Interest of shareholders. This is the reason for the prominent role which variants of residual income, such as economic value added (EVA®), a trademark of Stern and Stewart, play: a manager will anticipate the expected future residual income generated by a particular decision, typically an investment decision. When the manager is evaluated or even rewarded based on residual income, he will make his decision dependent on the present value of residual income which is known to be identical to net present value (NPV) (Preinreich, 1937) [1]. Therefore the manager’s decision will be consistent with the NPV- rule, as long as his discount rate and his time horizon are identical to the project’s. This property of residual income is termed “goal congruence” in the literature (Reichelstein,
1997).
However, residual income of a particular period does not by itself indicate the value creation of the period. Therefore, the use of residual income for rewarding purposes may lead to myopic behavior by managers (O’Hanlon and Peasnell, 1998) when their time horizon is shorter than the project’s [2]. In addition, residual income does not provide information on the extent to which the initially planned value creation has been realized in the period. However, since economic goodwill is identical to the present value of future residual income and therefore to value creation, a close relationship between goodwill accounting and value based performance measurement exists.
In this paper, we outline the link between value creation, performance measurement and goodwill accounting. We show that information required by IFRS and US-GAAP to evaluate a firms’ goodwill can be used to design a performance measurement system which provides information about both value creation and the afterward realization of value. Value creation means that the manager initiates projects with a positive net present value, which lead to increases in shareholders' wealth. In contrast, value realization describes the success in the later implementation and realization of the planned figures. From the perspective of value based management, we conclude that this performance measure is superior to standard residual income performance measurement. As a consequence, the information needed for external reporting purposes can also be used for internal decision- making. From a practical perspective, we show that appropriate adjustments to the data used for impairment testing result in information which ideally fits the requirements for an optimal performance measurement system. Hence, we contribute to the literature by民族风情文化周调查问卷表
3 showing how financial accounting information can be used in performance measurement
systems from both a theoretical and a practical perspective.
The remainder of the paper is organized as follows: In the following section, we review related literature and outline the aim of the paper. In section 3, we analyze properties of optimal value based performance measurement systems. In this context, we describe the link between residual income and value creation based on the analysis of O'Hanlon and Peasnell (2002). In particular, we develop a periodic measure which provides information about both value creation and its afterward realization. In section 4, we discuss the use of goodwill accounting information according to IFRS and US-GAAP to calculate this measure. We conclude with a summary.
2. Related literature
According to the IASB’s framework, the principal objective of financial statements is “to provide information about the financial position, performance and changes in financial position of an entity that is useful to a wide range of users in making economic decisions” (IASB-F 12). Similarly, the major objective of financial reporting in FASB’s framework is to provide information “that is useful in making business and economic decisions” (CON
1.33).From a practical perspective, the question arises whether the information provided for financial accounting purposes can also be used for performance measurement.
The discussion on the different functions of accounting and the use of financial accounting for management accounting purposes has a long tradition. Theoretical research has examined the stewardship versus valuation role of accounting information from the perspective of information economics. Particularly, the question is analyzed whether information needed for investors to value firms coincide with information required for performance measurement. Within an agency-framework, Gjesdal (1981) shows that decision usefulness and stewardship are distinct functions of accounting. Consequently, the literature is critical about the use of information relevant for decision making in performance measurement systems used for stewardship purposes (i.e. Lambert, 2001).
Although theoretical research recommends the use of distinct accounting information for different purposes, this result is not empirically valid in practise. Bushman et al. (2006) find that valuation earnings coefficients and compensation earnings coefficients are related empirically. That is, the information content of earnings from both a value relevance and a
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