Data Amplified 2019: Financial Reporting for New Economies: To Structure or Not to Structure?
We are in an era characterised by the explosive growth of new economies. New, rapidly expanding industries on the cutting edge of technology are increasingly the driving force of economic growth. Think Amazon, Apple, Tencent, Alphabet, Alibaba and Samsung. But how can the value of new economies best be recorded within financial statements? And should this information be in structured data?
At Data Amplified 2019, Wei-Guo Zhang, Professor at Shanghai University of Finance and Economics, explored the thorny issue of financial reporting for new economies. Typically, new economies are characterised by having lower value physical assets, with a higher ratio of goodwill and market capitalisation. Based on traditional GAAP many new economy firms experience long term loss and negative assets, despite their market and brand value increasing – Uber cars, for example, remain ubiquitous on American roads, despite the company losing $5 billion in one quarter.
Should this kind of missing value be recognized in structured data format within financial statements? How could current standards be improved to better serve the needs of investors in new economies? And should this data be structured or not?
Typical financial models and current accounting standards result in confusing financials when applied to new economies, with no correlation between growth potential and financial information based on traditional GAAP. To tackle this, many firms look to non-GAAP or alternative performance measures to facilitate decision-making by investors. Obviously, this non-GAAP data is not structured: it’s not digital, searchable or comparable. Data aggregators such as Bloomberg have stepped in to provide more timely information in a structured way.
So how should we recognize previously unrecognized assets? The current discussions within standard setter’s on the controversial issue of goodwill impairment could impact how intangible assets are reported. Some advocate altering standards to better reflect new economies. However, the IFRS Standards have doubled in number over the last ten years, with many more disclosure requirements, leading to an ongoing debate: do we have information shortage or overload? Some say the more the better, others say information overload leads to important information being obscured.
Our take? More structured data means investors can aggregate and analyse the information that is important to them, in the way they want it. This opens up analysis to more investors, increases clarity and improves comparability.