Skittish investors will not be surprised to learn that the bottom line of a company's income statement fails to tell the whole story. New research by Jan Barton, an associate professor of accounting at Emory University’s Goizueta Business School, suggests that subtotals near the center of the income statement, such as operating income, have a much stronger association with contemporaneous stock returns than do the top-line and bottom-line numbers. In a paper entitled, “Which Performance Measure Attributes Do Investors around the World Value the Most—and Why?” slated for publication in The Accounting Review in May, Barton and co-authors Grace Pownall, professor of accounting and associate dean of the doctoral program at Goizueta, and Bowe Hansen of the University of New Hampshire, argue that no one single performance measure can serve as a Rosetta Stone for investors as they shop for stocks around the world. Still, Barton says, the research suggests that helpful metrics tend to be those that quickly and directly reflect information about a firm’s future cash flow.

There is no accepted standard for appraising the worth of nonphysical assets like brands, human capital, and managerial expertise. Yet these are the essence of 21st-century business.

Historical cost accounting is fading as Corporate America marches into a new era.

Mark-to-market accounting rules require toxic assets to be carried on companies' books at fire-sale prices, based on recent trades of similar assets for far less than they would command in normal times. Many big banks say the crisis has been made worse by these rules. Not everyone agrees.

Robert Herz and FASB are preparing a radical new format for financial statements.

The basic financial statements - P&Ls and balance sheets - are not enough to help investors clearly understand a company's capability to generate value. The paper "Customer Equity: An Integral Part of Financial Reporting" recommends that companies start reporting "forward-looking customer metrics" by providing the value of their customer base and how it changes over time. This is especially important for companies whose customers are their main assets. As an example of why this is important and how it works, authors Thorsten Wiesel, Bernd Skiera and Julián Villanueva apply their model to the online movie rental service Netflix.

It's time to start preparing for the arrival of international accounting standards.

Accounting techniques like budgeting, sales projections and financial reporting are supposed to help prevent business failures by giving managers realistic plans to guide their actions and feedback on their progress. At least that's the theory. But when Gavin Cassar, a Wharton accounting professor, tested this idea, he found something troubling: Some accounting tools not only fail to help businesspeople, but may actually lead them astray. He analyzes these conclusions in two separate research papers.

Why the risk of wrongdoing has migrated from senior executives to middle management — and what to do about it.

Now open to public scrutiny, FASB's codification tool is a one-stop shop for both accounting experts and newbies.

What is a company worth? The answer to this question can vary depending on who you ask and the purpose of the valuation. As a result, figures derived by an options trader, credit liquidator, and an acquiring firm will not only differ in amount but, more interestingly, in the methods used to reach them. While discounted cash flow methods are widely accepted as the most correct, many other methods remain popular despite serious technical shortcomings. IESE's Pablo Fernández reviews the four main groups of valuation methods, then identifies the mistakes that are most common, offering managers a more comprehensive understanding of firm valuation, and a disciplined approach to properly navigate this challenge.

At a time when many barriers to global trade have fallen, countries all over the world are taking steps to harmonize their accounting standards and develop a truly global language of business. Under the lead of the International Accounting Standards Board (IASB), more than 100 countries have either implemented International Financial Reporting Standards (IFRS) or plan to do so. Yet while proponents of accounting harmonization say that IFRS will ultimately benefit firms and investors, Wharton accounting professor Luzi Hail says that there are reasons to be skeptical about these high hopes. He and three co-authors present their views in a new paper titled, "Mandatory IFRS Reporting Around the World: Early Evidence on the Economic Consequences."

It has long been suspected that fear of competition spurs managers to hide better-than-average business unit profit performance. However, a new study instead finds evidence that fear of increased oversight leads managers to hide less-than-average business unit performance.

Recent studies raise an uncharitable question: Is nonprofit accounting off track?

Accounting is often seen as a veil, a mere detail of measurement that does not affect the economic fundamentals of a firm. However, the intensity of the public debate surrounding accounting reforms in recent years suggests that there may be more at stake than obscure debates on measurement. Currently, attention is focused on the initiative of the International Accounting Standards Board (IASB) and the U.S. Financial Accounting Standards Board (FASB) to create global accounting standards based on market prices.

Private companies seeking a wholesale exemption from FASB's accounting rules are likely to be disappointed.

Special Purpose Entities (SPEs) have a useful role in business financing when used appropriately. However, there must be transparency, and all parties must understand the risks.

Public dissatisfaction with the mismatch between industrial rules of disclosure and post-industrial realities has surged in the last decade and a half, especially recently in the wake of well-publicized corporate swindles. In response, the American Institute of Certified Public Accountants (AICPA) convened a special committee on enhanced business reporting (EBR), asking it to develop a strategy that would "make better information available to investors, creditors and other stakeholders, helping them see an organization through the eyes of management and allowing them to make more informed decisions." Accenture and AssetEconomics teamed up to formally propose an EBR solution that meets the committee's goals without burying management in the tasks of data collection, calculation and presentation. This research note leads the reader through the basics of this proposed solution, which captures what has escaped the older accounting and financial reporting systems: the increasing importance of intangibles and future value in the composition of shareholder value.

Editor's Note: a great article...

How much is the Coca-Cola brand or trademark worth? $50 billion? $ 100 billion? In August 2003, in an article in BusinessWeek, Interbrand included it in their table of "The 100 Top Brands" at a value of $70.45 billion. How would you check whether you agreed with their assessment?

In this article, Caroline Woodward-of PricewaterhouseCoopers' Valuation & Strategy practice-offers some interesting answers to these, and other key IP valuation questions.

Public companies have been criticized for granting stock options to employees without adding chits to the corporate expense pile. As regulators and some shareholders argue for new rules, Stanford Business School researchers Jeremy Bulow and John Shoven try to follow the money-and the logic.

An emerging cost method, Resource Consumption Accounting (RCA) produces more accurate results compared to traditional cost methods and provides more detailed information. But is dealing with more details worth it? Is the view worth the climb? Based on the results from a pilot application at Clopay Plastics Products Company, we think it is.

How should companies price goods that they ship between their own divisions or related companies?

Internationally, that quandary confronts the producers of nearly half of all U.S. imported goods, a third of all U.S. exports, and a huge proportion of global trade elsewhere. By definition these aren't arms-length deals in an open marketplace, and they raise tough questions. What price, for instance, might Ford of Germany charge a Ford division in Mexico for German-made engines that are installed in Mexican-assembled cars?

In a prize-winning research paper, Business School accounting professor Stefan Reichelstein and coauthors Tim Baldenius and Nahum Melumad of Columbia University have developed a real-world answer to transfer pricing that balances both the economic criteria confronted by Hirshleifer and the puzzle of international tax rates.

NYU Professor Baruch Lev finds vast value in intangible assets.

Activity-based accounting looks great in the classroom, but too often fails in the field. In this Harvard Business Review excerpt, HBS professor Robert S. Kaplan along with Steven R. Anderson suggest a way around the obstacles.

Despite the fact that it is over 75 years old, most companies still use standard cost systems both to value inventory for financial statement purposes and for many other management purposes as well. While it has some advantages for financial statement purposes (simplicity, consistency, well understood by auditors), it is, at best, meaningless and, at worst, misleading as a tool to assist in making effective management decisions.

Editor's Note: an excellent look at ABC for the uninitiated; find Part II at
http://www.bettermanagement.com/Library/Library.aspx?LibraryID=8373