Why We Need to Update Financial Reporting for the Digital Era

Accounting is dead. Long live accounting.

One of the most important lessons from the current era of digital innovation is that traditional was of measuring it are broken. This article does a nice job of laying out the reasons why.

https://hbr.org/2018/06/why-we-need-to-update-financial-reporting-for-the-digital-era

The authors interviewed several chief financial officers (CFOs) of leading technology companies and senior analysts of investment banks who follow technology companies. They asked: (i) what makes the valuation of digital companies more challenging?; and (ii) how can digital firms improve their financial reports to communicate sources of value creation in their businesses? They conclude from these interviews that the time has come for investor bodies and companies to rethink the financial reporting model from scratch. For instance, standard-setters might want to encourage disclosures related to (i) value per customer; (ii) earnings or revenue outcomes or other specific metrics related to specific projects in progress; and (iii) data on how the R&D and software talent of digital firms is being deployed. Relying on firms’ voluntary initiatives is unlikely to work because executives told us time and again that they will not disclose sensitive information, unless their competition is forced to do the same.