Accrual Accounting for Performance Evaluation

Stanford GSB Research Paper No. 1886

38 Pages Posted: 25 Apr 2005

See all articles by Sunil Dutta

Sunil Dutta

University of California, Berkeley - Haas School of Business

Stefan J. Reichelstein

Stanford University - Stanford Graduate School of Business; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: February 2005

Abstract

This paper examines alternative accrual accounting rules from an incentive and control perspective. For a range of common production, financing and investment decisions we consider alternative asset valuation rules. The criterion for distinguishing among these rules is that the corresponding performance measure should provide managers with robust incentives to make present value maximizing decisions. Such goal congruence is shown to require intertemporal matching of revenues and expenses, though the specific form of matching needed for control purposes generally differs from GAAP. The practitioner oriented literature on economic profit plans has made various, and at times conflicting, recommendations regarding adjustments to the accounting rules used for external financial reporting. Our goal congruence approach provides a framework for comparing and evaluating these recommendations.

Keywords: Managerial performance measures, accrual accounting, incentive contracts, economic theory, economics of organizations, cost

JEL Classification: M40, M41, M46, G31, G39, C12, C21, C23

Suggested Citation

Dutta, Sunil and Reichelstein, Stefan J., Accrual Accounting for Performance Evaluation (February 2005). Stanford GSB Research Paper No. 1886. Available at SSRN: https://ssrn.com/abstract=706632 or http://dx.doi.org/10.2139/ssrn.706632

Sunil Dutta (Contact Author)

University of California, Berkeley - Haas School of Business ( email )

545 Student Services Building, #1900
2220 Piedmont Avenue
Berkeley, CA 94720
United States
510-643-1229 (Phone)
510-643-1412 (Fax)

Stefan J. Reichelstein

Stanford University - Stanford Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States
650-736-1129 (Phone)
650-725-7979 (Fax)

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

HOME PAGE: http://www.CESifo.de

Register to save articles to
your library

Register

Paper statistics

Downloads
1,497
Abstract Views
5,043
rank
11,960
PlumX Metrics