Corporate Disclosure of Material Information: The Evolution—and the Need to Evolve Again

Corporate Disclosure of Material Information: The Evolution—and the Need to Evolve Again

Jean Rogers¹, Robert Herz²

Article first published online: 23 DEC 2013

Journal of Applied Corporate Finance

Volume 25, Issue 3, pages 50–55, Summer 2013

This article by the former chairman of the FASB and the founder and executive director of the new Sustainability Accounting Standards Board (SASB) presents the rationale for and mission of the SASB. As the authors point out, both the Securities and Exchange Commission, which was created in 1934, and the Financial Accounting Standards Board, set up in 1973, emerged during times of low investor confidence to restore trust in the capital markets. And the institutional changes brought about by the creation of both the SEC and the FASB succeeded in eliciting new information for investors and in raising the standards by which such information was reported.

How to Create Value Without Earnings: The Case of Amazon

Josh Tarasoff¹, John McCormack²

Article first published online: 23 DEC 2013

Journal of Applied Corporate Finance

Volume 25, Issue 3, pages 39–43, Summer 2013

Investors and commentators often equate GAAP accounting metrics, especially earnings per share, with financial success. The reality, however, is that there is no simple, linear relationship between GAAP earnings and intrinsic value, which is defined as the present value of expected future cash flows. And adjustments of GAAP metrics, though admittedly subjective, are often required to understand the economic reality of a business.

http://Amazon.com Inc. provides a case study that throws into sharp relief the need to look beyond GAAP in order to analyze underlying fundamentals and value. In this paper, the authors argue that Amazon has done a superb job of building shareholder wealth, all the while reporting low and declining operating and net income margins. The article provides a framework for thinking about Amazon’s underlying profitability that is based on the concept of return on capital in relation to the cost of capital, and shows how that profitability has been masked by GAAP accounting. The authors demonstrate that the company is now investing very large amounts of capital with the expectation of earning rates of return well above its cost of capital. And their analysis suggests that if such investment can continue over the long term, Amazon’s current market value of $140 billion can be readily justified.

But as the authors go on to argue, we now live in a different world, one in which the management of environmental, social, and governance issues is increasingly viewed as critical to the long-run value creation of companies. And because today’s corporate reporting fails to account in a systematic way for material non-financial issues, it’s time once again for the capital markets to evolve. The SASB aims to meet this need by creating sustainability accounting standards for use by public companies in disclosing a minimum set of material sustainability impacts for companies in over 80 different industries. As part of a natural evolution in disclosure, the SASB aims to achieve the same goal the SEC and FASB started with: to protect investors and the public.