18-May-231Topic3TheDecisionUsefulnessApproachtoFinancialReportingTopic3TheDecisionUsefulnessApproachtoFinancialReporting1.Overview2.TheDecisionUsefulnessApproach3.Objectiveoffinancialreporting4.TheDecisionMaking5.Single-PersonDecisionTheory6.TheRational,Risk-AverseInvestor7.ThePrincipleofPortfolioDiversification8.TheOptimalInvestmentDecision18-May-2321.Overview18-May-233Themostusefulmeasureofnetincometoinforminvestors(tocontroladverseselection)need

notbethesameasthebestmeasuretomotivatemanagerperformance(tocontrolmoralhazard).(Gjesdal,1981)InforminvestorsMotivatemanagersInformationthatenablesbetterinvestmentdecisions,currentvalueaccountingInformationthatishighlyinformativeabouttheirperformance,alessvolatileandmoreconservativeincomemeasure,suchasonebasedonhistoricalcostThefundamentalproblemoffinancialaccountingtheoryishowtodesignandimplementconceptsandstandardsthatbesttradeofftheinvestor-informingandmanagerperformance–evaluatingrolesforaccountinginformation.1.OverviewGiventhatthemixedmeasurementmodelretainshistoricalcostaccountingformajorclassesofassetsandliabilities:Thepresentvaluemodelfacessomesevereproblemsinpractices;Historicalcostaccountingproducesrelativelyreliableinformation,eventhoughhistoricalisnotasrelevantaspresentvalueormarket-basedapproachestocurrentvalue.Howcanfinancialstatementsbemademoreuseful?Thisleadstotheconceptofdecisionusefulness.Toproperlyunderstandthisconcept,weneedtoconsiderothertheoriesfromeconomicsandfinance.Decisiontheories;andCapitalmarkettheories.Themainpurposeofthischapteristointroduceyoutosomeofthesetheoriesandtodiscusstheirrelevancetoaccounting.2.TheDecisionUsefulnessApproachHistoricalPerspective1966,AAA:AStatementofBasicAccountingTheory1973,AICPATruebloodCommission:ObjectivesofFinancialstatementsContrastiveapproach:Stewardship(Chapter8)Inadoptingthedecisionusefulnessapproach,twomajorquestionsmustbeaddressed:Firs,whoaretheusersoffinancialstatements?ConstituenciesSecond,whatarethedecisionproblemsoffinancialstatementusers?18-May-2362.TheDecisionUsefulnessApproachItistheinvestor’sresponsibilitytomakeinvestmentdecisionsRoleoffinancialreportingistosupplyinformationthatisusefulforthispurposeInformationisevidencethathasthepotentialtoaffectanindividual’sdecisiontheGNorBNinthefinancialstatements18-May-2372.TheDecisionUsefulnessApproachToprepareusefulinformation,theaccountantmustknowhowinvestorsmakedecisionsRoleoftherationaldecisiontheorymodelinfinancialreportingHelpsusunderstandhowfinancialstatementinformationhelpsinvestorstomakeinvestmentdecisionsCapturesaverageinvestorbehaviour?18-May-2382.TheDecisionUsefulnessApproachPriorprobabilitiesaresubjectiveInvestorassessesthembasedonallinformationavailablepriortotheinvestmentdecisionIfpriorprobabilitiesaresubjective,soareposteriorprobabilitiesHowever,iffinancialstatementinformationisinformative,posteriorprobabilitiesarebetterpredictorsoffuturefirmperformancethanpriorprobabilitiesHowisfinancialstatementinformationuseful?ProcessofcommunicationCompany’sactivitiesFinancial

ReportingUserperception3.ObjectiveofFinancialStatementEssentialcharacteristics

ofaccountingare:theidentification,measurement,andcommunicationoffinancialinformationabouteconomicentitiestointerestedparties. IdentificationofUsersUserInformationNeedsAccountingSystemReportsEconomicDataandActivitiesUserDecisionsAccounting—AnInformationProcess1111113.ObjectiveoffinancialreportingPrimaryusers:

existingandpotentialinvestors,lenders,andothercreditorsbuying,sellingorholdingequityanddebtinstrumentsdividends,principalandinterestpaymentsormarketpriceincreases.meettheneedsofthemaximumnumberofprimaryusers.Regulators?Management?1212123.Objectiveoffinancialreportingprovidefinancialinformationthatisusefultousersinmakingdecisionsaboutprovidingresourcestotheentityarenotdesignedtoshowthevalueofareportingentity;buttheyprovideinformationtohelpuserstoestimatethevalueofthereportingentity.assessmentoftheamount,timing,anduncertaintyoffuturenetcashinflowstotheentityHowto

define

the

concept

of

assets,

and

liabilities?1313133.ObjectiveoffinancialreportingUseful

informationtheresources,claims,andchangesinthoseresourcesandclaimsFinancialperformanceaccrualaccountingVScashflowsChangesinresourcesandclaimsnotresultingfromfinancialperformanceInformationabouttheefficiencyandeffectivenessoftheuseofresourcesdonotandcannotprovidealloftheinformationusersneedtoconsiderpertinentinformationfromothersources,eg,generaleconomicconditionsandexpectations,politicaleventsandpoliticalclimate,andindustryandcompanyoutlooks.Illustration2-2

HierarchyofAccountingQualities4.TheDecisionMakingAccountantshavedecidedthatinvestorsareamajorconstituencyofusersandhaveturnedtovarioustheoriesofdecisionandinvestment:Single-persondecisiontheoryTounderstandhowindividualsmaymakerationaldecisionsunderuncertainty.TheoryofinvestmentAspecializationofdecisiontheorytomodelthedecisionprocessesofarationalinvestor;tounderstandthenatureofriskinportfolioinvestmentcontext.18-May-23164.1Decision-MakingEnvironmentsCertainty

referstoadecisionenvironmentinwhichtheresultsofselectingeachalternativeareknownbeforethedecisionismade.UncertaintyreferstoadecisionenvironmentinwhichthedecisionmakerdoesnotknowwhatoutcomewilloccurwhenanalternativeisselectedThegoalofdecisionanalysisistofocusonmakinggooddecisions,whichinthelongrunshouldresultinanincreasednumberofgoodoutcomes4.2Decisionmakingprocess18-May-2317InformationPredictionDecisionOutcomeConfirmatoryrolePredictiveroleAccounting

InformationSystemUserPredictionModelUserDecisionModel18-May-23184.2BasicDecisionProcessIdentifyGoalsIdentifyDecisionNeedIdentifyProblemSpecifyAlternativesSpecifyDecisionModelChooseActionExperienceConsequences18-May-23195.Single-PersonDecisionTheoryIttakestheviewpointofanindividualwhomustmakeadecisionunderconditionsofuncertainty.stateprobabilitiesarenolongerobjectivesetsoutaformalprocedurewherebytheindividualcanmakethebestdecision,byselectingfromasetofalternatives.Additionalinformationcanbeobtainedtorevisethedecision-maker’ssubjectiveassessmentoftheprobabilitiesofwhatmighthappenafterthedecisionismade.18-May-23205.Single-PersonDecisionTheoryTherationalinvestorOptimalforecasts(thebestguessofthefuture)usingallavailableinformation,but…..NeedsinformationaboutriskaswellasexpectedreturnCanexpressclearpreferencesamongcommoditiesPrefersmoretolessPreferencesarealwaystransitiveA>B,andB>C,thenA>CA<B,andB<C,thenA<CA=B,andB=C，thenA=C18-May-23215.Single-PersonDecisionTheorytheRationalInvestorMaximizesexpectedutilityMayberiskaverse,Then,willdiversifyPortfoliotheory18-May-2322RealPeoplePeoplecan’talwaysexpresspreferencesamongcommoditiesPeopledon’talwayspreferthecheaptotheexpensivePreferencesarenotalwaystransitiveEconomicagentsrarely,ifever,actonthebasisofcompleteinformationEconomicagentsdonot,ingeneral,maximizetheirpreferencesPreferencesarenotstableovertime18-May-23236.DecisionTheoryModelDecisiontheoryisimportantbecauseithelpsustounderstandwhyinformationissuchapowerfulcommodity-itcanaffecttheactionstakenbyinvestors.AmodelofrationaldecisionmakinginthefaceofuncertaintyAnotherexampleof“analyticalresearch〞MakessimplifyingassumptionsRational“economicman〞approachPerfectlyspecifieddecisionprocessConceptofan“InformationSystem〞canbeintroducedandmodeled一切交易的實(shí)質(zhì)都是信息的買(mǎi)賣(mài)18-May-2324ProbabilitiesPriorprobability先驗(yàn)概率：在試驗(yàn)或?qū)嶒?yàn)之前得到的概率，又稱為數(shù)學(xué)概率Conditionalprobabilities條件概率P(A|B)：在事件B已經(jīng)發(fā)生的條件下，事件A發(fā)生的概率Posteriorstateprobabilities后驗(yàn)概率：在試驗(yàn)或?qū)嶒?yàn)之后得到的概率，又稱為經(jīng)驗(yàn)概率Bayes’theorem18-May-2325Bayes’TheoremAdevicetorevisestateprobabilitiesuponreceiptofnewevidenceθisstateofnaturemismessagereceivedP(θ)ispriorprobabilityofθ(subjective)FormulaThomasBayesBorn:1702inLondonDied:17Apr.176118-May-2326Bayes’TheoremAppliedto

AccountingInformationθisstateoffirmθ1=H=highfuturefirmperformanceθ2=L=lowfuturefirmperformancemisevidencereceivedfromthefinancialstatementsm1=GN=netincomeshowsgoodnewsm2=BN=netincomeshowsbadnewsSupposeGNisreceived:Information

has

predictive

valueGN:Actualearnings>ExpectedearningsBG:Actualearnings<Expectedearnings18-May-2327ShowsEvidenceProbabilities,Conditional

onEachState,forInputintoBayes’Theorem18-May-2328Consideraninvestorwith$10,000toinvestinoneofthefollowingmutuallyexclusiveacts: a1:buysharesofxLtd.For$10,000 a2:buyCanadaSavingsBonds(CSB)for$10,000Lettherebe3“statesofnature〞: θ1:sharesfall10%inmarketvalue θ2:sharesholdsteady θ3:sharesrise80%Example18-May-2329Example,con’tPayoffTable

PriorProbabilitiesP(θ1)=.05P(θ2)=.70P(θ3)=.25 1.0018-May-2330Example,con’tAssumetheinvestorusesexpectedmonetaryvalueasadecisioncriterion(EMV) EMV(a1):(.05)(-1000)+0+.25(8000)=1950 EMV(a2):(.05)(1000)+.70(1000)+.25(1000)=1000Therefore,ifinvestoractsnow,shouldtakea1.But:Maybeworthwhiletosecureadditionalinformation.18-May-2331DecisionProblemThinkofthefinancialstatementsofXLtd.asaninformationsystemconveyinginformationaboutprobabilitiesofθ.Assumethefinancialstatementswillgiveoneofthefollowing3mutuallyexclusivemessages:

18-May-2332BayesTheorem(Rule)ThebasicprincipleofBayes'Theoremisthatadditionalinformationcanchangeadecisionmaker’spriorbeliefsabouttheoccurrenceofanevent18-May-2333DecisionProblem,Cont.Theinformationsystemcanbecharacterizedbythefollowingtable:Theseconditionalprobabilities,orlikelihoods,aretheprobabilitiesofreceivingthevariousmessagesconditionaloneachstatebeingtrue.18-May-2334DecisionProblem,Cont.Now,foranymessage,thedecisionmakercanrevisehis/herpriorprobabilitiesusingBayes’Theorem.Supposethatm1wasreceivedfromthefinancialstatements.=P(m1)=.05×.75+.70×.5+.25×.10=.4125=.85=.061.00Then:Similarly:18-May-2335DecisionProblem,Cont.NotetheEMVofeachactisSoifm1werereceivedacta2wouldbechosen.18-May-2336DecisionProblem,Cont.Youshouldverifythatifm2wasreceived:whereAndtheoptionalactisthena1withEMVof$1444.60.0370×(-1000)+0.7778×0+0.1852×8000=1444.618-May-2337DecisionProblem,Cont.Similarly,ifm3wasreceived:whereAndtheoptionalactisthena1withEMVof$4401.70.0079×(-1000)+0.4409×0+0.5512×8000=4401.77.TheRational,Risk-AverseInvestorRiskUtilityFunctionTomodelriskaversion,decisiontheoristsusethedeviceofautilityfunction,whichrelatespayoffamountstothedecision-maker’sutility確定性決策：能取得確定結(jié)果的決策不確定性決策：不能取得確定結(jié)果的決策確定性等價(jià)：具有與某項(xiàng)決策的效用期望值相等效用確實(shí)定性決策18-May-2339RiskPreferenceAttitudes$0$2,000$4,000$6,000$8,000$10,00000.250.500.751-$2,000Risk-NeutralPreferenceFunction確定性等價(jià)的效用等于確定性決策的效用效用線是直線不要求風(fēng)險(xiǎn)補(bǔ)償，預(yù)期收益率等于無(wú)風(fēng)險(xiǎn)利率18-May-2340RiskPreferenceAttitudes$0$2,000$4,000$6,000$8,000$10,00000.250.500.751-$2,000Risk-AversePreferenceFunction確定性等價(jià)的效用小于確定性決策的效用在其它條件相同的情況下，投資者將選擇標(biāo)準(zhǔn)差較小的組合18-May-2341RiskPreferenceAttitudes$0$2,000$4,000$6,000$8,000$10,00000.250.500.751-$2,000Risk-SeekingPreferenceFunction確定性等價(jià)的效用大于確定性決策的效用18-May-2342AreSecuritiesMarketsFullyEfficient?BehaviouralfinanceBehaviouralcharacteristicsthatquestionmarketefficiencyLimitedattentionOverconfidenceRepresentativenessSelf-attributionbiasLeadingtomomentum成功歸于自身能力失敗歸于外在因素18-May-2343ProspectTheoryAnAlternativeTheoryofDecisionMakingSeparateevaluationofgainsandlossesWeightingofprobabilitiesOverconfidence:rareeventsunderweightedRepresentativeness:likelyeventsoverweightedLeadstoadispositioneffectImplicationsforfinancialaccountingLeadstoearningsmanagementtoavoidreportingsmalllosses?Prudenceconcept出贏保虧：賣(mài)出賺錢(qián)的股票、持有賠錢(qián)的股票18-May-2344ProspectTheoryUtilityFunctionu(x)Gainxloss兩種選擇：A肯定贏100萬(wàn)元，B50%可能性贏200萬(wàn)元，50%可能性什么也得不到？大局部人會(huì)選A，這說(shuō)明人們是風(fēng)險(xiǎn)躲避的兩種選擇：A肯定損失100萬(wàn)元，B50%可能性損失200萬(wàn)元，50%可能性損失為零大局部人選B，這說(shuō)明人們是風(fēng)險(xiǎn)偏好的在盈利和虧損兩種狀態(tài)下，人們的風(fēng)險(xiǎn)態(tài)度不僅不一致，且不對(duì)稱收益和風(fēng)險(xiǎn)分開(kāi)評(píng)估18-May-23458.ThePrincipleofPortfolioDiversificationsystematicrisk(generalmarketrisk)VSnon-systemrisk(Uniquerisk)Triestomaximizeportfolioexpectedreturnforagivenamountofportfoliorisk,orequivalentlyminimizeriskforagivenlevelofexpectedreturn,bycarefullychoosingtheproportionsofvariousassetsCollectionofinvestmentassetsthathascollectivelylowerriskthananyindividualasset.differenttypesofassetsoftenchangeinvalueinoppositeways.Fourbasicstepsinvolvedinportfolioconstruction

-Securityvaluation

-Assetallocation

-Portfoliooptimization

-Performancemeasurement18-May-2346PreferenceforRiskTheconceptofriskaversionisimportanttoaccountants,becauseitmeansthatinvestorsneedinformationconcerningtherisk,aswellastheexpectedvalue,offuturereturns.Suchinvestorsneedinformationtohelpthemassesssecurities’expectedreturnsandriskinessofthesereturns.Betaisanimportantriskmeasure.18-May-2347BetaDefinitionStandardizedcovariancebetweenreturnonshareandreturnonmarketOnlyrelevantriskmeasureforareasonablydiversifiedinvestorWhy?BecausefirmspecificriskdiversifiesawayImplication=investorsdon’tneedaccountinginfo?18-May-2348EstimatingBeta(continued)8.ThePrincipleof

PortfolioDiversificationSummaryRisk-averseinvestorscantakeadvantageoftheprincipleofportfoliodiversificationtoreducetheirrisk,byinvestinginaportfolioofsecurities.Thisisbecauserealizationsoffirm-specificstatesofnaturetendtocanceloutacrosssecurities,leavingeconomy-widefactorsasthemaincontributorstoportfoliorisk.Regardlessofthedegreeofriskaversion,weknowthatutilityincreasesinexpectedrateofreturnanddecreasesinvarianceoftheportfolio.18-May-2349TheOptimalInvestmentDecisionHoldingthemarketportfolioTh