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Why We Need to Update Financial Reporting for the Digital Era

The market caps of just four companies, Apple, Alphabet, Amazon, and Microsoft, now exceed $3 trillion. Their combined assets of $944 billion are an order of magnitude lower than the combined assets of $7,700 billion of the largest 3,177 companies in 1986, when the aggregate market capitalization reached $3 trillion for the first time. In our recent HBR article, we argued that financial statements fail to capture the value created by modern digital companies. Since then, we interviewed several chief financial officers (CFOs) of leading technology companies and senior analysts of investment banks who follow technology companies. We asked: (i) what makes the valuation of digital companies more challenging?; and (ii)  how can digital firms improve their financial reports to communicate sources of value creation in their businesses? We distilled seven key insights from those discussions.  Some of these ideas contradict traditional financial thinking whereas others seem highly controversial or pessimistic.

Read the entire post at Harvard Business Review>>