Andy Haldane raises an important issue in “Blessed are the bean counters except when it comes to growth” (Opinion, August 5), though his conclusion may be open to challenge.
Accounting standards setting has been subject to incremental change over many decades and the question rightly arises whether it is time for a more fundamental review. However, on the specific question he poses — about the relative impacts of using fair value or historic cost as the basis for asset valuation — the real issue is which better reflects the economic substance of the matter and provides better information to investors.
The fact that some assets have gained significantly in terms of their carrying amount — and some boards decide to take undue advantage of this for dividends and buybacks rather than building their businesses for the future — is not so much a problem of accounting as of corporate governance, and possibly a problem of taxation, with boards, presumably supported by their investors, finding it acceptable to take an unduly short-term approach.
Even leaving aside the thorny issue of accounting for the impact of inflation — which the profession backed away from over 40 years ago and which has probably been less of an issue until recently with inflation at historically low levels, especially post the financial crisis — there are, however, very significant issues that standards setting needs to address if it is to remain fit for the present let alone the future.
To name just two, how we account for intangible assets has not kept up with economic and societal developments such that for many leading businesses only a small proportion of their total assets are shown on the balance sheet and with rather limited information on those that are not provided in the accompanying narrative reporting.
Second, we are developing international sustainability standards alongside, rather than integrated with, financial reporting and perhaps while understandable for a transition period this needs to be reviewed.
We need a full discussion on how to measure and report on the performance, prospects and position of businesses in modern society and this will need far more focus on human, intellectual and social capital, the key drivers of success today, in order that all stakeholders know which companies deserve their support.
Anthony Carey
London HA5, UK
