Friday, June 22, 2007

The GAAP relief

CFOs of transnational corporations hate it. They have to present periodic financial reports in the format prescribed by the regulators of respective countries, as there's often a mismatch of income/expense recognition norms. Not just a repetitive exercise, precious man hours are lost by engaging people to assist the foreign consultants in making out original spreadsheets. Many have openly expressed their ire at this phenomenal wastage of time, money and effort (increases the bulk of the Annual Report/proxy statements, higher incidence of printing/mailing charges) all for something that an ordinary shareholder (who merely looks at stock price / dividend) would hardly care.

Some relief for the disheartened souls. The US SEC recently took a step towards allowing foreign public companies to choose international Financial Reporting Standards (IFRS) or US rules (GAAP) when filing data with the agency. [Big Four stand to lose a good deal, though.] Read the full report here.

The reason why I am a big fan of cashflow statement is that it is recognized by all. Cash is real, something that an investor can easily correlate to a transaction – capital or revenue, equity or debt. Cash flow statement enables better intra-business as well as inter-business comparison too. No ambiguity at all.
Income statement on the other hand, is an abstract estimate structured for complying with tax (and other) laws, where the taxman is `expected to believe’ the contention of the company. If (s)he doesn't buy your argument, fallout could be fresh demand for taxes. If you persist, you could be in for a protracted litigation cost of which may outweigh the disputed liability itself.

Can’t wish away income statements just yet – not until the tax laws are altered to recognize income in a simpler way that everyone can understand. Any takers ?

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