Financial reporting: Myths, interpretations and limitations

(Mar 11): A majority of companies have financial years ending Dec 31. Most would have just finalised or are about to release their FY2018 results. They make headline stories, such as “earnings doubled” or “collapsed in earnings” and these are linked to stock price performances on the stock exchange, for publicly traded companies. It is as if these accounting numbers, as reported in the published financial statements, are gospel truths. Are they?

Whether accountants, professional analysts or fund managers, bankers or amateur investors, the acceptance of these accounting results has become a convention, generally accepted if for no other reason than to facilitate discussions and decision-making.

Terminologies often used include price to earnings, price to book, enterprise to Ebitda, gearing ratio, debt to equity and return on equity. These ratios are used for comparison, to make investment decisions. What exactly are earnings or profits, book value or equity? Are they subjective and arbitrary numbers or scientific facts?

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