New Financial Accounting Standards for the New Economy?

Numerous empirical studies reveal that accounting numbers – equity as well as earnings’ measures - have lost value relevance, i.e. explanatory power for stock market capitalisation and/or abnormal returns, during the last decades. This effect is of particular significance after the rise of the New Economy in the early 90thies and at firms belonging to ‘new economy’ industries. On the grounds of this observation, commentators argue in favour of a change of the current accounting model. Proposed amendments include: (i) widening of intangible asset recognition criteria, including the capitalization of R&D, advertising and human resource expenditures; (ii) measurement of intangibles at fair value; (iii) a new set of ‘revenue accounting’ provisions, due to the observation that traditional revenue recognition concepts fail to capture the critical events of the value creation cycle at new economy firms. From an industrial economics perspective, the focus of these proposals is on the balance sheet treatment of competitive advantages of the firm. From a normative viewpoint, the arguments in favour of these proposals are founded on the observation of a change in competitive environments due to the transition from old economy to new economy. The paper analyses whether these changes should imply a change in the current accounting system. Competitive advantages and their financial accounting treatment are analysed conceptually on the grounds of economic theory. The insights gained give rise to a certain scepticism concerning the necessity of a change of the current accounting model.