“We need accounting experts with the courage of including intangible assets in balance sheets”

Last year we interviewed a member of the European Accounting Association and she said to us that not recognising non-tangible assets was creating a huge amount of good will and she couldn´t understand that.

And that is exactly the point that you were making in the beginning that the value of the company is not reflected in the financial statements and when I buy the company I can only buy it if I pay more and that more is the good will which is not on the balance sheet.

So given all the things you are telling me I suppose that politics, the global changing environment today, accounts more in accountability than we can belief, or not?

I think this is changing rapidly. In my country, I come from Belgium, young people, school children, every Thursday leave school and demonstrate in Brussels, they demonstrate for climate change, for the government to take more responsibility in saving the planet. This call you will see in the next elections we have in Europe for the European parliament. We will see the mood in society will change so rapidly, ware now awaiting a summer that will be hot again, we´ll have catastrophes. People will suffer from that. And they will pressure our political environment to do more for climate change. And they will not accept that the companies that are polluting, that are not doing what they should be doing, will continue to do so. And they will force these companies to record the way they pollute society, the way they deal with human resources, to account for that in their financial statements. This is a question of time. But the time is running out because we have social media which can create from one day to another a huge public appeal for change.

The time is running out for the board of directors… Who are the ones who take decisions.

Yes. But I think we must assist them. And I believe for that reason, you asked me how we could change that, we will have to change the way we set the standards. The people who set the standards should not all be accountants. There should also be other people, who criticise, who say I do not understand this. Why don´t you do it this way or that way? If we all go to the same school, study exactly the same thing, how can we then expect there to be a diversity of ideas which brings forward change and progress.

So we can have a view of today from an accountability point of view. About the concept of real value. Can we say there are different real values? Because one real value doesn´t exist.

It is a common mistake for people who are not familiar with accounting to believe that financial are correct. It is not true. Financial statements are full of subjectivity, because they are full of judgements. And it is very true that we cannot say that something only has one value. That is not a problem because it is one of the reasons people say we should not put these non-tangible assets on the balance sheet because we cannot compare the values. How do we resolve that problem in accounting? We do its with disclosure. I have to disclose to you how is my value based. I can disclose that. And by disclosing that you can compare it with other people also carrying out valuation. Do they use the same assumptions? Are they different? For what reasons are they different? So we have ways to deal with value even if it´s not 100% certain what the value is.

I have seen that in the conference you´re going to talk about the definitions of assets and liabilities.

Well, I can elaborate on that. Accounting is based on a balance sheet and a balance sheet has two sides, assets and liabilities. It has always been very difficult for accountants to agree on the definition of an asset or a liability. How do we do that now today? We have the international accounting standards board. And the international accounting standards board, which is based in London, has developed what they call a conceptual framework for financial reporting. It´s like a constitution. A constitution on which all these standards are built. So all the standards when they use the word asset have to use it in the same way as it is in the conceptual framework. The conceptual framework was changed last year. And unfortunately I believe it is not good because it does not recognise the change we are seeing in society whereby people want to have more future-oriented value in the balance sheet. Things like water, like air, are not considered as assets. But if I ask you is that important to have clean air?

I live right here in the centre of Madrid. Of course it is a very important asset.

We all agree that it´s important but we don´t put it on our balance sheet.

The board of directors, I insist …

No, it´s not the board of directors.

And the politicians and the political leaders in Brussels

No, the accounting standards today that we apply in Europe for the listed companies are developed by the international accounting standards board and what they need to see, they need to see that society is changing and that they need to be more considerate of new ideas which are more forward looking and not just looking at the past. Past performance is one element, but people today are more interested in the future.

Do you think today that another Enron would be possible?

Well, this is a very difficult question because one of the other points that we see today is that although financial statements must be audited we still have very important corporate failures. We had a major corporate failure in the United Kingdom, Carillion, which caused a lot of debate about the audit profession. What is the role of the auditors? And I see a linkage between this accounting debate of course and the auditors. An auditor does not have to look only at what happened in the past and whether its has been correctly reflected. I want the auditor also to express an opinion on is that business model of the company sustainable? Will it continue in the future? So more a prospective view of the auditor which can be perfectly combined with what you say of the boards. I would like the board to express in its annual report that we as a board, we believe our business model is viable for these and these reasons. The auditor then expresses a view on whether he or she agrees with that. That would help us moving forward and preventing that suddenly a major company will go bust because nobody has seen it or nobody wanted to talk about it before it happens.

 

About the Author

Julia Pastor
Julia Pastor has a broadly experience in business writing for Consejeros Media Group at Consejeros, Consenso del Mercado and The Corner. Previously, she worked for the financial news agency GBA and contributed to El País Business. She holds a Master in Financial Journalism and a degree in English from the Complutense University in Madrid.