The End of Accounting and the Path Forward for Investors and Managers

• Date: 01 January 2018
• DOI: http://doi.org/10.1002/jcaf.22299
• Published date: 01 January 2018

154

© 2018 Wiley Periodicals, Inc.

Published online in Wiley Online Library (wileyonlinelibrary.com).

DOI 10.1002/jcaf.22299

The End of Accounting and the Path

Forward for Investors and Managers

Dov Fischer

BOOK REVIEWED

Lev, Baruch, and Feng Gu,

2016, The End of Accounting

and the Path Forward for Investors

and Managers (Hoboken, NJ:

Wiley)

Baruch Lev is an NYU

accounting professor and a

foremost accounting expert

on intangible assets. For many

years, accounting researchers

have documented the declining

relevance of accounting infor-

mation such as net income and

return on equity in explaining

stock prices. According to Lev

and Gu, this decline in rele-

vance is due to poor accounting

standards for intellectual prop-

erty, specifically the expensing

of research and development.

Lev and Gu propose a

Strategic Resources and Con-

sequences Report that will

contain a snapshot of infor-

mation that really matters to

investors. For Sirius XM as an

example, subscribes represent

the main strategic resource.

The Report has five elements:

(a) resource development, such

as subscriber acquisition costs;

(b) strategic resources, such as

the number of subscribers;

(c) resource preservation, a

qualitative description of risk

factors such as competition

from Pandora; (d) resource

deployment, such as Sirius

penetration in new cars sold;

and (e) value created, which

consists of cash flow from

operations, plus research and

development, minus capital

expenditures, minus cost of

equity. Lev and Gu also pro-

vide an estimate of subscriber

lifetime value.

The authors provide an

example of Sirius second

quarter of 2013. For resource

development, subscriber

acquisition costs were $139

million. For strategic resources,

the company added 2.7 million

subscribers, lost 1.9 million,

and ended with 20.3 million,

with a monthly churn rate of

1.7%. For resource deploy-

ment, its new car penetration

was 69% up from 67% in the

previous quarter. Value

created was $230 million,

with subscriber lifetime value

of $8.38 billion, up from

$6.76 billion in the previous

quarter.

While Lev and Feng pro-

vide a compelling framework

for voluntary disclosure, their

measures do not necessarily

have greater relevance than

traditional accounting infor-

mation. As a case in point, the

two “value-created” measures

of Sirius contradict each other.

On the one hand, value cre-

ated during the quarter was

$230 million, but on the other

hand, subscriber lifetime value

increased by over $1.5 billion

during the quarter. The two

measures seem incompatible.

There is one feature about

this book that potentially rep-

resents a missed opportunity.

As compelling as the Strategic

Resources and Consequences

Report may be, its five elements

are unlikely to gain traction

for the simple reason that they

compete with the six capitals of

the integrated reporting frame-

work. Integrated reporting

has gained considerable trac-

tion since its release in 2013.

There is a hunger for practical