ACCT 635 Week 3 Discussion Board Forum 3 Example

Discussion Board Forum 3: Positive and Normative Accounting Theory

ACCT 635 Advanced Research for Financial Reporting, Discussion Board Forum 3

Thread by [Student Name]

The classmates are composites; the textbook, accounting standard update, studies and Bible passage cited are real.

Positive accounting theory tries to explain and predict accounting practice: why managers choose certain methods and why they support or oppose proposed standards. Normative theory prescribes: it asks what accounting should be, usually by reference to the needs of users. Wolk et al. (2017) present the two as complementary, since a standard setter needs to know both what users need and how preparers will respond.

ASU 2024-03 is a good case for both. It asks public companies to open up each major expense line in a note, showing how much of it is inventory bought, pay and benefits, depreciation and amortization of intangibles, plus total selling expenses and a description of the rest, starting with annual reports for years that begin after mid-December 2026 (Financial Accounting Standards Board [FASB], 2024).

Positive theory predicts who would object. Watts and Zimmerman (1978) identified bookkeeping costs and political costs among the factors that drive managers' positions on standards. Companies whose systems track expenses by function rather than by nature would face real bookkeeping costs to produce the new figures, and large, visible companies might worry that labor cost detail would attract attention from regulators or unions. The prediction is opposition from large preparers and support from investors and analysts, which is broadly the pattern the debate followed. Positive theory also predicts the shape of the compromise. A standard setter facing well-organized preparer opposition tends to narrow the scope, lengthen the transition and allow practical expedients, and the final update did leave the face of the income statement unchanged, put the detail in the notes and set an effective date more than two years after issuance. Those features look less like accidents than like the predictable price of getting the standard adopted.

Normative theory asks whether readers are better off. Blann and Moon (2026), studying disaggregation that companies provided voluntarily before the standard, found it common and increasing, and their evidence was consistent with detail on cost of goods sold, but not on selling and administrative expense, providing decision-useful information to investors and analysts. Not all disaggregation is equal, and the evidence suggests investors gain most where costs are most closely tied to the product. That finding supports the standard's direction while questioning whether every required line will be worth its cost.

Proverbs calls unequal weights and measures an abomination (English Standard Version Bible, 2001/2016, Proverbs 20:10). Disclosure that lets readers see what is inside a single expense line is one more way of keeping the measure honest.

Reply to Daniel

Daniel, you argued that positive accounting theory is scientific and value-free because it only describes and predicts. I think the claim is partly right and partly overstated. Positive theory does aim to explain behavior rather than prescribe it, and Watts and Zimmerman (1978) tested their predictions against firms' actual submissions to the FASB, which is a scientific method. But choosing what to explain, and which variables matter, involves judgment. Their model assumes managers act in their own interest through effects on compensation, debt contracts and political costs, and that assumption shapes every prediction.

Critics, including some of the authors our textbook surveys, have argued that this assumption smuggles in a view of human nature as purely self-interested. That matters for how we use the theory. If we accept that managers always lobby for their own benefit, we may discount any preparer comment on a proposed standard, even when it raises a legitimate cost concern. In the expense disaggregation debate, some preparers' objections about systems costs were surely self-interested, but some were also accurate descriptions of what the change would require.

Wolk et al. (2017) suggest treating positive and normative theory as complementary rather than as rivals. I would put it this way: positive theory tells the board whose voices to expect and why, and normative theory tells it how to weigh them. Would you agree that positive theory is useful precisely because it is not the last word, and that a board relying on it alone would end up discounting every argument preparers make?

Reply to Priya

Priya, your thread explained opposition to ASU 2024-03 mainly through bookkeeping costs. I would add a second reason that disclosure theory emphasizes: proprietary costs. Verrecchia (1983) showed that when disclosing information can harm a firm's competitive position, managers may rationally withhold it even when investors would value it, so voluntary disclosure stops short of full disclosure. Expense detail is a plausible example. A retailer that reveals how much of its cost of sales is freight, or a manufacturer that shows labor costs within cost of goods sold, may be giving competitors and suppliers information they can use in negotiation.

That helps explain the pattern Blann and Moon (2026) found before the standard: voluntary disaggregation was more common where demand for disclosure and disclosure incentives were stronger, and less common elsewhere. A mandate removes the choice, which is why proprietary cost concerns appear so often in comment letters on disclosure proposals. It also changes the competitive calculation, since every public competitor must disclose the same categories.

So let me suggest a small revision. The cost of the new standard is not only the cost of new systems but also the loss of a competitive advantage some firms enjoyed by keeping cost structures private. Whether that loss is a cost to society or merely a transfer between competitors is a harder question. If competitors simply learn what rivals pay, prices may become more efficient; if the disclosure discourages investment in cost advantages, it may be a real loss. Which do you think it is?

References

Blann, J. J., & Moon, J. R. (2026). Income statement expense disaggregation. The Accounting Review, 101(3), 137-165. https://doi.org/10.2308/tar-2023-0545

English Standard Version Bible. (2016). Crossway. (Original work published 2001)

Financial Accounting Standards Board. (2024). Accounting standards update No. 2024-03: Income statement, reporting comprehensive income, expense disaggregation disclosures (Subtopic 220-40): Disaggregation of income statement expenses.

Verrecchia, R. E. (1983). Discretionary disclosure. Journal of Accounting and Economics, 5, 179-194. https://doi.org/10.1016/0165-4101(83)90011-3

Watts, R. L., & Zimmerman, J. L. (1978). Towards a positive theory of the determination of accounting standards. The Accounting Review, 53(1), 112-134. https://doi.org/10.2308/tar-4500569

Wolk, H. I., Dodd, J. L., & Rozycki, J. J. (2017). Accounting theory: Conceptual issues in a political and economic environment (9th ed.). SAGE.