After quite a lot of years (best years ever) as an academic in Accounting, I still find myself with these two questions in the classroom. Does Accounting matter? Is not Accounting a boring and useless matter? And of course, the answers are: yes it does matter and no, it is not at all boring or useless. But I also know from my long years dedicated to lecturing in Accounting that things are better understood if accompanied by a proper example. So, let me provide you with an example of why Accounting is important (and I hope you will also think it is not boring).
Accounting rules in Europe (International Financial Reporting Standards) may be about to change in relation to the recording of operating leases (affecting, for the moment, quoted European companies). At the moment, operating leases are recorded as an expense, which means that, every year, the amounts that companies pay to their lessors for the assets rented (properties, planes, cars, machinery…..) are included in their income statement as an expense. So, for the moment, companies only account for current leases payments, not for future leases payments.
The new European regulation proposes that “future” payments, that is, the amounts that companies will pay next year and in the future for their leased assets, are also recorded in the financial information of companies, as debt. Following this, every year, companies would have to record as debt (liabilities side of the balance sheet) the amounts committed today to pay in the future for their leased assets.
Why has the regulator proposed this change? Because they consider that companies’ financial information will be of greater quality and transparency if they show, each year, the total amounts of payments committed for the future. The argument is that, if companies do not show that, they are failing to inform about the total debt they are committed to pay today.
Listed European companies have been lobbying strongly against this proposal, sending letters to the European regulator so that the proposal is delayed or even cancelled. And why is that? Because if it is finally issued, the debt amount of many companies may increase significantly, which means that their debt to equity ratio will also increase, and this can have undesirable consequences for them by means of financing restrictions, market prices or reputation issues.
So, that means that accounting has economic consequences that go beyond the numbers and that can be desirable but, sometimes also undesirable. We still do not know if this proposal will be finally approved or not but, in any case, this is a clear example of how accounting does matter. Why if not more than 1000 financial information users (companies, auditors…) would spend their time (which surely is scarce) sending letters to the regulator?
About Soledad MoyaSoledad Moya has a degree in Economics from the Universitat de Barcelona and a PhD in Business Administration from the Universitat Pompeu Fabra. She has worked as a visiting professor at the Universitat Autònoma de Barcelona and at the Leeds University Business School, and is author of numerous articles and school books on topics of professional and Accounting Reform, Business Analysis, Socio-economic consequences of accounting regulation and Consolidation of Financial Statements. She is assistant director of the Comptabilitat i Direcció Magazine (ACCID) and member of the Financial Reporting Standards Committee (FRSC) of the European Accounting Association. [Complete CV]