NAT and PAT Essay Example | Topics and Well Written Essays - 500 words

NAT and PAT - Essay Example ccounting Theory (PAT) is an objective theory aiming at predicting accounting practices and policies that are chosen applied by firms as well as the effects of such, on the firms after the implementation. Under this theory, available data and statistics in the firm are analyzed to enable the firm to derive applicable conclusions based on the results. The main purpose of the results of the analysis is to create an understanding when predicting accounting policies across differing firms. On the other hand, Normative Accounting Theory (NAT) is a subjective kind of theory with an aim to describe the economic future of a given firm or investor. This is the theory that usually attempts to tell economists what they should do. This theory does not solely use predictive values to make evaluations, but it also considers the logical consistency of the rationality of individuals. Therefore, as positive accounting theories tend to make predictions of the events of the real world, normative accoun ting theories tend to inform people about what they should do (Coetsee, 2010). PAT has two different perspectives that include the efficiency perspective and the opportunistic perspective. Under the opportunistic perspective of PAT, there are three elements including the bonus plan hypothesis, debt covenant hypothesis as well as the political cost hypothesis. The bonus plan hypothesis of PAT has the assumption that the manager with the bonus plan has a high likelihood of using accounting methods intended to increase the current period reported income. As such, this makes a prediction that a manager will be rewarded on the basis of their performance. Debt covenant hypothesis, on the other hand, tries to put a limit on the managers ability to transfer assets to new creditors, themselves or new shareholders. Political cost hypothesis, on the other hand, refers to how a firm would react to the possibility of regulation of other regulators as well as other interest groups and how these