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Unformatted text preview: 6.1 OVERVIEW The measurement approach to decision usefulness implies greater usage of current values in the financial statements proper. If a measurement approach is to be useful, it MUST NOT BE at the cost of a substantial reduction in reliability We define the measurement approach as follows: The measurement approach TO DECISION USEFULNESS is an approach to financial reporting under under which which accountants undertake a responsibility to INCORPORATE CURRENT VALUES INTO THE FINANCIAL STATEMENTS PROPER , providing that providing that this can be done with reasonable reliability, thereby thereby recognizing an increased obligation to assist investors to predict firm performance and value. The measurement approach DOES NOT INVALIDATE OUR ARGUMENT IN S ECTION 3.1 (investor is responsible for making his/her own predictions of future firm performance) The intent is to ENABLE BETTER PREDICTIONS OF THIS PERFORMANCE by means of a more informative information system While it is unlikely that current values will completely replace historical cost in the mixed measurement model, it is the case that the relative balance of cost-based versus current value-based information in the financial statements is moving in the measurement direction Reason: Investor rationality and securities market efficiency o Despite the impressive results outlined in Chapter 5 in favour of the decision usefulness of reported net income, recent years have seen increasing theory and evidence suggesting that securities markets may not be as efficient as originally believe o Recall (Sec 4.1) we view efficiency as a matter of degree, rather than efficient/not efficient Our interest in the extent of efficiency arises because lack of efficiency has major implications for accounting, that is: Whether or not Whether or not the theory of rational decision-making (Chapter 3) underlies investor behaviour Suppose that Suppose that (1) (1) markets are not efficient and (2) (2) investors are not rational Then: Then: RELIANCE ON THESE THEORIES TO JUSTIFY historical cost-based financial statements enhanced by much supplementary disclosure, which underlies the information approach to decision usefulness , is threatened is threatened ARGUMENT: If If investors collectively are not as adept at processing information as rational decision theory assumes, perhaps perhaps USEFULNESS WOULD BE ENHANCED B y greater use of current values in the financial statements proper CONCLUSION: While securities markets are not fully efficient, they are sufficiently so that accountants can be guided by efficient markets theory Lack of full efficiency can be explained equally well by rational decision theory as by non-rational investor behaviour The extent of inefficiency and non-rational investor behaviour can be reduced by measurement approach 6.2 ARE SECURITIES MARKETS FULLY EFFICIENT?...
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- Spring '09