Abstract
The key question of this paper is what are the implications for corporate governance from the emergence of contemporary financial reporting and intangible resources? Going beyond traditional financial reporting, Boards of Directors and corporate executives should investigate the intangible resources of contemporary financial reporting. What intangible resources are causing the huge price to earnings (PE) ratio gap and the huge market to book (M/B) ratio gap for their companies? Possibly such gaps are driven by global brand names, global licensing, customer loyalty, product quality, and product innovation. Unfortunately, the short-term focus upon traditional financial reporting by both Wall Street and corporate executives to “make the numbers”, i.e. short-term (quarterly), predicted numbers, has damaged firms’ competitiveness. Such damages include postponing or cutting expenditures on emerging technologies, advertising, research and development, employee training, and maintenance expenses. Research has shown that such earnings management techniques are relatively futile efforts since a consensus earnings miss by a company generally produces an insignificant 1.5% to 2% share price drop. Boards of Directors should inform corporate executives accordingly. To offer solutions to these issues and implications for corporate governance, this paper is divided into the following sections: the emergence of contemporary financial reporting; asset value migration: the power of intangibles; top five future business value drivers: all intangibles; forward looking measures for intangible resources; market gaps: “old economy” versus “new economy” companies; global brands and global licensing; hidden intangible values made visible; international perspectives on contemporary financial reporting; and conclusions.
Highlights
In a 2019 interview entitled “Regaining Relevance in Financial Reporting” (Frigo, 2019), Baruch Lev and Feng Gu elaborated the main message of their 2016 book, The End of Accounting
The Lev and Gu research (2016) for determining contemporary financial reporting was based on the detailed examination of the transcripts of hundreds of quarterly earnings calls by U.S public companies in order to gauge the information sought by financial analysts and investors
Concerning the key question of implications for corporate governance from the emergence of contemporary financial reporting and intangible resources, this paper has offered observations and solutions to the key issues of asset value migration: the power of intangibles, the top five future business value drivers which are all intangibles, forward looking measures for intangible resources and assets, market gaps for “old economy” versus “new economy” companies which are driven by intangibles, global brands and global licensing, hidden intangible values made visible, international perspectives on contemporary financial reporting, and conclusions
Summary
In a 2019 interview entitled “Regaining Relevance in Financial Reporting” (Frigo, 2019), Baruch Lev and Feng Gu elaborated the main message of their 2016 book, The End of Accounting They argued that investors are poorly served by arcane accounting methods and new ways to measure companies’ performance are needed. The most important, value-creating investments in patents, brands, information technology (IT), and other intangibles must be expensed, just like salaries and rent, instead of reflecting future value or benefits Reported earnings include both long-term sustainable growth and one-time, transitory gains and losses and they are based on many subjective managerial estimates, such as prospective bad debts, future pension liabilities, stock-option expenses, and asset impairments or write-offs.
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