Accounting Myopia - Revision history

Dirkjan at 19:23, 27 August 2020

2020-08-27T19:23:18Z

Dirkjan: Replaced content with "Accounting Myopia Category:finance Category:M18 Category:Term"

2020-08-27T18:38:29Z

Replaced content with "Accounting Myopia Category:finance Category:M18 Category:Term"

Dirkjan: Created page with "Accounting myopia (literally: myopia ("bijziendheid") describes a problem due to the fact that some types of investments that benefit the company from an economic perspective,..."

2020-08-25T07:21:17Z

Created page with "Accounting myopia (literally: myopia ("bijziendheid") describes a problem due to the fact that some types of investments that benefit the company from an economic perspective,..."

New page

Accounting myopia (literally: myopia ("bijziendheid") describes a problem due to the fact that some types of investments that benefit the company from an economic perspective, certainly for longer periods of future value generation, are not activated properly. Think of investing in the brand name and other, often intangible, values. These investments are fully and immediately charged to the accounting income for the period charged. The manager is thus tempted to postpone this type of investment.

* [[The economic concept of profit|Economic Profit]] is the ultimate measure of value creation but...
* [[The accounting concept of profit|Accounting Profit]] is a [[Lagging and leading indicators|lagging]]@mbi indicator
* What about stock performance as a proxy for economic profit?

=Pro's of accounting measures:=
* Relative precise and objective
* Goal congruent
* Controllable
* Understandable
* Inexpensive
=Con's of accounting measures:=
* The correlation between [[ECOP|ECOP]] and [[ACOP|ACOP]] exists but is rather weak
* Valuation problems
* Cost of working capital ([[WACC|WACC]])
* Hindsight oriented
=Solutions=
* Use [[ECOP|ECOP]]
* Split between short term performance an longer term investment control
* Combine financial results with [[Action Controls|Pre-action review]]@mbi
* Improve [[ACOP|ACOP]]
** Better matching
** More realistic realization principle
** Cost of equity capital
** Problem [[GAAP|GAAP]]]
* Longer term incentive plans
** Research shows ambiguous results
*** Very expensive, managers are only willing to accept the contract when the reward at the end is very high
*** Apparently higher risk for the manager
* Set of value drivers:
** Pros and cons off the balanced scorecard
* Reduce pressure for short term profit
* Relative performance measurement
* Subjective performance measurement
[[Category:finance]]

[[Category:M18]]

[[Category:Term]]

← Older revision		Revision as of 18:38, 27 August 2020
Line 1:		Line 1:
−	Accounting myopia (literally: myopia ("bijziendheid") describes a problem due to the fact that some types of investments that benefit the company from an economic perspective, certainly for longer periods of future value generation, are not activated properly. Think of investing in the brand name and other, often intangible, values. These investments are fully and immediately charged to the accounting income for the period charged. The manager is thus tempted to postpone this type of investment.	+	Accounting Myopia
−
−	* [[The economic concept of profit\|Economic Profit]] is the ultimate measure of value creation but...
−	* [[The accounting concept of profit\|Accounting Profit]] is a [[Lagging and leading indicators\|lagging]]@mbi indicator
−	* What about stock performance as a proxy for economic profit?
−
−	~~=Pro's of accounting measures:=~~
−	* Relative precise and objective
−	* Goal congruent
−	* Controllable
−	* Understandable
−	* Inexpensive
−	~~=Con's of accounting measures:=~~
−	* The correlation between [[ECOP\|ECOP]] and [[ACOP\|ACOP]] exists but is rather weak
−	* Valuation problems
−	* Cost of working capital ([[WACC\|WACC]])
−	* Hindsight oriented
−	~~=Solutions=~~
−	* Use [[ECOP\|ECOP]]
−	* Split between short term performance an longer term investment control
−	* Combine financial results with [[Action Controls\|Pre-action review]]@mbi
−	* Improve [[ACOP\|ACOP]]
−	** Better matching
−	** More realistic realization principle
−	** Cost of equity capital
−	** Problem [[GAAP\|GAAP]]]
−	* Longer term incentive plans
−	** Research shows ambiguous results
−	*** Very expensive, managers are only willing to accept the contract when the reward at the end is very high
−	*** Apparently higher risk for the manager
−	* Set of value drivers:
−	** Pros and cons off the balanced scorecard
−	* Reduce pressure for short term profit
−	* Relative performance measurement
−	* Subjective performance measurement
	[[Category:finance]]		[[Category:finance]]

← Older revision		Revision as of 19:23, 27 August 2020
Line 1:		Line 1:
−	Accounting ~~Myopia~~	+	Accounting myopia (literally: myopia ("bijziendheid") describes a problem due to the fact that some types of investments that benefit the company from an economic perspective, certainly for longer periods of future value generation, are not activated properly. Think of investing in the brand name and other, often intangible, values. These investments are fully and immediately charged to the accounting income for the period charged. The manager is thus tempted to postpone this type of investment.
		+
		+	* [[The economic concept of profit\|Economic Profit]] is the ultimate measure of value creation but...
		+	* [[The accounting concept of profit\|Accounting Profit]] is a [[Lagging and leading indicators\|lagging]]@mbi indicator
		+	* What about stock performance as a proxy for economic profit?
		+
		+	=Pro's of accounting measures:=
		+	* Relative precise and objective
		+	* Goal congruent
		+	* Controllable
		+	* Understandable
		+	* Inexpensive
		+	=Con's of accounting measures:=
		+	* The correlation between [[ECOP\|ECOP]] and [[ACOP\|ACOP]] exists but is rather weak
		+	* Valuation problems
		+	* Cost of working capital ([[WACC\|WACC]])
		+	* Hindsight oriented
		+	=Solutions=
		+	* Use [[ECOP\|ECOP]]
		+	* Split between short term performance an longer term investment control
		+	* Combine financial results with [[Action Controls\|Pre-action review]]@mbi
		+	* Improve [[ACOP\|ACOP]]
		+	** Better matching
		+	** More realistic realization principle
		+	** Cost of equity capital
		+	** Problem [[GAAP\|GAAP]]]
		+	* Longer term incentive plans
		+	** Research shows ambiguous results
		+	*** Very expensive, managers are only willing to accept the contract when the reward at the end is very high
		+	*** Apparently higher risk for the manager
		+	* Set of value drivers:
		+	** Pros and cons off the balanced scorecard
		+	* Reduce pressure for short term profit
		+	* Relative performance measurement
		+	* Subjective performance measurement
	[[Category:finance]]		[[Category:finance]]