Progressing from Accounting Standards to IndAS (or globally IFRS) has indeed been a huge step up in the Accounting world. Companies as well as regulators havenâ€™t yet recovered from the dust risen by the IFRS storm. However, is this change enough? Is IFRS sufficient to factor in the changes happening at lightening speed in the present world.
â€śInformation is the oil of the 21st century, and analytics is the combustion engine.â€ť
â€“Â Peter Sondergaard, SVP Gartner, 2011
But, the accounting standards in particular, and accounting and financial reporting in general, has remained largely oblivious to this â€śinformationâ€ť. Though data analytics has made impact and changed the way the businesses operate, this has not really made way to the financial statements (viz Balance sheet, profit and loss statement etc).
But the question arises, why should it?Â This articleÂ establishes the importance of data in accounting, but combines it with operations of running a business and thereby, we can observe several comments accepting the importance of big data in managerial accounting and financial and business decision making but questioning its relevance for financial reporting. Why should statutory compliance be burdened with all this? How can data or the analytics generated even be quantified, let alone valued and presented in a financial statement.Â I for one believe, it is not only important for statutory compliance to be burdened with this, but it is essential.
Consider for instanceÂ Ind AS 2 â€“ Valuation of Inventories (IAS 2)Â Through data analytics, businesses can now know where a particular product is in greater demand or under what circumstance the particular product is in greater demand. This is done by analysing user behaviour through various data points, be it social media like Facebook or Twitter, and/or by analysing their own sales data. Hence, products can be intelligently placed in specific markets at specific times.Â Is FIFO or LIFO of any practical relevance when such predictive analytic systems are able garner/predict real-time value of the inventory?
In a more macro sense, as thisÂ Gartner articleÂ argues, valuing data is accountingâ€™s 21st century problem. As said in the article, it is agreed that there canâ€™t be one perfect way of valuing data. But shouldnâ€™t we at least begin trying several? Consider for instance, a company like Zomato has huge quantum of data on peopleâ€™s food choices. Information such as at what time, what sort of food, is preferred by what age group of people and where, is gathered by the company. This alone can be worth shit loads of money but is nowhere reflected in the financial statements. Agreed that while valuing the company be it for any funding round or for takeover/sale, these may get appropriately valued as an intangible asset/ goodwill. But, can we be happy with that?
In the next few years, there will be numerous companies getting listed on various stock exchanges round the world, whose primary bread and butter will be data. If this data is not appropriately valued and reflected in the financial statements, how will potential investors be able to take a sound decision?Â How can auditors proclaim that the financials reflect true and fair view when the prominent asset itself figures nowhere?
While keeping the present standards as base, it is time to at least start the process of multiple forms of financial reporting, keeping in mind big data, analytics and AI.
Increased compliance costs? Maybe. Increased complexity? Definitely. But complexity is no justification for complacency.
Complexity is no justification for complacency.
It is time to re imagine financial reporting. It is high time to begin rewriting our standards.