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Asr Management Compensation Contracts a Problem

In: Business and Management

Submitted By shrayesh
Words 425
Pages 2
Although the Conceptual Framework views the primary use of accounting numbers as decision making, we still see accounting measures used in contracts for management compensation.

why do you think that companies use accounting numbers in management compensation contracts? (4 marks)

The conceptual framework is a set of interrelated concepts that define the nature, purpose and broad content of the general-purpose financial report that provides information useful for the users to make and evaluate decisions.
Conceptual framework is what the regulators that are AASB IASB ASX ASIC want accounting to be.
These are the bodies that generate accounting standards and policies.

The accounting numbers that are net profit after tax, assets and liabilities are used in the contracts, which are legally binding agreements between two or more parties who voluntarily agree on the agreement, which obligates both the parties to do or not to do something for the other parties. Each parties have the right to demand on the performance of whatever the agreement is upon.

The accounting regulation limits the policy choices to the management.
This is done in order to prevent the discretion in accounting done by managements for their own self-interests by expropriating wealth form debt holders to the shareholders.
This is called agency problem.

These accounting numbers are used in order to prevent delegation of decision making which is viewed primary by the conceptual framework. Also these numbers are used due to the assumption that the management act on their own self interest and because of information asymmetry which is the manipulation of the financial statements of the company. Thus this is the agency problem, which arises in a company because of the different goals between the management and the principles that provide the capital for the investment.

Management...

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