True/False:
Third-party intervention and economic consequences greatly complicates the setting of accounting standards.
True
100
True/False
ESO Slightly in-the-money has a large payoff (return).
False
100
True/False:
The greater the political costs, the more likely the firm will choose accounting policies that defer current earnings to future periods.
True
200
True/False
Accounting policy change does not affect firm value.
False
200
What are employee stock options?
They give employees the future right to buy company shares for a certain period of time at a fixed exercise price
200
What is the difference between a positive and normative theory?
A positive theory is a good prediction of real world events and a normative theory tells how people ought to react in real-world situations.
300
What are economic consequences?
The impact of accounting reports on the decision-making behaviours of business, government, and creditors.
300
What are the 3 tactics that executives can use to increase the value of ESOs?
1. Pump and Dump
2. Spring Loading
3. Late Timing
300
What are the three hypotheses of Positive Accounting Theory?
1. Bonus Plan Hypothesis
2. Debt Covenant Hypothesis
3. Political Cost Hypothesis
400
What is a “delicate balance”?
Standard-setting bodies must operate in both the accounting theory domain and the political domain
400
What is the intrinsic value of an ESO?
Exercise price – stock price
400
Name an assumption of the Positive Accounting Theory.
1. Managers exhibit opportunistic behaviour
2. Firms are organized in the most efficient manner
500
Give an accounting policy example, which brings economic consequences.
Implementing replacement cost accounting.
500
How do we currently account for ESOs?
According to SFAS 123R and IFRS 2, ESOs should be expensed.
500
What is the difference between opportunistic form and efficiency form?
Opportunistic form assumes managers choose accounting policies to maximize their own utility.
Efficiency form assumes that managers choose accounting policies to benefit the firm and its shareholders.