John R. Grinyer

Evidence of Managerial Short-termism in the UK

This paper considers an aspect of possible managerial short-termism in the UK. It discusses some potential motivations for that phenomenon and presents evidence which suggests that short-termism exists and is positively associated with managerial perceptions of capital market valuation practices. Two hypotheses were developed and tested using the responses concerning RD and that the extent to which managers behave as hypothesized above is positively associated with their perceptions of the level of emphasis placed by the capital market on measurements related to short-term reported earnings. The results obtained support the hypotheses. Overall, the evidence of the paper is consistent with the view that many finance directors of large UK companies are short-termist in their perceptions and that such short-termism is positively associated with their beliefs about the level of emphasis placed by the capital market on figures of reported earnings.

Managerial Choices in the Valuation of Acquired Goodwill in the UK

Abstract During the 1980s the UK regulations affecting accounting for acquired goodwill allowed managers to make accounting choices affecting recorded goodwill that best served their particular interests. This paper develops and tests the hypothesis that the proportions of purchase price assigned to separable net assets and consequently to goodwill are affected by gearing (leverage) and other considerations.

The rationale for accounting for goodwill

Abstract This paper discusses the basis for accounting for goodwill on acquisitions in the UK under the assumption that a primary purpose of financial statements is to monitor and motivate the financial performance of management. It establishes a case against the immediate write-off of goodwill to reserves and in favour of the capitalisation and amortisation of purchased goodwill. As the limited objective of the analysis is the improvement of current practice, the argument proceeds by reference to historical cost accounting.

National impediments to international harmonization: Evidence of lobbying in the U.K.

Abstract The international harmonization of financial reporting requires national acceptance of international standards. Accounting for goodwill in the U.K. provides an interesting case study of the pressures that can influence national standards in a direction contrary to that required for harmonization. The paper outlines the theoretical issues and historical UK context of accounting for goodwill and provides evidence of lobbying that is consistent with the hypothesis that managers and auditors lobby in furtherance of their vested interests. The implications of the UK experience for international harmonization are briefly discussed.

Deprival Value-Based Accounting Rates of Return under Uncertainty: A Note

Kay and Mayer (I986) (KM) and Edwards et al. (I987) (EKM) show that, under specified assumptions, a proposed investment project will have an expected deprival value-based accounting rate of return (ARR) greater than the projects cost of capital if and only if the project has a positive net present value (NPV). The analysis of KM and EKM was conducted under assumptions which effectively imply that all future cash flows can be predicted with certainty. The purpose of this note is to examine the applicability of the EKM approach under more general conditions involving uncertainty. The analysis shows that deprival value-based accounting rates of return properly calculated using certainty equivalents provide a logically complete basis for simple accept/reject investment decisions involving abandonment and deferment options.

Determinants of accounting choices in Egypt

In recent years, Egypt has been developing rapidly from a socialist to a fully developed market‐based economy. One may expect that this economic transition towards a more capitalist orientation will influence the country’s cultural and socio‐economic environment, and consequently the behaviour of its corporate managers. The increasing separation of ownership and control of capital could be expected to increase agency problems associated with managerial decisions. In these circumstances, it should be interesting to identify whether ‘positive accounting’ hypotheses would apply in such an environment. Therefore, this paper examines the relevance to financial reporting in Egypt of some established positive accounting theory hypotheses in addition to a new hypothesis related to taxation. The evidence of the study is consistent with the validity of the conventional ‘bonus’ and ‘debt’ hypotheses and the new ‘taxation’ hypothesis. These conclusions are also consistent with recent empirical studies of cultural and socio‐economic change in Egypt.

Revaluation of Fixed Assets in Accruals Accounting

Abstract The paper explores the topic of revaluation in accruals accounting under the assumption that an important purpose of financial statements is to report 011 managements financial performance. Having differentiated valuation and matching based approaches, the paper proceeds to indicate some reasons for revaluation in the latter by reference to the literature of management accounting and logical argument. It identifies exit value (net realisable value) as the most appropriate basis for valuation for the postulated purpose, but argues that revaluation should not occur annually but by reference to the expiration of ‘planning periods’ or to other specified events which may occur earlier. Therefore its arguments and proposals differ from those previously associated with advocates of exit value. The article concludes by discussing some of the practical issues arising from its suggestions.

A Case Study on Interest Adjusted Accounting Using EEI

Abstract It can be claimed that the failure of conventional accounting explicitly to recognise the cost of capital is a major shortcoming during periods of high interest rates. Another important problem stems from the apparently arbitrary and incorrigible allocations typically involved in the matching process. Grinyer has previously proposed a theoretical solution to these problems using an allocation algorithm he called ‘Earned Economic Income’ (EEI). This paper outlines and illustrates a practical development from the EEI concept by means of a case study which explains the calculations and estimates that were made when testing the approach in a firm manufacturing and trading in industrial textiles.

Managerial Advantages of using Payback as a Surrogate for NPV

ABSTRACT Existing literature identifies specific situations in which payback methods (PB) can provide precise surrogates for NPV analyses of accept/reject decisions. This paper extends that literature to take explicit account of taxation and of ranking decisions using profitability indices. Nevertheless, NPV can be considered preferable to PB as a basis for maximising stockholder wealth (MSW), because it requires fewer assumptions and provides more information. Yet simple PB continues to be used extensively, which suggests that it has advantages for decision-makers. Some authors suggest that its use reflects managerial short-termism and is inconsistent with MSW. In contrast, this paper proves that (with standard patterns of cash flows, defined risk classes and asymmetrical information) the use of PB instead of NPV should motivate risk-averse subordinate managers to adopt more positive NPV projects. Consequently, the appropriate use of PB can result in more wealth for stockholders than would occur using NPV directly. Furthermore, the use of PB avoids a number of costs and in the appropriate circumstances may therefore be the most cost-effective basis for evaluating investment decisions.

An analysis of lobbying behaviour ‐ The case of UK deferred taxation

This paper examines the lobbying behaviour of UK managers who commented on Accounting Standard Board proposals to re‐introduce full provision deferred taxation accounting. Although there were no direct cash‐flow implications associated with these proposals, they had the potential to affect a company’s reported net income and revenue reserves. Using published comments and financial statements data, the paper tests: (a) the conventional positive accounting theory gearing hypothesis, using debt/equity ratios and (b) a new dividend hypothesis that is presented in the paper. The findings did not provide support for the gearing hypothesis and are therefore consistent with recent work of various other authors. However, the new dividend hypothesis was supported and the paper therefore suggests that the potential impact that an accounting treatment has on the revenue reserves of a company, and thus its dividend paying capacity, is a plausible reason for observed lobbying behaviour in the UK.