,FINANCIAL
ACCOUNTING
THEORY Seventh Edition
William R. Scott
University of Waterloo
Toronto
, To Mary Ann, Julie, Martha, Kathy, Paul, and Cary
Acquisitions Editor: Megan Farrell
Sponsoring Editor: Kathleen McGill
Marketing Manager: Claire Varley
Program Manager: Madhu Ranadive
Developmental Editor: Rebecca Ryoji
Project Manager: Jessica Hellen
Production Services: Raghavi Khullar, Cenveo® Publisher Services
Permissions Project Manager: Joanne Tang
Text Permissions Research: Anna Waluk, Electronic Publishing Services
Cover Designer: Suzanne Behnke
Cover Image: © demonishen/Fotolia
Credits and acknowledgments of material borrowed from other sources and reproduced, with per-
mission, in this textbook appear on the appropriate page.
If you purchased this book outside the United States or Canada, you should be aware that it has
been imported without the approval of the publisher or author.
Copyright © 2015, 2012, 2009, 2006, 2003, 2000, 1997 Pearson Canada Inc. All rights reserved.
Manufactured in the United States of America. This publication is protected by copyright and
permission should be obtained from the publisher prior to any prohibited reproduction, storage
in a retrieval system, or transmission in any form or by any means, electronic, mechanical, pho-
tocopying, recording, or likewise. To obtain permission(s) to use material from this work, please
submit a written request to Pearson Canada Inc., Permissions Department, 26 Prince Andrew
Place, Don Mills, Ontario, M3C 2T8, or fax your request to 416-447-3126, or submit a request to
Permissions Requests at www.pearsoncanada.ca.
10 9 8 7 6 5 4 3 2 1 [EB]
Library and Archives Canada Cataloguing in Publication
Scott, William R. (William Robert), 1931-, author
Financial accounting theory / William R. Scott. – Seventh
edition.
Includes bibliographical references and index.
ISBN 978-0-13-298466-9 (bound)
1. Accounting—Textbooks. I. Title.
HF5635.S36 2014 657’.044 C2013-906491-5
ISBN 978-0-13-298466-9
, Contents
Preface xi 2 Accounting Under Ideal
Acknowledgments xv Conditions 37
2.1 Overview 37
1 Introduction 1
2.2 The Present Value Model Under
1.1 The Objective of This Book 1 Certainty 38
1.2 Some Historical Perspective 1 2.2.1 Summary 41
1.3 The 2007–2008 Market 2.3 The Present Value Model Under
Meltdowns 10 Uncertainty 41
1.4 Efficient Contracting 16 2.3.1 Summary 47
1.5 A Note on Ethical Behaviour 18 2.4 Examples of Present Value
1.6 Rules-Based versus Principles- Accounting 48
Based Accounting Standards 20 2.4.1 Embedded Value 48
1.7 The Complexity of Information 2.4.2 Reserve Recognition
in Financial Accounting and Accounting 49
Reporting 21 2.4.3 Critique of RRA 52
1.8 The Role of Accounting 2.4.4 Summary of RRA 56
Research 21 2.5 Historical Cost Accounting
1.9 The Importance of Information Revisited 56
Asymmetry 22 2.5.1 Comparison of Different
1.10 The Fundamental Problem of Measurement Bases 56
Financial Accounting Theory 24 2.5.2 Conclusion 58
1.11 Regulation as a Reaction to the 2.6 The Non-Existence of True Net
Fundamental Problem 26 Income 58
1.12 The Organization of This 2.7 Conclusion to Accounting Under
Book 27 Ideal Conditions 59
1.12.1 Ideal Conditions 27
1.12.2 Adverse Selection 27 3 The Decision Usefulness
1.12.3 Moral Hazard 28 Approach to Financial
1.12.4 Standard Setting 28 Reporting 72
1.12.5 The Process of Standard
Setting 29 3.1 Overview 72
1.13 Relevance of Financial 3.2 The Decision Usefulness
Accounting Theory to Approach 73
Accounting Practice 32 3.2.1 Summary 74
ACCOUNTING
THEORY Seventh Edition
William R. Scott
University of Waterloo
Toronto
, To Mary Ann, Julie, Martha, Kathy, Paul, and Cary
Acquisitions Editor: Megan Farrell
Sponsoring Editor: Kathleen McGill
Marketing Manager: Claire Varley
Program Manager: Madhu Ranadive
Developmental Editor: Rebecca Ryoji
Project Manager: Jessica Hellen
Production Services: Raghavi Khullar, Cenveo® Publisher Services
Permissions Project Manager: Joanne Tang
Text Permissions Research: Anna Waluk, Electronic Publishing Services
Cover Designer: Suzanne Behnke
Cover Image: © demonishen/Fotolia
Credits and acknowledgments of material borrowed from other sources and reproduced, with per-
mission, in this textbook appear on the appropriate page.
If you purchased this book outside the United States or Canada, you should be aware that it has
been imported without the approval of the publisher or author.
Copyright © 2015, 2012, 2009, 2006, 2003, 2000, 1997 Pearson Canada Inc. All rights reserved.
Manufactured in the United States of America. This publication is protected by copyright and
permission should be obtained from the publisher prior to any prohibited reproduction, storage
in a retrieval system, or transmission in any form or by any means, electronic, mechanical, pho-
tocopying, recording, or likewise. To obtain permission(s) to use material from this work, please
submit a written request to Pearson Canada Inc., Permissions Department, 26 Prince Andrew
Place, Don Mills, Ontario, M3C 2T8, or fax your request to 416-447-3126, or submit a request to
Permissions Requests at www.pearsoncanada.ca.
10 9 8 7 6 5 4 3 2 1 [EB]
Library and Archives Canada Cataloguing in Publication
Scott, William R. (William Robert), 1931-, author
Financial accounting theory / William R. Scott. – Seventh
edition.
Includes bibliographical references and index.
ISBN 978-0-13-298466-9 (bound)
1. Accounting—Textbooks. I. Title.
HF5635.S36 2014 657’.044 C2013-906491-5
ISBN 978-0-13-298466-9
, Contents
Preface xi 2 Accounting Under Ideal
Acknowledgments xv Conditions 37
2.1 Overview 37
1 Introduction 1
2.2 The Present Value Model Under
1.1 The Objective of This Book 1 Certainty 38
1.2 Some Historical Perspective 1 2.2.1 Summary 41
1.3 The 2007–2008 Market 2.3 The Present Value Model Under
Meltdowns 10 Uncertainty 41
1.4 Efficient Contracting 16 2.3.1 Summary 47
1.5 A Note on Ethical Behaviour 18 2.4 Examples of Present Value
1.6 Rules-Based versus Principles- Accounting 48
Based Accounting Standards 20 2.4.1 Embedded Value 48
1.7 The Complexity of Information 2.4.2 Reserve Recognition
in Financial Accounting and Accounting 49
Reporting 21 2.4.3 Critique of RRA 52
1.8 The Role of Accounting 2.4.4 Summary of RRA 56
Research 21 2.5 Historical Cost Accounting
1.9 The Importance of Information Revisited 56
Asymmetry 22 2.5.1 Comparison of Different
1.10 The Fundamental Problem of Measurement Bases 56
Financial Accounting Theory 24 2.5.2 Conclusion 58
1.11 Regulation as a Reaction to the 2.6 The Non-Existence of True Net
Fundamental Problem 26 Income 58
1.12 The Organization of This 2.7 Conclusion to Accounting Under
Book 27 Ideal Conditions 59
1.12.1 Ideal Conditions 27
1.12.2 Adverse Selection 27 3 The Decision Usefulness
1.12.3 Moral Hazard 28 Approach to Financial
1.12.4 Standard Setting 28 Reporting 72
1.12.5 The Process of Standard
Setting 29 3.1 Overview 72
1.13 Relevance of Financial 3.2 The Decision Usefulness
Accounting Theory to Approach 73
Accounting Practice 32 3.2.1 Summary 74
