Chapter 5: Measurement theory THEORY IN ACTION Theory in Action 5.1 Fair value measurement What do you think the authors mean by a principles- versus a rules-based system of accounting? Examples are also given for valuation that depends on the attributes of a principle-based accounting system which is based upon some conceptual framework that defines accounting rules in terms of the entity, purpose of accounting system and some notion of wealth and derived income. An example is an accounting system that is based upon the conceptual notion of economic decision making using market prices and the maintenance of real purchasing power (instructors should briefly explain the principles of capital maintenance and market value accounting). A rules-based system is often delivered by fiat that pays little attention to a conceptual framework (the Napoleonic accounting system used in Europe). The fact that there are many accounting rules in historic cost is often used by critics who argue there is no underlying (and unifying) conceptual framework in this system. What is the measurement problem they allude to? The instructor should use this question to introduce the concept of conceptual frameworks. IAS proposes to use a ‘fair value’ concept seemingly based upon commercial principles and market prices. The fundamental measurement problem alluded to is that commercial influences such as inflation, changing market prices and the attributes of the asset being measured have a number of different interpretations and ways of being implemented into an accounting system (see below). Which way should they be implemented? No guidance is provided — for example, for assets measurement, reliability and accuracy may depend on a number of factors: the level of inflation different market prices the level of subjectivity in estimating value the degree of conservatism used general economic conditions. The attribute of the asset would also play a strong role in determining the valuation method. What does Macve mean by the underlying conceptual framework? What problems does he see with a ‘fair value’ approach? A conceptual framework will provide the logical and empirical basis to apply the accounting principles. A ‘fair value’ approach, whilst having a commercial focus that relates to markets, is too general. Macve states that ‘fair value’ is left ambiguous with no conceptual framework that guides the valuation and measurement rules. Presumably in a political environment a more micro and definitive framework would not be agreed upon for international standards. The instructor may raise the question ‘Where does this leave us?’. The IAS has left it up to firms to decide on an individual basis. The overall point is to ask students to consider measurement issues, to accept that the world is not black and white, and that in accounting we potentially have practical measurement rules that are appropriate for different circumstances. That is, there are answers, but they are complex. A number of times students will argue for one general solution or claim that ‘it is all too theoretical’ rather than practical. The question then is: Should we make one general framework through legislation and accounting bodies, or be aware of these shortcomings and adapt to different circumstances as they arise? The later suggests only general guidelines that are subject to interpretation. Do you think that there is any difference between measures and value? These concepts are sometimes used interchangeably. Measures generally relate to something that is tangible and capable of scientific measurement. Values are more subjective. For example, an asset may have no measurable market price but have value in use to the business (specialised assets). Theory in Action 5.2 Capital or income? Why is the measurement distinction between capital and income important? In theory (and practice) income is the incremental increase in beginning period capital. Therefore income cannot be measured unless the beginning period capital amount is known. What do you think is real financial capital maintenance and what is physical capital maintenance? Financial capital maintenance is having the same amount of financial resources (or net assets valued in money terms) at the end of the period as at the beginning of the period. Real financial capital maintenance means maintaining the same purchasing power (so an adjustment for inflation is needed). Physical capital is the ability to produce the same level of goods and services at the end of the period. Is the increase in the value of a house you live in income or capital? If you wish to continue to live in the same level of housing then any increase in value is capital. If you sell then you have to purchase a similar house that provides accommodation services at a similar price. However, some students will argue that you will eventually sell so it is some form of future income or increase in value. Does your answer to question 3 change if your house is an investment property? Then you may legitimately use a financial (or real financial) concept of capital. Students should now realise some of the complexity of the arguments about measuring income and capital. QUESTIONS Technically, what do we mean when we say ‘X was measured’? First of all, we know that properties or characteristics of things are measured. That is, we do not measure people, but we might measure their weight or height. When we say, ‘X was measured’, we mean that a number (numeral) has been assigned to X according to certain rules governing the property, of which X is one. Therefore, X must be a characteristic of something. The number system used reveals the relationships involved, of which X is one. For example, if X is the income of Y Company, we mean that a number such as $115 000 has been assigned according to the accounting rules for determining income. The number system employed, having to do with dollars in this case, reveals the relative relationship of the $115 000 figure to other income figures. How is a scale related to the process of measurement? To measure is to establish a scale — that is, every measurement is made on a scale and the set of operations used to assign the numbers creates a scale. The type of scale depends on the rule(s) that have been formulated to relate the numbers and the property of the things being measured. A scale shows how much information the numbers represent; it gives meaning to the numbers. For example, to measure the income of Y Company we follow the accounting rule on how this is to be done. By following these accounting rules, a scale is created in dollars, which relates the number (say $115 000) to the property being measured (income). The scale used in accounting is historical dollars. Describe the following scales: nominal, ordinal, interval, ratio. Give an example of each. Which scales are applied in accounting and where? Nominal scale. Numbers are used as labels or names. The number does not indicate a quality or characteristic of the thing measured. The numbering of football players is a simple example. The use of this scale does not constitute an act of measurement. Ordinal scale. The number assigned to each object of a set indicates its rank order with respect to a given property. An example is the assignment of numbers to investment alternatives according to their profitability (rate of return); or the assignment of numbers to candidates for a certain job according to the measurer’s preference. The weakness of this scale is that the intervals between the numbers are not necessarily equal, and the number does not indicate the ‘quantity’ of the property. Interval scale. For an interval scale, the numbers show the rank order of the objects with respect to a given property, but unlike the ordinal scale the distance between the numbers is equal and is known. A ‘zero’ point is selected arbitrarily. An example is the Fahrenheit scale of temperature, where the freezing point (the ‘zero’ point) is arbitrarily set at 32 degrees. The weakness of the interval scale is that the zero point is arbitrarily established. In accounting, standard costs are based on an interval scale, since the ‘capacity’ is arbitrarily selected. Ratio scale. The ratio scale conveys the most information. A ratio scale is one where: the rank order of the objects with respect to a given property is known the intervals between the objects are equal and are known a unique origin or a natural zero point exists. An example is the measurement of length. Zero is naturally no length. Another is the use of dollars to represent cost or value — zero is naturally no cost or value. Ratio scales are applied to accounting. All measures used in the financial statements have a natural origin ($0.00). Intervals between measurement units are identical amounts of currency, and are known. And the rank order of the objects or events measured with respect to their values is known. However, to the extent that different measurement methods are applied — historical cost, net realisable value and present value, for instance — the scale is the same. But while the scale is ratio, the relative measures are not always meaningful because the attributes being measured are not the same. Determine whether the following statements are correct and state why: (a) The historical cost of inventory is $60 000 at year-end. When it is converted to constant end-of-year dollars by multiplying by 110/100 to get $66 000, the $66 000 is still the historical cost of the inventory. (b) Last month the quantity variance was determined to be $12 000 favourable, and this month it is $24 000 favourable: therefore, the efficient use of materials has been doubled. (c) On the basis of saving income tax, Company X ascertained that the double-declining-balance depreciation method is better than the straight-line method. By using the double-declining-balance method for depreciation rather than the straight-line method, Company X saved $10 000 in income tax this year; therefore, the former method is 10 000 times better than the latter. (d) On the basis of the amount of assets, we can say that Company X is twice as large as Company Y, because its total assets amount to $1 000 000 compared with $500 000 for Y. (a) Correct. A ratio scale is used, and thus it remains invariant over all transformations when multiplied by a constant, which in this case is 110/100. The invariance of the scale makes the rule (historical cost) the same even though the scale is expressed in different units, such as from nominal dollars to constant end-of-current year dollars. However, the value of inventory may or may not have appreciated at the same level as general inflation. Therefore this scaling is not an appropriate measurement tool for assets but is a base that can be used as a benchmark for the maintenance of purchasing power. (b) Incorrect. Variances are based on an interval scale, because the ‘zero point’ is arbitrarily selected — that is, it is not natural. The efficiency basis (capacity) could be theoretical, average, practical or normal. One of these is selected by the company according to its preference. For the interval scale, we cannot multiply or divide with respect to the particular numbers. For example, if the temperature in a given room is 40 degrees Fahrenheit and in another room it is 80 degrees Fahrenheit, we cannot say the second room is twice as hot as the first. It is not mathematically permissible and empirically misleading. In this particular case, the point of ‘no efficiency’ is a matter of conjecture; it is not measurable by variance analysis. (c) Incorrect. An interval scale is being used to determine which method is ‘better’ for saving income taxes. For the reasons given in (b) above, Company X cannot say the double-declining-balance method is 10 000 times better than the straight-line method. (d) Correct, in theory. A ratio scale is used where zero means no value. For a ratio scale, it is correct to multiply and divide the numbers (that is, to speak in ratio terms). However, we know that, technically, because of inflation (or deflation) the dollars of the historical costs are not the same comparatively over the years, and therefore this causes a problem. We can correct this problem by adjusting for the change in the specific value of the assets. The statement would be correct without qualification if the two companies purchased their assets on the same day and those assets were exactly the same (with the same usage). Describe the following types of measurement: fundamental, derived, fiat. In what sense are fiat measurements ‘weak’? What type of measurement is inventory costing? Fundamental measurement is one where the numbers can be assigned to properties based on natural laws (confirmed empirical theories), and which does not depend on the measurement of any other variable. Examples are length, electrical resistance, number and volume. According to Campbell, derived measurement is one that depends on the measurement of two or more quantities. However, perhaps it is better to say that it depends on at least one other quantity. In any event, the measurement is still based on natural law. An example is density, which is based on the measurements of mass and volume. An example in accounting is income, which uses asset values as a basis to estimate cost (depreciation, bad debts, etc.). A fiat measurement is one that depends on an arbitrary or stipulated definition rather than on a confirmed theory. The weakness is that because there is no confirmed theory underlying the measurement, there can be numerous ways to construct a scale for the measurement of the given property. For example, there are different ways to measure income. Which is the proper or best way? This type of measurement is prevalent in accounting. This basis was formulated by social scientists in order to justify the measurements in the social sciences; otherwise, there can be no measurement. There are some who do not believe in fiat measurement, and therefore question the use of the term ‘measurement’ in accounting and the social sciences. If accounting theory can be empirically validated, then instead of fiat measurements, we can have fundamental measurements. Inventory is a derived measure from fiat. What are the sources of error in measurement? All measurements involve errors. The sources of error are: Measurement operation (rule to assign numbers) stated imprecisely. Measurer. The measurer may misinterpret the rule, or be biased, or apply or read the instrument incorrectly. Instrument. The instrument may be flawed. The instrument could be physical (for example, a thermometer) or something abstract (such as a chart, graph or index or accountant’s judgement). Environment. The setting in which the measurement operation is performed can have an effect on the result, such as weather conditions, noise, pressure exerted by other people, or imperfect or numerous markets. Attribute unclear. What is to be measured may be unclear. For example, is the value of an asset the present value, acquisition cost, current cost or selling price? Explain whether the following statements are facts: (a) Canberra is 320 kilometres from Sydney. (b) Depreciation expense for Kambah Pty Ltd for 2001 was $1 294 000. (This is the amount reported on the statement of financial performance.) (c) Smoking leads to lung cancer. (d) Sales revenue for Telex Ltd for 2002 was $2 800 000. (This is the amount reported on the statement of financial performance.) (e) Equipment (net of accumulated depreciation of $400 000) for McNair Ltd for 2000 was worth $1 800 000. (This is the amount reported on the statement of financial position.) (a) Since all measurements involve error, the question is: How much error are we willing to accept? This depends on the purpose of the measurement. The statement, for general purposes, can be considered factual. Canberra is, roughly speaking, 320 kilometres from Sydney. (b) Unlike the first statement, which had to do with length (a fundamental type measurement), this statement pertains to economic cost or value. This involves a fiat type measurement. Accuracy of a measurement relates to how close a number is to the ‘bull’s eye’ (the true standard). In a fiat type measurement, we do not have supporting evidence on the true standard, and so we cannot really say that $1 294 000 represents the true amount of depreciation, or how close it is to the true amount. The figure is simply that which is derived by use of generally accepted accounting methods. The statement is a factual statement in the sense that the amount was actually reported by Kambah Pty Ltd. But whether the amount is the ‘true’ amount, no-one knows. There is no objective, empirical evidence supporting the accounting measurement of depreciation. This question reveals one weakness of applying fiat measurements. (c) There is empirical evidence to support the statement, but whether the evidence is persuasive is a matter of judgement. For some, the evidence is very persuasive; for others, it is not. The statement reveals the probability character of general statements. First, nothing is mentioned about the amount of smoking. The implication is that the greater amount of smoking (say, five packs of cigarettes a day as opposed to one pack), the truer the statement. Second, actual evidence will show that there are specific individuals who smoke, say, 10 packs of cigarettes a day and have done so for 50 years and have not yet contracted lung cancer. Yet, this does not necessarily negate the statement. The statement is a statistical one, appropriate to a large number of people. In reference to a particular person, this entails ‘subjective probabilities’. The theory of subjective probabilities is not presently supported mathematically. Considering the statistical nature of the statement, it can be regarded as factual if we believe the evidence is sufficiently persuasive. (d) Although the amount is derived by accounting methods, unlike the statement on depreciation in (b) above, this statement is based on observable data that can be verified. Assuming that this verification has been made by the auditors, this statement is factual. (e) Because the amount of $1 800 000 is mixed with accumulated depreciation, it cannot be accepted as a factual statement of market value except in the sense that it is the amount reported by McNair. The term ‘worth’ is used, which implies that the equipment can be sold for $1 800 000. It is doubtful that the book value is the same as the market value of the equipment. It is not a statement of fact with regards to value unless this is the case. The verifiable facts are that the equipment was purchased at a cost of $1 800 000 and that after amortising depreciation its book value is $400 000. What is the difference between accuracy and reliability in measurement? How are these notions related to the testing of a theory? Reliability refers to the proven consistency of a measurement or the operations from which the measurement is derived. We can speak of a measurement (the number) being reliable, or of the set of operations (instrument) being reliable. In statistics, reliability refers to the agreement of the results — consistency — among repeated application of the operation to a large number of cases. In statistics, the variable must be random; therefore, reliability relates to the random error in measurement, the unsystematic error component. If the random error is minimal, then the measurement is reliable. Reliability does not necessarily lead to accuracy. The reason is that accuracy has to do with how close the measurement is to the ‘true value’ of the attribute measured. In statistics, the true value is presented by the mean. In accounting, ‘true value’ pertains to the pragmatic notion of usefulness, which is expressed in the objective of accounting. Because the term ‘accuracy’ is so often misunderstood, the term ‘validity’ has been suggested to denote the same idea. We can speak of a valid measurement in the sense that it is appropriate for the stated purpose — that is, the measurement hits the ‘bull’s eye’ or is sufficiently close to it. Another way of putting it is to say the measurement is relevant. Accuracy or validity relates to the relevance of accounting information. The testing of a theory involves the determination that the numbers involved in the theory are reliable and accurate (valid). In accounting, we say that the data must be reliable and relevant — that is, useful. Discuss whether accounting measurement is fiat or fundamental. Can accounting numbers ever be related to fundamental values? If so, what are they? This question underlies a good deal of the debate in accounting theory and will provoke a number of different answers from students. The tutor should lead discussion according to the response of students. Some discussion points are: Accounting measurement, to a great degree, is determined by fiat, and is generally imposed on society by accountants or government committees dominated by accountants. However, accounting outputs must have some fundamental value because there is a correlation between outside referents such as stock prices, current prices, expected future cash flows and risk. Accounting theorists cannot agree on fundamental value because it changes according to the nature of the asset, the use of the asset and the use to which the demanded value is put. Is it historical cost, buying price, selling price, discounted value or a variant of these? Some empirical researchers have examined these values to try and determine which ones are more reliable or have the highest correlation with market or stock prices. Discuss how recent accounting standards using ‘fair value’ accounting such as IAS 39 and IAS 41 have moved away from fundamental measurement. If we define fundamental measurement as a stewardship concept then this commercial focus has moved accounting towards a market price approach and away from historic cost. On the other hand the ‘fair value’ approach is ambiguous as to which concept of market value (price) should be used, or if different concepts are appropriate in different firms and circumstances, then what are they? See also Theory in action 1. Why will international financial reporting standards induce an increased demand for risk management techniques? Required to report ‘fair values’ which are subject to interpretation. Possibility of overvaluation. Fluctuating balance sheet valuations and income derivations may require managers to hedge values in the market place. The movement towards measurement and valuation principle places more risk on managers to perform and report appropriate return on assets, capital etc. 12. How will the move towards fair values affect the role of auditors and the audit function? Do you think it will affect the training of accounting students? How so? It could be argued that a movement away from historical costs towards fair values will affect the role of auditors and the audit function by placing greater emphasis on auditing management estimates instead of transaction based historical costs. The training of accounting students would then be expected to reflect this change by placing greater emphasis on teaching students how to deal with uncertainty in accounting and auditing. The guidelines for auditing fair values are contained in ASA 540 (ISA 540). ASA 540 (ISA 540) discusses the requirements for auditing accounting estimates, including fair value accounting estimates and related disclosures. The standard requires the auditor to obtain sufficient appropriate evidence about whether the estimates are reasonable. The auditor should assess how management makes the relevant accounting estimates and should also understand the data on which the estimates are based. The auditor would consider the relevant controls and whether external experts have been used. The auditor should determine whether the management has appropriately applied the relevant accounting standards, and whether the estimates have been made consistently and appropriately. The procedures used by the auditor include testing the method and data, and the reasonableness of the underlying assumptions. The auditor should also develop an estimate to compare with management’s estimate. ASA 540 recognises that greater uncertainty exists for some estimates, and management could be more biased under some conditions. In some cases, the estimation uncertainly is so high that a reasonable accounting estimate cannot be made. This could be dealt with by additional disclosure of the range of the estimate and the uncertainty associated with them. However, it could also be argued that management estimates are already inherent in traditional accounting. For example, managers are required to estimate the provision for doubtful debts, and auditors are required to audit these estimates by considering the underlying assumptions and data used by the management, and auditing the consistency and reasonableness of their methods of making the estimate. Another example is the requirement to show inventories at the lower of cost and net realisable value. As discussed in the text, inventory valuation in a manufacturing environment is already reliant on many estimates and calculations which are to be audited. 13. What would be included in overhead costs assigned to inventory? How many ways can you think of assigning these costs when there are multiple products and departments? What are the audit implications? AASB 102 (IAS2) deals with inventories. This standard requires overhead costs to be allocated to inventories, if the costs are related to bringing inventory to their present location and condition. Standard costs take into account normal levels of materials and supplies, labour, efficiency and capacity utilisation. They are regularly reviewed and, if necessary, revised in light of current conditions. Overhead costs include depreciation and maintenance of factory buildings and equipment, cost of factory management and administration, indirect materials and indirect labour (see para 12 AASB 102). AASB 102 requires overhead costs to be allocated between products that share a production process on a ‘rational and consistent basis’. This could include using the relative sales value of each product. Auditors will need to make a judgement about what is ‘rational’ in each circumstance. If a particular ‘driver’ of cost allocation is used, such as indirect labour, the auditor needs to audit these cost drivers. The auditor also must understand what is normal production capacity and causes of variations, and whether these are persistent or temporary. Case Study 5.1 12 ways to value intangibles and brands Evaluate the advantages and disadvantages of each suggested measurement technique. Tutors should note that all methods of valuing brands and intangibles are highly subjective, because by their very nature they must be estimates of future cash inflows. Some observations on each method follow: Net present value. This technique is derived from finance and requires the valuer to estimate the proportion of future cash flows (or earnings) attributed to the brand and its impact on risk. You need to question how to sort out the relative cash flows and how to derive the discount rate. CAPM. CAPM will provide the discount rate to apply to the NPV method, but requires stock prices to estimate. Most firms are not listed, and this requires the valuer to use a surrogate for unlisted firms (such as a similar firm that is listed). Cost of creation. This, in its simplest form, just means adding up all the costs of creating a brand. But some costs are sunk, some are irrelevant and some should be expensed. Market based comparisons. Comparisons with listed brand values used by other corporations are valid if the techniques used by them are also valid and the asset being compared is the same. This technique may be acceptable for tangible assets, like land or buildings; but intangibles are not strictly comparable and values are subjective. Royalty relief method. This method is valid if the brand can be leased or licensed because the payments are incremental cash flows. However, the market for these is limited and cash flow payments are unique to individual brands or intangibles. Relative value. This method is subjective and qualitative, and difficult to estimate quantitatively. Balanced scorecard. This method adds additional (mostly) qualitative measures. It enables the valuer to obtain a greater sense of the brand’s worth, but does not provide value by itself. Competency models. These suffer from the subjective problems of determining who are the most successful employees determining market value. Benchmarking. This provides an assessment of your performance against market leaders, but does not provide a market value. It assumes that the scorecard can be linearly transposed. Business worth. Again, this technique provides benchmarks and has the same problems. Business process auditing. This method is subjective and lacks structure. Knowledge bank. This involves valuation by fiat that simply reverses the rules of accounting. Make a recommendation as to which measurement technique should be used. The most structured technique is the use of a discounted net present value model that applies CAPM to estimate the discount risk rate (techniques 1 and 2). These techniques are grounded in finance theory and the theory of diversification. It is suggested that the economic value-added model is the most appropriate model to apply to intangibles (see chapter 9 and the Ohlson model). Would you consider using more than one measurement technique? Why or why not? Yes. Given the subject nature of the estimations, the more information gleaned the better the feel for the ultimate value. The use of qualitative factors — such as perceived customer loyalty, retention rates of staff, demand for staff, intellectual property, internal business processes and relative value — provide support for your ultimate calculations. Case Study 5.2 Risk management survey 2005: Take a risk. No chance. Why would firms be concerned with increasing or reducing hedging activities under different accounting systems? IAS focus on fair value requires many assets and liabilities previously not reported to be now be valued and reported on the balance sheet. If markets are volatile then assets and liabilities need to be hedged. If the valuations now have considerable impact on the income statement then managers may also wish to hedge against falling income and managers' own wealth if it is tied to reported income. What impact will international reporting standards have on the income statement? Higher assets values mean higher depreciation or amortisation. Changes in asset and liability values may be recorded as impairments and reduce income. Why is the measurement and reporting of pension liabilities and assets a concern for risk management? Essentially, the decision to hedge or not to hedge has costs. The cost of the hedging instrument (futures, options, leaseback etc.) itself and the possibility that firms will lock themselves into current economic conditions. Case Study 5.3 The trend toward fair value accounting What do you think is the fundamental problem with financial statements based upon the historic cost measurement principle used under US GAAP? Accounting measures transactions at historical cost. Hence, the fundamental measurement problem is the divergence of written-down historical cost values from outside influences such as inflation, changing market prices and the attributes of the asset being measured. Historical cost accounting is a derived measurement system from allocating costs – assets are simply left over or balancing amounts and do not represent ‘financial value’. What do you think of the principle ‘…accounts must reflect economic reality’ as a core principle of measurement in accounting? This is really the argument about relevance. Historical costs are outdated and hence not relevant as a measure of economic reality and therefore we need to take account of markets or estimates that measure economic reality and are relevant for financial decision making. Tutors should lead this discussion in order to challenge perceptions that there is only one measurement system. How would you measure economic reality? This question boils down to: What is economic reality? It is a slippery concept that will vary. For example: Valuation depends on the attributes of the asset being measured — monetary assets (cash), assets traded in established markets (market price) and intangibles (value derived from continued operations and future cash flows). Further, economic reality changes according to who demands the information. Economic reality for investors is future cash flows or earnings; for traders it is current market selling price; for manufacturers it is current buying price;, for auditors it is historical transactions. 4. What is reliability in accounting? Historical costs can be reliable if you check simple mathematical calculations (ie. verifiability). But the article mentions other interpretations – precision, and verifiability against market prices or estimates. Tutors should lead discussion but essentially reliability is interpreted by historical cost accountants as verifiability and by market based accountants as reliability for making economic decisions (depending on ones ontology or view of the world). Case Study 5.4 IFRS put damper on share options schemes Instructors should use this case study to illustrate how changes in accounting standards and the measurement of income can have impacts on the behaviour of managers and employees. 1. How do share option schemes affect the measure of income under international financial reporting standards? Basically income will be reduced which may have an influence on the perception of managers' performance and firm performance by outsiders. Under IFRS companies are required to deduct the cost of issuing options from earnings for the first time. An example given from LogicaCMG estimates that it will reduce profits by about 13%. 2. Why has this led to the reduction in stock-based packages for staff? Stock options, as part of a remuneration package, has fallen because the stock market was previously flat and the requirement that the cost of options be expensed in the current period. On the other hand it is reported that share plans, whilst also required to be expensed under IFRS, are a viable alternative to the granting of options in salary packages. Stock options require the share price to reach a required level (strike price) before the share is granted, whilst the granting of shares occurs at the current price. From the point of view of employees options are a much longer term payoff (more likely to occur in bull markets) and shares provide an immediate payoff. 3. How is the form of structuring and reporting financial statements important to: (a) Management (b) Shareholders If there is a link between short-term reported income and stock returns then the wealth of individuals (managers, shareholders) may be reduced or management practices placed under tighter control. Options are a longer term bonding arrangement, if options are no longer used because of accounting requirements then the focus of the firm may be directed towards shorter term (and more risky) goals. Solution Manual for Accounting Theory Jayne Godfrey, Allan Hodgson, Ann Tarca, Jane Hamilton, Scott Holmes 9780470818152
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