By Humphrey Nash

The name given to the accounting model described in the draft proposal Accounting For The Future is the acronym AFTF.  The title Accounting For The Future describes both an accounting model of the future (using present values of expected future cash flows) and an accounting model proposed for use in the future.  The title does not capture some important characteristics that might be equally or more descriptive.  Alternative titles are explored.

Accounting for Shareholders

The AFTF model described recognizes the primacy of the shareholder in financial reporting to shareholders.  It recognizes that shareholders are interested in a value-based accounting.  AFTF reports shareholder values to shareholders.  It also recognizes that the shareholder must to be accounted for within the accounting model.  It does this in two ways.  First, the model is a value-added model which explicitly takes into account the shareholder cost of capital.  Second, the model explicitly uses capital market information produced by the shareholders.  AFTF uses the cost of capital to scale values to the shareholder.  Current GAAP accounting ignores capital market information.  The capital markets are a powerful and effective information processing machine.

Accounting for Value

Clearly a value-based model has an advantage over a cost-based model like GAAP in recognizing and representing value.  This provides an advantage for preserving or enhancing value.  We cannot maximize what we cannot measure.  AFTF measures and accounts for value and is useful for value creation.  This can add value to the science and practice of accounting.

Accounting for Decisions

As explained in the draft proposal Accounting For The Future, the normal accounting perspective is that of the decision.  We attach values to decisions not things.  We do this at all levels.  At the macro (capital market) level, the company valuation is useful for shareholder purchase decisions, mergers and acquisitions, stock buyback decisions, dividend policy, etc.  At the line of business level, decisions to abandon, continue or expand operations will depend on whether or not value is being added by that line.  At the micro level, the pricing or purchase decision will depend on the values present.  There are two reasons for the decision utility of AFTF.   First, the decision is aligned with the valuation; a positive valuation indicates a positive decision and a negative valuation indicates a negative decision.  Second, using a uniform shareholder cost of capital as the discount rate makes the valuation process scalable, additive and consistent --- consistent with the shareholders' interests.

The draft proposal seeks to broaden accounting to encompass all financial decision-making within a unified value-based accounting model.  The natural disciplines of accounting and the specific disciplines of AFTF can be combined to produce decision-useful information which is relevant and reliable.

Accounting for Intangibles

Accounting has struggled with intangible values.   Part of this struggle is due to the fact that traditional accounting tangibles now account for only a small fraction of today's values.  Part of this struggle is semantic.   The word "intangibles" implies something that cannot measured, let alone completely identified.  AFTF cuts the Gordian knot.   AFTF makes no attempt to separately identify and separately value each intangible.   Instead AFTF identifies the effects of all intangibles and it does so in a relevant, feasible and reliable manner.   Expected future cash flows, as they are disciplined within AFTF, account for intangibles.  Hence, for example, existing intellectual capital (human resources, knowledge, patents, structures, philosophy, skills, training) are manifest in current cash flows and expected future cash flows.   A new decision to hire, train, buy a patent, etc., will be easily incorporated into expected future cash flows, if that decision is an informed decision (made after an appropriate cost/benefits analysis).   Under AFTF un-informed decisions are eliminated by the required correspondences between valuations and decisions.

Accounting for Management

Management accounting is different from financial reporting.  It shouldn't be.  Management represents the interest of shareholders and the values and goals of management and shareholders should be identical.  AFTF is accounting for shareholders, for value, for decisions and for intangibles, all of vital concern to management.  Chapter 8 of Accounting For The Future further details how AFTF is accounting for management purposes.  AFTF is a useful management tool for strategic decisions or as a day-to-day management tool.  Since AFTF values the future, management can be freed from the tyranny of short term accounting and reporting perspectives.

AFTF also conveys information about management.  Management must reveal and quantify its decisions and expectations.  Since AFTF measures the future effects (as a present value) of today's decisions, there is a close association between the decision-cause and the value-effect.  This permits real-time accounting of the management decisions.  The actual-to-expected reports will provide ongoing management performance measures.

Accounting For Change

AFTF attaches values to decisions.  Every valuation from micro to macro is associated with a decision.

Hence, for example, the valuation of a line of business generally suggests some change.  Only in the case of a value-added equals to zero (exactly meeting the shareholder cost of capital) does the valuation not suggest some change.  The decision perspective encourages decisions to be made and properly measures the differential effect of that decision.  In contrast GAAP accounting measures the current cost but seldom future benefits.  This sends the wrong message to shareholders and management, perhaps stifling or misdirecting change.

Value-added measures real change (progress) since it only measures the excess over the shareholders cost of capital.  The normalization process (described in the draft proposal and in the essay Disciplining Prospective Accounting) separates new and old information, making it clear when change has or will occur.  AFTF measures and encourages change --- a necessity in a changing world.

Conclusion

The above section titles are all good descriptive titles for the draft proposal.  There are several appropriate choices reflecting the generality and utility of the model.