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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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This note was uploaded on 03/27/2012 for the course ACC 706 taught by Professor Shadifarshad during the Spring '09 term at Ryerson.
- Spring '09