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ACCA Strategic Professional · Advanced Performance Management · Financial performance measurement

Which of the following is the main reason EVA is often preferred to accounting-profit-based divisional measures when rewarding managers?

EVA is preferred because it adjusts accounting profit for distortions, such as expensed investment in R&D, and deducts a charge for all capital used. This links managers' rewards more closely to shareholder value creation. It still needs a cost of capital and gives an absolute amount.

  1. AIt adjusts accounting profit for distortions such as expensed R&D and charges for all capital, linking reward more closely to shareholder valueCorrect
  2. BIt removes the need to estimate a cost of capital
  3. CIt always produces a percentage figure that can be compared across divisions of different size
  4. DIt is unaffected by accounting policy choices because it uses cash flows only

Explanation

EVA starts from NOPAT, adjusts for accounting distortions (for example capitalising R&D or marketing spend), and deducts a charge for capital, so reward ties to value creation. It still needs a cost of capital, it is an absolute figure not a percentage, and it still relies on adjusted accounting figures.

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