[Abstract] EVA financial management system was developed by ŦԼ˹�ض�˹ Stewart Consulting (Stern Stewart & CO.) Proposed a performance evaluation and incentive system, its purpose is to make corporate managers to maximize shareholder value as The code of conduct. In this paper, the origin of EVA are discussed and presented the EVA index to adjust to the corresponding GAAP, EVA and EVA formulation of standards and related incentive system, hoping to build our performance evaluation and incentive systems have implications .
[Keywords:] the added value of the residual income performance evaluation of the market value added bonus bank
Many U.S. and British companies use EVA financial management system to evaluate corporate performance, the Western academics also appeared in numerous articles of them. For this reason, we focus to discuss the theoretical basis of the EVA system, on the recognized principles (GAAP ) adjustment, EVA base formulation and the associated incentive system to explore the EVA as a tool for business managers to monitor and encourage the inner nature, and hoping to build a performance evaluation of enterprise systems with motivation to do one.
First, the residual income: EVA The Ideological Origins
40 years in the 19th century, some Western accounting scholars will present a series of future cash flows re-expressed as the present value of the carrying amount of the present and future value of residual income and (Preinreich, 1938, EdwardsandBell, 1961, Peasnell, 1982). Olsen (1989,1995), Felson and Olsen (1995,1996) of the party such as, AT & T, Coca Cola. Chrysler. QuakerOats and so on. Method of theoretical work have brought the credibility of the growing, now it has become a capital market-based financial accounting as an important framework. We have to deduce the help of this framework as the EVA financial management system based on the theoretical formula.
For a series of present value of future cash flows and statements of the company value is equal to the carrying value from the current present value of future residual income and the value of the company expressed its net earnings to satisfy the first condition is the accounting contact, namely:
Bt = Bt-l + NIt-Ct ... ... ... ... ... ... ... ... ... (1)
On time t where Bt that the carrying amount of equity (including debt and equity), NIt that moment of time t-1 to period t accounting profits, Ct for the owner of the net during the payment. Net surplus is required to contact book value of all the profits and losses should be included in the profits, from one period to another period of change in carrying value is equal to net profit minus dividends paid. This assumption allows the book value based on future earnings and future cash that investors flow, where the income is based on the perspective of shareholders and profit entity concept to define. If the concept of using profit entity, the net assets equal debt plus equity, the ownership of the profit if the concept of adoption, the net assets equal equity. each period residual income (you) is defined as the period of the accounting profit and the difference between the cost of capital during the period, with the formula expressed as:
RIt = NIt-(rXBt-1) ... ... ... ... ... ... ... ... ... (2)
Where r is the cost of capital, said the return rate of return, assuming it is constant. NIt accounting profit for the period indicated.
We use all of the present value of future cash flows statement value of the company:
T on that moment where Vt interests (including debt and equity) value, r is the discount rate (assumed to be constant), Ct + r representatives from the cash flow for future periods, net earnings link will be on the style with the remaining earnings to be restated:
If that tends to ,, Bt + r / (1 + r) tends to zero, then the equation (3b) can be expressed as:
Equation (3c) the establishment of a net surplus of contact must be the premise, and this is crucial. Conservative accounting approach can change the equation (3c) to the right of the relative number of two projects, namely, interest in the t time the book down value, but will improve during the follow-up residual income. Stern Stewart carrying value and profits of traditional accounting measurement to be adjusted, and adjusted the results of residual income known as economic value added (EVA). At this time, but also equations can be (3c) expressed as:
On the type of Bt is adjusted by the Stern Stewart's book value, equation (3d) EVA financial management system provides a theoretical basis. Vt and the carrying value of the economic value of Bt is the main reason for the different timing of recognition of gains and losses different. economic value exceeds the carrying value of the enterprise is considered part of the goodwill is not recognized. Equation (3d) for the point of view provides a formal statement of the company's goodwill is not recognized the present value of future EVA. If the enterprises to create more than the economic value of the capital value of its investment, the business is successful. market is the final arbiter of success, and thus the economic value created by business end is bound to lead companies with high market value of equity and debt. Stern Stewart will be part of the market value of invested capital as more than "market value added" (MVA), and use the formula expressed as:
Based on the above statements, the success of a business lies mainly in its creation of the present value of future EVA. However, some people believe that there is a difficulty in the definition of success, first of all, the owner of the book value reflects the amount of investment or reinvestment (ie, capital and investment retained earnings), which constitute the baseline assessment of future success. Second, the book value of the cumulative achievements of year, affirming that the EVA in the past and not in the amount allocated to the owners. In the past recognized the greater profits, Bt, the higher Therefore, the lower MVAt. They think that investment in infrastructure should be excluded in order to resolve the retained earnings. Moreover, in current and future test through the MVA, the past profits of the accounting recognition of this created a burden. just beginning in business operation, the equation (4) is a clear business value measurement, because the point in time, there is no distortion of accounting measurement imperfect performance of companies in the past.
We ROAt that return on assets, as ROAt = NIt / Bt-l, therefore, EVA can also be expressed as:
MVAt = NIt-rBt-l = (ROAt a r) Bt-l ... ... ... ... ... ... .. (5)
NIt is the result of adjusted net income. After the above discussion, we think: because they can be implanted in a formal EVA valuation model, and can be broken down into its projects, including profitability, so it is available an interesting place, that can be said based on the digital value drivers. For example, the equation (5) into equation (3d), can be directly to the accounting value of the EVA-based assessment model.
Second, EVA: GAAP adjusted based on residual income of the product
(A) of the residual income performance measures as a single period of criticism and response indicators
First of all, critics say, the investment cost is sunk cost, so consider the cost of fixed-interest investments can improve the quality of production decisions. And, in the amount of capital in certain circumstances, due to neglect of the interaction between segments, the main pushed to the lower investment decisions will lead to the loss of enterprise value. In this regard, Stern Stewart pointed out that many companies have grown too large to be managed well and should therefore be delegated to managers so that they become quasi-owners , investment decisions can be delegated to the Division. the owner can not avoid the costs of early stage capital investment, as a prospective owner managers can not be avoided. So, sunk costs, interest charges should be thought of as a residual income instead of the main advantages shortcomings.
Second, critics argue that residual income based on single indicators during the incentive system will lead to short-term behavior of managers. Residual income is based on generally accepted accounting principles (GAAP) to, because of the existence of the accounting system itself failed to reflect the true risk (including specific important asset is not recognized), may not properly concerned about the management and long-term business enterprise. In fact, the entity accounting system calculated to equal the book value of the economic value of the entity, and obtained through the adjustment of residual income EVA out of the defect can be avoided.
(B) of the Stern Stewart's adjustments to the GAAP
Stern Stewart adjustment of more than 120 aspects of the GAAP to arrive at EVA. However, they noted that a particular company, may only need 10 or so to adjust. Stern Stewart objectives of GAAP adjustments is to create a way for managers to act as the owner of the performance measures as ways to adjust them based on the following three purposes:
1. Of conservative accounting adjustments. Here, we only listed four types of sensitivity to explain the accounting treatment of EVA accounting adjustments on the sound. (1) the adjustment of the accounting treatment of intangible assets. Stern Stewart that all intangible assets should be invested (such as goodwill, and development costs (R & D), advertising costs, and training costs) are capitalized in order to prevent short-term behavior of managers. for goodwill, they are both opposed to an immediate write-off of goodwill accounting treatment of costs, nor in favor of its capitalized and amortized approach, they agree to capitalized but not amortized in the accounting treatment of goodwill on behalf of companies that purchased an investment in the enterprise to have their earnings to create a competitive , should be the full amount of goodwill on the balance sheet in the EVA presented, (2) oil and gas industry, unsuccessful exploration costs on behalf of that part of the productive areas of the real costs, so these costs should be capitalized rather than an expense. The accounting treatment of Shiwu would unduly risk-averse managers, (3) inventory valuation method LIFO method should be adjusted, and additional notes in the report "last in, first out of Preparation" informal account to eliminate its conservative accounting effects, (4) recognized on the liabilities they are opposed to deferred tax accounting. First of all, the accounting of deferred tax liabilities, strengthen the sound doctrine, due to deferred tax liabilities can be expected to pay in the future so that it the present value of zero. Second, the development of efficient treatment reduced the tax program managers motivation.
2. To prevent the occurrence of earnings management. Stern Stewart adjustment is to eliminate some of the accounting profit managers the opportunity to smooth (at least it is the least chance). Their main goal is to provision for bad debts, guarantees, inventory impairment. They suggested that these project-related costs should be recognized in cash basis. There is evidence that when performance measurements associated with the manager bonus plan, the accrual to be used to manage earnings (eg Healy, 1985, Holthauseneta1; 1995, Guidry, 1998), but , there is no empirical evidence that the provision for bad debts, warranty and inventory impairment is a means of earnings management.
3. Adjusted to eliminate the past accounting errors. Stern Stewart proposed a measure to prevent accounting errors in the past leaving investors to make mistakes divestment decision-making process. If an asset's carrying value of the range of its economic value (cost accounting under which phenomenon is very common), the economy may affect the managers to make the correct decision for retention or divestment.
Should be said that Stern Stewart is the traditional practice of combining the results. They GAAP amendment designed to prevent short-term behavior of managers and play with numbers. However, what constitutes a single period of management performance is excellent a complex, not a single period of the accounting measurement can do. various accounting adjustments in a way it can be combined with the concept of EVA in consistent earnings, is also not clear on this point. even in the adjustment After the EVA is not necessarily superior to that of management performance, EVA is not necessarily a negative value has been to show that the impairment. Stern Stewart also made clear that, even in their adjustment, there are still a variety of systematic bias .
Third, EVA base formulation: the re-adjustment of GAAP adjustments
Although Stern Stewart were a lot of amendments to GAAP, but the bias still exists. The deviation from the way public accounting records of transactions. Many of the expenses to include "interests" of the purchase, these "interests" does not directly with them contact the relevant project or action, a major example is the "doing", it costs hidden in the daily operating costs, which may cause the value of corporate assets is less than the carrying value of its own. the book value of enterprise assets may also greater than its economic value. this happens in the cyclical industry and the "sunset" industry, if the depreciation schedules is not well adjusted to reflect the context of declining asset values, the future may be negative EVA. Therefore, the economic environment and the accounting treatment of the existence of imperfect (that is, the adjustment can not completely eliminate their influence), can not simply evaluate the performance of the benchmarking EVA is zero, and should have been positioned above or below zero. Stern Stewart this is called "different talent" problem. That is, in some enterprises, the competitive advantage from past accidents and the previous investment will allow the management team in the future is relatively easy to obtain a positive net present value, while other industries, the current management team have access to even the EVA to zero may represent a great success.
If the "zero" value of the EVA is not a suitable benchmark, then what should the standard formulation of EVA?
Once again we return to equation (3d) and (4), which will provide a basis for the formulation of appropriate starting point for EVA. Because, MVA can be expressed by the capital market as all future expected present value and EVA. Stephenson (Sri Lanka Stern Stewart's executive, the compensation consulting practice before the leader) that should be deducted using the MVA expected EVA EVA basis for formulating the future, the current EVA MVA base into the future requires a number of assumptions , namely the non-zero expected future EVA will follow the time series. He reviewed the two methods. A simple way is to assume that the MVA is expected to present a limited "competitive advantage" obtained during the present value of future EVA. He pointed out that although this method is simple, but by reference to the continuing operations of the company's EVA and MVA observation, MVA did not usually disappear within a short period. Therefore, he proposed an alternative method, the method assumes that the nonzero value of the EVA will be infinite and sustained period, or at least predictable in any sustained beyond the period. Recently, Stern Stewart's reference-based "expected EVA improvement" developed EVA benchmarks. This method can be understood in two ways. First If the adjustment of the basic principles of accounting can not eliminate the measurement of EVA as a deviation from business income of non-normal, then focus on changes in EVA benchmarks may be successful. Second, EVA improved model of the expected growth in EVA with a capital base in proportion as the constant, which assumes that the market value and the carrying value of the ratio may be disguised in the future remain the same, which means that profits will be based on a permanent basis to judge the performance of managers, assuming that any new investment in the past can always come Investment gains are the same magnitude.
We now give a simple example to illustrate the development of market-based thrust of EVA based approach. Assumes that the expected EVA will permanently grow at a geometric way. Further assumptions, expectations and the company's market value to book value are the same with the EVA growth rate, which is expected to market value and the carrying value of the ratio will remain unchanged. In the above context, equation (3d) and can be expressed as:
Vt = Bt + EVAt +1 / (r-g) = Bt + Bt (M-1) ... ... ... ... ... ... ... ... ... ... ... ... ... ... (6)
On the type of g (g Et [EVAt +1 / Bt] = (M-1) (r-g) ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... (7)
In this example, the expected rate of EVA (ie, the items left equation) and the reconciliation of the nominal value of the premium rate market, the cost of capital and the growth rate difference between the positive correlation. Assume that other things being equal, the EVA at the time t +1 if the small in (M-1) (r-g) Bt, said the performance of managers is not satisfactory, so sooner or later will be accompanied by a decline in enterprise value.
This brief example of the above by reference to market expectations for the future development of EVA EVA baseline. However, the zero value of EVA as a benchmark may be better, because this method will lead to a difficult, namely: to what extent permitted The market is expected to draw future EVA EVA benchmarks? EVA practice had to do to overcome the problem. For example, assume that a management team has a good reputation, this will lead to market for their higher expected future EVA. If EVA base developed during the beginning, these markets is expected to be included, even if managers get a high expected EVA, they can not be rewarded. This is not a hypothetical example, Carm (PitneyBowes CEO, a a strong supporter of EVA) proposed the same consideration. the development of standards as a way to reward managers, because they efforts, rather than their "talent", the task is very difficult. a way likely to be this purpose, it needs to be a "peel value" based formulation of EVA benchmarks, that is, if a manager has to replace the average quality of the managers, by reference to the estimated market value for the enterprise, to develop the managers EVA base.
Based on the above discussion, we believe, EVA is an objective bias, as reflected on the situation no matter how perfect man, there is always some deviations, but after constantly adjust at least an approximation of the real economy. Therefore, we basically agree with Stern Stewart to adjust their thinking.
Fourth, EVA bonus bank system
Stern Stewart pointed out that the bank should be set up to manage the EVA bonus based bonus incentives. Their system and many companies are not consistent with the actual system, so we first describe the conventional bonus plan.
(A) of the regular dividend program
Many conventional bonus plan that has the characteristics in Table 1: the lower performance in the enterprise, when managers do not dividends. Performance levels once reached the L, executives began to receive dividends, dividend increases as increasing performance. But in more than U, the managers will not receive additional bonuses. In the circumstances described in Table 1, the managers and prospective owners are not in position, a quasi-owner of the dividend payments should increase with the increasing performance . When the results over U, such dividend payment plan and management failed to effectively stimulate the incentive to work hard. Moreover, if corporate performance has been less than L, it can not stimulate managers to work hard.
The reason why the implementation of such a bonus plan, the reason is: in the U point, if the managers know the amount of dividends based on performance during the no boundaries, they will have strong incentives to engage in the behavior of accelerated revenue recognition. They may use manipulation or the expense of future investment decisions to improve business performance. L point of the existence of statutory and due to the presence of a poor labor market performance of corporate managers operating income levels of the specified limits.
(B) EVA bonus bank system
To a certain extent, EVA is used to manipulate earnings to avoid further dividend payment behavior. While earnings manipulation (during the redistribution of profits between) change the present value of these profits with the relevant dividend, but such re-allocation of profits did not change the present value of EVA. from equation (3d) can be seen in this: the profit is recognized in advance to give the "time value of money interest" EVA in future periods through the capital costs levied to be eliminated. So If the EVA bonus directly related, then they can be avoided through the manipulation of the period to change the profits to pay dividends. However, if the dividend is not reflected in full (including present and future) impact of the manipulation, the value of invariance will be destroyed. For example, managers receive future dividends may be 0, or if the manager is in the current EVA EVA resulting from the negative effects of future dividend payments will affect the future of work before the change, then the value will change invariance. because at this time under the EVA system, managers still have an incentive to accelerate revenue recognition. In other words, the EVA system, still can not avoid the occurrence of acts of managers to manipulate profits.
Stern Stewart proposed to set the dividend payment and bonus payment of bank dividends be separated to prevent managers manipulate the behavior of EVA. In the bonus bank system, the EVA-based bonus will be counted a single person during the management of managers bank accounts of those dividends, the account balance at the beginning of the period, including dividends paid over the period prior to the period prior to the balance of dividend payments. This issue dividends paid bonuses based on the updated bank account balance (which by the opening balance plus the year remuneration component). Shiyou specific application, including all forms, is typically a constant percentage of regularly pay dividends, the dividends are usually one-third of bank account balance. If the bonus bank account balance is negative, there will be no dividend payments. Current balance (positive or negative) will be carried forward to the next.
Bonus bank system allows the company to report based on a single period of high performance, high bonuses awarded to managers, rather than the usual requirement that a line bonus system, but if the future performance of the fact that is false, the more bonus rewards can be stopped before being paid. dividends by the banking system during the follow-up report on performance pay to fix the dividend, cutting management in the short-term (ie, before the change became apparent in the work) motivation, it also has high performance honest managers a great incentive. Moreover, because a negative EVA-based bonus to bonus based on the bank account balance request, so the company can have poor operating performance, but the manager has a higher performance implementation of the report fine. Sri Lanka Stern Stewart pointed out, because in the system increases the risk managers, so managers must be given greater value to compensation. Stern Stewart did not mention how the bonus interest on bank account balances. bonus bank set Stern Stewart is a bias adjustment on the last line of defense, the purpose is to eliminate the short-term behavior of managers.
It should be noted that, despite the EVA financial management system as an effective management tool, in the United States, Britain and other countries much attention, but there are many Fanduizhisheng, for example, Bi and Germany (1997) through the evidence, that traditional performance measurement methods that report earnings and abnormal link between shareholder returns more closely than EVA. Baker, Derek et al (1997) proposed a "modified value added (REVA)" and compared it with EVA, and their empirical conclusions that REVA abnormal shareholder returns and the correlation is stronger than EVA. We are here on the EVA financial management system made only a frame, mainly to explore and encourage the EVA as an evaluation tool for the intrinsic nature of business managers for Construction of the majority of my colleagues for the performance evaluation of characteristics and related incentive systems available.