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Steve Randy Waldman in interfluidity » Do financial statements tell the truth? (via quotingthecrisis) Extremely well said. (via crazynutjob) “Valuable” to whom, precisely? To you, specifically, or will it be more valuable to anybody who might purchase the equipment? The balance sheet isn’t meant to be an arbitrary picture of value; it’s meant to be a relatively materially accurate snapshot of a concern’s assets and liabilities. Stop wishing that financial statements could tell you the future. They can’t. Knowing the difference between the objective cost vs. the relative value of resources and judging the hypothetical non-verifiable value of those resources is part of the management decision-making process, and can be helpfully covered in the MD&A if it’s so important to you that the users of the financial statements know about it. Accountants work with the past and present - if you want someone to tell you what PP&E will be worth in the next year, hire a psychic. Also, “because I said so” does not constitute sufficient audit evidence to back up whatever number you slap in the general ledger. (via misanthropologie) I’m not sure what you are getting at. Accounting is full of untruths—verifiable lies. But it’s also full of unverifiable lies. Accrual basis accounting books future revenues now. Mark-to-model accounting is no better than “because I said so.” You are therefore incorrect in your assertion. Objectivity itself is often an illusion. So why not embrace subjectivity? “Valuable to whom?” is a good question. Current accounting answers that question with “Nobody.” There isn’t a single person who would value an asset at the price allowed. Objective cost is almost completely without meaning beyond cash-flow (which gets busted in accrual basis accounting). If the purpose of financial statements are to disclose information to investors, regulators, etc., then current accounting practices are nothing but a failure. So why defend them? If the purpose of financial statements isn’t to disclose information, then why bother in the first place? Your criticism seems misplaced. Predicting the future is already attempted by accountants. The current methods that use future predictions are of no value to anyone. So why not ask that they predict the future in a way that is useful? You favor useless objectivity over useful subjectivity, but if you defend the status quo, you also favor useless subjectivity over useful subjectivity. If you require a psychic to establish a meaningful value, then the whole system is broken. Throw it all out. The utility of reporting the value of assets is not ambiguous: owners want to know what those with the best (local) information evaluate the value of the assets. Cash flow statements still have their place. But an asset sheet is supposed to disclose the value of assets. Current accounting attempts to remove all of the local information. The practice itself attempts to fail at its utility objective. But I’ll go further. I’m not sure why accounting standards are obsessed with a single number assigned to value anyway. This furthers the illusion of objectivity. In no other endeavor would this be acceptable. Give me error bars. Give me PDFs. Heck, give me a simple good / bad assessment. |
In the United States, firm assets are initially valued at “cost”. Very simply, we say an asset is worth whatever a firm paid for it. For our machinery, that value is almost certainly “wrong”: If our expansion works out as planned, the equipment will have been much more valuable than its cost, and if our expansion turns out poorly cost will have been an overoptimistic estimate. The great virtue of “historical cost” is not that it is a good estimate, but that it is objectively measurable. Accounting conventions seem to prefer objective, verifiable lies to subjective truths! Is that dumb?
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