Can accounting cope with the accelerating life cycle of business?
Published on 04 December 2013 0 comments
The impact of the increasing pace of change in mobile communication technology has been graphically illustrated this year in the travails of Blackberry and Nokia’s decisions to exit the mobile handset business. Rapid loss of business value always raises questions about the relevance of the current financial reporting model. This is not a new question (refer to the article by Maurice Clark published in the Journal of Political Economy in 1917) but it does seem that the speed with which established truths become outdated is increasing.
Financial reporting is essentially backward looking, being focussed on reporting historical performance. However one of its main uses is to assist in the valuation of companies – an essentially forward looking activity. Some attempts have been made to address this issue by introducing risk disclosures into financial reporting standards (IFRS 7 being the obvious example but more recent standards are studded with risk disclosure requirements). Unfortunately much of these are based on disaggregating balance sheet numbers which are of course drawn up at a particular point in time. Far too many of them are out of date by the time the financial statements are published. Faster, more frequent reporting might help but that would create a big burden on preparers and the quality of the data reported could suffer.
Is the answer a refocussing of financial reporting disclosure around the business model? This is the direction advocated for corporate reporting as a whole in the draft framework proposed by the International Integrated Reporting Council. In the IFRS world there has always been controversy around the “business model”: some believe the concept should have much greater attention while others believe comparability and neutrality will suffer if this is the case. In practice, the business model appears as a key concept in some standards but not in others.
The current conceptual framework discussion is an opportunity to debate this. The IASB has included a short section discussing the business model concept in its discussion paper although its preliminary conclusion is restricted to saying that financial reporting standards could be made more relevant if the Board considers, when developing standards, how an entity conducts its business activities. Does this go far enough?
Let me know what you think.