Positive Accounting Theory

Running head: POSITIVE ACCOUNTING THEORY
Positive Accounting Theory
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1POSITIVE ACCOUNTING THEORY
Table of Contents
Answer to Question 1:.....................................................................................................................2
Answer to Question 2:.....................................................................................................................2
Answer to Question 3:.....................................................................................................................3
Answer to Question 4:.....................................................................................................................3
Answer to Question 5:.....................................................................................................................4
Requirement a:.............................................................................................................................4
Requirement b:.............................................................................................................................4
Requirement c:.............................................................................................................................4
References:......................................................................................................................................6

2POSITIVE ACCOUNTING THEORY
Answer to Question 1:
According to the efficiency perspective, the contractual agreements are formed to
minimise the expected conflicts of interest and related agency costs between different individuals
associated with the business operations of an organisation. With the help of such contracts, the
future transactions could be minimised and as a result, the value of the firm increases (Alayemi,
2015). Since these agreements are formed for minimising future conflicts, they are taken into
account to be initiated on upfront basis, which is termed as ex ante.
According to the opportunistic perspective, the self-interest of the individuals motivate
them at the expense of others and after involvement in contractual agreements, they would tend
to capitalise on flexibility to ensure favourable pay-offs, which is again at the expense of others.
Since it is not possible to cover all points in details in contracts, the opportunistic managers
anticipate the flexibilities in the contracts. Moreover, it is crucial for the independent auditors in
assuring the reasonableness of the adopted accounting standards in line with the accepted
practice. Since these behaviours happen after negotiation of transactions, the actions are
considered to take place on ex post basis.
Answer to Question 2:
In the words of Beattie (2014), the increasing obligatory covenants would provide a prior
sign to point towards default risk and this would lead to fall in the risk exposure of the lending
party. The reason is that the management would have lower ability of circumventing restrictive
agreements. For instance, by undertaking asset revaluation, these covenants would lead to
technical default related to loan agreement earlier than if the management has the scope of