Do balance sheets provide the information investors need to make their decisions? The question might seem misplaced, but it is not. Ask any equity analyst what kind of information he/she uses to valuate a listed (manufacturing) company, and he/she would immediately answer: EBITDA and net financial position. Then ask a CFO of a manufacturing company where these two indicators are reported in financial statement. If the company is not listed, he/she would answer that there is no trace of them, because they are not accounting measures required by either IAS/IFRS or ITA GAAP. If the company is listed, it’s very likely that the CFO will refer to a section the company has voluntarily drafted not to leave analysts in the dark. It’s also very probable that the CFO in question will signal the criterion which distinguishes the EBITDA calculated by the company from that calculated for other companies, maybe because it excludes non-recurring and non-organic components, while others include them. Something analogous could happen for the net financial position. One should not be astonished by this. Since these are not accounting measures, but financial indicators, there are no common standards to calculate them.

  It is thus evident that balance sheets suffer from an inadequate presentation of the measures of performance. Are standard-setters aware of this? Yes, they are. Before his appointment, Bob Hertz, current president of FASB, the board that sets US accounting standards, wrote a book with Robert Eccles titled Financial Reporting Revolution, where the information gap left by current accounting rules is explicitly denounced. Why hasn’t the Board intervened? Simplification, the standard-setter reasons, could provide a partial and distorted picture of a company. There is truth in this, and I have always argued that the value of a firm cannot be reduced to x times its EBITDA, but the opposite risk also exists, that of excessive complexity. If the balance sheet gets too complicated, extra-accounting indicators are likely to proliferate, with the added risk of manipulation, since companies can calculate performance indicators as they see fit.

  It is a risk that is now being addressed by a joint project of FASB and IASB concerning the reporting of balance sheet data. The first step has been made in September 2007, with the reformulation by IASB of the IAS 1 accounting principles which has changed the reporting of company income: comprehensive income (equal to net income +/- variations in net assets) now has to be reported. But this is not very helpful, because investors deem it too complex and marred by short-term components, to be used to appraise the income-generating prospects of a given company. A second step has been the publication by the two Boards of a discussion paper in March 2008. According to the discussion paper, the new Profit and Loss Statement will have to no longer report net profits, but only comprehensive income. Yet there is no mention of synthetic indicators of performance.