Comment by strife25 | Hacker News Reader

Comment by strife25 | Hacker News Reader

"These backwards-looking representations aren't terribly useful when thinking about the future. Financial statements now account for only 5% of the information that investors use to evaluate companies, and key accounting metrics, like Earnings and Assets, have stopped correlating with stock prices. To fill these gaps, almost all companies report custom non-GAAP metrics in their financial reports, to paint a better picture of their business. WeWork famously defined a Community Adjusted EBITDA metric that ignored most of their costs to suggest that they were actually, sort of, profitable. You can decide for yourself whether WeWork's metrics made sense. But that's precisely the problem — without consistent standards, "creative accounting" can cloud our judgment and our economy suffers."

This has been a topic i've been curious about for a while now - if the way business performance is measured has changed, why have the standards not evolved as well?

Accounting standards do change all the time. Enron forced a change in how variable interest entities are treated. Rise of multi national conglomerates added comprehensive income accounting to account for FX. Most recently, rise of SaaS changed the way revenue and costs are accrued for multi year contracts.

The debate is what is the point of accounting standard - is it to calculate standardized figures like revenue and earnings in the most consistent way possible across all industries? Or is it to splinter the accounting world by adding a myriad of industry specific terms like “subscribers” and “churn” and even “EBITDA” that only apply to some companies but not all? I prefer the former but it’s a debated topic.

Standards are always evolving and act more as a compliance tool than anything right now. There have been and probably always will be better metrics for "valuing" a business than GAAP financial statements alone.

Companies choosing to disclose non-standardized metrics are attempting to give you a better picture of the business. The problem, as you noted, is that sometimes companies will stretch the truth.

I don't think accounting standards are going to fill this gap anytime soon unless the SEC chooses to restrict that type of reporting altogether. I doubt this will happen because investors want more information, not less (even if you have to read between the lines)

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