IDEAS home Printed from https://ideas.repec.org/a/spr/jbecon/v90y2020i5d10.1007_s11573-020-00981-3.html
   My bibliography  Save this article

Accounting for provisions: an economic analysis of intertemporal cost allocations and their incentive properties

Author

Listed:
  • Christian Lohmann

    (University of Bamberg
    Schumpeter School of Business and Economics)

  • Nils Crasselt

    (Schumpeter School of Business and Economics)

Abstract

The use of accounting information and related performance measures for (delegated) investment decision-making has been extensively analyzed in the context of investment projects with upfront investments. In many cases, however, a project may also require large payments at the end of its life. In accounting statements, companies anticipate such payments by setting up provisions during a project’s useful life. To date, very few studies have explored provision schemes with regard to the decision-facilitating and the decision-influencing roles of management accounting. In this paper, we analyze three different provision schemes of practical relevance. We benchmark the cost allocations that result from each such scheme against cost allocations resulting from two provision schemes that are derived from the analysis of investment projects with upfront investments. The first comparison concerns the decision-facilitating role and builds on the principles of investment-based cost accounting according to Küpper (1985, 2009). The second comparison concerns the decision-influencing role and is based on the theory of goal-congruent performance measures as developed by Rogerson (1997) and Reichelstein (1997). These comparisons demonstrate to which extent the cost allocations associated with the provision schemes that are commonly used in practice deviate from the benchmark solutions we present. We also examine the potential distortions that may arise when accounting performance measures based on the practically relevant provision schemes are used for investment decision-making.

Suggested Citation

  • Christian Lohmann & Nils Crasselt, 2020. "Accounting for provisions: an economic analysis of intertemporal cost allocations and their incentive properties," Journal of Business Economics, Springer, vol. 90(5), pages 825-844, June.
    • Handle: RePEc:spr:jbecon:v:90:y:2020:i:5:d:10.1007_s11573-020-00981-3
    DOI: 10.1007/s11573-020-00981-3
    as

    Download full text from publisher

    File URL: http://link.springer.com/10.1007/s11573-020-00981-3
    File Function: Abstract
    Download Restriction: Access to the full text of the articles in this series is restricted.
    File URL: https://libkey.io/10.1007/s11573-020-00981-3?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. William P. Rogerson, 2008. "Intertemporal Cost Allocation and Investment Decisions," Journal of Political Economy, University of Chicago Press, vol. 116(5), pages 931-950, October.
    2. Rogerson, William P, 1997. "Intertemporal Cost Allocation and Managerial Investment Incentives: A Theory Explaining the Use of Economic Value Added as a Performance Measure," Journal of Political Economy, University of Chicago Press, vol. 105(4), pages 770-795, August.
    3. Pao-Yu Oei & Hanna Brauers & Claudia Kemfert & Martin Kittel & Leonard Göke & Christian von Hirschhausen & Paula Walk, 2018. "Kohleausstieg in NRW im deutschen und europäischen Kontext - Energiewirtschaft, Klimaziele und wirtschaftliche Entwicklung," DIW Berlin: Politikberatung kompakt, DIW Berlin, German Institute for Economic Research, volume 127, number pbk129, January.
    4. Madhav V. Rajan & Stefan Reichelstein, 2009. "Depreciation Rules and the Relation between Marginal and Historical Cost," Journal of Accounting Research, Wiley Blackwell, vol. 47(3), pages 823-865, June.
    5. Christian von Hirschhausen & Clemens Gerbaulet & Claudia Kemfert & Felix Reitz & Cornelia Ziehm, 2015. "German Nuclear Phase-Out Enters the Next Stage: Electricity Supply Remains Secure - Major Challenges and High Costs for Dismantling and Final Waste Disposal," DIW Economic Bulletin, DIW Berlin, German Institute for Economic Research, vol. 5(22/23), pages 293-301.
    6. Christian Lohmann, 2015. "Managerial incentives for capacity investment decisions," Journal of Management Control: Zeitschrift für Planung und Unternehmenssteuerung, Springer, vol. 26(1), pages 27-49, April.
    7. Rogerson William P, 2011. "On the Relationship Between Historic Cost, Forward Looking Cost and Long Run Marginal Cost," Review of Network Economics, De Gruyter, vol. 10(2), pages 1-31, June.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Alexander Nezlobin & Madhav V. Rajan & Stefan Reichelstein, 2012. "Dynamics of Rate-of-Return Regulation," Management Science, INFORMS, vol. 58(5), pages 980-995, May.
    2. Livdan, Dmitry & Nezlobin, Alexander, 2022. "Incentivizing irreversible investment," LSE Research Online Documents on Economics 110531, London School of Economics and Political Science, LSE Library.
    3. Sunil Dutta & Stefan Reichelstein, 2021. "Capacity Rights and Full-Cost Transfer Pricing," Management Science, INFORMS, vol. 67(2), pages 1303-1325, February.
    4. Maureen McNichols & Madhav V. Rajan & Stefan Reichelstein, 2014. "Conservatism Correction for the Market-To-Book Ratio and Tobin's q," CESifo Working Paper Series 4626, CESifo.
    5. Christian Lohmann, 2015. "Managerial incentives for capacity investment decisions," Journal of Management Control: Zeitschrift für Planung und Unternehmenssteuerung, Springer, vol. 26(1), pages 27-49, April.
    6. Sunil Dutta & Stefan J. Reichelstein, 2019. "Capacity Rights and Full Cost Transfer Pricing," CESifo Working Paper Series 7968, CESifo.
    7. Küpper, Hans-Ulrich & Pedell, Burkhard, 2016. "Which asset valuation and depreciation method should be used for regulated utilities? An analytical and simulation-based comparison," Utilities Policy, Elsevier, vol. 40(C), pages 88-103.
    8. Özge .Ic{s}legen & Stefan Reichelstein, 2011. "Carbon Capture by Fossil Fuel Power Plants: An Economic Analysis," Management Science, INFORMS, vol. 57(1), pages 21-39, January.
    9. Stephen H. Penman & Xiao-Jun Zhang, 2021. "Connecting book rate of return to risk and return: the information conveyed by conservative accounting," Review of Accounting Studies, Springer, vol. 26(1), pages 391-423, March.
    10. Alexander Nezlobin, 2012. "Accrual Accounting, Informational Sufficiency, and Equity Valuation," Journal of Accounting Research, Wiley Blackwell, vol. 50(1), pages 233-273, March.
    11. Stefan Reichelstein & Anna Rohlfing-Bastian, 2014. "Levelized Product Cost: Concept and Decision Relevance," CESifo Working Paper Series 4590, CESifo.
    12. Nezlobin, Alexander, 2018. "Dynamic Investment Models in Accounting Research," Foundations and Trends(R) in Accounting, now publishers, vol. 12(3), pages 216-297, December.
    13. Alexander Nezlobin & Madhav V. Rajan & Stefan Reichelstein, 2016. "Structural properties of the price-to-earnings and price-to-book ratios," Review of Accounting Studies, Springer, vol. 21(2), pages 438-472, June.
    14. Livdan, Dmitry & Nezlobin, Alexander, 2021. "Investment, capital stock, and replacement cost of assets when economic depreciation is non-geometric," Journal of Financial Economics, Elsevier, vol. 142(3), pages 1444-1469.
    15. Pfaff, & Troßmann,, 2016. "Die Kosten- und Leistungsrechnung – Ein Blick auf mehr als 70 Jahre Vergangenheit und eine spannende Zukunft," Die Unternehmung - Swiss Journal of Business Research and Practice, Nomos Verlagsgesellschaft mbH & Co. KG, vol. 70(4), pages 365-386.
    16. Gunther Friedl & Björn Anton, 2010. "Anforderungen an ein wertorientiertes Management Accounting in Banken," Schmalenbach Journal of Business Research, Springer, vol. 62(61), pages 83-107, January.
    17. Stephan Leitner & Doris Behrens, 2015. "On the fault (in)tolerance of coordination mechanisms for distributed investment decisions," Central European Journal of Operations Research, Springer;Slovak Society for Operations Research;Hungarian Operational Research Society;Czech Society for Operations Research;Österr. Gesellschaft für Operations Research (ÖGOR);Slovenian Society Informatika - Section for Operational Research;Croatian Operational Research Society, vol. 23(1), pages 251-278, March.
    18. Dmitry Livdan & Alexander Nezlobin, 2017. "Accounting rules, equity valuation, and growth options," Review of Accounting Studies, Springer, vol. 22(3), pages 1122-1155, September.
    19. Reynaud, Arnaud & Thomas, Alban, 2013. "Firm's profitability and regulation in water and network industries: An empirical analysis," Utilities Policy, Elsevier, vol. 24(C), pages 48-58.
    20. Margaret A. Abernethy & Jan Bouwens & Laurence Van Lent, 2013. "The Role of Performance Measures in the Intertemporal Decisions of Business Unit Managers," Contemporary Accounting Research, John Wiley & Sons, vol. 30(3), pages 925-961, September.

    More about this item

    Keywords

    Closing expenditures; Cost allocation; Investment incentives; Investment-based cost accounting; Provision schemes; Residual income;
    All these keywords.

    JEL classification:

    • C02 - Mathematical and Quantitative Methods - - General - - - Mathematical Economics
    • D25 - Microeconomics - - Production and Organizations - - - Intertemporal Firm Choice: Investment, Capacity, and Financing
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:spr:jbecon:v:90:y:2020:i:5:d:10.1007_s11573-020-00981-3. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.springer.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.