How does one assess the impact of asset and liability recognition and their measurement?
ASSESSING THE IMPACT OF ASSET AND LIABILITY RECOGNITION AND MEASUREMENT ISSUES
The balance sheet does not provide all the information an analyst wants or needs about a firm's resources and the claims on those resources. Authoritative accounting guidance precludes the recognition of some resources as assets and some obligations as liabilities. In addition, measurement requirements mean that the amounts reported on the balance sheet for assets, liabilities, and shareholders' equity do not necessarily reflect current market conditions.
In assessing the financial condition of a firm, an astute analyst recognizes these features of the balance sheet and adjusts the reported numbers.
The current price of a share of common stock reflects current economic conditions, not the requirements of authoritative guidance. Market-to-book-value ratios tend to be large for firms that make substantial expenditures on internally developed assets, including research and development, advertising, and employee development. (Other factors, such as a firm's competitive position and its growth potential, also influence the market-to-book-value ratio.)
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