Skip to content

ACCA Strategic Professional · Advanced Performance Management · Financial performance measurement

Which adjustment is typically made when calculating Economic Value Added (EVA) from accounting profit?

EVA commonly capitalises items like R&D and marketing that create long-term value, adding them back to profit and to capital employed. This removes the accounting bias against investing for the future. EVA still charges for capital at the weighted average cost of capital.

  1. ADeduct research and development expenditure that has been capitalised as an asset in the financial statements
  2. BCapitalise development and marketing spend that builds long-term value, adding it back to profit and to capital employedCorrect
  3. CReplace the cost of capital with the risk-free rate
  4. DAdd depreciation to profit and exclude non-current assets from capital employed

Explanation

EVA adjusts accounting profit (NOPAT) to better reflect economic reality, for example capitalising R&D and brand-building spend and amortising it, so profit and capital are both restated. Using the risk-free rate would understate the charge, since EVA uses the weighted average cost of capital. Option one reverses the adjustment.

Did you get it right without looking?

One question tells you little. A timed set on Financial performance measurement shows your real accuracy, how long you take and where you lose marks.

Practise Financial performance measurementFree diagnostic mock

More Financial performance measurement questions