The deteriorating usefulness of financial report information and how to reverse it
A paper on the wide-spread and growing dissatisfaction with the relevance and usefulness of financial report information, its causes and potential remedies.
- Baruch Lev, Stern School of Business, New York University
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, and earnings’ relevance lost in terms of reflecting enterprise performance. 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) their 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.
The full paper has been published in the annual International Accounting Policy Forum special issue of Accounting and Business Research (volume 48, 2018 – issue 5). The paper can be downloaded from the Taylor and Francis website. The transcript of the practitioner’s response to the paper is also available.