This article http://buffalonews.com/2017/03/17/ub-professor-discovers-investors-really-care/ is a review of the new book, "The End of Accounting and the Path Forward for Investors and Managers." After reviewing hundreds of earnings conference calls, the authors have concluded that investors are much more interested in the future than in current returns (traditional measures like earnings per share, etc).
A couple of quotes from the interview with author Feng Gu:
Financial analysts are widely regarded as the most sophisticated investors. They spend their whole life and career tracking the performance of publicly traded companies. Their main job is to help investors understand the performance and the changing risk of each company, so this way investors can make decisions about whether or not they want to invest in a given company.
It turned out the majority of analysts' questions and interests are not along the line of traditional financial reports. So for example, when a company like Sirius XM comes out with its quarterly earnings, the CEO or CFO starts with a quick mention of the earnings per share, which is really one of the key numbers that is included in companies' financial reports. Quickly, everybody forgets about earnings per share and they talk about something else that is not required by the system financial reporting, that is not included in the standard financial reports. ... After reading 200, 300 such examples, we got a very clear sense that investors are not interested in what is included in the standard financial reports. They are interested in something more important, something that is not being reported by companies today.
I think in our book, we made a point very clear that regulators have to require companies to treat investment in their strategic assets as investment for accounting purposes. ... Most of the investment in strategic assets like R&D, advertising, branding and so on, are not being treated as an asset on the balance sheet of the company. They're being treated as just a one-time expense. ... This is the least that regulators can do to correct the information problem that we have documented and other people have documented.
(Score: 3, Informative) by VLM on Wednesday March 22 2017, @11:40AM (3 children)
There's two "financial analyst" type comments I can make.
1) There is willful ignorance of the effect of ultra-low multigenerational lows in interest rates vs the predictable effect on capital asset prices. Stuff like technology or management skill have no effect anymore relative to the much larger effect of fed policy. In a game thats converted from investment to speculation, its no surprise that metrics that meant something to a investment game mean nothing in speculation. Its like asking who owns the monopoly boardwalk properties when the rest of the players are playing blackjack (with or without hookers). Gosh I don't know why capital asset prices are at multigenerational bubble speculative highs, must be... lack of goodwill yeah thats it. Couldn't be interest rates naah.
2) The journalist filter implies its the end of the world as we know it for GAAP accounting standards but assuming the dude isn't disingenuous (see #1 above) thats just the idiot journalist filter again. The point of the article is companies, analysts, and regulators are undervaluing the "goodwill" slush category on the balance sheet. Which is probably wrong and has bad effects.
In the long run the higher the goodwill value the more fraud as its basically a made up number. People have gone to jail for posting fake revenue to boost the stock price to get a bonus before. No one can go to jail for faking the goodwill number because its quite literally made up to make the asset and liability sections of the balance sheet match.
For people with a clue, intentionally "salting the earth" of the balance sheet makes investment or gambling less likely to rely on the balance sheet and more likely to rely on BS, hookers and blow kickbacks, wall street shenanigans as we're used to. So the logical argument in the article is that people aren't paying attention to the financials, so the bright idea is to corrupt the financials into even higher levels of meaninglessness, then they'll start using the balance sheet to invest because now the numbers are hooked up to a random number generator, um wtf?
(Score: 4, Insightful) by rondon on Wednesday March 22 2017, @12:21PM (1 child)
While I don't think VLM said it in a very concise way, I do agree with his last point overall - more "estimates" in the balance sheet is probably a bad thing. On top of that, allowing companies to capitalize more expenses is probably bad as well, as it will lead to much, much easier manipulation of the financial statements.
(Score: 2) by Dale on Wednesday March 22 2017, @03:07PM
My first thought was "oh so they can hide long term expenses through capitalization" when I read it too. Nothing has ever gone wrong with people abusing that before (/sarcasm).
Perrhaps they should consider that the financial statements are not exclusively a tool for financial speculation for stock trading.
(Score: 2) by Sulla on Wednesday March 22 2017, @03:06PM
Finance and management love to do what they can to change GAAP standards so they can get bigger income from investments or bonuses based on fake numbers. Of course its not the finance people and management that always to to prison for it.
Ceterum censeo Sinae esse delendam
(Score: 3, Insightful) by MrGuy on Wednesday March 22 2017, @12:29PM
Emphasis mine.
The article concludes that, because analysts ASK about things that are not in the published reports, they are ONLY INTERESTED in things that are not in the published reports.
A perfectly reasonable alternative hypothesis would be that financial analysts are sufficiently sophisticated to read a financial report, so they don't need to ask about it - they can read the report when they're done. Instead, when they have time to ask questions to executives, they would ask about things that are NOT in the report, simply because they don't have any other way to get that information.
If you look at what financial analysts PUBLISH, instead of what they ASK, their analysis is well grounded in the reported financials and fundamentals of the companies.
(Score: 3, Interesting) by Sulla on Wednesday March 22 2017, @02:54PM (1 child)
This article makes a great point. I see no reason why research and development of a chemical plant in India should not be included as an asset on the financial statement. This would do a much better job representing a companies financial standing.
This is why there is a difference between accounting and finance. In finance you can take risk so you will want to take into account possible future improvements and their effect on the company's success or failure. There is no such allowance in accounting where the goal is simply to fairly represent the companies standing as it currently stands.
To change the topic, the assertion that finance people care more about the future than just the next quarter is a load of shit. If they cared about the future we would be decades ahead of where we are now. If a company is developing a product that will make them the most powerful company in 2030 but currently is making no money at all, they will forever make no money because the reward is too far off. Tesla is an example, would have been hard to get it anywhere without government grants. The market could have handled it but the way finance people see things now it would have taken far longer.
Ceterum censeo Sinae esse delendam
(Score: 0) by Anonymous Coward on Wednesday March 22 2017, @09:40PM
" I see no reason why research and development of a chemical plant in India should not be included as an asset on the financial statement. "
Perhaps the reason is that while it is easy to figure out how much the research cost, it is hard to figure out how much it is worth.
If a company does a big r&d effort and has a new product ready to bring to market, how do they know how well it will sell?
The value is not the product ready for market, it is the actual profits it generates from actual sales.