Accounting exists to inform the operators and owners of a business. Accounts, and their associated notes, should only include information useful to decision-making. Far too often accountants or their proxy rule-makers seem to create and implement policies that serve to protect their own interests rather than trying to build the best framework for financial statement users. The Financial Times Lex* team explores changes they would make to the system:
Additions: “On the balance sheet, disclosures on intangibles are poor. Goodwill can make up half or more of a company’s assets, yet details on its calculation are usually absent. Valuations are opaque for other asset classes, as well. Banks use market or historical indicators to value their books. These contain varying assumptions (such as the health of the subprime loan market). Calculating these assets’ value using various methods, and stating assumptions, would help. Finally, information that crosses time periods, such as debt and hedging profiles, could be displayed far more effectively on standardized charts.”
Deletions: “…the history of trying to improve statutory accounts is defined by more being less. Since Lehman, many rule makers believe that even more disclosure is better still. But Hans Hoogervorst, head of the International Accounting Standards Board, argued last week that “not all disclosures provide useful information”. He wants some cut. Here are six possible places he could start…”
* We would be remiss if we did not address one of the issues that the article mentions. At the end of the piece, the author states that share buybacks “add no real value.” In fact, the wisdom of share buybacks is conditioned on the price of the shares compared to their intrinsic value. When purchased at a discount to intrinsic value, they are highly beneficial to remaining shareholders. When purchased above intrinsic value, they destroy value for remaining shareholders.