Center for Excellence in Accounting and Security Analysis of Columbia Business School (CEASA)

Ceasa_final.jpgColumbia Business School’s Center for Excellence in Accounting and Security Analysis (“CEASA”) aims to be a leading voice for independent, practical solutions for financial reporting and security analysis, promoting financial reporting that reflects economic reality and encourages investment practices that communicate sound valuations. CEASA’s mission is to develop workable solutions to issues in financial reporting and accounting policy; produce a core set of principles for equity analysis; collect and synthesize best thinking and best practices; disseminate ideas to regulators, analysts, investors, accountants and management; and promote sound research on relevant issues.  CEASA's guiding criterion is to serve the public interest by supporting the integrity of financial reporting and the efficiency of capital markets. The Center is supported by General Electric, IBM and Morgan Stanley. 

Accounting for Intangible Assets: There is Also an Income Statement.

With value in firms of today flowing less from tangibles assets and more from so-called intangibles – brands, distribution systems, supply chains, “knowledge capital,” “organization capital” – accounting is seen as remiss, with high price-to-book ratios as evidence. In the speculative 1920s, accountants wrote up asset values for perceived value, but woke to the crash of 1929 accused of “putting water in the balance sheet.” The subsequent creation of the Securities and Exchange Commission in the United States led to a 60 year regime where such policy was prohibited. This outlook was reinforced by fundamental analysts of the time, Benjamin Graham and his adherents. Accounting that calls for the recognition of “intangible assets” on the balance sheet may be misconceived. This paper makes the point that omitting these assets is not necessarily deficient: the value of intangible (and other) assets can be ascertained from the income statement.

The Subject Matter of Financial Reporting

CEASA’s occasional paper challenges the view of primacy of a balance sheet-based financial reporting model and its extension into a full fair value accounting model.
The paper considers that the business activity is the primary object of financial reporting, which is characterised as investing cash in non-cash resources to be combined according to a specific economic logic to generate future net cash flows. The production of net cash flows is the business activity in its entirety, not single non-cash resources or constructs like "net assets". The paper argues that different business activities have different business models based on a different economic logic and that the value of a non-cash resource to an activity depends on the way it contributes to the net cash inflows under the economic logic of the activity in progress, i.e. depending on its function and use. The paper claims that accounting concepts and measurement attributes have to be aligned with the inherent economic logic of an activity if faithful representation is to be achieved.