of accounting is to reduce agency cost and enhance trust via double-entry bookkeeping and other specific mechanism. Since alternatives are pervasive in accounting choice and treatments, accounting standards, a set of principles to determine how to make choice in accounting policy, will be necessary. The occurring of Yinguangxia and Enron scandals leave accounting standards to be blamed. So, we will discuss how accounting standards to be helpful in building trust. Introduction of accounting standards The role of accounting standards here is defined to build trust, therefore, generally accepted and followed by all participants are essential, this will request authoritativeness. Two ways to realize authoritativeness, governmental support or generally representativeness. Accounting standards is useful in help management to make choice when facing multi-choices. There are also two ways to help making choice, one is by elaborating the underlying principles and leaving the room for management to exercise, the other is making the choice for management, or giving them a cooking book. This is the origin of principle-based and rule-based argument. Several basic accounting principles will be briefed. The development of accounting standards in China We divide the whole process into three phrases, phrase I up to 1992, phrase II covers from 1992-2000, and 2000 and later covered in phrase III. We encourage instructors to discuss the cases occurred in this part. Introduction of Accounting theory Two key issues will be covered in this part, deconstruction and the demand for and supply of accounting theory. Since deconstruction is a term from philosophy, instructors are encouraged to pay attention on this specific field. However, it is also acceptable if instructors skip this part and jump to the positive theory. Watts and Zimmerman (1979) is the basis of this part, so instructors are encouraged to read this paper carefully and then explain it to students in simple and understandable ways. About case discussion Several cases are introduced and discussed in this lesson. We encourage instructors to discuss cases as more as possible. Key points 1. Build a birdview of accounting standards and, especially, the relation between accounting standards and trust. 2. Appreciate the underlying reason of rule-based and principle-based debate. 3. Comprehend the deconstruction theory of accounting. Reading materials 1. Zeff, Stephen, Accounting Standards Setting: Theory and Practice, CFEPH (Beijing), 2005. 2.Watts and Ziimmerman, 1979, The demand for and supply of accounting theory: a market for excuses, THE ACCOUNTING REVIEW，Vol. LIV, No. 2.73-305 3. Scott, William, Financial Accounting Theory, third edition, Prentice Hall, 2003. Read news and comments about Enron, WorldCom, and related topics from Yahoo Business Full Coverage and other sources, find the cases discussed in class. Also, find cases which are not covered in class. Try to discuss them with your fellow classmates.