Current Event Presentation: "The Imprecise World of Article Review

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Current event presentation: "The imprecise world of accounting"

Accounting is often thought of as a profession of precision. However, according to Hans Hoogervorst, chairman of the International Accounting Standards Board, calculating the true value of an asset is as much art as science, despite the many measurement techniques offered by the international financial reporting standards (IFRS) and U.S. GAAP. A good example of this is the notion of 'intangible assets.' Facebook is not a particularly valuable company, financially speaking, in terms of the revenue it is able to garner at present from advertising, but it possesses tremendous cultural capital. The money-making potential of a new patent for a drug or the power of a trademarked name likewise cannot be quantified before it is sold, but must be taken into consideration when evaluating the perceived prestige of a company.

Because of the dot.com bubble there is often a tendency to be reluctant to place a high value on intangible assets, given that companies that did not 'do anything' were highly valued based simply on inflated reputations and an awed respect for technology in the 1990s.

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But a failure to consider the stock's value in 'the real world' can lead to chronic under or over-valuing (witness how the real estate market was over-valued during the housing bubble).

The ways that income is valued are also incomplete, according to pure, technical accounting procedures. For example, the three main components of income are the traditional profit or loss or net income, other comprehensive income (OCI), and total comprehensive income. OCI, or unrealized gains or losses are often discounted in importance, but for smaller firms the figure can be revelatory of the health and growth of the business.

The fact that balance sheets cannot take into consideration every asset of the business in a distinctive, unique way that is particular to the business model underlines how accounting is far from 'bean counting.' Ethics in accountancy and a true feel for the discipline is required if balance sheets are to offer meaningful information to investors.

Reference

Hoogervorst, Hans. (2012). The imprecise world of….....

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