Commerce 4AF3
Accounting Theory
Winter 2014 Course Outline

Accounting and Financial Management Services
DeGroote School of Business
McMaster University

Course Objectives

This course is designed to give an overview of topics relevant to current accounting theory, research, standard setting and practice through relevant readings and by detailed examination of various accounting models.

Instructor and Contact Information

Name: HT Hao
E-mail: haohorn@mcmaster.ca
Office: DSB323
Office Hours: Wednesday 11:30-12:20, Friday10:30-11:20 and by appointment.
Tel: (905) 525-9140 Ext: 23984
Class Time and Location:
C02 Friday 11:30-14:20 @BSB/138
C03 Wednesday 8:30-11:20 @KTH/B105

|Course Website: |http://avenue.mcmaster.ca/ |

Course Elements

|Credit Value: |3 |Leadership: |Yes |Global View: |Yes |IT Skill: |No |
|Avenue: |Yes |Numeracy: |Yes |Written Skill: |Yes |Ethics: |Yes |
|Participation: |Yes |Innovation: |Yes |Group Work: |Yes |Oral Skill: |Yes |
|Evidence-Based: |Yes |Experiential: |No |Final Exam: |Yes |Guest Speaker: |No |
| | | | | | | | |

Course Description

This course is about accounting, not how to account. Accounting students have been exposed to the methodology and practice of accounting need to critically examine the broader implications of financial accounting for the fair and efficient working of our economy. The objective is to give the students an understanding of current financial accounting and reporting environment, taking into account the diverse interests of both external users and management. Various professional and conceptual topics will integrate research from Accounting, Finance, and Economic journals. The journals used will be from both the academic and professional literatures. To accomplish these implied objectives, a combination of class formats will be used including lectures, the trading floor, seminars, case analysis and expert guest lecturers. Lectures will be used to develop the foundation: the accounting process and accounting models considered alternatives to GAAP. Seminars will be led by the course participants, usually in groups of three or four members, to present and develop topics related to accounting theory and the accounting environment. Case study will be used to link the research topics and develop linkages from the theoretical to the practical.

Learning Outcomes

Upon completion of this course, students will be able to complete the following key tasks:

➢ Analyze the advantages/disadvantages of the various accounting models;

➢ Assess business health/performance as implied by the various accounting models;

➢ Conduct an assessment of a given situation from a political economy perspective;

➢ Begin to understand the many perspectives from which accounting can be studied.

Required Course Materials and Readings

Financial Accounting Theory, 6th Edition, William R. Scott, 2012.

|Avenue registration for course content, readings and case materials | |
|( http://avenue.mcmaster.ca | |

Evaluation

Exam: We will have one comprehensive in-class examination on 9th week (March 12 &14). The exact scope and format of this examination will be announced later.

Students will form group consist of 4 students to complete three group projects. ➢ Group Seminar Project: Each group will prepare material and lead a designated seminar of assigned paper from selected topics (paper will be assigned once groups are formed). This seminar is to consider and introduce a broad spectrum of material for class discussion. Included in the seminar project will be (1) a presentation (15%), and (2) a discussion and question period (5%). Each group needs to submit a soft copy of presentation materials (e.g., power-point slides) including the questions discussed during presentation. The total time for seminar presentation and discussion is to be a maximum of 40 minutes. All group members are expected to participate in the delivery and discussion of materials of the assigned paper. All students not presenting on a given date should be prepared to participate in classroom discussion of the topic. ➢ Research in Motion Case Report: The due date for this report is 4th Class (January 29 &31). ➢ Analyst Report Project: Each group will select and analyze a Canadian firm (the firm must be identified by the end of third class). Each group will complete an analyst report in which a trading recommendation must be made (in terms of buy, sell, or hold) and information and analysis used to input this decision must also included. Students will submit the report and make a short presentation (no more than 10 minutes) in the 12th class (April 2 & 4). ➢ Class Participation: Name cards are used to help give credit for your participation. You must have a name card with your full first and last name clearly written and displayed in front of you for every class. Participation in discussion aids in assimilation of concepts and is an essential part of your professional development. Classes are more interesting and intellectually stimulating if there is participation from everyone. In order for you to gain maximum benefit from discussions, it is essential that you complete assigned text material and/or readings in advance, as well as attempt assigned problems. Therefore class participation marks will be awarded on the basis of each student’s contribution to discussions, and relevant questions and comments during lectures. Class participation is not equivalent to class attendance. Specifically, students who fail to participate in case discussions will receive a class participation mark of zero, regardless of regular class attendance (a separate component). Students unable to attend class should inform the instructor before class of the conflict.

Components and Weights

| | |
|Exam |30% |
| |20% |
|Group Seminar Project | |
| |15% |
|RIM Case Report | |
| |15% |
|Analyst Report Project | |
|Class Participation |20% |
| | |
|Total |100% |

NOTE: The use of a McMaster standard calculator is allowed during examinations in this course. See McMaster calculator policy at the following URL:

http://www.mcmaster.ca/policy/Students-AcademicStudies/examinationindex.html

Conversion

At the end of the course your overall percentage grade will be converted to your letter grade in accordance with the following conversion scheme.

Letter Grade Percent Letter Grade Percent A+ 90 - 100 C+ 67 - 69 A 85 - 89 C 63 - 66 A- 80 - 84 C- 60 - 62 B+ 77 - 79 D+ 57 - 59 B 73 - 76 D 53 - 56 B- 70 - 72 D- 50 - 52 F 00 - 49

Communication and Feedback

Students who are uncomfortable in directly approaching an instructor regarding a course concern may send a confidential email to the respective Area Chair (mohde@mcmaster.ca) or the Associate Dean (adbusac@mcmaster.ca).

Students who wish to correspond with instructors or TAs directly via email must send messages that originate from their official McMaster University email account. This protects the confidentiality and sensitivity of information as well as confirms the identity of the student. Emails regarding course issues should NOT be sent to the Area Administrative Assistants.

Instructors are required to provide evaluation feedback for at least 10% of the final grade to students prior to Week #8 in the term.

Instructors may conduct an informal course review with students by Week #4 to allow time for modifications in curriculum delivery.

Students who wish to have a course component re-evaluated must complete the following form:

http://www.mcmaster.ca/policy/Students-AcademicStudies/Form_A.pdf

In order for the component to be re-read:

• the component must be worth 10% or more of the final grade in the course • students pay a fee of $50 in Gilmour Hall #209 (receipt is then brought to APO) • the Area Chair will seek out an independent adjudicator to re-grade the component • an adjustment to the grade for the component will be made if a grade change of three points or greater on the 12 point scale (equivalent to 10 marks out of 100) has been suggested by the adjudicator as assigned by the Area Chair • if a grade change is made, the student fee will be refunded

Academic Dishonesty

It is the student’s responsibility to understand what constitutes academic dishonesty. Please refer to the University Senate Academic Integrity Policy at the following URL:

http://www.mcmaster.ca/policy/Students-AcademicStudies/AcademicIntegrity.pdf

This policy describes the responsibilities, procedures, and guidelines for students and faculty should a case of academic dishonesty arise. Academic dishonesty is defined as to knowingly act or fail to act in a way that results or could result in unearned academic credit or advantage. Please refer to the policy for a list of examples. The policy also provides faculty with procedures to follow in cases of academic dishonesty as well as general guidelines for penalties. For further information related to the policy, please refer to the Office of Academic Integrity at:

http://www.mcmaster.ca/academicintegrity

Requesting Relief For Missed Academic Term Work

1. Students may request relief from a regularly scheduled midterm, test, assignment or other course component in the following two ways:

a) for absences from classes lasting up to five (5) days; or
b) for absences from classes lasting more than five (5) days.
c) for conflicts arising from Faculty Office approved events

a) For absences from classes lasting up to five (5) days
Students must use the MSAF (McMaster Student Absence Form). This is an on-line, self-reporting tool, for which submission of medical or other types of supporting documentation is normally not required. Students may use this tool to submit a maximum of one (1) request for relief of missed academic work per term as long as the weighting of the component is worth 29% of the final grade or less. Students must follow up with their course instructors regarding the nature of the relief within two days of submitting the form. Failure to do so may negate the opportunity for relief. It is the prerogative of the instructor of the course to determine the appropriate relief for missed term work in his/her course.

If the value of the component is worth 30% or more, students must report to the APO to discuss their situation and will be required to provide appropriate supporting documentation.

b) For absences from classes lasting more than five (5) days
Students cannot use the MSAF. They MUST report to the APO to discuss their situation and will be required to provide appropriate supporting documentation.

Students who wish to submit more than one request for relief of missed academic work per term cannot use the MSAF. They must report to the APO and discuss their situation with an academic advisor. They will be required to provide supporting documentation and possibly meet with the Manager.

c) For conflicts arising from Faculty Office approved events
Students unable to write a mid-term at the posted exam time due to the following reasons: religious; work-related (for part-time students only); representing university at an academic or varsity athletic event; conflicts between two overlapping scheduled mid-term exams; or other extenuating circumstances, have the option of applying for special exam arrangements. Please see the DeGroote Missed Course Work Policy for a list of conflicts that qualify for academic accommodation

http://ug.degroote.mcmaster.ca/forms-and-resources/missed-course-work-policy/
Such requests must be made to the Academic Programs Office at least ten (10) working days before the scheduled exam along with acceptable documentation.
Non-Commerce students must submit their documentation to their own Faculty Office and then alert the Academic Programs Office of their interest in an alternate sitting of the midterm.

Instructors cannot themselves allow students to unofficially write make-up exams/tests. Adjudication of the request must be handled by the Academic Programs Office.

The MSAF cannot be used during any final examination period.

If a mid-term exam is missed without a valid reason, students will receive a grade of zero (0) for that component.

Student Accessibility Services

Student Accessibility Services (SAS) offers various support services for students with disabilities. Students are required to inform SAS of accommodation needs for examinations on or before the last date for withdrawal from a course without failure (please refer to official university sessional dates). Students must forward a copy of such SAS accommodation to the instructor immediately upon receipt. If a student with a disability chooses NOT to take advantage of an SAS accommodation and chooses to sit for a regular exam, a petition for relief may not be filed after the examination is complete. The SAS website is:

http://sas.mcmaster.ca

Potential Modifications to the Course

The instructor and university reserve the right to modify elements of the course during the term. The university may change the dates and deadlines for any or all courses in extreme circumstances. If either type of modification becomes necessary, reasonable notice and communication with the students will be given with explanation and the opportunity to comment on changes. It is the responsibility of the student to check their McMaster email and course websites weekly during the term and to note any changes.

Course Schedule

Commerce 4AF3
Accounting Theory
Winter 2014 Course Schedule

|Week |Topic and Activity |Reading Assignment |
|Class 1 |Introduction: Overview of Accounting Theory. Information Asymmetry |Stott, Chapters 1 and 2 |
|January |(Adverse Selection and Moral Hazard). Accounting Under Ideal Conditions. | |
|8 & 10 |The Present Value Model Under Certainty and Uncertainty. | |
| | | |
|Class 2 |The Decision Usefulness Approach to Financial Reporting. |Stott, Chapters 3 and 4 |
|January | | |
|15 & 17 | | |
|Class 3 |Agency theory, Moral Hazard |Stott, Chapter 10 |
|January |Positive Accounting Theory | |
|22 & 24 |Corporate Governance | |
| | | |
|Class 4 |Information Asymmetry, Corporate Disclosure, and the Capital Markets: A |Scott Chapter 4 |
|January |Review of Empirical Disclosure Literature. | |
|29 & 31 |Ball and Brown. JAR, 1968. Earnings Surprises, Abnormal Returns, Earnings | |
| |Forecast. | |
| |Rim Case Report Due | |
|Class 5 |The Information Approach to Decision Usefulness. The Measurement Approach |Scott, Chapter 6 and 11 |
|February |to Decision Usefulness. |1. Schipper. Accounting Horizons, 1989. |
|5 & 7 |Seminar Project Presentation: Papers 1, 2 and 3 |2. Schipper and Vincent. Accounting 3. Horizons. 2003. |
| | |John Hand. AR, 1989. |
|Class 6 |The Information Approach to Decision Usefulness. The Measurement Approach |Scott Chapters 6 and 10 |
|February |to Decision Usefulness. |4. Sweeney. JAE, 1994. |
|12 & 14 |Seminar Project Presentation: Papers 4, 5 and 6. |5. Healy. JAE, 1985. |
| | |6. Han and Wang. AR, 1998. |
|Class 7 |The Measurement Approach to Decision Usefulness. Measurement Applications.|Scott Chapters 8 and 9 |
|February | |7. Abarbanell & Bushee, AR, 1998 |
|26 & 28 |Seminar Project Presentation: Papers 7, 8 and 9. |8. Healy and Palepu, Accounting Horizons, 1993. |
| | |9. Nichols and Wahlen. Accounting Horizons. 2004. |
|Class 8 |Compensation and Performance Evaluation |Scott Chapters 11 |
|March |Seminar Project Presentation Seminar Project Presentation: Papers 10, 11 |10. Kasznik and McEwen. AR, 1995. |
|5 & 7 |and 12. |11. Murphy & Zimmerman. JAE, 1992. |
| | |12. Baber, Kang and Kumar. JAE, 1998 |
| | | |
|Class 9 |Exam | |
|March | | |
|12 & 14 | | |
| | | |
|Class 10 |Valuation Models |Valuation Notes |
|March | | |
|19 & 21 | | |
|Class 11 |Valuation Models and Fundamental Analysis |Valuation Notes |
|March | | |
|26 & 28 | | |
|Class 12 |Analyst Report Project Presentation | |
|April | | |
|2 & 4 | | |
Suggested Papers for Group Seminar Project
(1) Commentary on Earnings Management, Schipper. Accounting Horizons, 1989

(2) Earnings Quality. Schipper and Vincent. Accounting Horizons. 2003

(3) Did firms undertake debt-equity swaps for an accounting paper profit or true financial gain? John Hand. The Accounting Review, 1989

(4) Debt-covenant Violation and Managers’ Accounting Responses. Sweeney. Journal of Accounting and Economics, 1994

(5) The Effect of Bonus Schemes on Accounting Decisions. Healy, P. The Journal of Accounting and Economics, 1985

(6) Political Costs and earnings Management of Oil Companies during the 1990 Persian Gulf Crisis. Han, J. And S. W., Wang. The Accounting Review, 1998

(7) Abnormal Returns to a Fundamental Analysis Strategy. Abarbanell, J. S. and B. J. Bushee. The Accounting Review, 1998

(8) The Effect of Firm’s Financial Disclosure Strategies on Stock Prices. Healy, P., and K. Palepu. Accounting Horizons, 1993

(9) How Do Earnings Numbers Relate to Stock Returns? A Review of Classic Accounting Research with Updated Evidence. Nichols and Wahlen. Accounting Horizons. 2004

(10) To Warn or Not to Warn: Management Disclosures in the Face of an Earnings Surprise. Kasznik, R. And B. McEwen. The Accounting Review, 1995

(11) Financial Performance Surrounding CEO Turnover. Murphy, K. And J. Zimmerman. The Journal of Accounting and Economics, 1992

(12) Accounting earnings and executive compensation: The role of earnings persistence
Baber, W.R., S.H., Kang, and K.R. Kumar, The Journal of Accounting and Economics, 1998