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Examples for HGB based evaluation options of
assets and liabilities or earnings and expenses
are
--
the strict versus mitigated lower of cost or
market principle of long term assets
--
activating options for financing and adminis-
tration cost within the production cost calcu-
lation
--
the choice of switching between the classifi-
cation into long term or short term assets
--
the posting of a loan or bond disagio into as-
sets or alternatively as part of the expenses
of the profit and loss statement
--
the application of different depreciation me-
thods for material and immaterial assets like
machines, e.g. the linear, degressive or num-
ber of units method
--
the application of different consumption fol-
low-up procedures for short term goods and
stock (currents assets) as first in – first out
(FIFO), last in – first out (LIFO) and the
(weighted) average method
--
the measurement of depreciations/losses
onto accounts receivable trade based on ex-
pected clients´ insolvency estimated by stati-
stical prognostic methods
--
the determination of discounted long term
provisions, e.g. for corporate pension plans
based on actuarial methods
--
the differentiation of scientific research cost
and development cost to differ expenses in
the profit and loss statement form activating
production cost
--
the activation of self-developed and directly
applied non-material/intangible assets.
Behavioural Accounting
International: IFRS/IAS
International Accounting is based on the mark
to market evaluation of assets and liabilities by
their Fair Value (FV) or at Amortized Cost (AC).
Unrealized profits or losses resulting from unre-
alized evaluation effects like derivatives or cur-
rencies are posted before taxes into the Other
Comprehensive Income (OCI) as part of the
equity capital within the balance sheet with or
without tax latencies. Hence, the OCI leads to
much more volatile annual corporate earnings
resulting in much more volatile stock market
Furthermore it is to decide to cover only regio-
nal/national or alternatively global/international
markets and choosing the structure of diversifi-
cation differing between being a mono liner or a
global player as well as deciding to cover the re-
tail or the wholesale markets.
The
budgeting process
can be organized as
top down or interactive bottom up budgeting
applying tools like the Zero Based Budgeting
(ZBB) and the Earned Value Analysis (EVA).
These behavioural internal controlling tools in-
fluence the organizational competence and
profit centre responsibility within the corpora
tion and therefore the decisions and judgement
making of internal stakeholders and key peop-
le. Management and supervisory board are of-
ten driven by the mentality of Conservatism Be-
haviour that leads to prefer the top down
instead of the bottom up way.
Behavioural Accounting
National: HGB
External Behavioural Accounting tries to pre-
dict the outcome of accounting rules on inves-
tors, shareholders and stakeholders with refe-
rence to the profit/loss and cash flow state-
ment as well as the balance sheet structure in
terms of reporting requirements, taxation, au-
diting, dividend payments and corporate ra-
tings. Hence, Behavioural Accounting sup-
ports Judgement and Decision Making (JDM)
as well as Disclosure and Market Efficiency
and furthermore Incentives and Control func-
tions for a performance related payment sys-
tem of management. Different recognition,
classification and evaluation options of HGB
(Handelsgesetzbuch, German Commercial
Code) based accounting enable to control and
measure profit and loss statement, net liquidi-
ty, net working capital and equity ratios of cor-
porate annual reports. Furthermore, the infor-
mation provided with the notes influence the
opinion of investors and public onto the corpo-
rates´ future perspectives. A relatively high net
profit margin leads to extended dividend ex-
pectations of share holders and higher corpo-
rate income tax payments to the financial au-
thorities than hidden reserves do.
neurial wages. If this benchmark yield is too
ambitious, the management of a company is
forced to take extraordinary high business risks
that threaten to long term performance and
wealth of the company. Typical examples for a
high corporate risk exposure are the debt to
equity capital ratio and a running short of net li-
quidity and net working capital. These effects
lead to an underestimation of risk as a conse-
quence of Overconfidence, Wishful Thinking
and Optimism. The management feels to be
driven by a tough competition environment and
strongly ambitious target setting as a conse-
quence of Herding.
Another issue is the applied internal cost cal-
culation model. Herein, there is differed bet-
ween a full cost method on the one hand and
the application of the partial cost method on
the other hand that only refers to
partial, vari-
able cost
components. While the
full cost
method
is the right calculation approach for
the long term perspective of the going concern,
the variable cost method refers to the short
term perspective that faces for instance a
tough competition situation in the market. The
application of these two different calculation
models can be explained by the behaviour of
Framing and Anchoring.
Two types of product program
The internal decision making and judgement of
risks is therefore directly monitored by means
of behavioural preferences. Internal behavioural
accounting is furthermore the basis for key cor-
porate strategies. The extension of market sha-
res and a steady diversification of product lines
are often combined with reductions of profit
margins and liquidity. Another scope is to differ
the product program between standardized low
quality products on the one hand and individu-
alized high quality products on the other side.
The question is to cover the total or large mar-
kets offering high quantities with low profit
margins or to focus on high margin products
with high value, complexity and individuality.
This strategic behaviour and decision making is
related to the theory of Porter’s Five Forces of
competition intensity and market structures.
Behavioural Finance
