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Accounting for provisions: an economic analysis of intertemporal cost allocations and their incentive properties

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  • Christian Lohmann

    (University of Bamberg
    Schumpeter School of Business and Economics)

  • Nils Crasselt

    (Schumpeter School of Business and Economics)

Abstract

The use of accounting information and related performance measures for (delegated) investment decision-making has been extensively analyzed in the context of investment projects with upfront investments. In many cases, however, a project may also require large payments at the end of its life. In accounting statements, companies anticipate such payments by setting up provisions during a project’s useful life. To date, very few studies have explored provision schemes with regard to the decision-facilitating and the decision-influencing roles of management accounting. In this paper, we analyze three different provision schemes of practical relevance. We benchmark the cost allocations that result from each such scheme against cost allocations resulting from two provision schemes that are derived from the analysis of investment projects with upfront investments. The first comparison concerns the decision-facilitating role and builds on the principles of investment-based cost accounting according to Küpper (1985, 2009). The second comparison concerns the decision-influencing role and is based on the theory of goal-congruent performance measures as developed by Rogerson (1997) and Reichelstein (1997). These comparisons demonstrate to which extent the cost allocations associated with the provision schemes that are commonly used in practice deviate from the benchmark solutions we present. We also examine the potential distortions that may arise when accounting performance measures based on the practically relevant provision schemes are used for investment decision-making.

Suggested Citation

  • Christian Lohmann & Nils Crasselt, 2020. "Accounting for provisions: an economic analysis of intertemporal cost allocations and their incentive properties," Journal of Business Economics, Springer, vol. 90(5), pages 825-844, June.
    • Handle: RePEc:spr:jbecon:v:90:y:2020:i:5:d:10.1007_s11573-020-00981-3
    DOI: 10.1007/s11573-020-00981-3
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    References listed on IDEAS

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    1. William P. Rogerson, 2008. "Intertemporal Cost Allocation and Investment Decisions," Journal of Political Economy, University of Chicago Press, vol. 116(5), pages 931-950, October.
    2. Rogerson, William P, 1997. "Intertemporal Cost Allocation and Managerial Investment Incentives: A Theory Explaining the Use of Economic Value Added as a Performance Measure," Journal of Political Economy, University of Chicago Press, vol. 105(4), pages 770-795, August.
    3. Pao-Yu Oei & Hanna Brauers & Claudia Kemfert & Martin Kittel & Leonard Göke & Christian von Hirschhausen & Paula Walk, 2018. "Kohleausstieg in NRW im deutschen und europäischen Kontext - Energiewirtschaft, Klimaziele und wirtschaftliche Entwicklung," DIW Berlin: Politikberatung kompakt, DIW Berlin, German Institute for Economic Research, volume 127, number pbk129.
    4. Madhav V. Rajan & Stefan Reichelstein, 2009. "Depreciation Rules and the Relation between Marginal and Historical Cost," Journal of Accounting Research, Wiley Blackwell, vol. 47(3), pages 823-865, June.
    5. Christian von Hirschhausen & Clemens Gerbaulet & Claudia Kemfert & Felix Reitz & Cornelia Ziehm, 2015. "German Nuclear Phase-Out Enters the Next Stage: Electricity Supply Remains Secure - Major Challenges and High Costs for Dismantling and Final Waste Disposal," DIW Economic Bulletin, DIW Berlin, German Institute for Economic Research, vol. 5(22/23), pages 293-301.
    6. Christian Lohmann, 2015. "Managerial incentives for capacity investment decisions," Journal of Management Control: Zeitschrift für Planung und Unternehmenssteuerung, Springer, vol. 26(1), pages 27-49, April.
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    More about this item

    Keywords

    Closing expenditures; Cost allocation; Investment incentives; Investment-based cost accounting; Provision schemes; Residual income;
    All these keywords.

    JEL classification:

    • C02 - Mathematical and Quantitative Methods - - General - - - Mathematical Economics
    • D25 - Microeconomics - - Production and Organizations - - - Intertemporal Firm Choice: Investment, Capacity, and Financing
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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