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Accounting for values - Creating value in the long term (Measuring issues,…
Accounting for values - Creating value in the long term
Share holder value
Maximising shareholder wealth is assumed to be the key objective of a business.
Conflicts often arise between shareholders and management over the short and long term.
Alfred Rappaport (1986) 10 ways to create shareholder value
Do not manage earnings or provide
earnings guidance
Make strategic decisions that maximize expected value, even at the expense of lowering near-term earnings.
Make acquisitions that maximize expected value, even at the expense of lowering near-term earnings.
Carry only assets that maximize value
Return cash to shareholders when there are no credible value-creating opportunities to invest in the business.
Reward CEOs and other senior executives for delivering superior long-term returns.
Reward operating-unit executives for adding superior multiyear value.
Reward middle managers and frontline employees for delivering superior performance on the key value drivers that they influence directly
Require senior executives to bear the risks of ownership just as shareholders do.
Provide investors with value-relevant information.
Measuring issues
traditional basis of measurement (historical cost) t
new basis (fair value).
measurement choiches
Accural accounting
historical cost
fair value
deprival value
the problem with historical cost accounting
HCA records the value of an asset as the price at which it was originally purchased
issues with HCA
Amounts determined may not be relevant to current decision-making if there is a long time span since the transaction occurred.
The amount paid for an item or received for an item may not necessarily be indicative of its value.
Judgement involved in determining depreciation rates can create inconsistencies and opportunities for manipulation.
Inability to determine the cost of some items, as items may be donated with no actual cost to the entity, or they may be internally generated rather than purchased.
Historical cost does not take into account changes in the value of money over time. In other words, it ignores price inflation.
In contrast, fair value accounting (FVA) identifies the actual market value of an asset or liability at the measurement date to overcome the limitations of measuring the actual value of an asset or liability subsequent to acquisition date. FVA aims to give a fair value to an entity regardless of market conditions.