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Bad debts and warranty costs

Estimate accrual

LIFO inventory costing Construction in progress Discontinued operations

LIFO permitted Record as asset Include in assets and earnings

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Common examples of Stern Stewart’s adjustments. For example, the effect of capitalizing R&D is to add to CAPITAL (assets) past R&D expenses, less accumulated amortization. The effect on NOPAT (earnings) is to add back current R&D expenses and subtract the period’s amortization of capitalized R&D. For a firm experiencing growth (decline) in R&D, the adjustment increases (reduces) contemporaneous NOPAT. The effect on EVA depends on the amount of capitalized R&D. For a firm in steady state, the adjustment has little net effect on NOPAT, but increases CAPITAL, thereby reducing EVA.

Stern Stewart’s rationales for these adjustments include: a) to better represent the underlying economics of the transactions; b) to reduce incentives for dysfunctional or suboptimal decision making; and c) to improve comparability externally (across firms) and internally (e.g., across divisions) by putting the accounting on a similar basis. Not all rationales apply to each adjustment.

Filename: 178168 Directory: C:\WINDOWS\DESKTOP Template: Normal.dot Title: EVAdence on EVA® Subject: Author: CCST Keywords: Comments: Creation Date: 08/27/99 9:31 AM Change Number: 2 Last Saved On: 08/27/99 9:31 AM Last Saved By: Jim Wallace Total Editing Time: 4 Minutes Last Printed On: 09/09/99 5:05 PM As of Last Complete Printing Number of Pages: 26 Number of Words: 5,322 (approx.) Number of Characters: 30,340 (approx.)