Economicconsequencesandposotiveaccountingtheory.ppt

* * * * * * * * Economic Consequences and Positive Accounting Theory Tang Song tangsong@mail.shufe.edu.cn 6590 4842 School of Accountancy Shanghai University of Finance and Economics * Chapter 8Economic Consequences and Positive Accounting Theory What are Economic Consequences? Answer: Accounting policies matter Especially to managers Even if no effect on cash flows Efficient Securities Market Theory Accounting policies do not matter Beaver (1973): text, Section 4.3.1 If no effect on cash flows If fully disclosed Another Efficient Securities Market Anomaly? Answer: Not necessarily Economic consequences can be reconciled with efficient securities market theory * Why economic consequences is important? Many of interesting events in accounting practice derive from EC A suggestion that accounting policies do not matter is at odds with accountants’ experience The research on the reasons of EC leads to several important accounting theory branches * The rise of economic consequences Zeff (1978): “the impact of accounting reports on the decision making behavior of business, government and creditors” Accounting reports can affect the real decisions made by managers and others, rather than simply reflecting the results of these decisions. * The rise of economic consequences (cont’d) The accounting standard-setting bodies face a dilemma Third-party intervention Business, industry associations, and governments attempted to influence, or did influence, accounting standard-setting. Standard-setting is a “delicate balancing act” Not only in the accounting theory domain, but also in the political domain. Economic Consequences in Action Employee stock options (ESOs) APB 25 applied until 2004/2005 No expense need be recorded if intrinsic value = zero Are ESOs an expense? Dilution Opportunity cost Economic Consequences in Action (cont’d) Measuring ESO expense Black/Scholes option pricing formula Assumes option held to expiry date But ESOs can be exercised early, between vestin