Chapter 6: The Search for Objectives Instructor Manual
Accounting Theory (9
th
edition) Page 1 of 8
CHAPTER HIGHLIGHTS
Chapter 6 continues the thrust of Chapter 5 by examining important documents and committee
reports that have appeared since the publication of ARS 1 and ARS 3. As its title indicates, the
chapter is concerned with the question of who financial reporting is prepared for and what
information should accessible by them. ASOBAT was the first formal report to emphasize the
importance of user needs to accounting standard setting, even though the actual development of
the user needs themselves was quite limited.
In the wake of the demise of the APB, the AICPA commissioned the Wheat Committee and the
Trueblood Committee reports. The former pertained to the organization of the APB’s successor
and was briefly discussed in Chapter 3. The latter attempted to delineate the major overall
objectives of accounting in terms of user needs. The objectives have been criticized as being
non-operational. However, since they were intended to be at the apex of a metatheoretical
structure, that criticism misses the point, in our opinion.
The discussion of user objectives and user diversity, which was given in separate appendices in
previous editions of this book, are now included in the body of the chapter. This information is
important and supplements the discussion of the various committee reports and documents
covered in the chapter.
QUESTIONS
Q-1 How do objectives differ from postulates?
Objectives are goals to be strived for. As such, they must be normative in nature. They may also
have different degrees of specificity. For example, an objective stating that information should
be relevant to users is very broad and is not operational. Objectives standing below relevance
Chapter 6: The Search for Objectives Instructor Manual
Accounting Theory (9
th
edition) Page 2 of 8
Q-2 Do you think that the funds flow statement is more “factual” and less “interpretative”
than the income statement and balance sheet?
The funds flow statement is more factual than the other statements, but it is not wholly factual.
Q-3 Do you think that the standards mentioned in ASOBAT are really standards? Why or
why not?
If we reserve the term “standards” as rules or guidelines for practice, ASOBAT’s standards lie
above standards in the sense that we presently use the term. They would lie below ASOBAT’s
Q-4 Why is the problem of heterogeneous users so critical in the development of
accounting theory?
If different user groups have different accounting information needs, a very thorny problem
exists. There is a cost associated with preparing and disseminating accounting information. On
the other hand, users do not directly pay for the information they need. Hence, a market-oriented
Q-5 APB Statement 4 defines assets in the following terms: “Assets are economic resources
of an enterprise that are recognized and measured in conformity with generally
accepted accounting principles. Assets also include certain deferred charges that are
not resources but that are recognized and measured in conformity with generally
accepted accounting principles.” Do you think this is a useful definition? Why or why
not?
This definition from APB Statement 4 is not very useful. The definition has a cart-before-the-
horse problem because the definition should help in determining GAAP but it says that if GAAP
Chapter 6: The Search for Objectives Instructor Manual
Accounting Theory (9
th
edition) Page 3 of 8
Q-6 How do the research orientations of accounting in Chapter 2 compare with SATTA’s
organization of research?
The orientations are different, but there is some overlap. Both list information economics as a
separate category. In SATTA, the “classical” approaches were basically deductive and
normative in nature with little, if any, emphasis upon user needs. Aside from information
economics, current research was classified by whether it emphasized decision models or decision
Q-7 The statement of Herbert Miller (footnote 33) is closest to which theoretical approach
delineated in SATTA?
Miller, Herbert E. (1974). “Discussion of Opportunities and Implications of the Report on
Objectives of Financial Statements,” Studies on Financial Accounting Objectives, 1974
Q-8 How has the definition of accounting been modified in recent years?
The decision-usefulness aspect of accounting was brought into the definition by ASOBAT, as
Q-9 What potential conflicts are present in terms of different user needs?
The problem here is, in a very real sense, the opposite of the problem concerning the conflict
among objectives. On one side are actual shareholders versus potential shareholders. The
former would certainly desire “good news,” whereas “bad news” might benefit the latter to the
Chapter 6: The Search for Objectives Instructor Manual
Accounting Theory (9
th
edition) Page 4 of 8
Q-10 Why has Ijiri advocated the need for a conceptual framework to implement
accountability?
We still need to know who the users of the accounting information would be: that is, how far the
net should be cast in terms of covering user groups. Should we, for example provide information
about environmental concerns and, if so, who should pay for the information? Similarly, the
Q-11 The Trueblood Committee Report advocated the use of financial forecasts. Why do
you think that adoption of this suggestion has been very unenthusiastically received by
preparers and auditors?
Q-12 Under an accountability orientation, Ijiri makes a strong case for the use of historical
costing including the possibility of general price-level adjustments. Why do you think
he has made this choice?
To quote Ijiri himself from his “Theory of Accounting Measurement” (Studies in Accounting
Research #10, American Accounting Association, 1975, p. 35):
Q-13 Past viewpoints expressed that financial statement preparers are also the largest class
of users of financial statements. Hence, the preparer has a “unique ability” to recognize
user needs that the FASB does not really appreciate. Critique this viewpoint.
They do indeed have a “unique ability” and they are important users. However, agency theory issues can
Chapter 6: The Search for Objectives Instructor Manual
Accounting Theory (9
th
edition) Page 5 of 8
Q-14 Why would “fairness” in financial reporting be difficult to implement?
We all have a tendency to think that what benefits us is “fair” and what does not benefit us is
Q-15 What is the relationship between “stewardship” and “accountability”? Discuss.
Accountability is related to but broader than stewardship. Both are concerned with good internal
controls. Accountability is much more concerned with how well management has done. Thus,
Q-16 Do you think that the income tax return mandated by the federal government is an
example of user heterogeneity? Why or why not?
Perhaps preparer heterogeneity would be a better term but the idea is definitely there. This is one
reason why the federal income tax return is so complicated. One small example would be social
Q-17 If a division manager of a firm were fired due to poor operating results, would this be
an example of stewardship?
CASES, PROBLEMS, AND WRITING ASSIGNMENTS
1. A crucial question brought up in this chapter concerns the issue of whether the
admittedly heterogeneous users of financial statements have highly diverse information
needs in terms of their underlying objectives. State as carefully as you can (1) why the
user groups have largely diverse information needs, and (2) why the user groups may
have relatively similar information needs. Do you think user diversity or different user
objectives presents the greater problem for accounting standard-setters?
Different user groups do indeed have somewhat different user needs. Shareholders, for example,
would want financial information which would tell something about the long-term growth and
Chapter 6: The Search for Objectives Instructor Manual
Accounting Theory (9
th
edition) Page 6 of 8
2. Using the different valuation methods discussed in Appendix 1-A, what possible
different user preferences do you see among the various user groups?
Historical cost and possibly general price level adjustment might be the most understandable
methods (which cuts across user groups). Management itself might prefer exit valuation since it
shows liquidity available to management for assessing the possibility of liquidating assets for the
CRITICAL THINKING AND ANALYSIS
1. Do you see an evolutionary process involving the documents and reports presented in
this chapter? Explain.
There is a certain evolutionary pattern that is present. After the failure of ARS 1 and ARS 3,
ASOBAT picked up the user orientation approach which was followed in APB Statement 4, the
Trueblood Report, and eventually the FASB’s conceptual framework. Close up, several of
ASOBAT’s standards for accounting information (relevance, verifiability, and freedom from
bias) appear in the conceptual framework (freedom from bias is complementary to the
Chapter 6: The Search for Objectives Instructor Manual
Accounting Theory (9
th
edition) Page 7 of 8
2. If different user groups do have different objectives, how might the situation be
handled?
This is a tough question. Can financial reporting be all things to all people? If it can, will the
costs be acceptable to those bearing them? Perhaps technology can help. XBRL, for example,
3. Williams and Ravenscroft (2015) question decision usefulness as the basis for
accounting standards. Take a position and argue its merits.
Williams, Paul F. and Sue P. Ravenscroft (Summer 2015). “Rethinking Decision Usefulness,”
Contemporary Accounting Research, 763-788.
“We investigate whether decision usefulness currently articulates a sufficiently coherent basis for
accounting as a social, regulatory practice. Relying on extensive evidence provided by
disciplines that investigate human behavior we demonstrate that decision usefulness serves more
4. What are the implications of Young (2006) on the standards promulgated by standards-
setting bodies?
Young, Joni J. (August 2006). “Making Up Users,” Accounting, Organizations and Society, 579–
600.
Young provides a good chronological perspective of how we got to the importance of “users”
and “decision usefulness” in our accounting standards. Our standards setting bodies chose to
Chapter 6: The Search for Objectives Instructor Manual
Accounting Theory (9
th
edition) Page 8 of 8