This document formulates some reflections on the accounting utility that is incorporated in the financial statements, being these a tool for the management of business organizations.
The general accounting framework applicable in Colombia is the regulatory decree 2649 of 1993, which regulates the basic accounting standards, the objectives and qualities of financial information, among other aspects. Fundamental concepts when processing accounting information, the basis for determining profit (operating or accounting profit), it also refers to the maintenance of equity, there is also expressed a way to determine utility from the comparison of equity.
Then, he takes care to formulate some reflections on the weaknesses of the utility, among them: Being vitiated by subjective technical concepts, not recognizing the variations of the markets, the matching of income and costs; the non-recognition of intangible assets and their contribution to the generation of income, such as intellectual capital, brands, know-how, customer loyalty, supplier exclusivity, etc. From these reflections some questions are formulated, such as for whom the Utility? This questioning seeks to study the validity of the decisions that can be taken from the accounting profit.
Finally, today we have two bills underway in the Congress of the Republic of Colombia, one of them focuses on updating Colombian accounting standards, adopting international accounting standards, reducing the number of issuers of accounting standards and forming specialized agencies. in accounting matters, seeking that Colombian businesses are in tune with the language used by other countries in the world.
Weaknesses of the concept of accounting profit included in the financial statements
The accounting principles generally accepted in Colombia, defined in Article 6 of Law 42 of 1990 and in Article 1 of Regulatory Decree 2649 of 1993, incorporate the basic accounting standards, the latter includes 13 standards, which refer to the compliance with the objectives and qualities of accounting information, trying to be a valuable instrument for the management of business organizations. These instruments are the financial statements (the Balance Sheet, the Income Statements) and other complementary reports such as: The Statement of Changes in Financial Situation, the Statement of Changes in Equity and Cash Flow; in all, the concept of utility is incorporated as relevant in each of these reports.
The term accounting utility, or for some scholars "Accounting Utility Paradigm" has lost relevance over time, to the point that it has been transcending the credibility of the other concepts of the Balance Sheet and the Income Statement. The concept of accounting profit must be carefully strengthened, otherwise the accounting information will be relieved by other reports that allow adequate organizational management.
1- Theoretically, it has not precisely identified which concept of utility is the one that is incorporated in the financial statements, if it is the purely accounting concept (accounting utility), the financial, the economic, the social.
2- The generally accepted accounting principles show measurement and valuation inconsistencies (art 10 DR 2649/93) between different companies and in different periods of the same company. This decree was adopted in Colombia based on international standards that were in force before 1993, that is, today these standards are obsolete.
3- In the face of price changes, accounting profit is determined based on historical costs.
4- Tailor-made internal reports have been gaining importance for investors and managers.
As indicated, one of the fundamental weaknesses of the concept of utility is the theoretical and practical foundation of measurement and valuation, consequently the exercise of accounting research has identified aspects that must be improved:
1- The accounting profit must be better related to the concept of income or economic rent (a).
2- Specify theoretically appropriately the concept of operational utility.
3- The accounting utility should not be unique, contrary to this, for each purpose the concept of utility should be determined considering different elements.
4- Make appropriate distinctions between the capital invested by the shareholder and the profit received as a dividend distribution.
The invested capital, according to Irving Fischer, is the existence of wealth at a given moment, while income or utility is a stream of services through time, utility is the enjoyment of the stream of services, or it is also the enjoyment by the use of capital in favor of shareholders.
For investors and suppliers, the capital of the company is of interest, as well as the changes it experiences in the generation of resource flows, guaranteeing them the payment of interest and principal, that is, that it complies with the basic rule of equity maintenance (art 14 DR 2649/93). As the study of Profit deepens, the deficiencies in the measurement of profit are more noticeable, among them, it is pertinent to appropriately separate profit from the invested capital.
Traditionally, accounting profit has been taken as a fundamental element to rate the efficiency of companies, understood from gross profitability, net profitability, return on investment (ROI), EBITDA (earnings before interest, taxes and depreciation, thus trying to obtain an adequate measurement of the efficiency of the assets that contribute to the generation of income (depreciation, amortization, depletion), of the income and costs that have not fulfilled the operational cycle (uncollected billing, acquisition of goods and services pending In other words, there is growth in the portfolio, a decrease in inventories and an increase in profit, but the flows of resources do not respond to a true profit, otherwise, it occurs with the purchase of goods and services.
At this point in this document, it is pertinent to formulate the following question: How useful is it to measure efficiency based on past data, which present conceptual weaknesses, and from them make value judgments (financial analysis) concluding the level of efficiency of a business?.
To answer, it is necessary to point out that the “… term efficiency is relative and only makes sense when compared with an ideal or any other basis. It also depends on whether the company's goal is to maximize profit or to provide a fair or reasonable return on the investment. If the capital employed by the company is constant from year to year, the profit figure itself can be used as a measure of the company's efficiency. The profit for the current year can then be compared with previous years, and some judgment would have to be made whether or not the profit of any year has reached the appropriate goal. However, if the capital invested varies from year to year, the profit has to be compared with some changing magnitude, such as the capital invested or the total income… ”Thus, as the case may be,the efficiency measurement is adequate or not depending on the criteria they have and the comparison to qualify whether it is good or not, as well as the validity of the measurement of the utility and the capital invested by the owners.
Expanding the answer a bit, when efficiency is "measured" from gross profitability and when compared from one year to another, it is often misleading, since operational and technical capacities are different, unless conditions remain the same., a fact that is unusual in organizations. The same weakness is evident when comparing the level of efficiency of a company with another company in the same sector, any conclusion or value judgment is wrong, since the capacities of each organization are different, then we are faced with two different magnitudes to formulate a judgment as if they were the same.
Now, when accounting profit is taken as basic information to make predictions, determining factors when carrying out purchase and sale transactions of financial assets. This statement allows us to reflect on the validity of the conclusions built from the calculations of the Net Present Value (NPV), for example, of a company that is under valuation, either for sale, capitalization or for any other reason. Therefore, the market value, that formed by the economic forces of supply and demand; The accounting information does not include in its data elements that substantially vary the value of financial assets, such as interest rates, currency exchange rates, inflation itself, consumption, basic consumer goods, substitutes,the intellectual capital, the risks to which it is exposed, the value of the information available to the company, the technical knowledge of research and development, etc.
Throughout this document, the weaknesses of the utility have been pointed out, but it remains to be mentioned that some of these weaknesses lie in the theoretical incapacity of some accounting professionals; legal or conceptual inability to properly measure economic events and incorporate it into the determination of Profit. It is usual for the accountant to determine Profit from the accounting point of view (based on the transactions in the Income Statement), ignoring the calculation from the point of view of comparison of assets (Balance sheet approach), either from financial capital or from operating capital (Art 14 DR 2649/93), then, accounting becomes a subjective accounting system, since Profit does not reveal whether it is affected by recurring operations or by non-recurring cases,extraordinary events or events of force majeure or fortuitous event.
Then, the accounting profit that is reported in the Financial Statements is a combination of several elements: The profit by comparison of assets and the profit calculated by the traditional "accounting" procedure, that is, they are made up of several elements: Such as the subjective interest of whoever processes the accounting information, the future cash flows expected by management, accounting does not require the actual collection of cash to make the acknowledgments etc, which ultimately is the basis for making business decisions. The importance of Profit as a result of the past to make decisions for the present and the future lies in the opportunity to measure non-recurring and exogenous economic events.
Regarding the profit by comparison of the patrimony (Maintenance of the Patrimony) also presents deficiencies, among them:
1- Expectations of future cash flows are not constant over time, as they are exposed to risks that make the economic value of the figures vary. In the event that an adjustment is made or the recognition criteria change, the subjective element is present there.
2- The chronological element in the effective realization of the utility. The measurement of the utility does not reveal whether it is due to unilateral management measures, to the application of the law with all the technical deficiencies that it has or due to fortuitous cases, making the information inefficient.
3- When the value of the company is determined, by any financial methodology, the future flows of resources are discounted, many of these are occasional, extraordinary, unrealized or non-recurring profits, and have no relationship whatsoever with the past, with the present, nor with the future.
Regulatory Decree 2649 of 1993, in its article 3, deals with the objectives of accounting information, in numeral 2 it indicates “Predicting cash flow”, which is the paradigm managed with the use of Financial Statements, making reliable predictions, affirming that the accounting information is adequately measured, recognized and presented.
4- Investors live in a world of attacks from competition, uncertainty in the markets, optimism or pessimism, which radically affects the results of the projected periods.
The measurement of Profit from transactions (accounting approach) is the one applied by DR 2649/93 and is the one given by the Universities. It consists that the profit is determined by the changes presented in assets (including intangibles such as intellectual capital) and liabilities during a period of time, generating representations of the inflow of resources (income) or representations of the flow of outflows of resources (expenses and / or costs). This procedure has advantages by facilitating the accountant's operational work:
1- The utility can be classified according to its origin, for example: by product line, by activity, by geographical area, by customer, etc.
2- The methodology is to tabulate the transactions that affect assets, liabilities, equity, income, costs and expenses. Here the presence of a technical problem is evident and is the pairing of income and cost or expense and vice versa within an accounting period.
Now, we have to question for whom the Accounting Profit ?. The premise is that the utility is for all users of the information, whether internal or external (article 21 of DR 2649/93), among them are investors, suppliers and other creditors, according to the interest of each recipient of the information, but theoretically the concept of utility has a different connotation:
1- Utility based on added value: It is that additional value as a consequence of comparing its production against goods and services. This utility is important for unions, employees, the government in collecting taxes.
2- Net profit of the company: This profit is important for the shareholders or partners; It constitutes the added value to the business value discounting depreciation, amortization, taxes (EBITDA), that is, there is not only a potential dividend to be received, but an increase in the value of the company.
3- Profit for the investor: This profit becomes relevant due to the priority of rights that each shareholder has (ordinary, preferred). It is that profit deducted from income tax.
4- Usefulness for shareholders with minority interest: This condition expresses the decision-making power before the General Assembly of Shareholders, and before the legal actions that may be taken against the company. It is that profit for the investors, but deducting the preferred dividends, from the majority interest.
The study of utility has been cataloged as the beginning of the third stage of accounting theory, the renowned Spanish professor Tua Pereda has stated that “The utility paradigm poses a clear question to our discipline: what is the best way to meet the needs of information users? Or, put another way, how to make accounting systems useful? "
Initially, accounting fulfilled a very limited function, it had to give an account to its state owners at a given date; the objective was formalistic legalistic, it was based on the record of operations. The accounting information was then presented as a unique and irrefutable economic truth because it was based on the mathematical equation, this concept prevailing over the transcendence and importance of utility. As a result of the international economic upheaval, especially in the main World Stock Exchanges, it was concluded that companies did not provide reliable accounting information to their users.
From this moment on, the user became a determinant of the information to be included in the Financial Statements, in really satisfying the objectives and complying with the qualities required for the decision makers on it.
As accounting research evolves, it is more noticeable that Accounting Profit does not meet user expectations. Proof of this is that many leading companies are attaching supplementary reports to their financial statements that respond relatively well to their information needs.
In the last decade, theorists have endeavored to sustain and shorten the gap between the information included in the Financial Statements and the information required by investors, creditors, etc. In this regard, today we are talking about other concepts that affect the profit included in the financial statements, they are:
1- The intellectual capital.
2- The environmental responsibility of companies.
3- Prospective information (IAS 8).
The latest advances made in our country, in order that the accounting utility and general accounting information satisfy the objectives and qualities of the information. There is Bill 165 of 2007 as the speaker is the House Representative Simon Gaviria Muñoz, a bill that only consists of 4 articles. In the explanatory memorandum section, he makes a normative account applicable to accounting as an information system. The most recent of norms on accounting regulation was Law 550 of 1999, a law that was only valid for 5 years, which in its article 63, establishes: “For the purposes of guaranteeing the quality, sufficiency and timeliness of the information provided to associates and third parties, the National Government will review the current standards in accounting, auditing,tax audit and disclosure of information, in order to adjust them to international parameters and propose the pertinent modifications to Congress ”This legal order was not reached, therefore Decree 2649/93 continues to be the fundamental basis for recognizing changes in assets, liabilities and equity, as well as the basic and technical standards to determine Profit, which is reported in the Balance Sheet.
The intention of the Government to put the country in tune with the new accounting dynamics and fill the existing regulatory gaps, in addition to grouping the different estates around the study of the issue and updating the debate on whether or not to adopt the IFRS, did nothing more than polarize the different positions on the matter.
Conclusions
The concept of Accounting Profit presents fundamental weaknesses, consequently it has lost credibility as an instrument for making business decisions:
1- The accounting community have not properly resolved the application on the so-called knowledge accounting, which is to measure and value the management and creation of knowledge as a productive asset of companies, which contribute to the generation of Profit.
2- The accounting information is fed by complex transactions, with economic, financial, technical, legal, social, geographical elements (international standards), distancing the possibility of informing the recipients of a single utility, which satisfies all those interested in the accounting information.
3- Globalization, the elimination of commercial borders, requires accounting to handle a single language of business, when determining the results of an organization, in such a way that the result is equivalent to the reading of another Public Accountant from any country in the world.
4- Faced with the weaknesses of the accounting profit, the Entities have found it necessary to process other types of information that allow them to make investment and financing decisions. That is why company valuation methodologies do not consider accounting as fundamental, but rather rely on market variables especially.
5- Currently, the accounting information system framed by DR 2649/93, has ambiguities, reducing its dynamism and integrity when properly reporting a result.
6- Intellectual capital is a valuable asset for organizations, however, even Colombian companies do not reveal it in the asset and equity section, breaking the rule of prudence, affecting the calculation of accounting profit, by the procedure Accounting or Operations and by the procedure for Maintenance of Heritage. The mandatory suggestion to mitigate this weakness is to deepen the analysis of the various elements that make up the intellectual capital, their relative importance in the management of the organization, basic questions to establish rules that allow homogenizing the criteria used for identification, measurement and presentation of intangible assets so that users can have reliable information.
7- The environmental responsibility of the company: It consists of assuming obligations of this nature, with direct effects on the accounting information. The decisions of the entities in pursuit of environmental prevention and sanitation, whether voluntary or mandatory, have an impact on the heritage and their results and as such must be informed to the community. In this sense, two relevant aspects should be studied: Recognition and measurement of environmental costs; Recognition and measurement of environmental liabilities. The first is to recognize as an asset, expense or loss, the second refers to certain and / or contingent responsibilities in the general framework of accounting.
8- Prospective information: Business dynamics requires having the best and largest amount of data that allow predicting results or establishing financial scenarios. The predictive value of the information contained in the historical financial statements is questionable, so the presentation of information projected as a complement to traditional information gives the latter a very important added value.
9- The purpose of the projected information is to provide users with reasonable forecasts based on the economic and financial balance of the entity, so that said users can make their decisions based on rational estimates, reducing, as far as possible, the risk that these entail if this type of information is not available. The presentation of the projected accounting information, according to the proposed models, can range from the dissemination of the estimates of those variables that are considered most significant, such as sales income, results, earnings per share, generated resources, profitability, among others;until the issuance in the form of complete financial statements and following the same accounting formats and criteria used for the preparation of retrospective information.
The accounting utility paradigm as the only user-oriented truth, with which the values of verifiability and objectivity of the economic benefit paradigm, while remaining important. The main objective of accounting is to provide economic and quantitative information that is useful in decision-making for different users: the state, creditors, shareholders, managers, etc.
Compliance with the objectives of accounting information (art 3 of DR 2649/93), objectives linked to the interests of the different users, purposes and their consequent impact on accounting rules, is a constant attention not only in specialized literature, but also in accounting regulation, as can be seen from Túa Pereda's proposal of the hypothetical deductive itinerary that must be followed in the issuance of accounting standards, derived from the business environment and the objectives that financial information seeks to achieve (useful for different users).
Finally, today we are talking about the knowledge economy, where most of the wealth that is generated in the world is produced not from tradable goods, but from representations of (intangible) objects. According to economic reports from the 1980s, sales of intangibles in the United States exceeded the level of sales of tangible goods, a phenomenon that has been called the New Economy.
The obvious weaknesses that utility presents, a concept that is directly related to all the other elements of the Balance Sheet and Income Statement, allows us to affirm that Accounting is in Crisis, it has lost prominence in business decisions.
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