ACCT 90013: Financial
Accounting Theory &
Practice
Introduction
By Stefan F. Schantl
1. Course Overview
2. Approach in ACCT90013
3. Information Asymmetry and Financial Accounting
Outline of Today’s Lecture
Course Overview
Instructor Team
Email: Please include “ACCT90013” in the subject line in all emails!
Name Contact Details
Prof. Gary Biddle
Address: Level 8, ‘The Spot’, 198 Berkeley Street, Carlton 3010
Phone: 03 834 49807
Email: g.biddle@unimelb.edu.au
Consultation hours: Zoom and face-2-face consultations
A/Prof. Stefan
Schantl
(coordinator)
Address: Level 8, ‘The Spot’, 198 Berkeley Street, Carlton
3010.
Phone: 03 834 41171
Email: stefan.schantl@unimelb.edu.au
Consultation hours: Zoom and face-2-face consultations
Lectures
• Objective: Introduce arguments, observations, and ideas
• 1 hour per week (Weeks 1 - 12)
• Format: prerecorded and to be watched at your own pace (but nevertheless within
the scheduled week); except in weeks 1 and 12 (via Zoom, see LMS>Subject
Page>Zoom); recordings made available at the beginning of the respective week
Seminars
• Objective: Development of professional judgment through case study and problem set
discussions
• 2 hours per week (Weeks 2 – 12)
• Format: On campus (Wed 9AM, 12PM) and via Zoom (Thu 10AM)
Teaching Format
Course Information
Subject Webpage: https://canvas.lms.unimelb.edu.au/
• Materials posted before seminars
– Video recordings and slides
– Required readings
– Cases and problem sets
• Materials posted after seminars
– Seminar slides
Lecture and Seminar Schedules
Week Date Commencing Lecture Topic Seminar Topic
1 27 February Introduction - Stefan(Zoom) NO SEMINARS
2 6 March Standard Setting - Gary(pre-recorded)
Introduction - Stefan
(On-campus, Zoom)
3 13 March Recognition - Stefan(pre-recorded)
Standard Setting - Gary
(On-campus, Zoom)
4 20 March Measurement - Stefan(pre-recorded)
Recognition - Stefan
(On-campus, Zoom)
5 27 March Income - Gary(pre-recorded)
Measurement - Stefan
(On-campus, Zoom)
6 3 April Equity Valuation - Gary(pre-recorded)
Income - Gary
(On-campus, Zoom)
Break (7 April – 16 April)
7 17 April Value Relevance and Market Efficiency -Gary (pre-recorded)
Equity Valuation - Gary
(On-campus, Zoom)
8 24 April Compensation Contracting - Stefan(pre-recorded)
Value Relevance and Market Efficiency -
Gary (On-campus, Zoom)
9 1 May Debt Contracting - Stefan(pre-recorded)
Compensation Contracting - Stefan
(On-campus, Zoom)
10 8 May Information Intermediaries - Stefan(pre-recorded)
Debt Contracting - Stefan
(On-campus, Zoom)
11 15 May Disclosure - Stefan(pre-recorded)
Information Intermediaries - Stefan
(On-campus, Zoom)
12 22 May Review - Stefan(Zoom)
Disclosure - Stefan
(On-campus, Zoom)
Subject Assessment
Assessment Task Individual or Group Due Percentage
Engagement
Assignments
(4 x 500 words)
Individual Throughout semester 30%
Group Midterm Report
(4000 words) Group
28 April
(11.59PM=end of
the day)
20%
End-of-semester exam
(2 hours) Individual
Examination period
(5 June – 23 June) 50%
Engagement Assignments (30%)
– To get you going with maintaining and updating your business
knowledge (self-learning)
– Reconciling lecture content with current practice and trends by
searching for business news articles with a connection to the contents
– 4 assignments a 500 words to be completed individually between weeks
3 and 12
– Specific guidance on engagement assignments will be released later
Subject Assessment
Group Midterm Report (20%)
– Apply what you have learned in weeks 1 through 6
– Analysis of a firm that can be selected from a prespecified list
– Groups of 3-4 students
– Specific guidance on the group midterm report, including on group
formation, will be released later
Subject Assessment
End-of-Semester Examination (50%)
– Concluding 2-hours exam on the entire semester’s course content
– Hurdle requirement
– Note: The exam, due to the online and thus open book format, is tightly
timed and focused on your judgment capabilities and your abilities to
apply the course contents instead of simply reiterating them. This
implies a certain level of difficulty.
– Specific guidance as well as a mock exam will be provided at the end of
the semester
Subject Assessment
Approach in
ACCT90013

Introduction of conceptual issues in financial accounting
(“financial accounting theory”)
• Aim: Understanding how financial accounting information is
generated and when it is more or less decision-useful
• Discussion of accounting-based issues within a framework on
what important incentives are, how measurements work, what
the decisions are that gave rise to information, and what to
anticipate as a consequence of providing information (i.e., the
how’s and what’s)
Application in practice: How can what happens in real world
business practice be understood through a conceptual lens?
Approach in ACCT90013
What is a Theory?
“A coherent set of hypothetical, conceptual &
pragmatic principles forming the general
framework of reference for a field of inquiry.”
Theories in Business
→Business pracƟce is complicated!
Manager’s incentives Macroeconomy and competition
Consumer
preferences
Politics
Regulation and
oversight
Investors’ decisions
and preferences
Information
intermediaries
Natural environment
Theories in Business
→And we only get to observe some of it, namely what becomes public (e.g.,
pricing, financial reports, certain but certainly not all behavior)!
Pricing Decisions and Policies
Accounting
Information
Manager’s incentives Macroeconomy and competition
Consumer
preferences
Politics
Regulation and
oversight
Investors’ decisions
and preferences
Information
intermediaries
Natural environment
Theories in Business
Theories: HOW things work (the arrows) and WHY we see certain things
(observations)
• In any context, WHY is the beginning of an important question
• The better the theories, the better
– we can interpret observations
– anticipate future observations
– make better decisions on our own
– anticipate unintended consequences of decisions
How to learn theories (examples):
• Education
• Experience and reflection
• Discussions with colleagues
• Reading the newspaper
• …
Observation: Substantial growth in 1H 2023 earnings of Australian grocery retail
companies (Coles 17%, Woolworths 14%) reported beginning of last week
(21/22 Feb 2023)
How should stock prices react to these news?
Example: Retail 2023
Source
Observation: Substantial growth in 1H 2023 earnings of Australian grocery retail
companies (Coles 17%, Woolworths 14%) reported beginning of last week
(21/22 Feb)
Example: Retail 2023
Source
But: Stock prices don’t react/slightly decline (e.g., Coles)
WHY?!
Observation: Substantial growth in 1H 2023 earnings of Australian grocery retail
companies (Coles 17%, Woolworths 14%) reported beginning of last week
(21/22 Feb)
Example: Retail 2023
Source
Change in perspective (again Coles):
One potential explanation: Investors price in the earnings
news way before the earnings date as they do their own
research (or might obtain some leaked information) - Ball and
Brown (1968)
Perspectives Matter!
Perspectives
• Week 1-2: Standard setters’ perspective
– Considerations in the setting of accounting standards
• Weeks 3 to 5, 12: Preparers’ (aka firms’ and managers’) perspective
– Quality of financial reporting information
– Disclosure of additional information
• Weeks 6 to 11: User’s (aka investors’) perspective
– Valuation
– Contracting
Information
Asymmetry and
Financial
Accounting
Healy, P. (2001). “The Financial Reporting Environment”
• READ IT! It is a great article.
Pages 22 to 33 of “Conceptual Framework for Financial Reporting”
Required Readings
Information Asymmetry
Information asymmetry occurs when one party (e.g., seller) to a
transaction knows more about the transaction (e.g., product quality)
than another party (e.g., buyer)
– Uninformed party is at a disadvantage
– Informed party can exploit her/his advantage
Information Asymmetry
Information
Asymmetry
Moral Hazard Adverse Selection
Moral Hazard in Capital Markets
Moral hazard (“hidden action”) exists when one of the parties to an agreement
has an incentive, after the agreement is made, to act in a manner that brings
additional benefits to him- or herself at the expense of the other party.
In capital markets moral hazard occurs due to separation of ownership and
control (Jensen and Meckling 1976) as it is not possible for shareholders to
directly observe all of managers’ decisions
– Managers may be tempted to make suboptimal decisions
– For example: Underinvest in promising R&D projects, cut discretionary
spending in marketing, fraud
How can moral hazard be mitigated?!
Adverse Selection in Capital
Markets
Adverse selection (“hidden information”) is the tendency for a party to enter
into agreements in which it can use its private information to its advantage and
to the disadvantage of the less informed party.
Adverse selection in capital markets:
1. Managers know more about the current financial condition and future
prospects of the firm than outside investors (information asymmetry)
2. Absent any information, investors don’t know how to allocate their capital
3. Facing high cost of raising capital, good firms may exit the market
Adverse Selection in Capital
Markets
4. Consequences
– At the very least: It is hard and expensive for firms to raise capital
– High capital costs imply that even good projects are not undertaken as
they are not good enough
– In the extreme: Markets break down and nobody has a job!
Adverse Selection in Capital
Markets
4. Consequences
– At the very least: It is hard and expensive for firms to raise capital
– High capital costs imply that even good projects are not undertaken as
they are not good enough
– In the extreme: Markets break down and nobody has a job!How can adverse selection be
mitigated?!
Financial accounting information can save the day!
Moral hazard: Write contracts that include conditions that are contingent on
accounting earnings
Adverse selection: Publicly disclose the information that is only known
internally in a condensed form, namely through financial statements
How to Address These Problems?
Financial Accounting: Roles
Moral Hazard
Contracting Perspective
Role of accounting reports to
steer decisions
Stewardship Role
Information Users
Adverse Selection
Capital Markets Perspective
Role of accounting reports to
value the firm
Valuation Role
The Objective of General Purpose
Financial Reporting
IFRS Conceptual Framework states that:
The primary users of general purpose financial reporting are
present and potential investors, lenders and other creditors, who
use that information to make decisions about buying, selling or
holding equity or debt instruments and providing or settling loans
or other forms of credit.
The primary users need information about the resources of the
entity not only to assess an entity's prospects for future net cash
inflows but also how effectively and efficiently management has
discharged their responsibilities to use the entity's existing
resources (i.e., stewardship).
Fundamental qualitative characteristics
– Relevance
– Faithful representation (aka “reliability”)
Enhancing qualitative characteristics
– Comparability
– Verifiability
– Timeliness
– Understandability
Characteristics of Useful Financial
Information
Concluding
Remarks
Good financial reporting…
– mitigates information asymmetry to alleviate both moral hazard and adverse
selection problems
– captures the substance of transactions
– arises from high-quality standard setting
Outlook for the next weeks: Determinants and shortcomings of accounting
standards and resulting implications for financial reporting quality
In a Nutshell
Ask questions
• via email (stefan.schantl@unimelb.edu.au)
• via the discussion board on LMS or
• during consultations (see LMS)
Conclusion