Inhoudsopgave
INHOUDSOPGAVE...............................................................1
1 – INTRODUCTION...........................................................13
1.1 – The objective of this book...................................................................................................... 13
1.2 – Some historical perspective.................................................................................................... 13
1.3 – The 2007-2008 Market Meltdown..........................................................................................15
1.4 – Efficiënt contracting............................................................................................................... 16
1.5 – A note on ethical behaviour................................................................................................... 17
1.6 – Rule-based versus principles-based accounting.......................................................................17
1.7 – The complexity of information in Financial Accounting and reporting.....................................17
1.8 – The role of accounting research..............................................................................................17
1.9 – The importance of information asymmetry.............................................................................18
1.10 – The fundamental problem of financial accounting theory.....................................................18
1.11 – Regulation as a reaction to the fundamental problem...........................................................19
1.12 – The organization of this book............................................................................................... 20
1.12.1 – Ideal conditions......................................................................................................................20
1.12.2 – Adverse selection...................................................................................................................20
1.12.3 – Moral Hazard..........................................................................................................................20
1.12.4 – Standard Setting.....................................................................................................................20
1.12.5 – The process of Standard Setting............................................................................................21
1
, 1.13 – Relevance of financial accounting theory to accounting practice...........................................21
2 – ACCOUNTING UNDER IDEAL CONDITIONS......................23
2.1 – Overview............................................................................................................................... 23
2.2 – The present value model under certainty...............................................................................23
2.3 – The present value model under uncertainty...........................................................................23
2.4 – Examples of present value accounting....................................................................................24
2.4.1 – Embedded value.......................................................................................................................24
2.4.2 – Reserve Recognition accounting..............................................................................................24
2.4.3 – Critique of RRA.........................................................................................................................24
2.5 – Historical cost accounting revisited......................................................................................... 25
2.5.1 – Comparison of Different Measurement Bases.........................................................................25
2.6 – The non-existence of true net income.....................................................................................25
3 – THE DECISION USEFULNESS APPROACH TO FINANCIAL
REPORTING.............................................................................26
3.1 – Overview............................................................................................................................... 26
3.2 – The decision usefulness approach...........................................................................................26
3.3 – Single-person decision theory................................................................................................. 27
3.3.1 – Decision Theory Applied..........................................................................................................27
3.3.2 – The Information System...........................................................................................................27
3.3.3. - Information Defined.................................................................................................................29
3.4 – The rational, risk-averse investor............................................................................................ 29
2
,3.5 – The principle of portfolio diversification.................................................................................29
3.6 – Increasing the decision usefulness of financial reporting.........................................................30
3.6.1 – Introduction..............................................................................................................................30
3.6.2 – Objectives of Management Discussion and Analysis...............................................................30
3.6.3 – Example....................................................................................................................................30
3.6.4 – Is MD&A useful?.......................................................................................................................30
3.7 – The reaction of professional accounting bodies to the decision usefulness approach...............30
3.7.1 – Conceptual framework.............................................................................................................30
4 – EFFICIENT SECURITIES MARKETS..................................33
4.1 – Overview............................................................................................................................... 33
4.2 – Efficient securities markets..................................................................................................... 33
4.2.1 The Meaning of Efficiency...........................................................................................................33
4.2.2 – How do market prices fully reflect all available information?.................................................34
4.3 – Implications of efficient securities markets for financial reporting...........................................35
4.3.1 – Implications..............................................................................................................................35
4.4 – The informativeness of price..................................................................................................36
4.4.1 – A logical inconsistency.............................................................................................................36
4.5 – A model of cost of capital....................................................................................................... 36
4.5.1 – A capital asset pricing model (CAPM)......................................................................................36
4.5.2 – Critique of the Capital Asset Pricing Model.............................................................................36
4.6 – Information asymmetry.......................................................................................................... 37
4.6.1 – A closer look at information asymmetry..................................................................................37
4.6.2 – Fundamental value...................................................................................................................37
3
, 4.7 – The social significance of securities markets that work well....................................................37
5 – THE VALUE RELEVANCE OF ACCOUNTING INFORMATION 39
5.1 – Overview............................................................................................................................... 39
5.2 – Outline of the research problem.............................................................................................39
5.2.1 – Reasons for market responses.................................................................................................39
5.2.2 – Finding the market response...................................................................................................39
5.2.3 – Separating market-wide and firm-specific factors...................................................................39
5.2.4 – Comparing returns and income...............................................................................................40
5.3 – The Ball and Brown study (1968)............................................................................................ 40
5.3.1 – Methodology and findings.......................................................................................................40
5.3.2 – Causation versus association...................................................................................................40
5.3.3 – The outcomes of the BB study.................................................................................................41
5.4 – Earnings response coefficients (ERC).......................................................................................41
5.4.1 – Reasons for differential market responses..............................................................................41
5.4.2 – Implications of ERC research....................................................................................................42
5.4.3 – Measuring Investors Earnings expectations............................................................................43
5.5 – A caveat about the “best” accounting policy...........................................................................43
5.6 – The value relevance of other financial statement information................................................43
6 – THE MEASUREMENT APPROACH TO DECISION
USEFULNESS...........................................................................44
6.1 – Overview............................................................................................................................... 44
6.2 – Are securities markets fully efficient?.....................................................................................44
6.2.1 – Introduction..............................................................................................................................44
4
INHOUDSOPGAVE...............................................................1
1 – INTRODUCTION...........................................................13
1.1 – The objective of this book...................................................................................................... 13
1.2 – Some historical perspective.................................................................................................... 13
1.3 – The 2007-2008 Market Meltdown..........................................................................................15
1.4 – Efficiënt contracting............................................................................................................... 16
1.5 – A note on ethical behaviour................................................................................................... 17
1.6 – Rule-based versus principles-based accounting.......................................................................17
1.7 – The complexity of information in Financial Accounting and reporting.....................................17
1.8 – The role of accounting research..............................................................................................17
1.9 – The importance of information asymmetry.............................................................................18
1.10 – The fundamental problem of financial accounting theory.....................................................18
1.11 – Regulation as a reaction to the fundamental problem...........................................................19
1.12 – The organization of this book............................................................................................... 20
1.12.1 – Ideal conditions......................................................................................................................20
1.12.2 – Adverse selection...................................................................................................................20
1.12.3 – Moral Hazard..........................................................................................................................20
1.12.4 – Standard Setting.....................................................................................................................20
1.12.5 – The process of Standard Setting............................................................................................21
1
, 1.13 – Relevance of financial accounting theory to accounting practice...........................................21
2 – ACCOUNTING UNDER IDEAL CONDITIONS......................23
2.1 – Overview............................................................................................................................... 23
2.2 – The present value model under certainty...............................................................................23
2.3 – The present value model under uncertainty...........................................................................23
2.4 – Examples of present value accounting....................................................................................24
2.4.1 – Embedded value.......................................................................................................................24
2.4.2 – Reserve Recognition accounting..............................................................................................24
2.4.3 – Critique of RRA.........................................................................................................................24
2.5 – Historical cost accounting revisited......................................................................................... 25
2.5.1 – Comparison of Different Measurement Bases.........................................................................25
2.6 – The non-existence of true net income.....................................................................................25
3 – THE DECISION USEFULNESS APPROACH TO FINANCIAL
REPORTING.............................................................................26
3.1 – Overview............................................................................................................................... 26
3.2 – The decision usefulness approach...........................................................................................26
3.3 – Single-person decision theory................................................................................................. 27
3.3.1 – Decision Theory Applied..........................................................................................................27
3.3.2 – The Information System...........................................................................................................27
3.3.3. - Information Defined.................................................................................................................29
3.4 – The rational, risk-averse investor............................................................................................ 29
2
,3.5 – The principle of portfolio diversification.................................................................................29
3.6 – Increasing the decision usefulness of financial reporting.........................................................30
3.6.1 – Introduction..............................................................................................................................30
3.6.2 – Objectives of Management Discussion and Analysis...............................................................30
3.6.3 – Example....................................................................................................................................30
3.6.4 – Is MD&A useful?.......................................................................................................................30
3.7 – The reaction of professional accounting bodies to the decision usefulness approach...............30
3.7.1 – Conceptual framework.............................................................................................................30
4 – EFFICIENT SECURITIES MARKETS..................................33
4.1 – Overview............................................................................................................................... 33
4.2 – Efficient securities markets..................................................................................................... 33
4.2.1 The Meaning of Efficiency...........................................................................................................33
4.2.2 – How do market prices fully reflect all available information?.................................................34
4.3 – Implications of efficient securities markets for financial reporting...........................................35
4.3.1 – Implications..............................................................................................................................35
4.4 – The informativeness of price..................................................................................................36
4.4.1 – A logical inconsistency.............................................................................................................36
4.5 – A model of cost of capital....................................................................................................... 36
4.5.1 – A capital asset pricing model (CAPM)......................................................................................36
4.5.2 – Critique of the Capital Asset Pricing Model.............................................................................36
4.6 – Information asymmetry.......................................................................................................... 37
4.6.1 – A closer look at information asymmetry..................................................................................37
4.6.2 – Fundamental value...................................................................................................................37
3
, 4.7 – The social significance of securities markets that work well....................................................37
5 – THE VALUE RELEVANCE OF ACCOUNTING INFORMATION 39
5.1 – Overview............................................................................................................................... 39
5.2 – Outline of the research problem.............................................................................................39
5.2.1 – Reasons for market responses.................................................................................................39
5.2.2 – Finding the market response...................................................................................................39
5.2.3 – Separating market-wide and firm-specific factors...................................................................39
5.2.4 – Comparing returns and income...............................................................................................40
5.3 – The Ball and Brown study (1968)............................................................................................ 40
5.3.1 – Methodology and findings.......................................................................................................40
5.3.2 – Causation versus association...................................................................................................40
5.3.3 – The outcomes of the BB study.................................................................................................41
5.4 – Earnings response coefficients (ERC).......................................................................................41
5.4.1 – Reasons for differential market responses..............................................................................41
5.4.2 – Implications of ERC research....................................................................................................42
5.4.3 – Measuring Investors Earnings expectations............................................................................43
5.5 – A caveat about the “best” accounting policy...........................................................................43
5.6 – The value relevance of other financial statement information................................................43
6 – THE MEASUREMENT APPROACH TO DECISION
USEFULNESS...........................................................................44
6.1 – Overview............................................................................................................................... 44
6.2 – Are securities markets fully efficient?.....................................................................................44
6.2.1 – Introduction..............................................................................................................................44
4
