Restating accounts for new information Under current accounting rules, companies – in countries where the practice is permitted – can restate past years’ accounts in limited circumstances only. Restatement is required if material errors are discovered in past years’ accounts. It may be required if a new accounting standard is introduced. It is permitted if the company changes an accounting method. Restatement is not permitted in other situations.

Many managers believe these rules are too restrictive. Consider, for example, the treatment of outlays on research. Even under the new international standard, it is difficult if not impossible for a firm to capitalise non-contractual research costs. At the time of the expenditure, future benefits are likely to be considered too uncertain to permit asset recognition. If later the research proves successful, the company cannot restate past years’ accounts and recognise a research asset retrospectively since the circumstance – a revision of estimates of future benefits – does not qualify for restatement.

The economic consequences are potentially severe. Expenditures on intangibles are growing as a proportion of total investment as services increase their share of national output. In addition, there is evidence that technology is now changing at a faster rate – which implies rising corporate expenditures on research and development. These outlays are usually not capitalised and, as a result, balance sheets understate companies’ economic resources. In some cases the understatement is extreme. For example, the book value of Microsoft’s net assets was only 22% of their market value at the end of 2002.

Some financial experts have proposed that there should be continuous restatement of financial reports.30 Under their proposal, companies would regularly revise past years’ financial statements as new information becomes available and uncertainties about the future benefits of expenditures on intangibles are resolved. Note that this proposal is not as revolutionary as it sounds. Revising past periods’ accounts to incorporate new information is a common practice in government accounting.

Required Comment on the above proposal. Are there other advantages of continuous restatement of financial accounts in addition to those mentioned above? What are the potential disadvantages of this idea?

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