Purpose: The paper seeks to complement a more conventional PAT-based study of accounting method choice in Egyptian firms (Dey et al., 2007) by examining three alternative computational reasons for depreciation method choice: simplicity; compatibility with industry norm; and suitability for class of asset. Design/methodology/approach: The paper draws on a questionnaire survey, sent to Egyptian companies, in which managers were asked to indicate their reasons for choosing depreciation methods as well as the actual depreciation methods used. Findings: The paper finds that technical reasons were frequently given in survey responses from managers. However, the available evidence on the actual depreciation methods used by their firms and industries is in fact more consistent with PAT-based theories of accounting choice than with such alternatives. This suggests that the responses to the survey reflected managers’ rationalisations of decisions made for self-interested purposes. Originality/value: Most recent work on managerial decisions concerning accounting choices utilises data gathered from databases of published financial information and is undertaken within a PAT context. This study extends that approach by utilising the results of a questionnaire distributed in Egypt to test some additional hypotheses that reflect possible technical accounting reasons for justifying depreciation methods.

Purpose - This paper aims to complement a more conventional positive accounting theory (PAT)-based study of accounting method choice in Egyptian firms by examining three alternative computational reasons for depreciation method choice: simplicity; compatibility with industry norm; and suitability for class of asset.Design/methodology/approach - The paper draws on a questionnaire survey, sent to Egyptian companies, in which managers were asked to indicate their reasons for choosing depreciation methods as well as the actual depreciation methods used.Findings - The paper finds that technical reasons were frequently given in survey responses from managers. However, the available evidence on the actual depreciation methods used by their firms and industries is in fact more consistent with PAT-based theories of accounting choice than with such alternatives. This suggests that the responses to the survey reflected managers' rationalisations of decisions made for self-interested purposes.Originality/value - Most recent work on managerial decisions concerning accounting choices utilises data gathered from databases of published financial information and is undertaken within a PAT context. This study extends that approach by utilising the results of a questionnaire distributed in Egypt to test some additional hypotheses that reflect possible technical accounting reasons for justifying depreciation methods.

In recent years, Egypt has been developing rapidly from a socialist to a fully developed market‐based economy. One may expect that this economic transition towards a more capitalist orientation will influence the country’s cultural and socio‐economic environment, and consequently the behaviour of its corporate managers. The increasing separation of ownership and control of capital could be expected to increase agency problems associated with managerial decisions. In these circumstances, it should be interesting to identify whether ‘positive accounting’ hypotheses would apply in such an environment. Therefore, this paper examines the relevance to financial reporting in Egypt of some established positive accounting theory hypotheses in addition to a new hypothesis related to taxation. The evidence of the study is consistent with the validity of the conventional ‘bonus’ and ‘debt’ hypotheses and the new ‘taxation’ hypothesis. These conclusions are also consistent with recent empirical studies of cultural and socio‐economic change in Egypt.

This paper examines the lobbying behaviour of UK managers who commented on Accounting Standard Board proposals to re‐introduce full provision deferred taxation accounting. Although there were no direct cash‐flow implications associated with these proposals, they had the potential to affect a company’s reported net income and revenue reserves. Using published comments and financial statements data, the paper tests: (a) the conventional positive accounting theory gearing hypothesis, using debt/equity ratios and (b) a new dividend hypothesis that is presented in the paper. The findings did not provide support for the gearing hypothesis and are therefore consistent with recent work of various other authors. However, the new dividend hypothesis was supported and the paper therefore suggests that the potential impact that an accounting treatment has on the revenue reserves of a company, and thus its dividend paying capacity, is a plausible reason for observed lobbying behaviour in the UK.

ABSTRACT Existing literature identifies specific situations in which payback methods (PB) can provide precise surrogates for NPV analyses of accept/reject decisions. This paper extends that literature to take explicit account of taxation and of ranking decisions using profitability indices. Nevertheless, NPV can be considered preferable to PB as a basis for maximising stockholder wealth (MSW), because it requires fewer assumptions and provides more information. Yet simple PB continues to be used extensively, which suggests that it has advantages for decision-makers. Some authors suggest that its use reflects managerial short-termism and is inconsistent with MSW. In contrast, this paper proves that (with standard patterns of cash flows, defined risk classes and asymmetrical information) the use of PB instead of NPV should motivate risk-averse subordinate managers to adopt more positive NPV projects. Consequently, the appropriate use of PB can result in more wealth for stockholders than would occur using NPV directly. Furthermore, the use of PB avoids a number of costs and in the appropriate circumstances may therefore be the most cost-effective basis for evaluating investment decisions.

The paper presents evidence that demonstrates that U.K. and International Accounting Standards require entries in income statements that are sometimes based on a matching approach and sometimes on a valuation approach. It indicates that the two approaches are fundamentally different and that they produce different net income figures that have different meanings. In these circumstances, the imposition of the standards currently required results in figures of net income that have no defined meaning and are therefore potentially confusing. Consequently, one can argue that the regulators have been misguided in failing adequately to differentiate between the two approaches. Each income statement published should be based on a clearly identified model and be interpretable by reference to known assumptions.

Straight-line depreciation (SL) appears to be a crude procedure that is unsupported by economic logic. Nevertheless, internationally, it is the most widely used method of allocating the costs of fixed assets to accounting periods by way of depreciation charges. Many authors attribute its use to its simplicity. That justification may be deemed to be insufficient, since ideally SL should provide accounting figures with economic meaning under known assumptions. Such meaning might be defined by reference to the net present value (NPV) calculus, which is recommended in the literature of financial management for the evaluation of economic flows associated with the acquisition of fixed assets. After briefly considering economic depreciation alternatives discussed in the literature, this article selects the Ladelle/Brief/Grinyer Earned Economic Income (EEI) calculus as a theoretical model for the examination of SL depreciation. EEI provides signals which are consistent with those given by NPV and can satisfy the accounting constraint that one should recognize realised profits only. The article employs mathematics and deterministic computer simulation to explore some circumstances in which SL provides figures which approximate to the net investment charges using the EEI calculus. It shows that there are many patterns of declining annual benefits from ownership for which SL provides an approximation to EEI net charges that could be considered to be adequate. Consequently SL often provides more economically interpretable information, and consequently is more defensible, than is typically assumed in the literature relating to accounting.

Skinner (1998) challenged the papers that had presented the theory of Earned Economic Income (EEI) and had developed it in an attempt to show how it could be applied in practice. He asserted that they were illogical, inconsistent and based on a flawed chain of reasoning. This paper contends that Skinner's arguments were probably based on confusion. Such confusion could be attributable to a misinterpretation of adequate exposition by the proponents of EEI, because of Skinner's apparent fixation on a valuation-based concept of income measurement. Alternatively, it could be an indication of inadequacies in such exposition. Due to the possibility of the latter, this response seeks very briefly to clarify some of the concepts that Skinner disputes, indicating the reasons for dismissing his contentions. It is possible that Skinner dislikes EEI because it is inconsistent with a model for which he has a prior preference, but that would not be an appropriate basis for dismissing reasoned argument.

This paper considers an aspect of possible managerial short‐termism in the UK. It discusses some potential motivations for that phenomenon and presents evidence which suggests that short‐termism exists and is positively associated with managerial perceptions of capital market valuation practices. Two hypotheses were developed and tested using the responses concerning R&D expenditure obtained from a postal questionnaire sent to the finance directors of theTimes 1000companies. These were that many top managers in UK quoted companies behave in a ‘short‐termist’ manner; and that the extent to which managers behave as hypothesized above is positively associated with their perceptions of the level of emphasis placed by the capital market on measurements related to short‐term reported earnings. The results obtained support the hypotheses. Overall, the evidence of the paper is consistent with the view that many finance directors of large UK companies are short‐termist in their perceptions and that such short‐termism is positively associated with their beliefs about the level of emphasis placed by the capital market on figures of reported earnings.

This note welcomes and responds to Ken Peasnell's (1995) paper on the analytical properties of EEI. It clarifies Grinyer's thinking on a number of issues where it differs from the interpretation provided by Peasnell. The potential difficulties arising from the aggregation of flows of multiple mutually dependent projects under certainty is acknowledged and illustrated. Grinyer's 1987 paper proposed a solution to the problem which is amplified and developed further. The position of EEI under uncertainty is then considered. The paper considers the choice between a risk-adjusted and a risk-free rate of interest. It proposes the adoption of the latter and outlines the consequences for the concept of EEI. Peasnell discussed the reliability of EEI figures in an uncertain environment with possibilities of management manipulation of estimates. This issue is addressed and it is argued that relatively EEI may be more robust in this context than he implied.

Skinner criticises the present author for (a) failing to discuss IRR methods, (b) placing too much reliance on the matching principle, (c) developing a procedure with the same defects as conventional accounting methods, and (d) overlooking relevant prior work. Although it does not affect the EEI analysis, (d) is in part accepted. Criticisms (a) to (c) are not however well founded within the context of the EEI analyses to date.

Information about the abandonment values (AVs) of major capital projects may provide additional perspectives concerning risk and liquidity. Such perspectives are unlikely to be obtained merely by the inclusion of the worth of abandonment options in the valuation of projects by reference to shareholders' interests. This possibility is discussed, with special emphasis on managerial perspectives. The paper then outlines the results of a postal survey of the responses of financial managers to questions on the topic.

Ma and Hopkins' (1988) paper on accounting for goodwill derives insupportable conclusions because its analysis is based on an inappropriate paradigm. This comment presents a supportable rationale for capitalization and amortization of purchased goodwill and concludes that the 'unsolved puzzle' that Ma and Hopkins present is likely to be a corroborating example for the 'old' matching-based paradigm and a confounding example for the 'new' valuation-based alternative.

The concept and practical implementation of EEI has been introduced in a series of papers and has been tested for feasibility. This paper explores the reactions of managers who acted as respondents to a questionnaire in a total of seven UK and Iranian companies in which the system was tested. It discusses the limitations of the case based research methodology available, the observatons from the study and the factors that might have influenced the responses made to a questionnaire. Although EEI was generally considered to be potentially useful for some purposes, there was a marked reluctance on the part of respondents to move from established historical cost accounting practice. Some of the identified constraints on the adoption of EEI seem likely to impede the introduction of any new accounting model.

The international harmonization of financial reporting requires national acceptance of international standards. Accounting for goodwill in the U.K. provides an interesting case study of the pressures that can influence national standards in a direction contrary to that required for harmonization. The paper outlines the theoretical issues and historical UK context of accounting for goodwill and provides evidence of lobbying that is consistent with the hypothesis that managers and auditors lobby in furtherance of their vested interests. The implications of the UK experience for international harmonization are briefly discussed.

During the 1980s the UK regulations affecting accounting for acquired goodwill allowed managers to make accounting choices affecting recorded goodwill that best served their particular interests. This paper develops and tests the hypothesis that the proportions of purchase price assigned to separable net assets and consequently to goodwill are affected by gearing (leverage) and other considerations.

It can be claimed that the failure of conventional accounting explicitly to recognise the cost of capital is a major shortcoming during periods of high interest rates. Another important problem stems from the apparently arbitrary and incorrigible allocations typically involved in the matching process. Grinyer has previously proposed a theoretical solution to these problems using an allocation algorithm he called ‘Earned Economic Income’ (EEI). This paper outlines and illustrates a practical development from the EEI concept by means of a case study which explains the calculations and estimates that were made when testing the approach in a firm manufacturing and trading in industrial textiles.

Journal of Business Finance & AccountingVolume 16, Issue 3 p. 303-315 The Need For Ex Post Eei John R. Grinyer, John R. Grinyer the authors are from the Department of Accountancy and Business Finance at the University of Dundee. They wish to acknowledge financial assistance from the Carnegie Trust for the Universities of Scotland in the development of this paper.Search for more papers by this authorRobert A. Lyon, Robert A. Lyon the authors are from the Department of Accountancy and Business Finance at the University of Dundee. They wish to acknowledge financial assistance from the Carnegie Trust for the Universities of Scotland in the development of this paper.Search for more papers by this author John R. Grinyer, John R. Grinyer the authors are from the Department of Accountancy and Business Finance at the University of Dundee. They wish to acknowledge financial assistance from the Carnegie Trust for the Universities of Scotland in the development of this paper.Search for more papers by this authorRobert A. Lyon, Robert A. Lyon the authors are from the Department of Accountancy and Business Finance at the University of Dundee. They wish to acknowledge financial assistance from the Carnegie Trust for the Universities of Scotland in the development of this paper.Search for more papers by this author First published: June 1989 https://doi.org/10.1111/j.1468-5957.1989.tb00020.xCitations: 8AboutPDF ToolsRequest permissionExport citationAdd to favoritesTrack citation ShareShare Give accessShare full text accessShare full-text accessPlease review our Terms and Conditions of Use and check box below to share full-text version of article.I have read and accept the Wiley Online Library Terms and Conditions of UseShareable LinkUse the link below to share a full-text version of this article with your friends and colleagues. Learn more.Copy URL Share a linkShare onFacebookTwitterLinkedInRedditWechat Citing Literature Volume16, Issue3June 1989Pages 303-315 RelatedInformation