Financial Reporting Reboot

Now they tell us.  Finance and accounting are already hard enough, and now it looks like we’ve been doing it wrong this whole time?

But maybe they’re right.  If you’ve ever felt that some financial concepts don’t quite make sense, such as treating R&D and product development as expenses rather than as investments and assets, you may be onto something.

An HBR article discusses the disconnect between some common but outdated financial reporting practices and what actually matters to companies and investors in the real world.  The authors suggest that it’s time for an overhaul with “concrete revisions to what must be reported in financial reports”.  For example: recording spending on innovation, knowledge-capital, and HR as assets; and classifying R&D as a valuable investment in the future rather than as an expense that reduces profit.

The authors suggest that companies should group their outlays into 3 categories to reduce confusion and to help business managers and investors make better decisions:

  1. Spending to maintain current operations.
  2. Investments in “future-oriented” efforts, such as R&D.
  3. Extraordinary and one-time items, such as restructuring costs.

OK, now that we’ve got that figured out, what’s next – a complete re-write of the financial statements? Actually, yes.  In fact, the entire layout of financial statements has been on FASB’s revisions list for some time, and could move to the top of their to-do list soon.  See PriSim’s blog post New Financial Statements.

Here’s hoping that in another 5-10 years we won’t say, “Those were the good old days of finance”.