The Deteriorating Usefulness of Financial Report Information and How to Reverse It

Abstract

There is a wide-spread and growing dissatisfaction with the relevance and usefulness of financial report information, particularly among investors and corporate executives. Such dissatisfaction is supported by extensive research which consistently documents a growing gap between capital market indicators and financial information, particularly so for reported earnings. I trace the deterioration of the usefulness of financial information to: (1) the abandonment by accounting standard-setters of the traditional income statement (matching) model in favor of the balance sheet (asset valuation) model, and (2) the failure to adjust asset recognition rules to the fundamental shift in corporate value-creating resources from tangible to intangible assets. I conclude this paper with change proposals to restore the usefulness of financial information to investors.