The Role of Management as a User of Accounting Information: Implications for Standard Setting

Both the FASB and the IASB do not actively consider information needs of the managementin the process of standard setting. We argue that this focus on external users does not fullyanswer the question as to what constitutes useful accounting information. We analyze thedifferences of managerial and financial accounting with respect to its objectives. We present athree-step approach to identifying useful information. In the first step, information is analyzedwithin an efficiency-based framework of financial economics. Information is considereduseful when it allows efficient resource allocation. This objective requires forward-lookinginformation for purposes of decision making. Backward-looking accounting figures serve asthe basis for their derivation. In addition, performance measures for control purposes areneeded to indicate the necessity as well as the direction of corrective action. In a second stepwe introduce information asymmetries and incentive problems. Accrual accounting becomesrelevant for managerial decision making via the incentives it provides. In the third stepexternal agency conflicts are considered. We argue that external users will generally need thesame information as management, which is largely forward-looking. In this process accrualaccounting serves as a compromise, incorporating projections reliably in backward-lookingaccounting figures.