Academic journal article Issues in Accounting Education

Relevance, Reliability, and the Earnings Quality Debate

Academic journal article Issues in Accounting Education

Relevance, Reliability, and the Earnings Quality Debate

Article excerpt


These instructional materials are designed to elicit debate about the primary accounting qualities of relevance and reliability, and to encourage you to consider how these qualities are linked to the debate over earnings quality. The case material comprises two narrative essays, which elicit divergent views about relevance and reliability, and several discussion questions. You will use these essays and discussion questions as the foundation for a discussion and building a deeper understanding of earnings quality, through extensive inquiry of fundamental financial accounting concepts.


The Future of Accounting and Disclosure in an Evolving World: The Need for Dramatic Change

--Wailman (1995)

The Day Has Come to Put Brand Equities on Our Balance Sheets

--Ambler (1999)

Is the Balance Sheet Outdated?

--Batchelor (1999)

Have Financial Statements Lost Their Relevance?

--Francis and Schipper (1999)

Brainpower on the Balance Sheet

--Aston (2002)

These are ominous titles to be sure. But what are their underlying messages? That the world has changed, but accounting has stood still! That it's high time to wake up and smell the intangibles!

There is little doubt the accounting profession is under constant fire, from all quarters, business and academic a]ike, for its seeming inability to remove its historical cost cloak and become relevant in a world where intangibles rule, where creating brand value is the business strategy of choice, where cutting back on R&D spending is not an option, and where human capital, and the need to invest in it, is patently obvious to all enlightened managers.

Who can argue? These are the characteristics of the business world in which we live. Coke and Nike are building brand equity, Microsoft and Cisco are spending billions of dollars on R&D, and Citigroup and McDonalds do see their employees as their most valuable assets. These things are quite clear. The question is whether accounting, at least in its present form, is of use in this business world. The answer, seemingly, is no-and the evidence is overwhelming.

Take for example a recent Interbrand survey, (1) which was released with great fanfare. According to Interbrand, Coke, the world's most valuable brand, is valued at approximately $72.5 billion; a value representing 51 percent of that company's market capitalization. Nike meanwhile has its brand value estimated at $8 billion; representing 71 percent of its market capitalization. Two other "Billion Dollar Brands," Hertz and Adidas, have brand values estimated at 110 percent and 151 percent of their respective market capitalizations. Meanwhile, a quick look at the accounting for these values. Nothing. The brand assets--invisible! And to be clear, neither a $100 billion valuation nor 200 percent of market capitalization will get the brand any closer to the balance sheet.

Next stop--R&D. In a recent year, Microsoft recorded approximately $3.8 billion as an R&D expense. (2) Cisco meanwhile showed a $2.7 billion R&D expense. (3) An expense--surely not! Their R&D is top shelf, and the resulting products are market leaders. These firms are the future for high tech. Surely if any two companies shouldn't be expensing their R&D, it would be these two. Clearly, their R&D expenditures are investments that create "future economic benefits." Sorry--rules are rules--accounting spares no one. There's just no room on the balance sheet for R&D.

Investing (or planning to invest) in human capital? What smarter way is there to ensure the success of a business? Indeed, people are the business. Take Citigroup, where the message from the Chairman's Office is that "Citigroup at its core is the people who work here every day," and that "We are investing in our employees' training, their potential and their futures. …

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