Question

One objective of financial accounting is to provide relevant information for decision-making, including investment decisions by shareholders and potential shareholders. In this case, the balance sheet of LinkedIn showed a shareholders’ equity at September 30, 2016 that was much smaller than what Microsoft, after a bidding process, paid for that equity.

Discuss whether you feel that the accounting process resulted in a misleading presentation of LinkedIn’s equity at September, 30, 2016.

If you feel the accounting process could be improved, suggest a way of improving it. If you feel not improvement is feasible or desirable, explain your opinion.

Answer 1

It is true that financial accounting is to provide the relevant information to the users. But everything has its merits and demerits.

Financial accounting deals with monetary aspects of the business. It shows the financial position, quantitative aspects of every item and transaction, not with qualitative aspects.

For ex: It can record what you are paying to your employees i.e. Salary, getting from your customer as sale price but it can show you the level of customer satisfaction, the goodwill it is creating or the increase in the employees.

But as far as the valuation aspect is concerned, we see both the quantitative and the qualitative aspect, not only the assets but also the brand name you have created.

So, in case of linked in, it had less assets which showed less equity but a goodwill, a name that had a value for which microsoft paid which was higher than the equity.

According to me, since accounting deals with only monetary terms then let it be. Other reports can be made such as valuation of self generated assets, human resource accounting, which are not mandatory but if made will be beneficial for the users.