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U.S. Financial Reporting Is Stuck in the 20th Century

One of the most important uses of financial statements is to enable investors to make timely decisions about buying and selling stocks. In the simplest analysis, an investor makes money by buying shares cheap and selling when it becomes overpriced. Value investors rely on multiple, often complicated, methods to make trading decisions. One way relies on income statement (profits) and balance sheets (assets) to identify cheap or expensive stocks. But current accounting rules require that funds companies spend on innovation, product development, information technology and other investments in the future should not be reported as assets and must be treated as costs in calculation of profits. The current system is causing confusion among investors and may even lead to misallocation of investment capital. It’s time to make concrete revisions to what must be reported in financial reports. Read the rest of the post on Harvard Business Review.