Below is a comprehensive list of major changes made to the seventh edition of Financial Accounting Theory : Thorough review of recent academic accounting research, with updated explanations and discussion of important papers added throughout the text. The text represents the current state of academic accounting theory as published in major research journals up to about mid-2013. Increased attention to contract theory (replacing positive accounting theory), with Chapter 8 rewritten to fully explain the roles of reliability and conservatism of accounting information in securing efficient corporate governance, borrowing, and stewardship. Extensive discussion and evaluation of criticisms of securities market efficiency and investor rationality following the 2007-2008 securities market meltdowns. Much accounting research relies on these concepts. The important assumptions of rational expectations, common knowledge, and market liquidity that underlie market efficiency theory are explained and discussed. The text concludes that relaxation of these assumptions is needed if accountants are to better understand the working of securities markets and the information needs of investors. The text also concludes that accounting-related securities anomalies, typically claimed to result from investor non-rationality, can also be consistent with investor rationality once these assumptions are relaxed.

Theoretical and empirical papers supporting these conclusions are outlined (Chapters 4 and 6). New and proposed accounting standards, including for financial instruments, derecognition, consolidation, leases, and loan loss provisioning, are described and evaluated. Discussion of the Conceptual Framework is updated throughout the book (Chapter 7). Discussion of standards convergence and the possibility of U.S. adoption of International Accounting Standards is updated to take recent developments into account (Chapter 13). Recent research using sophisticated computer software to evaluate the information content of the written and spoken word is explained and evaluated. The text includes coverage of research papers using this methodology to study the informativeness of Management Discussion and Analysis (Chapter 3) and of executive conference calls (Chapter 11).

New problem material is added throughout the text, including numerical problems of present value accounting, decision theory, and agency. Other new problems are based on embedded value, earnout contracts, outside directors, bail-in bonds, delegated monitoring, ESO repricing, and Sarbanes/Oxley Act. Discussions and problem materialsderived from recent accounting scandals (Groupon, Olympus Corp., and Satyam Computer Services) are also added. Discussion of whether information risk is diversifiable, and thus of the extent to which firms benefit from superior accounting disclosure, is updated in the light of recent research (Chapter 12). The lengthy explanation of portfolio theory, included in all previous editions, is moved to the Instructor's Manual, replaced by a much shorter explanation of portfolio diversification (Chapter 3). Discussion and illustration of Management Discussion and Analysis (Chapter 3) and of Reserve Recognition Accounting (Chapter 2) is updated.