The Efficient Contracting

Approach to Decision Usefulness

Efriyanti – 123011811015
Mulia Kusuma Tantra – 123011811060
Nuryatun – 123011811041
Rohmah Ahdia Sari - 123011811048
Overview

Efficient contract theory is expected to be able to

provide limitations on management performance
in determining accounting policies in the company.
 Efficient Contracting Theory
Efficient contract studies study the role of financial
accounting information in moderating information
asymmetry between contractors;
 Debt Contracts and Managerial Compensation Contracts
 The interests of lenders and managers can conflict with
the interests of shareholders

Efficient theoretical contract studies help align the interests

of managers and creditors and shareholders.
SOURCES OF EFFICIENT CONTRACTING DEMAND
FOR FINANCIAL ACCOUNTING INFORMATION

Lenders Shareholders
(Pemberi Pinjaman) (Pemegang Saham)
 Lenders
(Pemberi Pinjaman)

SOURCES OF Lenders pay attention to information asymmetry

EFFICIENT because management may not be transparent in
CONTRACTING choosing accounting policies so that they can
DEMAND threaten the interests of lenders. The lender
FOR FINANCIAL demands protection from that possibility.
ACCOUNTING
INFORMATION
Lenders face payoff asymmetry. they will lose if
the company is performing poorly and their profits
are limited if the company performs well.
 Shareholders
(Pemegang Saham)

SOURCES OF
EFFICIENT The source of efficient contracts on demand for
accounting policies is also obtained from shareholders to
CONTRACTING
protect themselves from exploitation by management to
DEMAND a certain extent, exploitation is controlled by basing
FOR FINANCIAL compensation managers on several measures of
ACCOUNTING manager's performance.
INFORMATION
This encourages managers to take responsibility and
determine the limits of opportunistic manager actions
ACCOUNTING POLICIES FOR EFFICIENT
CONTRACTING

Reliability Conservatism
(Keandalan) (Konservatisme)
 Reliability
(keandalan)

ACCOUNTING In order to be reliable, accounting information for

POLICIES FOR efficient contracts must be based on actual
EFFICIENT market transactions and can be verified by third
CONTRACTING parties. Contract theory supports fair value only if
the value can be determined reliably.
 Conservatism
(konservatisme)
Asymmetry results create a demand for conservatism
requirements, the lender's request for information about
unrealized losses is greater than the demand for unrealized
profit information. because unrealized profits are believed to
ACCOUNTING be less useful than unrealized losses in predicting financial
POLICIES FOR difficulties.
EFFICIENT
Efficient contracts have conservative conditions to provide
CONTRACTING an early warning system of impending financial difficulties
and create a systematic understatement of net asset
values ​by providing a lower limit of net assets to help lenders
evaluate the security of their loans. Conditional conservatism
is also demanded by shareholders for service purposes,
because it is more difficult for managers who want to
improve their reputation and compensation Conservatism
provides an early warning system for loss operations and
investment policies
 Contract Rigidity
By their nature, the contract will be difficult to change. In other words, contracts are
rigid and there are also many long-term contracts, such as;
1. debt contracts if a long-term contract depends on accounting variables, then it is
possible that accounting standards will change during the contract period that changes
can affect the value of the agreement, there by increasing the likelihood of violations.
2. Another possibility is to combine the provisions in the contract itself to be able to deal
with unexpected events.

Facing a contract of rigidity, companies face the corporate governance tradeoff

optimization of the set of accounting policies for companies is a compromise. On the
one hand, accounting policies will minimize the choice of opportunistic accounting
policies by managers first, but are subject to the cost of lack of accounting flexibility to
meet changing circumstances, such as new accounting standards that affect debt and
compensation agreements.

On the other hand, it allows managers to choose an arrangement of accounting policies

that will reduce the cost of contract rigidity. But it exposes companies to the costs of
opportunistic managerial behavior. Efficient contracts help to explain what accountants
and accounting policies are known to managers.