Accounting myopia (literally: myopia ("bijziendheid") describes a problem due to the fact that some types of investments that benefit the company from an economic perspective, certainly for longer periods of future value generation, are not activated properly. Think of investing in the brand name and other, often intangible, values​​. These investments are fully and immediately charged to the accounting income for the period charged. The manager is thus tempted to postpone this type of investment.

* [[Economic Profit|The economic concept of profit]] is the ultimate measure of value creation but...
* [[Accounting Profit|The accounting concept of profit]] is a [[lagging|Lagging and leading indicators]]@mbi indicator
* What about stock performance as a proxy for economic profit?

!Pro's of accounting measures:
* Relative precise and objective
* Goal congruent
* Controllable
* Understandable
* Inexpensive
!Con's of accounting measures:
* The correlation between [[ECOP]] and [[ACOP]] exists but is rather weak
* Valuation problems
* Cost of working capital ([[WACC]])
* Hindsight oriented
!Solutions
* Use [[ECOP]]
* Split between short term performance an longer term investment control
* Combine financial results with [[Pre-action review|Action Controls]]@mbi
* Improve [[ACOP]]
** Better matching
** More realistic realization principle
** Cost of equity capital
** Problem [[GAAP]]]
* Longer term incentive plans
** Research shows ambiguous results
*** Very expensive, managers are only willing to accept the contract when the reward at the end is very high
*** Apparently higher risk for the manager
* Set of value drivers:
** Pros and cons off the balanced scorecard
* Reduce pressure for short term profit
* Relative performance measurement
* Subjective performance measurement
bag
finance_public
created
Sat, 08 Oct 2011 09:49:45 GMT
creator
dirkjan
modified
Sat, 08 Oct 2011 09:49:45 GMT
modifier
dirkjan
tags
M18
Term
creator
dirkjan