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Economic Consequences
Employment Stock Options
Positive Accounting Theory
100
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

They give employees the future right to buy company shares for a certain period of time at a fixed exercise price

What are employee stock options?

200

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.

What is the difference between a positive and normative theory?

300

The impact of accounting reports on the decision-making behaviours of business, government, and creditors.

What are economic consequences?

300

1. Pump and Dump 2. Spring Loading 3. Late Timing 

What are the 3 tactics that executives can use to increase the value of ESOs?

300

1. Bonus Plan Hypothesis 2. Debt Covenant Hypothesis 3. Political Cost Hypothesis 

What are the three hypotheses of Positive Accounting Theory?

400

Standard-setting bodies must operate in both the accounting theory domain and the political domain

What is a “delicate balance”?

400

Exercise price – stock price

What is the intrinsic value of an ESO?

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

According to SFAS 123R and IFRS 2, ESOs should be expensed.

How do we currently account for ESOs?

500

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.

What is the difference between opportunistic form and efficiency form?