Currently, our external reporting requirements here in America are based upon Generally Accepted Accounting Principles, or GAAP, designed to reveal important information about companies that dominated the landscape when GAAP was developed in the early 20th century. Railroads, auto makers and manufacturing enterprises dominated the U.S. economy at that time. These builders were from the old school industrialized economy model where their company's value was inherently based upon the assets on their balance sheet. These assets were tangible things like purchasing plants, machinery, equipment, rolling stock, and other units of production. There was simply transparency where the costs of these assets were recorded on balance sheets and depreciated over time. At the same time these assets were used to generate revenues. There was a direct correlation between the depreciated value of an asset and the revenue it's able to produce. Pretty straight forward. Balance sheet figures for assets, liabilities and capital roughly reflected the cost of replacing the company as a whole and the company’s earnings reflected the costs of producing the goods and services that were responsible for its revenues.
Well, that reporting model works nicely when you're in a manufacturing-based economy but what about now when we've changed the game and added complexities like outsourcing, deeply entrenched supply chains, and global operations where the actual company's employees are only designing the products but everything else from manufacturing to distribution is handled elsewhere?
This is the Knowledge Economy.
But do we have the right instruments in place to manage, report, and analyze our businesses? Is GAAP sufficient enough for us to fully understand not only our businesses value but also help us determine what courses of action to take based on economic twists and turns not to mention shifting consumer or business demand for our products and services?
Read more at the Insight Community blog