Accounting is both story and science

Accounting standards are published internationally under IFRS (International Financial Reporting Standards), and in the U.S. under GAAP (Generally Accepted Accounting Principles). These standards comprise thousands of pages outlining every accounting scenario imaginable. Because of the incredible breadth of content, accountants often specialize in one area of IFRS, such as asset depreciation. An outsider may conclude that a business which follows these standards is mathematically perfect in the way it’s represented on paper - pure science. The outsider would be partially correct; the application of GAAP to depreciation does have a systematic element to it. What may be missed; however, is that IFRS and GAAP offer a range of interpretation to allow for every imaginable business model and it’s therefore up to the financially savvy to interpret their business model in light of existing standards to give an accurate picture of the business' financial health.

The way a business describes its financial story has major implications for its employees, its investors, and its debtors. A description which fits the business model poorly will give stakeholders false signals that will lead to poor decisions that will harm the business. These signals may indicate growth in profit which has little to do with the business' activities, such as a recent change in the valuation of current assets to reflect mark-at-market value instead of purchase value. Other signals may indicate loss which is improperly allocated, such as an overly conservative depreciation calculation on a newly purchased non-current asset. Industries treat assets in different ways, which may require a financial analyst to reconsider the importance of certain line items based on the industry that the business is in.

I’d love to get the financial information for our team at Relativity, and this book makes me wonder if my manager has it. I suspect he has only a little more financial understanding than I do, and has had to learn it on-the-fly to satisfy requirements placed on him by our finance department. This does help to put some of our team’s reporting expectations in context - at times we have to specify the work we do in a specific category even though this information does little to change our team’s objective and adds overhead to our work. I suspect that this data is used to make arguments for budget allocations and may have been the proof needed for our recent plans to add new employees in every facet of our team.

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