Accounting for the Cost of Interest

Residual income and value creation: An investigation into the lost-capital paradigm

“…In his Accounting for the Cost of Interest, Anthony (1975) advocates the use of a charge on equity capital in accounting statements: The interest on the use of equity capital should be accounted for as an item of cost.…”

“…Within this subclass, Drukarczyk and Schueler's (2000) Net Economic Income and the lost-capital companion of Fernández's (2002) Created Shareholder Value are briefly investigated (section 8). A final unification of the two paradigms is shown to be implied by Anthony's (1975) notion of profit: The use of his argument leads to a subclass of residual income models that belong to both paradigms (section 9). Some concluding remarks end the paper and a brief numerical example is illustrated in the Appendix.…”

“…Contrary to the standard residual income, the capital charge is equal to the capital lost by investors multiplied by the cost of capital. The lost capital may be viewed as Anthony's (1975) profit. They are all conveniently reinterpreted within the theoretical domain of the lost-capital paradigm and conjoined in a unified view.…”

A Comparison of Error Rates for EVA, Residual Income, GAAP-earnings and Other Metrics Using a Long-Window Valuation Approach

“…For example, Stern Stewart and Penman (2003) advocate expense recognition of non-cash costs incurred by shareholders arising from the exercise of employee share options, which GAAP ignored prior to IFRS 2 (IASB, 2004). Like Anthony (1975;1983) Stern Stewart also strongly advocate recognition of an expense for shareholders' cost of equity capital, which is also ignored under GAAP. Timing or transitory differences also exist between GAAP and EVA in the form of capitalisation and amortisation of value creating expenditure, such as research and development costs, which are typically written off immediately as an expense under GAAP.…”

“…The objective of this study is to investigate the relative decision usefulness of differences between GAAP-based accounting and alternative methods, such as Stern Stewart's measure of EVA to the prediction of cash flows. We focus in particular on the value relevance of the recognition of a cost of equity capital in measuring reported income which has long been advocated by Anthony (1975;1983) and which is noticeably absent from the issues under consideration by the IASB in its quest to improve financial reporting quality.…”