{"id":58394,"date":"2025-01-30T19:41:54","date_gmt":"2025-01-30T19:41:54","guid":{"rendered":"https:\/\/peraltafinancing.com\/accounting\/07-11-21-the-sad-state-of-accounting-lev-end-of-accounting-blog\/"},"modified":"2025-01-30T19:41:54","modified_gmt":"2025-01-30T19:41:54","slug":"07-11-21-the-sad-state-of-accounting-lev-end-of-accounting-blog","status":"publish","type":"post","link":"https:\/\/fivemor.com\/?p=58394","title":{"rendered":"[07\/11\/21] The Sad State of Accounting \u2013 Lev End Of Accounting Blog"},"content":{"rendered":"


\n<\/p>\n

\n

\u00a0 \u00a0 \u00a0 \u00a0 \u00a0If you invest <\/span>today <\/span>in plant or machinery, the<\/span>se<\/span> assets are recognized as such on the balance sheet and book value, but if you invest in drug development (R&D) or AI, the costs will be expensed in the income statement, dragging down reported earnings and book values. In 2019, the last pre-Covid boom year, <\/span>a full half of U.S. public companies, and 70% of high tech and healthcare (including drug) companies reported <\/span>annual losses<\/span>. Half of these \u201closers\u201d would have reported profits without the intangibles expensing. This is not a reliable accounting system.<\/span><\/span><\/p>\n

\u00a0 \u00a0 \u00a0 \u00a0 \u00a0So, if I were the new chief of the International Accounting Standards Board (IASB), I <\/span>wouldn\u2019t waste my time on<\/span> trivialities, like the estimated cash flows from insurance contracts, or income tax accounting. Rather, I would focus on dragging accounting to the 21<\/span>st<\/span> century by recognizing as assets the main value-creators of businesses: internally-generated intangibles.<\/span><\/span><\/p>\n

2. Facts, not guesses<\/em><\/span>.<\/em> Accounting regulators in the past 30-40 years moved steadily away from reporting facts to relying on managerial estimates and guesses<\/span>, a<\/span>ll in the name of the illusory \u201cfair value accounting\u201d principle. Financial reports are currently floating on a sea of estimates, often manipulated by managers: assets write-offs (to current values), <\/span>goodwill impairment, revenues allocated to future services (software contracts), etc.<\/span> Current balance sheets are an odd, and rather useless mixture of assets reported at historical (irrelevant) purchase costs, observable current values (traded securities), and guesswork (impaired assets and goodwill). The total of this hodge podge of valuation <\/span>bases serves to measure profitability: return on assets (ROA).<\/span><\/span><\/p>\n

\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 A serious IASB chief would focus on reigning-in the constant proliferation of financial report managerial estimates, thereby enhancing the credibility and usefulness of accounting data.<\/span><\/p>\n

3. Hopelessly behind events.<\/em><\/span> People used to joke about the U.S. \u201cleading from behind.\u201d Wi<\/span>th accounting, this is not a joke<\/span>. New accounting standards, like the recently enacted revenue recognition and leases standards, <\/span>took<\/span> 10-15 years to enact. Newly-emerging information needs of investors are just being ignored by accountants.<\/span><\/span><\/p>\n

\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 Consider, for example, the current rush of investors to ESG-intensive companies. Whatever you think of ESG (and I have my doubts about it), a reliable <\/span>information <\/span>system which will report on corporate investment in ESG, and particularly on <\/span>tradeoffs<\/span> (e.g., how much profits were sacrificed to achieve carbon emission reduction) is currently of great importance to investors. The various rankings of companies by ESG promulgated by various vendors are notoriously unreliable.<\/span><\/span><\/p>\n

\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 Since ESG doesn\u2019t seem like a passing fad, if I were the new IASB chief, I would start working on a system reporting corporate ESG costs and consequences, but definitely not by <\/span>initiating <\/span>a 10-15 years project.<\/span><\/span><\/p>\n

Am I hopeful that my suggestions for an IASB (or FASB) agenda will be adopted? No. But I will be remiss <\/span>not making my opinion on such an<\/span> important matter publicly available and open to debate.<\/span><\/span><\/p>\n<\/div>\n\n","protected":false},"excerpt":{"rendered":"

\u00a0 \u00a0 \u00a0 \u00a0 \u00a0If you invest today in plant or machinery, these assets are recognized as such on the balance sheet and book value, but if you invest in drug development (R&D) or AI, the costs will be expensed in the income statement, dragging down reported earnings and book values. In 2019, the last […]<\/p>\n","protected":false},"author":1,"featured_media":58395,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[11759],"tags":[12843,3767,11214,22377,5296],"dealstore":[],"offerexpiration":[],"class_list":["post-58394","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-accounting","tag-accounting","tag-blog","tag-lev","tag-sad","tag-state"],"yoast_head":"\n[07\/11\/21] The Sad State of Accounting \u2013 Lev End Of Accounting Blog - Som2ny Network<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/fivemor.com\/?p=58394\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"[07\/11\/21] The Sad State of Accounting \u2013 Lev End Of Accounting Blog - Som2ny Network\" \/>\n<meta property=\"og:description\" content=\"\u00a0 \u00a0 \u00a0 \u00a0 \u00a0If you invest today in plant or machinery, these assets are recognized as such on the balance sheet and book value, but if you invest in drug development (R&D) or AI, the costs will be expensed in the income statement, dragging down reported earnings and book values. 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