The problem with Generally Accepted Accounting Principles (GAAP) is that they create inconsistencies when comparing one company to another, and can distort a company’s true historical profitability. By making adjustments, we aim to remove the financial statement distortions and miscategorizations of GAAP. In this article we will discuss why we capitalize R&D in order to see a clearer, more accurate picture of a company’s historical profitability.

• 70+ were in attendance at the New York Society of Securities Analysts panel, discussing the serious problems with mergers and acquisitions (M&A) reporting
• It’s not just problems with goodwill. Under GAAP, Generally Accepted Accounting Principles, M&A accounting mixes apples and oranges throughout the financial statements, e.g. AT&T/Direct TV, Becton Dickinson/CareFusion, and Dollar Tree/Family Dollar
• Parent company assets are held at book value while many acquired assets are restated significantly to “fair value.” This means the parent’s assets continue to depreciate from historical book values, while the acquired assets come on the books at “new,” usually lower, fair values

Two simple yet interesting questions were posed recently at two Valens events. The first question, from our company Christmas party, is the type of simple query that can cause you to think very philosophically about life. The second question, from the recent APEC forum, is a loaded one about stock market forecasts. At some level, the two questions are related, and both provide ideas to contemplate for the coming year.

Under Generally Accepted Accounting Principles (GAAP), expensing R&D in the year spent is required. For many firms, this leads to extensive volatility in profit and return calculations, and to an inadequate measure of assets or invested capital. This doubly impacts return on asset calculations, and not consistently so, thereby creating wildly different calculations of economic profit.