Economic Value Added

This paper discusses the concept of Economic Value Added (EVA), invented and promoted by Stern Stewart & Co..

This paper relates that Economic Value Added (EVA) may truly be considered the new “hottest thing” in accounting theory because it aims at eliminating the problems accounting faces today by incorporated the concept of a “true economic profit” into accounting and bookkeeping. The author points out that one of the errors accountants usually make, which leads to distorted reporting of a company’s earnings, is the fact that equity capital is not taken into consideration as a cost. The paper stresses that stock options grants are an expense and that stock options are a form of compensation, which should be expensed as exercise rights vest.

Table of Contents
The Cost of Equity Capital
Operating vs. Financing Decisions
Pension Plan Accounting
Full Cost Accounting
Stock Options
Stewart suggests that the pension cost (which is to be determined) should be calculated as the difference between the service cost on one side and the difference between the fund return and the liability interest. The fund return is determined as the return on a portfolio of bonds of similar characteristics with the pension fund, so that in the end the return on the fund and the liability interest will cancel one another. In this way, the pension cost will be equal to its service cost.