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Accrual Accounting for Performance Evaluation

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  • Sunil Dutta

    (University of California)

  • Stefan Reichelstein

    (Stanford University)

Abstract

This paper examines alternative accrual accounting rules from an incentive and control perspective. For a range of common production, financing and investment decisions we consider alternative asset valuation rules. The criterion for distinguishing among these rules is that the corresponding performance measure should provide managers with robust incentives to make present value maximizing decisions. Such goal congruence is shown to require intertemporal matching of revenues and expenses, though the specific form of matching needed for control purposes generally differs from GAAP. The practitioner oriented literature on economic profit plans (EPP) has made various, and at times conflicting, recommendations regarding adjustments to the accounting rules used for external financial reporting. Our goal congruence approach provides a framework for comparing and evaluating these recommendations.

Suggested Citation

  • Sunil Dutta & Stefan Reichelstein, 2005. "Accrual Accounting for Performance Evaluation," Review of Accounting Studies, Springer, vol. 10(4), pages 527-552, December.
    • Handle: RePEc:spr:reaccs:v:10:y:2005:i:4:d:10.1007_s11142-005-4213-6
    DOI: 10.1007/s11142-005-4213-6
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    JEL classification:

    • M40 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - General
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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