Financial Accounting Theory, 8th edition

William R. Scott University of Waterloo
Patricia O'Brien University of Waterloo

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Financial Accounting Theory presents financial accounting as a means to resolve problems of asymmetric information and to facilitate contracting. It develops ideas from decision theory and information economics to emphasize that accounting serves important purposes in society, of enhancing trust and meeting information needs.

Despite its theoretical orientation, the book does not ignore the institutional structure of financial accounting and standard setting. It features considerable coverage and critical evaluation of financial accounting standards and regulations, such as fair value accounting, financial instruments, reserve recognition accounting, management discussion and analysis, employee stock options, impairment tests, hedge accounting, derecognition, consolidation, and comprehensive income. The structure of standard-setting bodies is also described, and the role of structure in helping to engineer the consent necessary for a successful standard is evaluated.

Hallmark features of this title

The 2018 IASB Conceptual Framework is an important component of this book. Over time, it will be an important aspect of the financial accounting environment. Its relationships to the theory developed here are critically evaluated.
Theory in Practice: These vignettes provide real-world cases that illustrate the theoretical concepts. Some are pursued further in end-of-chapter Questions and Problems.
Questions and Problems: Each chapter except Chapter 1 ends with questions and problems that allow students to test, and sometime extend, their understanding of the chapter's contents.

New and updated features of this title

The coverage of the Conceptual Framework (Chapter 3) has been updated to the 2018 IASB version, with references to it incorporated throughout the text. We have also updated references to new accounting standards (Chapter 7), several of which were at the exposure draft stage in Edition 7.
Theory in Practice vignette 3.2, regarding evidence that tone of MD&A predicts future earnings, is rewritten to bring out artificial intelligence implications. Additional examples of computerized textual analysis are added, including of analyst written reports (Chapter 5), effects of tone and sentiment on attribute framing (Chapter 6). and qualitative statements in earnings announcements (Chapter 12).
The text reviews recent academic accounting research, with updated explanations and discussion of important papers added throughout the text. The text represents the current state of accounting-related theories, as published in major research journals up to about mid-2018.

Introduction
Accounting Under Ideal Conditions
The Decision Usefulness Approach to Financial Reporting
Efficient Securities Markets
The Value Relevance of Accounting Information
The Valuation Approach to Decision Usefulness
Valuation Applications
The Efficient Contracting Approach to Decision Usefulness
An Analysis of Conflict
Executive Compensation
Earnings Management
Standard Setting Economic Issues
Standard Setting Political Issues

William Scott received his B. Comm. from Carleton University, and his MBA and Ph.D. from the School of Business, University of Chicago. He is a Fellow of Chartered Professional Accountants Canada. His research has been published in the Journal of Accounting Research, Contemporary Accounting Research, Journal of Business Finance & Accounting, and several other academic journals. He has served on the editorial boards of Journal of Accounting Research, Contemporary Accounting Research, and The Accounting Review; and served a term as Editor of Contemporary Accounting Research. He has taught at Carleton University, University of Chicago, Queen’s University at Kingston, University of British Columbia and University of Waterloo, and is now distinguished Emeritus Professor at University of Waterloo.

Professor Patricia C. O’Brien is the EY Professor at the School of Accounting & Finance, University of Waterloo. Her research, on topics concerning financial analysts, financial reporting standards, and information in capital markets, is published in many of the premier accounting journals. In 2009, the Canadian Academic Accounting Association honored Professor O’Brien with the Haim Falk Award for Distinguished Contribution to Accounting Thought. She currently serves on the Academic Advisory Council to Canada’s Accounting Standards Board. She has served as Editor-in-Chief of Contemporary Accounting Research (CAR), and on the editorial boards of CAR, the Journal of Accounting Research, The Accounting Review, and the Journal of Accounting and Public Policy. She holds an A.B. degree cum laude in mathematics from Cornell University, and earned her M.B.A. and Ph.D. degrees at the University of Chicago. Prior to joining Waterloo, Professor O’Brien was a faculty member at the University of Rochester, Massachusetts Institute of Technology, the University of Michigan, London Business School, and York University. She has held visiting appointments at the Helsinki School of Economics, the University of Chicago, Stanford University, and the University of Amsterdam, as well as in the Office of the Chief Economist of the Ontario Securities Commission.

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