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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, 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.