Hodak - Measuring EP/EVA

Financial vs. Managerial Accounting

	Purpose Give external investors a uniform basis for comparing performance of different companies over time.	Conservativism Defer recognition of revenues until reasonably certain Accelerate recognition of costs Expense rather than capitalize costs Write off capitalized assets as quickly as possible
	Purpose Give managers within a company financial data to support optimal decisions about resource allocation.	Balance Match revenues to costs as closely as possible Capitalize expenses expected to generate revenue into the future Depreciate or amortize assets over their estimated useful lives

As we go through the adjustment process, it is worth keeping in mind that Economic Profit is used for managerial accounting. Managerial accounting is distinct from, and has a different purpose from, financial accounting. Financial accounting is designed to give external investors a uniform basis for evaluating companies, both among different companies in the same period, and the same company across different periods. As such, it is subject to well established rules or principles (e.g., GAAP, IFRS).

In contrast, managerial reporting is designed to provide managers and employees within the company a sound basis for making decisions based on their company's particular business model and strategy, and for measuring the effects of those decisions on value creation. As such, it is not necessary for managerial accounting to conform to the uniform rules of financial accounting.

Many companies nevertheless desire to make it relatively easy to reconcile their managerial and financial accounting reports in order to maintain transparency for the board and, to the extent that EP is a part of company disclosures, for external investors and other stakeholders. This need for transparency is one of the reasons we will later see to limit the number of adjustments to Baseline EP.