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Appropriating Payoffs

  • Ricardo G. Barcelona
Chapter

Abstract

Power prices in competitive wholesale markets are set by the costs of marginal supplies based on their LCOE. By deconstructing the components of this, the chapter cross-references economic and accounting variables. This exercise allows managers to derive economic or accounting profits through the use of the familiar formats of financial statements. The analysis informs managers on a firm’s economic and financial performance. In real life, revenues are calculated based on power prices (i.e. economic costs of supply) and the quantity sold. Expenses are expressed as historic costs. This so-called “hybrid” reporting flatters reported income through inadvertently overstating earnings before tax while increasing tax liabilities. To ascertain the sources of value creation (or erosion), residual income analysis is employed, providing a framework whereby strategic actions and their financial outcomes are evaluated.

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Copyright information

© The Author(s) 2017

Authors and Affiliations

  1. 1.IESE Business SchoolUniversity of NavarraBarcelonaSpain

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