Normative theories of accounting:

What and why?

1 Created by Dr G. L. Ilott, CQUniversity Australia

What are normative theories?

Normative theories are those that seek to inform you of what should
be normal, acceptable or best practice. They are not at all concerned
about what is currently happening, or in predicting what will happen in
the future. All normative theories are concerned with is what should be
happening now.
The conceptual framework, with its resulting accounting standards, is
an example of a normative theory. It prescribes what financial
accountants should or must do.

2 Created by Dr G. L. Ilott, CQUniversity Australia

How do normative theories of accounting
develop?
Normative theories represent a person, or a group of people's opinion on
what is the best way to do things. The theory is offered for public review,
either in academic publications or in commentary within accounting
associations.

This might sound simplistic, but it is not! Normative theories often involve
complex logic and reasoning, based on extensive historical research.

Is it valid to claim that what has worked in the past would work in the future,
or even should be done now? This is a problem with normative theorising.

3 Created by Dr G. L. Ilott, CQUniversity Australia

Normative theories can be very broad and
complex
Normative theories such as the conceptual framework represent the
work of lots of smart people interviewing experienced accountants and
investors. The conceptual framework codifies what has been found in
the profession to represent "best practice".

Normative valuation theories represent some peoples' ideas on what

investors need and how to achieve it.

4 Created by Dr G. L. Ilott, CQUniversity Australia

Alternatives to normative theorising

There are many alternatives to normative theorising. We will meet a few of

them later in this unit.

The most direct opposite of normative theory is positive theory.

Positive theory is interested in what is actually happening, and predicting

what will happen in the future given a specific scenario. It is not interested in
whether this should be what happens. It makes no value judgment over right
or wrong.

Positive theory is objective, evidence-driven and scientific in its approach.

5 Created by Dr G. L. Ilott, CQUniversity Australia
A quick contrast
It is pointless to label one of these as being the best approach. Each serves a need.

Issue Normative theory Positive theory

Focus What should happen What is happening, and what will

probably happen in the future.

Ethics Value driven: Right vs. Wrong Evidence driven, values not considered.

Purpose Prescriptive (thou shalt…) Predictive, descriptive.

Decision-usefulness approach Decision-model emphasis. Decision maker emphasis.

6 Created by Dr G. L. Ilott, CQUniversity Australia

Before you go…

The following learning objective (LO 2) will take a tour through some
issues in measurement and the idea of value. You might find it
surprising that the concept of "value" is problematic to accountants,
hence many decades of research and writing on this topic.

7 Created by Dr G. L. Ilott, CQUniversity Australia