ICAEW Financial Reporting Faculty publishes report on whether financial reporting encourages short-termism

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04 May, 2016

The Financial Reporting Faculty of the Institute of Chartered Accountants in England and Wales (ICAEW) has published a Public Policy Paper on ‘Long-Term Investment and Accounting: Overcoming Short-Term Bias’, as part of its information for Better Markets thought leadership initiative.

The report examines the evidence as to whether financial reporting encourages short-termism and questions whether financial reporting could provide better information to its users on long-term performance. It looks in particular at five areas in which current financial reporting has been accused of encouraging short-termism;

  • through the effects of using fair values;
  • by not providing information on long-term performance;
  • through excessive frequency of reporting;
  • by writing off rather than capitalising spending on long-term assets such as intangibles; and
  • by ignoring long-run effects on the natural world or on society as a whole.

The paper concludes that current evidence does not suggest that current financial reporting practices impedes long-term investment, except in relation to the frequency of reporting where there can be a trade-off between the benefits of transparency and the costs of ensuring that investors’ expectations of performance are met at the frequent intervals required.

An executive summary and the full research paper are available from the ICAEW website.

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