1. Doctorate of Business Administration
Income And Asset Value Measurement Systems
By:
Associate Professor Dr. GholamReza Zandi

2. Statement Of Financial Position As Prime Financial Statement
In countries financed mainly by bank loans:
Main focus is on the ability to repay loans
Statement of financial position is important.
In countries financed mainly by shareholders:
Main focus is on to investor protection
Investor decision-making
Income statement and profit is important.
Emphasis changing to Shareholders’ of FP.

3. Statement Of Financial Position As Prime Financial Statement
Post-2000 effect of corporate scandals
Liquidity problems
Off balance sheet liabilities.
Emphasis now changing back to:
Statement of financial position as prime statement
Income seen as a residual arising from changes in
opening statement of financial position;
closing statement of financial position.

4. Role And Objective Of Income Measurement
Main objectives are to provide a means of:
Control in the micro sense by
assessing stewardship performance in maximising income;
comparing actual performance with predicted performance.
Control in the macro sense by
government bodies regulating price charged by public utilities.

5. Income Measurement Objectives
Means of prediction
Dividend policy
Retention policy
A basis for assessing tax
Subject to the disallowance of certain expenses, e.g. entertainment.
Uniform provision, e.g. capital allowances to replace the depreciation charge.

6. Income Measurement Objectives Investor Decision-making
Investors need to predict future cash flows.
Necessary for estimating dividend and retention policy.
Important for estimating
future dividend income and capital growth.
The income statement is the surrogate for future cash flows.

7. Accountant’s View of Income
Accounting income is
an ex post measure;
relating to transactions that have already occurred;
based on historical cost;
a link between the opening and closing statements of financial position.
It explains the change between opening and closing statements of financial position.

8. Accountant’s View of Income
Accounting income is also
Still affected by subjective judgements including estimating
non-current asset expected life and residual value;
inventory obsolescence;
trade receivable provisions.
Income = net assets at end – net assets at beginning + dividends paid.

9. Accountant’s View of Capital
Accounting capital consists of:
The unconsumed portion of non-monetary assets such as non-current assets and inventory, plus
The monetary assets such as accounts receivable and cash, less
The monetary liabilities such as accounts payable.

10. Accountant’s View of Value
Accounting value is
the value of unconsumed costs of assets;
not market realisable value;
market value now being used for marketable securities.

11. Economist’s View of Income, Capital And Value
Fisher’s view:
Capital is the present value of future cash flows.
Capital is measured at the beginning and end of the period.
Income is the maximum consumption enjoyed by the individual without reducing the individual’s capital stock as measured in present value terms.

12. Economist’s View of Income, Capital And Value

13. Illustrate Opening Capital Calculation @ 8%

14. Illustration Of Income Calculation For Year 1  PV1=115, PV0 = 115, = 106, Income Y1= 115, ,853=8,550

15. Illustration Of Predicting Income Calculation For Year 2

16. Illustration Of Predicting Income Calculation For Year 2 Y2= 124,636 – 115,403= 9,233

17. Critical Comment on The Economist’s Measure
Choice of discount factor is subjective
Opportunity cost, current cost of capital, borrowing rate.
Investors have differing risk and time preferences.
Capital and hence income includes unrealised cash flows
So, not used for assessing tax.
So, not used as a base for declaring dividends.

18. Critical Comment On The Economist’s Measure
Future cash flows may not materialise
Investment plans may change.
Individual assets are not reported in a balance sheet
Capital and income are a result of using a bunch of assets as a group.

19. Critical Comment On The Accountant’s Measure
Heterogeneous mix of values in the balance sheet.
Capital gains not normally recognised until realised but accrue in previous periods.
Unallocated costs are carried forward under the going concern assumption.
Accounting income and economic income are reconciled in the long term.

20. Income, Capital And Changing Price Levels
Economic and accounting income assume capital maintenance before income can arise
HOWEVER
Differing definitions of capital.

21. Differing Definitions Of Capital
Money capital initially put in by the owners
The aim of traditional, transaction-based accountancy.
Potential consumption capital
The aim of the economist.
Operating capacity capital to maintain productive capacity
The aim of the current cost accounting system.

22. The End
End of Chapter 1.