1、19-Jun-2303The Decision Usefulness Approach to Financial Reporting1Topic 3 The Decision Usefulness Approach to Financial ReportingTopic 3 The Decision Usefulness Approach to Financial Reportingv1.Overviewv2.The Decision Usefulness Approachv3.Objective of financial reportingv4.The Decision Makingv5.S
2、ingle-Person Decision Theory v6.The Rational,Risk-Averse Investorv7.The Principle of Portfolio Diversificationv8.The Optimal Investment Decision19-Jun-2303The Decision Usefulness Approach to Financial Reporting21.Overview19-Jun-2301 Overview of Accounting Theory and its research(Qinggang Wang)3vThe
3、most useful measure of net income to inform investors(to control adverse selection)need not be the same as the best measure to motivate manager performance(to control moral hazard).(Gjesdal,1981)Inform investorsMotivate managersInformation that enables better investment decisions,current value accou
4、ntingInformation that is highly informative about their performance,a less volatile and more conservative income measure,such as one based on historical costThe fundamental problem of financial accounting theory is how to design and implement concepts and standards that best trade off the investor-i
5、nforming and manager performanceevaluating roles for accounting information.1.OverviewvGiven that the mixed measurement model retains historical cost accounting for major classes of assets and liabilities:The present value model faces some severe problems in practices;Historical cost accounting prod
6、uces relatively reliable information,even though historical is not as relevant as present value or market-based approaches to current value.vHow can financial statements be made more useful?This leads to the concept of decision usefulness.To properly understand this concept,we need to consider other
7、 theories from economics and finance.Decision theories;andCapital market theories.vThe main purpose of this chapter is to introduce you to some of these theories and to discuss their relevance to accounting.2.The Decision Usefulness ApproachvHistorical Perspective1966,AAA:A Statement of Basic Accoun
8、ting Theory1973,AICPA Trueblood Commission:Objectives of Financial statementsvContrastive approach:Stewardship(Chapter 8)vIn adopting the decision usefulness approach,two major questions must be addressed:Firs,who are the users of financial statements?ConstituenciesSecond,what are the decision probl
9、ems of financial statement users?19-Jun-2303The Decision Usefulness Approach to Financial Reporting62.The Decision Usefulness ApproachvIt is the investors responsibility to make investment decisionsvRole of financial reporting is to supply information that is useful for this purposevInformation is e
10、vidence that has the potential to affect an individuals decisionthe GN or BN in the financial statements19-Jun-2303The Decision Usefulness Approach to Financial Reporting72.The Decision Usefulness ApproachvTo prepare useful information,the accountant must know how investors make decisionsvRole of th
11、e rational decision theory model in financial reportingHelps us understand how financial statement information helps investors to make investment decisionsCaptures average investor behaviour?19-Jun-2303The Decision Usefulness Approach to Financial Reporting82.The Decision Usefulness ApproachvPrior p
12、robabilities are subjectiveInvestor assesses them based on all information available prior to the investment decisionvIf prior probabilities are subjective,so are posterior probabilitiesHowever,if financial statement information is informative,posterior probabilities are better predictors of future
13、firm performance than prior probabilitiesvHow is financial statement information useful?Process of communicationProcess of communicationCompanys activitiesFinancialReportingUser perception3.Objective of Financial StatementEssential characteristics of accounting are:(1)the identification,measurement,
14、and communication of financial information about(2)economic entities to(3)interested parties.Identificationof UsersUserInformationNeedsAccountingSystemReportsEconomic Dataand ActivitiesUserDecisions Accounting An Information Process Accounting An Information Process 1111113.Objective of financial re
15、portingvPrimary users:existing and potential investors,lenders,and other creditorsbuying,selling or holding equity and debt instruments dividends,principal and interest payments or market price increases.vmeet the needs of the maximum number of primary users.Regulators?Management?1212123.Objective o
16、f financial reportingvprovide financial information that is useful to users in making decisions about providing resources to the entityvare not designed to show the value of a reporting entity;but they provide information to help users to estimate the value of the reporting entity.assessment of the
17、amount,timing,and uncertainty of future net cash inflows to the entityvHow to define the concept of assets,and liabilities?1313133.Objective of financial reportingvUseful informationthe resources,claims,and changes in those resources and claimsFinancial performancevaccrual accounting VS cash flowsCh
18、anges in resources and claims not resulting from financial performanceInformation about the efficiency and effectiveness of the use of resourcesvdo not and cannot provide all of the informationusers need to consider pertinent information from other sources,eg,general economic conditions and expectat
19、ions,political events and political climate,and industry and company outlooks.Illustration 2-2 Hierarchy of Accounting Qualities4.The Decision MakingvAccountants have decided that investors are a major constituency of users and have turned to various theories of decision and investment:Single-person
20、 decision theoryvTo understand how individuals may make rational decisions under uncertainty.Theory of investmentvA specialization of decision theory to model the decision processes of a rational investor;to understand the nature of risk in portfolio investment context.19-Jun-2303The Decision Useful
21、ness Approach to Financial Reporting164.1Decision-Making EnvironmentsvvCertaintyCertainty refers to a decision environment in which the results of selecting each alternative are known before the decision is made.vvUncertaintyUncertainty refers to a decision environment in which the decision maker do
22、es not know what outcome will occur when an alternative is selectedvThe goal of decision analysisgoal of decision analysis is to focus on making good decisions,which in the long run should result in an increased number of good outcomes4.2Decision making process19-Jun-2301 Overview of Accounting Theo
23、ry and its research(Qinggang Wang)17InformationPredictionDecisionOutcomeConfirmatory roleConfirmatory rolePredictive roleAccounting Information SystemUser Prediction ModelUserDecisionModel19-Jun-2303The Decision Usefulness Approach to Financial Reporting184.2Basic Decision ProcessIdentifyGoalsIdenti
24、fyDecisionNeedIdentifyProblemSpecifyAlternativesSpecifyDecisionModelChooseActionExperienceConsequences19-Jun-2303The Decision Usefulness Approach to Financial Reporting195.Single-Person Decision Theory vIt takes the viewpoint of an individual who must make a decision under conditions of uncertainty.
25、state probabilities are no longer objectivesets out a formal procedure whereby the individual can make the best decision,by selecting from a set of alternatives.Additional information can be obtained to revise the decision-makers subjective assessment of the probabilities of what might happen after
26、the decision is made.19-Jun-2303The Decision Usefulness Approach to Financial Reporting205.Single-Person Decision TheoryvThe rational investorOptimal forecasts(the best guess of the future)using all available information,but.vNeeds information about risk as well as expected returnCan express clear p
27、references among commoditiesPrefers more to lessPreferences are always transitiveAB,andBC,then ACAB,andBC,then A Expected earningsBG:Actual earnings Expected earnings19-Jun-2303The Decision Usefulness Approach to Financial Reporting27Shows Evidence Probabilities,Conditionalon Each State,for Input in
28、to Bayes Theorem Current Financial Statement EvidenceTotalGNBN State ofNature H P(GN/H)P(BN/H)1L P(GN/L)P(BN/L)119-Jun-2303The Decision Usefulness Approach to Financial Reporting28Consider an investor with$10,000 to invest in one of the following mutually exclusive acts:a1:buy shares of x Ltd.For$10
29、,000a2:buy Canada Savings Bonds(CSB)for$10,000Let there be 3“states of nature”:1:shares fall 10%in market value2:shares hold steady3:shares rise 80%Example19-Jun-2303The Decision Usefulness Approach to Financial Reporting31Decision ProblemThink of the financial statements of X Ltd.as an information
30、system conveying information about probabilities of.Assume the financial statements will give one of the following 3 mutually exclusive messages:19-Jun-2303The Decision Usefulness Approach to Financial Reporting32Bayes Theorem(Rule)vThe basic principle of Bayes Theorem is that additional information
31、 can change a decision makers prior beliefs about the occurrence of an event 7.The Rational,Risk-Averse InvestorvRisk Utility FunctionTo model risk aversion,decision theorists use the device of a utility function,which relates payoff amounts to the decision-makers utility确定性决策：能取得确定结果的决策不确定性决策：不能取得确
32、定结果的决策确定性等价：具有与某项决策的效用期望值相等效用的确定性决策19-Jun-2303The Decision Usefulness Approach to Financial Reporting39Risk Preference Attitudes$0$2,000$4,000$6,000$8,000$10,00000.250.500.751-$2,000Risk-Neutral Preference Functionl确定性等价的效用等于确定性决策的效用l效用线是直线l不要求风险补偿，预期收益率等于无风险利率19-Jun-2303The Decision Usefulness Appr
33、oach to Financial Reporting40Risk Preference Attitudes$0$2,000$4,000$6,000$8,000$10,00000.250.500.751-$2,000Risk-Averse Preference Function确定性等价的效用小于确定性决策的效用在其它条件相同的情况下，投资者将选择标准差较小的组合19-Jun-2303The Decision Usefulness Approach to Financial Reporting41Risk Preference Attitudes$0$2,000$4,000$6,000$8,0
34、00$10,00000.250.500.751-$2,000Risk-Seeking Preference Function确定性等价的效用大于确定性决策的效用19-Jun-2303The Decision Usefulness Approach to Financial Reporting42Are Securities Markets Fully Efficient?vBehavioural financeBehavioural characteristics that question market efficiencyvLimited attentionvOverconfidencev
35、RepresentativenessvSelf-attribution biasLeading to momentum成功归于自身能力失败归于外在因素19-Jun-2303The Decision Usefulness Approach to Financial Reporting43Prospect TheoryvAn Alternative Theory of Decision MakingSeparate evaluation of gains and lossesWeighting of probabilitiesvOverconfidence:rare events underwei
36、ghtedvRepresentativeness:likely events overweightedvLeads to a disposition effectImplications for financial accountingvLeads to earnings management to avoid reporting small losses?vPrudence concept出赢保亏：卖出赚钱的股票、持有赔钱的股票19-Jun-2303The Decision Usefulness Approach to Financial Reporting44Prospect Theory
37、 Utility Functionu(x)Gain x lossl两种选择：A肯定赢100万元，B50%可能性赢200万元，50%可能性什么也得不到？l大部分人会选A，这说明人们是风险规避的l两种选择：A肯定损失100万元，B50%可能性损失200万元，50%可能性损失为零l大部分人选B，这说明人们是风险偏好的l在盈利和亏损两种状态下，人们的风险态度不仅不一致，且不对称l收益和风险分开评估19-Jun-2303The Decision Usefulness Approach to Financial Reporting458.The Principle of Portfolio Diversi
38、ficationvsystematic risk(general market risk)VS non-system risk(Unique risk)vTries to maximize portfolio expected return for a given amount of portfolio risk,or equivalently minimize risk for a given level of expected return,by carefully choosing the proportions of various assetsvCollection of inves
39、tment assets that has collectively lower risk than any individual asset.different types of assets often change in value in opposite ways.vFour basic steps involved in portfolio construction-Security valuation-Asset allocation-Portfolio optimization-Performance measurement19-Jun-2303The Decision Usef
40、ulness Approach to Financial Reporting46Preference for RiskvThe concept of risk aversion is important to accountants,because it means that investors need information concerning the risk,as well as the expected value,of future returns.vSuch investors need information to help them assess securities ex
41、pected returns and riskiness of these returns.vBeta is an important risk measure.19-Jun-2303The Decision Usefulness Approach to Financial Reporting47BetavDefinitionStandardized covariance between return on share and return on marketvOnly relevant risk measure for a reasonably diversified investorWhy
42、?Because firm specific risk diversifies awayImplication=investors dont need accounting info?19-Jun-2306The Measurement Approach to Decision Usefulness(Qinggang Wang)48Estimating Beta(continued)8.The Principle of Portfolio DiversificationvSummaryRisk-averse investors can take advantage of the princip
43、le of portfolio diversification to reduce their risk,by investing in a portfolio of securities.This is because realizations of firm-specific states of nature tend to cancel out across securities,leaving economy-wide factors as the main contributors to portfolio risk.Regardless of the degree of risk
44、aversion,we know that utility increases in expected rate of return and decreases in variance of the portfolio.19-Jun-2303The Decision Usefulness Approach to Financial Reporting49The Optimal Investment DecisionvHolding the market portfolioThe firm-specific risks tend to cancel out;Such non-diversifia
45、ble risk is called systematic risk;The return on the market portfolio can then be proxied by the return on a market index for that exchange.vOptimal portfolio investment decisionSell some of the high-risk stocks?The answer lies in the risk-free asset.19-Jun-2303The Decision Usefulness Approach to Fi
46、nancial Reporting506.The Optimal Investment Decision FIGURE 3.4 THE OPTIMAL PORTFOLIO INVESTMENT DECISIONExpected rate of return0.10750.08500.04000 0 0.00090.0020Variance(risk)YMZ19-Jun-2303The Decision Usefulness Approach to Financial Reporting51The Optimal Investment DecisionvSummary When transact
47、ion costs are ignored,a risk-averse investors optimal investment decision is to buy that combination of market portfolio and risk-free asset that yields the best tradeoff between expected return and risk.This tradeoff is individual-specific it depends on the investors utility function.19-Jun-2303The
48、 Decision Usefulness Approach to Financial Reporting52ConclusionsvThe decision usefulness approach to financial reporting implies that accountants need to understand the decision problems of financial statement users.Single-person decision theory and its specialization to the portfolio investment de
49、cision provide understanding of the needs of rational,risk-averse investors such investors need information to help them assess securities expected returns and riskiness of these returns.Beta is an important risk measure.vFinancial statements are an important and cost-effective source of information for investors,even though they do not report directly on future investment payoffs.vMajor accounting standard setting bodies such as the IASB and FASB have adopted the decision usefulness approach.19-Jun-2305The Information Approach to Decision Usefulness54
