The End of Accounting and the Path Forward for Investors and Managers (Wiley Finance) by Baruch Lev & Feng Gu

Author:Baruch Lev & Feng Gu [Lev, Baruch & Gu, Feng]
Language: eng
Format: epub
ISBN: 9781119191087
Publisher: Wiley
Published: 2016-06-14T05:00:00+00:00

Usefulness attribute no. 2: Inform investors with specificity about the investments (expenditures) made in the process of building the enterprise's strategic assets (customer acquisition costs for telecom and internet companies, for example).

One such investment, R&D, is currently reported in the income statement, whereas most other investments—brand creation and maintenance, technology acquisitions, employee training, consultants' work on business processes, media content creation, IT support of business processes, and like investments—are lumped in the income statement with regular expense items, generally in SG&A, and hence are obscured from investors. We challenge anyone to explain the logic underlying the current practice of separately reporting in the income statement innocuous expenses, such as interest, but not, say, the generally larger and much more consequential information systems expenditures. Even the currently reported R&D expense isn't particularly meaningful without breakdowns to, for example, the “R”—research, mainly aimed at developing new technologies—and the “D”—development, the tweaking of current technologies.8 Expenditures on basic research are riskier than those on development, but generally generate higher benefits, hence the importance to investors of distinguishing between the two R&D strategies. The mapping of investments to resources is thus a crucial element of investors' needs and, therefore, prominently featured in our proposed information system. Changes in the types and amounts of investments, as well as deviations from peer companies, provide early signs of subsequent shifts in resource values and productivities, obviously of considerable consequence to investors.

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