Measurement Approach to Decision Usefulness
MEASUREMENT APPROACH TO
DECISION USEFULNESS
•
(184) MEASUREMENT APPROACH:
i. ii. iii.
Accountants (not investors) “undertake a responsibility”
To incorporate CURRENT VALUE ACCOUNTING directly in to the F/S
Provided “reasonable (37) reliability”
iv.
v.
a.
b.
As part of an “increased obligation” of the accounting profession
“To assist investors to predict future performance and value”
Performance = N.I.
Value = share price
vi.
Via a “more informative information system”
•
QUALIFIERS
i. ii. (185) “Beta is the only relevant risk measure according to the CAPM”
“there is evidence that accounting variables … do a better job than beta in predicting share return”
•
RISK vs. RETURN
i.
“Perhaps accountants should take more responsibility for reporting on firm risk”
1
JUSTIFICATION FOR THE MEASUREMENT APPROACH
•
4 point rationale for adopting the measurement approach
i.
iii. iv. “ … conclude that securities markets are close enough to full efficiency (161 ‘partly informative’) that the theory can serve as a guide to accountants”
“ … suggest that the extent of inefficiency and NON RATIONAL INVESTOR BEHAVIOUR can be reduced by a measurement approach”
“ … a low proportion of share price variability explained by historical cost-based net income”
(186) “the legal liability to which accountants are exposed when firms become financially distressed”
•
The justification for current value accounting is actually based on three theories:
i. ii. iii.
(68) Rational investor theory (single person decision theory)
(78) Utility theory (“to model risk aversion”)
(156) The efficient markets theory (the CAPM)
•
Chapter 6 discusses
i. ii. iii.
Irrational investor behaviour
Empirical studies of changes in the price a share of stock
Alternative explanations (tending towards theories) of the causes of these price movements
•
The chapter does not discuss current value accounting.
DECISION USEFULNESS
•
(184) MEASUREMENT APPROACH:
i. ii. iii.
Accountants (not investors) “undertake a responsibility”
To incorporate CURRENT VALUE ACCOUNTING directly in to the F/S
Provided “reasonable (37) reliability”
iv.
v.
a.
b.
As part of an “increased obligation” of the accounting profession
“To assist investors to predict future performance and value”
Performance = N.I.
Value = share price
vi.
Via a “more informative information system”
•
QUALIFIERS
i. ii. (185) “Beta is the only relevant risk measure according to the CAPM”
“there is evidence that accounting variables … do a better job than beta in predicting share return”
•
RISK vs. RETURN
i.
“Perhaps accountants should take more responsibility for reporting on firm risk”
1
JUSTIFICATION FOR THE MEASUREMENT APPROACH
•
4 point rationale for adopting the measurement approach
i.
iii. iv. “ … conclude that securities markets are close enough to full efficiency (161 ‘partly informative’) that the theory can serve as a guide to accountants”
“ … suggest that the extent of inefficiency and NON RATIONAL INVESTOR BEHAVIOUR can be reduced by a measurement approach”
“ … a low proportion of share price variability explained by historical cost-based net income”
(186) “the legal liability to which accountants are exposed when firms become financially distressed”
•
The justification for current value accounting is actually based on three theories:
i. ii. iii.
(68) Rational investor theory (single person decision theory)
(78) Utility theory (“to model risk aversion”)
(156) The efficient markets theory (the CAPM)
•
Chapter 6 discusses
i. ii. iii.
Irrational investor behaviour
Empirical studies of changes in the price a share of stock
Alternative explanations (tending towards theories) of the causes of these price movements
•
The chapter does not discuss current value accounting.