Investors find standard GAAP backward-looking financials flawed and insufficient, according to a new book, The End of Accounting and the Path Forward for Investors and Managers, by Baruch Lev (New York University) and Feng Gu (SUNY Buffalo). GAAP was fine when there was an industrial economy comprised of hard assets. But the new economy is built on hard-to-quantify intangible assets and GAAP hasn’t evolved enough to capture this new reality, says the book, which is now available here.
FV is one culprit: The authors say that part of the problem is the move to fair value, which results in one-time hits to the income statement from changes in fair values of assets and liabilities, impairments of assets, write-offs of goodwill, and so on. This “noise” helps to camouflage normal earnings. They offer a solution they call the “Value Creation Report,” which includes new indicators that focus on strategy and execution to identify and evaluate a company's true value-creating resources.
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