Financial Accounting Theory

Financial Accounting Theory presents financial accounting as a means to resolve problems of asymmetric information and to facilitate contracting. It develops ideas from decision theory and information economics to emphasize that accounting serves important purposes in society, of enhancing trust and meeting information needs.

Despite its theoretical orientation, the book does not ignore the institutional structure of financial accounting and standard setting. It features considerable coverage and critical evaluation of financial accounting standards and regulations, such as fair value accounting, financial instruments, reserve recognition accounting, management discussion and analysis, employee stock options, impairment tests, hedge accounting, derecognition, consolidation, and comprehensive income. The structure of standard-setting bodies is also described, and the role of structure in helping to engineer the consent necessary for a successful standard is evaluated.

The book’s primary orientation is toward the accounting standards of the International Accounting Standards Board (IASB), but most topics reference U.S. accounting standards and standard setting as well. The text discussion concentrates on relating standards to the theoretical framework of the book, while providing students with exposure to the main features of the standards themselves.