AC3193

Summer 2020 online assessment guidance

AC3193 Accounting Theory

The assessment will be an open-book take-home online assessment within a 24-

hour window. The requirements for this assessment remain the same as the
originally planned closed-book exam, with an expected time/effort of 3 hours.

Candidates should answer FOUR of the following EIGHT questions: TWO from
Section A and TWO from Section B. All questions carry equal marks.

Each essay-based answer must not exceed 1,000 words. Anything beyond
1,000 words will not be read. In-text references will count towards the word
count.

You should complete any attempts of Questions 2-8 of this paper using word
processing software (e.g. Microsoft Word). This should be saved as a .doc or .docx
file and then uploaded to the VLE as ONE individual file including the coversheet.

You may hand-write calculations, formulae, or diagrams, but these should be

scanned or copied and included as images in the Word document that you submit.
Please ensure that any images are inserted at the appropriate point of your
document and correctly aligned (i.e. markers will not need to rotate images to read
them).

Any attempt of Question 1 should be handwritten or typed through a spreadsheet

application, converted to xls/xlsx, and submitted separately as an additional file.

Each page should have your candidate number in the header. Please do not
write your name anywhere on any part of your submission

Extracts from compound interest tables are given after the final question on this
paper.

You may use any calculator for any appropriate calculations. Credit will only be given
if all workings are shown.
The paper will be available at 12:00 midday (BST) on Monday 6 July 2020.

You have until 12:00 midday (BST) on Tuesday 7 July 2020 to upload your file into
the VLE submission portal. However, you are advised not to leave your submission
to the last minute. We will deduct 5 marks if your submission is up to one hour late,
10 marks if your submission is more than one hour late but less than two hours late
(etc.).

UL20/0376 Page 1 of 6
If you think there is any information missing or any error in any question, then you
should indicate this but proceed to answer the question stating any assumptions you
have made

The assessment has been designed with a duration of 24 hours to provide a more
flexible window in which to complete the assessment and to appropriately test the
course learning outcomes. As an open-book assessment, the expected amount of
effort required to complete all questions and upload your answers during this window
is no more than 3 hours. Organise your time well and avoid working all night.

You are assured that there will be no benefit in you going beyond the expected 3
hours of effort. Your assessment has been carefully designed to help you show what
you have learned in the hours allocated.

You are not expected to compile a full bibliography for each essay-based answer. As
per the AC3193 examination when taken under standard examination centre
conditions, you are expected to use normal in-text referencing – i.e. listing (Author,
Title, Year). When inserting a section of text of size from someone else’s work in
your own, you must use quotation marks and add a reference to the source in
(Author, Title, Year) format to make clear that you are citing verbatim.

This is an open book assessment and as such you may have access to additional
materials including but not limited to subject guides and any recommended reading.
But the work you submit is expected to be 100% your own. Therefore, unless
instructed otherwise, you must not collaborate or confer with anyone during the
assessment. The University of London will carry out checks to ensure the academic
integrity of your work. Many students that break the University of London’s
assessment regulations did not intend to cheat but did not properly understand the
University of London’s regulations on referencing and plagiarism. The University of
London considers all forms of plagiarism, whether deliberate or otherwise, a very
serious matter and can apply severe penalties that might impact on your award. The
University of London 2019-20 Procedure for the Consideration of Allegations of
Assessment offences is available online at:
https://london.ac.uk/sites/default/files/governance/assessment-offence-procedure-
year-2019-2020.pdf

The University of London’s Rules for Taking Online Timed Assessments have been
included in an update to the University of London General Regulations and are
available at:
https://london.ac.uk/sites/default/files/regulations/progregs-general-2019-2020.pdf

© University of London 2020

UL20/0376 Page 2 of 6
Section A

Answer any TWO questions from this section.

1. The following information relates to Oldham Mutual Fund Management (OMF) Ltd.
On 1 January 2019, the company’s director invested in an asset that produces the
following net cash receipts (after deducting all costs) from the investment. No further
net cash receipts are expected after 31 December 2021.

Expected net cash receipts for 2019 £200,000

Expected net cash receipts for 2020 £460,000
Expected net cash receipts for 2021 £800,000
Expected cost of capital for 2019 and beyond 4%

On 31 December 2019, however, he had to revise downwards his expectations for

future income due to a deteriorating economic environment.

Actual net cash receipts for 2019 £150,000

Expected net cash receipts for 2020 £400,000
Expected net cash receipts for 2021 £670,000
Actual cost of capital for 2019 6%
Actual cost of capital for 2020 10%
Expected cost of capital for 2021 and beyond 10%

Unfortunately for the company, the cost of capital has increased as the central bank
attempts to fight inflation by raising interest rates. This new rate is expected to
remain at that level for the foreseeable future. All cash flows arise at the end of the
year.

Required:
(a) Define Hicks’ approach to income measurement and explain its implications
for accountants.
(7 marks)

(b) For the asset held by the company, calculate to the nearest £1:
(i) Hicks’ income ex-ante for the year to 31 December 2019
(ii) Hicks’ income ex post 1A and 1B for the year to 31 December 2019
(iii) Hicks’ income ex post 2A and 2B for the year to 31 December 2019

(12 marks)

(c) Without further calculation, briefly explain why the following differences arise:

(i) ex ante versus ex post income

(ii) ex post income A versus B
(iii) ex post income 1 versus 2
(6 marks)

UL20/0376 Page 3 of 6
2. What are some of the key theories that link accounting with the notion of efficient
markets? What do these theories find and what are the assumptions that
underpin their methods?
(25 marks)

3. Explain what is meant by a critical approach to accounting theory. What does this
approach seek to achieve? Illustrate your answers by describing theories that use
such an approach.
(25 marks)

4. Outline the different theoretical arguments put forward for and against accounting
regulation. What are the core assumptions that such theories make?
(25 marks)

Section B

Answer any TWO questions from this section.

5. In the context of management control, what is the issue of myopia and how does
it arise? How might one attempt to resolve this myopia problem?
(25 marks)

6. Discuss the view that management control is a uniform practice that is the same
in all contexts.
(25 marks)

7. Compare and contrast the usage of market measures and accounting measures
of performance in the context of management control?
(25 marks)

8. What ethical issues can arise in the area of management control?

(25 marks)

END OF PAPER

UL20/0376 Page 4 of 6
Present Value interest factor per £1.00 due at the end of n years for interest rate of:
% 1 2 3 4 5 6 7 8 9 10
n
1 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909
2 0.980 0.961 0.943 0.925 0.907 0.890 0.873 0.857 0.842 0.826
3 0.971 0.942 0.915 0.889 0.864 0.840 0.816 0.794 0.772 0.751
4 0.961 0.924 0.888 0.855 0.823 0.792 0.763 0.735 0.708 0.683
5 0.951 0.906 0.863 0.822 0.784 0.747 0.713 0.681 0.650 0.621
6 0.942 0.888 0.837 0.790 0.746 0.705 0.666 0.630 0.596 0.564
7 0.933 0.871 0.813 0.760 0.711 0.665 0.623 0.583 0.547 0.513
8 0.923 0.853 0.789 0.731 0.677 0.627 0.582 0.540 0.502 0.467
9 0.914 0.837 0.766 0.703 0.645 0.592 0.544 0.500 0.460 0.424
10 0.905 0.820 0.744 0.676 0.614 0.558 0.508 0.463 0.422 0.386
11 0.896 0.804 0.722 0.650 0.585 0.527 0.475 0.429 0.388 0.350
12 0.887 0.788 0.701 0.625 0.557 0.497 0.444 0.397 0.356 0.319
13 0.879 0.773 0.681 0.601 0.530 0.469 0.415 0.368 0.326 0.290
14 0.870 0.758 0.661 0.577 0.505 0.442 0.388 0.340 0.299 0.263
15 0.861 0.743 0.642 0.555 0.481 0.417 0.362 0.315 0.275 0.239
16 0.853 0.728 0.623 0.534 0.458 0.394 0.339 0.292 0.252 0.218
17 0.844 0.714 0.605 0.513 0.436 0.371 0.317 0.270 0.231 0.198
18 0.836 0.700 0.587 0.494 0.416 0.350 0.296 0.250 0.212 0.180
19 0.828 0.686 0.570 0.475 0.396 0.331 0.277 0.232 0.194 0.164
20 0.820 0.673 0.554 0.456 0.377 0.312 0.258 0.215 0.178 0.149
21 0.811 0.660 0.538 0.439 0.359 0.294 0.242 0.199 0.164 0.135
22 0.803 0.647 0.522 0.422 0.342 0.278 0.226 0.184 0.150 0.123
23 0.795 0.634 0.507 0.406 0.326 0.262 0.211 0.170 0.138 0.112
24 0.788 0.622 0.492 0.390 0.310 0.247 0.197 0.158 0.126 0.102
25 0.780 0.610 0.478 0.375 0.295 0.233 0.184 0.146 0.116 0.092

% 11 12 13 14 15 16 17 18 19 20
n
1 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833
2 0.812 0.797 0.783 0.769 0.756 0.743 0.731 0.718 0.706 0.694
3 0.731 0.712 0.693 0.675 0.658 0.641 0.624 0.609 0.593 0.579
4 0.659 0.636 0.613 0.592 0.572 0.552 0.534 0.516 0.499 0.482
5 0.593 0.567 0.543 0.519 0.497 0.476 0.456 0.437 0.419 0.402
6 0.535 0.507 0.480 0.456 0.432 0.410 0.390 0.370 0.352 0.335
7 0.482 0.452 0.425 0.400 0.376 0.354 0.333 0.314 0.296 0.279
8 0.434 0.404 0.376 0.351 0.327 0.305 0.285 0.266 0.249 0.233
9 0.391 0.361 0.333 0.308 0.284 0.263 0.243 0.225 0.209 0.194
10 0.352 0.322 0.295 0.270 0.247 0.227 0.208 0.191 0.176 0.162
11 0.317 0.287 0.261 0.237 0.215 0.195 0.178 0.162 0.148 0.135
12 0.286 0.257 0.231 0.208 0.187 0.168 0.152 0.137 0.124 0.112
13 0.258 0.229 0.204 0.182 0.163 0.145 0.130 0.116 0.104 0.093
14 0.232 0.205 0.181 0.160 0.141 0.125 0.111 0.099 0.088 0.078
15 0.209 0.183 0.160 0.140 0.123 0.108 0.095 0.084 0.074 0.065
16 0.188 0.163 0.141 0.123 0.107 0.093 0.081 0.071 0.062 0.054
17 0.170 0.146 0.125 0.108 0.093 0.080 0.069 0.060 0.052 0.045
18 0.153 0.130 0.111 0.095 0.081 0.069 0.059 0.051 0.044 0.038
19 0.138 0.116 0.098 0.083 0.070 0.060 0.051 0.043 0.037 0.031
20 0.124 0.104 0.087 0.073 0.061 0.051 0.043 0.037 0.031 0.026
21 0.112 0.093 0.077 0.064 0.053 0.044 0.037 0.031 0.026 0.022
22 0.101 0.083 0.068 0.056 0.046 0.038 0.032 0.026 0.022 0.018
23 0.091 0.074 0.060 0.049 0.040 0.033 0.027 0.022 0.018 0.015
24 0.082 0.066 0.053 0.043 0.035 0.028 0.023 0.019 0.015 0.013
25 0.074 0.059 0.047 0.038 0.030 0.024 0.020 0.016 0.013 0.010

UL20/0376 Page 5 of 6
Present Value interest factor for an annuity of £1.00 for a series of n years for interest
rate of:
% 1 2 3 4 5 6 7 8 9 10
n
1 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909
2 1.970 1.942 1.913 1.886 1.859 1.833 1.808 1.783 1.759 1.736
3 2.941 2.884 2.829 2.775 2.723 2.673 2.624 2.577 2.531 2.487
4 3.902 3.808 3.717 3.630 3.546 3.465 3.387 3.312 3.240 3.170
5 4.853 4.713 4.580 4.452 4.329 4.212 4.100 3.993 3.890 3.791
6 5.795 5.601 5.417 5.242 5.076 4.917 4.767 4.623 4.486 4.355
7 6.728 6.472 6.230 6.002 5.786 5.582 5.389 5.206 5.033 4.868
8 7.652 7.325 7.020 6.733 6.463 6.210 5.971 5.747 5.535 5.335
9 8.566 8.162 7.786 7.435 7.108 6.802 6.515 6.247 5.995 5.759
10 9.471 8.983 8.530 8.111 7.722 7.360 7.024 6.710 6.418 6.145
11 10.368 9.787 9.253 8.760 8.306 7.887 7.499 7.139 6.805 6.495
12 11.255 10.575 9.954 9.385 8.863 8.384 7.943 7.536 7.161 6.814
13 12.134 11.348 10.635 9.986 9.394 8.853 8.358 7.904 7.487 7.103
14 13.004 12.106 11.296 10.563 9.899 9.295 8.745 8.244 7.786 7.367
15 13.865 12.849 11.938 11.118 10.380 9.712 9.108 8.559 8.061 7.606
16 14.718 13.578 12.561 11.652 10.838 10.106 9.447 8.851 8.313 7.824
17 15.562 14.292 13.166 12.166 11.274 10.477 9.763 9.122 8.544 8.022
18 16.398 14.992 13.754 12.659 11.690 10.828 10.059 9.372 8.756 8.201
19 17.226 15.678 14.324 13.134 12.085 11.158 10.336 9.604 8.950 8.365
20 18.046 16.351 14.877 13.590 12.462 11.470 10.594 9.818 9.129 8.514
21 18.857 17.011 15.415 14.029 12.821 11.764 10.836 10.017 9.292 8.649
22 19.660 17.658 15.937 14.451 13.163 12.042 11.061 10.201 9.442 8.772
23 20.456 18.292 16.444 14.857 13.489 12.303 11.272 10.371 9.580 8.883
24 21.243 18.914 16.936 15.247 13.799 12.550 11.469 10.529 9.707 8.985
25 22.023 19.523 17.413 15.622 14.094 12.783 11.654 10.675 9.823 9.077

% 11 12 13 14 15 16 17 18 19 20
n
1 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833
2 1.713 1.690 1.668 1.647 1.626 1.605 1.585 1.566 1.547 1.528
3 2.444 2.402 2.361 2.322 2.283 2.246 2.210 2.174 2.140 2.106
4 3.102 3.037 2.974 2.914 2.855 2.798 2.743 2.690 2.639 2.589
5 3.696 3.605 3.517 3.433 3.352 3.274 3.199 3.127 3.058 2.991
6 4.231 4.111 3.998 3.889 3.784 3.685 3.589 3.498 3.410 3.326
7 4.712 4.564 4.423 4.288 4.160 4.039 3.922 3.812 3.706 3.605
8 5.146 4.968 4.799 4.639 4.487 4.344 4.207 4.078 3.954 3.837
9 5.537 5.328 5.132 4.946 4.772 4.607 4.451 4.303 4.163 4.031
10 5.889 5.650 5.426 5.216 5.019 4.833 4.659 4.494 4.339 4.192
11 6.207 5.938 5.687 5.453 5.234 5.029 4.836 4.656 4.486 4.327
12 6.492 6.194 5.918 5.660 5.421 5.197 4.988 4.793 4.611 4.439
13 6.750 6.424 6.122 5.842 5.583 5.342 5.118 4.910 4.715 4.533
14 6.982 6.628 6.302 6.002 5.724 5.468 5.229 5.008 4.802 4.611
15 7.191 6.811 6.462 6.142 5.847 5.575 5.324 5.092 4.876 4.675
16 7.379 6.974 6.604 6.265 5.954 5.668 5.405 5.162 4.938 4.730
17 7.549 7.120 6.729 6.373 6.047 5.749 5.475 5.222 4.990 4.775
18 7.702 7.250 6.840 6.467 6.128 5.818 5.534 5.273 5.033 4.812
19 7.839 7.366 6.938 6.550 6.198 5.877 5.584 5.316 5.070 4.843
20 7.963 7.469 7.025 6.623 6.259 5.929 5.628 5.353 5.101 4.870
21 8.075 7.562 7.102 6.687 6.312 5.973 5.665 5.384 5.127 4.891
22 8.176 7.645 7.170 6.743 6.359 6.011 5.696 5.410 5.149 4.909
23 8.266 7.718 7.230 6.792 6.399 6.044 5.723 5.432 5.167 4.925
24 8.348 7.784 7.283 6.835 6.434 6.073 5.746 5.451 5.182 4.937
25 8.422 7.843 7.330 6.873 6.464 6.097 5.766 5.467 5.195 4.948

UL20/0376 Page 6 of 6
Examiners’ commentaries 2020

Examiners’ commentaries 2020

AC3193 Accounting theory

Important note

This commentary reflects the examination and assessment arrangements for this course in the
academic year 2019–20. The format and structure of the examination may change in future years,
and any such changes will be publicised on the virtual learning environment (VLE).

Information about the subject guide and the Essential reading

references

Unless otherwise stated, all cross-references will be to the latest version of the subject guide (2018).
You should always attempt to use the most recent edition of any Essential reading textbook, even if
the commentary and/or online reading list and/or subject guide refer to an earlier edition. If
different editions of Essential reading are listed, please check the VLE for reading supplements – if
none are available, please use the contents list and index of the new edition to find the relevant
section.

General remarks

Learning outcomes

At the end of this course and having completed the Essential reading and activities you should be
able to:

critically assess the impact of positive and normative accounting theories and their
applications in dealing with complex financial accounting issues such as alternative
accounting conventions, conceptual framework and economic income approach.

discuss the different approaches in regulating financial accounting information

discuss the demand and implications of financial information in capital market research

evaluate the applications of sociological and organisational approaches to the study of

accounting

evaluate issues arising from management control in its organisational context

discuss various approaches to performance measurement and control in various types of

organisations, and devise and evaluate indicators of performance

discuss contingency theory and its impacts on management control practices in organisations

discuss the ethical issues of using management control methods and its use in non-profit
organisations.

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AC3193 Accounting theory

What the examiners are looking for

Question 1 (the only numerically based question) was not attempted by all candidates. The
examiners are generally expecting candidates to show technical competency if they attempted
Question 1, and an ability to demonstrate critical and independent thinking for the remaining
discursive questions (Questions 2 to 8). This would include the use of examples that relate directly
to their argument (clearly described and logically fitting with the argument made) and indications
that the candidate has read and is able to understand material outside of the subject guide. Basic
essay writing skills are also to be expected (for example, introduction, arguments in each of the main
sections supported by examples and use of academic literature, conclusion).

Examination revision strategy

Many candidates are disappointed to find that their examination performance is poorer than they
expected. This may be due to a number of reasons, but one particular failing is ‘question
spotting’, that is, confining your examination preparation to a few questions and/or topics which
have come up in past papers for the course. This can have serious consequences.

We recognise that candidates might not cover all topics in the syllabus in the same depth, but you
need to be aware that examiners are free to set questions on any aspect of the syllabus. This
means that you need to study enough of the syllabus to enable you to answer the required number of
examination questions.

The syllabus can be found in the Course information sheet available on the VLE. You should read
the syllabus carefully and ensure that you cover sufficient material in preparation for the
examination. Examiners will vary the topics and questions from year to year and may well set
questions that have not appeared in past papers. Examination papers may legitimately include
questions on any topic in the syllabus. So, although past papers can be helpful during your revision,
you cannot assume that topics or specific questions that have come up in past examinations will
occur again.

If you rely on a question-spotting strategy, it is likely you will find yourself in difficulties
when you sit the examination. We strongly advise you not to adopt this strategy.

2
Examiners’ commentaries 2020

Examiners’ commentaries 2020

AC3193 Accounting theory

Important note

This commentary reflects the examination and assessment arrangements for this course in the
academic year 2019–20. The format and structure of the examination may change in future years,
and any such changes will be publicised on the virtual learning environment (VLE).

Information about the subject guide and the Essential reading

references

Unless otherwise stated, all cross-references will be to the latest version of the subject guide (2018).
You should always attempt to use the most recent edition of any Essential reading textbook, even if
the commentary and/or online reading list and/or subject guide refer to an earlier edition. If
different editions of Essential reading are listed, please check the VLE for reading supplements – if
none are available, please use the contents list and index of the new edition to find the relevant
section.

Comments on specific questions

Candidates should answer FOUR of the following EIGHT questions: TWO from Section A and
TWO from Section B. All questions carry equal marks.

Each essay-based answer must not exceed 1,000 words. Anything beyond 1,000 words
will not be read. In-text references will count towards the word count.

Section A

Answer any TWO questions from this section.

Question 1

The following information relates to Oldham Mutual Fund Management (OMF)

Ltd. On 1 January 2019, the company’s director invested in an asset that produces
the following net cash receipts (after deducting all costs) from the investment. No
further net cash receipts are expected after 31 December 2021.

Expected net cash receipts for 2019 £200,000

Expected net cash receipts for 2020 £460,000
Expected net cash receipts for 2021 £800,000
Expected cost of capital for 2019 and beyond 4%

On 31 December 2019, however, he had to revise downwards his expectations for

future income due to a deteriorating economic environment.

3
AC3193 Accounting theory

Actual net cash receipts for 2019 £150,000

Expected net cash receipts for 2020 £400,000
Expected net cash receipts for 2021 £670,000
Actual cost of capital for 2019 6%
Actual cost of capital for 2020 10%
Expected cost of capital for 2021 and beyond 10%

Unfortunately for the company, the cost of capital has increased as the central bank
attempts to fight inflation by raising interest rates. This new rate is expected to
remain at that level for the foreseeable future. All cash flows arise at the end of the
year.

Required:

(a) Define Hicks’ approach to income measurement and explain its implications for
accountants.
(7 marks)
(b) For the asset held by the company, calculate to the nearest £1:
i. Hicks’ income ex-ante for the year to 31 December 2019

ii. Hicks’ income ex post 1A and 1B for the year to 31 December 2019

iii. Hicks’ income ex post 2A and 2B for the year to 31 December 2019.
(12 marks)
(c) Without further calculation, briefly explain why the following differences arise:
i. ex ante versus ex post income

ii. ex post income A versus B

iii. ex post income 1 versus 2

(6 marks)

Reading for this question

Subject guide, Chapter 3 and Errata to the chapter.

Alexander, D., A. Britton, A. Jorissen, M. Hoogendoorn and C.V. Mourik International financial
reporting and analysis. (Andover: Cengage Learning EMEA, 2017) seventh edition [ISBN
9781473725454] Chapter 4.

Approaching the question

(a) The subject guide covers the key ideas that underpin Hicks’ approach to income
measurement (in Chapter 3). It is important that candidates are able to appreciate what
are the key differences when comparing Hicks’ to the accounting approach (for example,
mainly prospective versus retrospective views of income measurement). It is also important
for answers to consider implications – is the Hicks’ approach usable from an accounting
perspective? See discussion in the subject guide (Sections 3.10 and 3.11).

(b) We have:

Period Original £ Discount PV

1 200,000 0.962 192,308
2 460,000 0.925 425,296
3 800,000 0.889 711,197
V 0 t0 1,328,801

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Examiners’ commentaries 2020

Period Revised £ Discount PV

1 150,000 0.909 136,364
2 400,000 0.826 330,579
3 670,000 0.751 503,381
V 0 t1 970,323

Period Original £ Discount PV

1 460,000 0.962 442,308
2 800,000 0.925 739,645
V 1 t0 1,181,953

Period Revised £ Discount PV

1 400,000 0.909 363,636
2 670,000 0.826 553,719
V 1 t1 917,355

Income Ex-ante (or Ex-ante 1) = D1 t0 + V1 t0 − V0 t0 = 53, 152.

Income Ex post 1A = D1 t1 + V1 t1 − V0 t0 = (261, 445).
Income Ex post 1B = D1 t1 + V1 t1 − V0 t1 = 535, 835.
Income Ex post 2B = ((V0 t1 )(r1 t1 )(1 + r0 t1 ))/(1 + r1 t1 )) = 93, 504.

(c) The discussions and solutions to part (c) are covered in the subject guide Sections 3.6 to 3.8.

Question 2

What are some of the key theories that link accounting with the notion of efficient
markets? What do these theories find and what are the assumptions that underpin
their methods?

(25 marks)

Reading for this question

Subject guide, Chapter 6.

Ball, R. and P. Brown ‘An empirical evaluation of accounting income numbers’, Journal of
Accounting Research 6(2) 1968, pp. 159–78.

Watts, R.L. and J. Zimmerman Positive accounting theory. (Englewood Cliffs, NJ: Prentice–Hall,
1986) [ISBN 9780136861713].

Approaching the question

Many answers provided by candidates were generic, in that they covered the broad areas around
the topic but did indicate to the examiners that a significant amount of thought and reading had
gone into answers. This question was one of the less popular choices among questions in Section
A.

Answers could start by explaining the linkages between accounting’s role in capital market
research, and how it has become a major focus of financial accounting research over the past 40
years. Next, the main body of the answer could address the main question asked, i.e. the impact
of capital market research on financial reporting based on readings/literature. For example, this
part of the answer may start by stating that capital market research has investigated the
information content of corporate earnings announcements as well as many other accounting and

5
AC3193 Accounting theory

disclosure items. Results of this research are useful for both practicing accountants and finance
professionals such as security analysts.

Knowledge of these results is considered to be particularly useful in relation to making financial

reporting decisions. It is often argued that more informed choices between accounting and
disclosure alternatives could be made if the expected impacts on share prices are anticipated
when making financial reporting decisions. Key literature should also acknowledge the
contributions of Ball and Brown (1968) and how this has sparked a new paradigm in positivistic
research into information perspectives on accounting.

Question 3

Explain what is meant by a critical approach to accounting theory. What does this
approach seek to achieve? Illustrate your answers by describing theories that use
such an approach.

(25 marks)

Reading for this question

Subject guide, Chapter 8.

Chua, W.F. ‘Radical developments in accounting thought’, The Accounting Review 61(4) 1986,
pp. 601–32.

Gallhofer, S. and J. Haslam ‘Some reflections on the emancipatory accounting construct: shifting
meaning and the possibilities of a new pragmatism’, Critical Perspectives on Accounting 2017.
Advance online publication. doi. org/10.1016/j.cpa.2017.01.004

Laughlin, R. ‘Empirical research in accounting: alternative approaches and a case for

‘middle-range’ thinking’, Accounting, Auditing and Accountability Journal 8(1) 1995, pp. 63–87.

Roslender, R. ‘Introduction’ in Roslender, R. (ed.) The Routledge companion to critical

accounting. (London: Routledge, 2017) [ISBN 9781317686736].

Approaching the question

The subject guide refers to a number of understandings of critical in the accounting literature.
Roslender (in one of his delineations) distinguishes between a mainstream positivistic and
quantitative approach and alternative approaches he sees as critical. The subject guide also notes
how all research in accounting might be considered critical in the sense of looking to improve
something. Perhaps the most dominant understanding of critical when applied to accounting
research is that it is research that wants to change things (social structures, systems of thought)
in some radical way. So, the answer to the question depends upon how critical is seen. Gallhofer
and Haslam and related theorising is an interesting illustration. Their work is in the tradition of
a more radical orientation but they seek to argue that critical theorising has changed under the
influence of various currents of post-structuralist, post-modern and post-Marxist theorising.
They elaborate this through exploring change in the meaning of ‘emancipatory accounting’ which
they argue used to roughly mean an accounting helping bring about a Marxist revolution but
now means something more like to make things better along a continuum (in terms of progressive
criteria), a notion they link to pragmatism.

The examiners were liberal given the different ways the question can be answered. Most
candidates saw ‘critical’ in the more radical sociological sense but often in crude terms that did
not well reflect either the subject guide or the wider literature of critical accounting. Some were
confused about Roslender’s view of critical (indicated above). The description of theories using a
critical approach was typically not well done. Those who wrote about emancipatory accounting
did tend to reflect the guide well. Some answers used Chua’s overview well. Very few went

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Examiners’ commentaries 2020

beyond the subject guide and its main readings. The liberal approach and a commitment to
recognising points made by candidates meant that only a relatively small number of candidates
fell below the pass mark. On the other hand, very few scored a first-class mark for the reasons
indicated above.

Question 4

Outline the different theoretical arguments put forward for and against accounting
regulation. What are the core assumptions that such theories make?

(25 marks)

Reading for this question

Subject guide, Chapter 3 and Errata to the chapter.

Deegan, C. and J. Unerman, Financial accounting theory (Maidenhead: McGraw–Hill Education,

2011) second edition [ISBN 9780077126735]. Chapter 3.

Approaching the question

Regulation can be variously understood (for instance regulation through States, markets and
‘other’ forces – for example, civil society, cultural have all been seen as involved in a generic
notion of regulation). In mainstream economic theory there is often a distinction between State
(including perhaps a quasi-state such as state-backed standards) regulation and markets. Most
approaches in the literature are influenced by economic theory and the latter way of seeing
regulation.

Drawing from such theory, some have argued that you do not need regulation. Markets function
so as to yield the desired accounting information. Those interested in raising capital efficiently
have an incentive to provide good accounting information. Others draw from economics theory to
make out the argument that accounting is a public good and there are externalities and
free-riding involved in its functioning without regulation. It will be under provided and perhaps
of lesser quality without regulation. There are then sub-debates about whether regulation should
be by laws or standards and how rigid these things should be – some see the latter as more
traditional debate about accounting regulation as it is the main discourse on regulation of the
accountancy profession.

Beyond mainstream economics, regulation is linked to dimensions of well-being beyond the

narrower economic one focused upon in the main debates (this can include concern about the
distribution of wealth and ‘social’ dimensions). And a socio-economics approach has been
articulated that seeks to draw from economics logic but recognises the imperfect character of our
markets context (so that, for example, disclosure should be limited where it does more harm
than good and where the benefits of accounting should exceed the economic costs of information
which actually do manifest in the real world).

Given the different approaches and the broad scope (even in the subject guide there is a wide
coverage) examiners were liberal. Candidates were rewarded for developing coherent arguments.
Those attempting the question typically did enough to pass given the liberal perspective of
examiners and their concern to reward candidates points. However, few scored very highly as
answers were typically less than comprehensive, lacking in coherence and scarcely went beyond
the subject guide.

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AC3193 Accounting theory

Section B

Answer any TWO questions from this section.

Question 5

In the context of management control, what is the issue of myopia and how does it
arise? How might one attempt to resolve this myopia problem?

(25 marks)

Reading for this question

Subject guide, Chapter 17.

Merchant, K.A. and W.A. Van der Stede Management control systems: Performance
measurement, evaluation and incentives. (Harlow: Pearson, 2017) fourth edition [ISBN
9781292110554] Chapter 11.

Approaching the question

This was the most popular question answered in Section B. The majority of answers, however,
were generic and did not suggest that the candidate had attempted a significant amount of
further reading to find interesting examples and additional academic literature to support their
answers.

The subject guide has a chapter devoted to this topic. It indicates how many typical accounting
measures used for control can encourage a short-sighted or short-term approach. In the context
of motivations and structures applying there is even concern to manipulate accounting measures
for short-sighted and short-term objectives. The subject guide outlines a range of ways how the
problem might be overcome: changing bonus systems; using non-financial indicators; pre-action
reviews; extending measurement horizons; using Economic Income rather than stock market
value; improving communications; measuring value drivers.

Most answers stuck to points made in the subject guide and showed good understanding of these
points, typically relating them coherently and elaborating weaknesses as well as strengths of
suggested ‘solutions’. Most candidates attempting the question in the examination therefore
achieved clear pass marks. Better answers included the candidate’s own reflections and/or drew
from literature beyond the subject guide. There were few in this category.

Question 6

Discuss the view that management control is a uniform practice that is the same in
all contexts.

(25 marks)

Reading for this question

Subject guide, Chapter 11.

Merchant, K.A. and W.A. Van der Stede Management control systems: Performance
measurement, evaluation and incentives. (Harlow: Pearson, 2017) fourth edition [ISBN
9781292110554] Chapters 4 and 5.

Approaching the question

This question was not done by many and poorly attempted, although the examiners gave credit

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Examiners’ commentaries 2020

to efforts to tackle the challenging issues that the question relates to. Very few related to all the
dimensions in the subject guide and hardly any went beyond the subject guide.

This topic is covered in the subject guide in terms of notions of contingency in general and
specifically issues arising when setting up in a new context. The subject guide includes some
discussion on the relevance of information asymmetry, national culture, local institutions,
regulations, company, contract and employment law, financial markets, differences in local
business situations and regional uncertainty.

Expansion into a new context may be in the same country but in a different region where the
cultural norms may be different (for example, in China – Hong Kong and Sichuan, in Britain –
London and Glasgow). The differences are likely to be more extreme in different countries as
laws and regulations will be different as well as workplace norms and culture.

The company will already be using action, cultural, personnel and results controls to monitor
performance in their existing company. Establishing a division elsewhere can be a good
opportunity to review current practice and operations as well as adapting them to fit in with
local practices.

If a company is taking over an existing operation in another country, there may be learning
opportunities when comparing the ways of working that already exist in the new division, before
trying to introduce controls which have worked in the existing divisions. If performance
comparisons between new and old divisional performance are required, this should ensure
equitable comparability.

Question 7

Compare and contrast the usage of market measures and accounting measures of
performance in the context of management control?

(25 marks)

Reading for this question

Subject guide, Chapter 16.

Alexander, D., A. Britton, A. Jorissen, M. Hoogendoorn and C.V. Mourik International financial
reporting and analysis. (Andover: Cengage Learning EMEA, 2017) seventh edition [ISBN
9781473725454] Chapter 10.

Approaching the question

Market measures use the value created, i.e. the return to equity shareholders, calculated as: the
dividends paid during the measurement period plus the change in the market value of the
stocks/shares. Answers at a minimum should include discussions around the advantages (for
example, ease of measurements) and limitations (for example, lack of controllability) of doing so.

The discussion around limitation should be expanded to include the many activities outside the
company’s control which can affect the share price. Discussions should also include the issues
surrounding companies that are privately owned – how easy would it be (or otherwise) to use
accounting measurements for control? Further discussions could include the subjectivity and
manipulability of accounting measures/estimates.

Question 8

What ethical issues can arise in the area of management control?

(25 marks)

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AC3193 Accounting theory

Reading for this question

Subject guide, Chapter 19.

Alexander, D., A. Britton, A. Jorissen, M. Hoogendoorn and C.V. Mourik International financial
reporting and analysis. (Andover: Cengage Learning EMEA, 2017) seventh edition [ISBN
9781473725454] Chapter 15.

Approaching the question

This question was also a popular choice among candidates. Many answers failed to define ethical
issues and the principles behind ethics more generally. As with many of the above questions,
much of the answers provided were of a generic nature with little evidence of further reading.

Chapter 19 of the subject guide is the basis for answers with alternative emphases. More
generally, issues about doing the right thing and/or doing the thing that has the best
consequences are pervasive in relation to human activities and contexts. Accountants often have
professional codes to follow although of course such codes could be assessed by ethical criteria.
Section 19.5 highlights ethical issues in relation to managers creating budgetary slack to impact
accountability processes, or manipulating accounting numbers or managers/employees being
overly controlled (loss of autonomy and repressive acts). Also since control indicators or
mechanisms may not be perfect there are ethical issues about using them (and how much reliance
is put on them). The text suggests that good ethics can be spread in an organisation and codes
may be important for larger organisations.

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