Academic journal article Journal of Accountancy

The Changing Significance of Financial Statements

Academic journal article Journal of Accountancy

The Changing Significance of Financial Statements

Article excerpt


Financial statement users are turning to other information sources to meet their needs. How should the profession respond?

Financial statement users are turning increasingly to other sources to meet needs which are not being met by the information such statements contain. As more and more other data and analyses become available, the relative importance of financial statements decreases within the context of the total range of available information. Because of the growing disparity between users' needs and what statements provide, CPAs may find their role diminishing since it is related to information that is of declining importance.

The American Institute of CPAs future issues committee has prepared an issues paper on the changing significance of financial statements. The paper has been submitted to the Institute's strategic planning committee, which will use it as input in its planning process. This article describes the future issues committee's findings, the implications for the profession and the options available to CPAs.


A number of factors have contributed to the changing perception of financial statements' relative importance. Key among them is the radical change in the general business environment since the generally accepted accounting principles model was developed.

Today there are both new levels of enterprise risk and uncertainties and unprecedented volatility in the capacity of certain assets to provide economic benefits. For example, when oil drilling rigs and tankers are idled as a consequence of falling oil prices, such fluctuations raise the questions of whether historical cost is the most useful measure of the value of various assets and whether users need additional information on asset measurements. There also has been an increase in the sources of future economic benefits not measured and reported under the current GAAP model.

Companies face tremendous volatility in foreign currency values, commodity prices and interest rates. Meanwhile, the pace of technological development increases the risk that products and production facilities will become obsolete as well as the possibility that competitors will produce more efficiently and cut into a company's market share or profit margins. Complex financial transactions and instruments are more and more common in today's economy. All of these factors have created concern about whether financial statements provide users with sufficient information for decision making.

In addition, the GAAP model does not include many nonmonetary assets. For example, when goodwill is recognized in a business combination, the future economic benefits it encompasses, such as customer base, managerial skills, research capability and future prospects, are not separately measured and reported. And they are not reflected at all in financial statements that do not include goodwill arising from a purchase. But these intangible, unmeasured assets have great importance in an economy increasingly dependent on expertise, data and technology, an economy in which an expanding service sector does not rely on fixed assets as the primary generator of revenue.

As a result of all these factors, users often make investment and lending decisions based in large part on data that are not included in GAAP financial statements and that have not been attested to by an independent outside party. They study companies' public reports, 10-K filings and sections of annual reports other than the financial statements. They search for current-value financial data, financial forecasts and other information contained in companies' business and strategic plans. To acquire this information, they turn to sources other than CPAs, such as investment bankers, financial analysts and the companies themselves. Yet, the raison d'etre for an independent CPA profession is to attest to information useful in making investment and credit decisions. …

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