https://hbr.org/2020/12/u-s-financial-reporting-is-stuck-in-the-20th-century?utm_medium=email&utm_source=newsletter_monthly&utm_campaign=finance_not_activesubs&deliveryName=DM111568

Summary   

One of the most important uses of financial statements is to enable investors to make timely decisions about buying and selling stocks. In the simplest analysis, an investor makes money by buying shares cheap and selling when it becomes overpriced. Value investors rely on multiple, often complicated, methods to make trading decisions. One way relies on income statement (profits) and balance sheets (assets) to identify cheap or expensive stocks. But current accounting rules require that funds companies spend on innovation, product development, information technology and other investments in the future should not be reported as assets and must be treated as costs in calculation of profits. The current system is causing confusion among investors and may even lead to misallocation of investment capital. It’s time to make concrete revisions to what must be reported in financial reports. 

Article

Recently, a large value fund managing about $10 billion dollars in assets decided to close its operation. It was just one of numerous value funds, managing trillions of dollars, that have seen their worst performance in the last 200 years. Those aren’t just any dollars either — they include pension and retirement funds and lifetime savings. So why are these value funds closing en masse? To do our analysis of this question, we reviewed our research and revisited our earlier HBR article, “Why Financial Statements Don’t Work for Digital Companies,” to explain these new developments. But more importantly, we believe these closures make reforming financial reporting even more urgent. Without such reform, investors will continue to create their own, half-baked solutions, which harm their cause more than help it.

One of the most important uses of financial statements is to enable investors to make timely decisions about buying and selling stocks. In the simplest analysis, an investor makes money by buying shares cheap and selling when it becomes overpriced. Buying and selling a company’s stock also implies that money flows towards or away from it. For example, a rising stock price may encourage Tesla’s Elon Musk to spend more on electric vehicles, while declining Exxon Mobil stock implies that capital gets pulled out of fossil fuels.

Value investors rely on multiple, often complicated, methods to make trading decisions. One way relies on income statement (profits) and balance sheets (assets) to identify cheap or expensive stocks. For example, a stock with low stock prices but large assets and profits could be a good stock to buy. This has been the fundamental tenet of value investing. However, as our previous HBR article and Professor Baruch Lev’s 2016 book The End of Accounting describe, balance sheet and income statement are becoming largely useless for this kind of decision making.

If you consider the mechanics of the modern organizations whose stock prices increased most dramatically in the 21^st century, they spend large amounts on innovation, product development, process improvement, information technology, organizational strategy, hiring and training personnel, customer acquisition, brand development, and on wringing efficiencies from their peer and supplier networks. The current accounting rules, however, require that these amounts should not be reported as assets and also must be treated as costs in calculation of profits. The more a modern company invests in building its future, the lower are its reported profits. So, a company that builds unique competencies, based on knowledge and ideas, appears as extremely expensive stock based on the traditional value investing philosophy, instead of as a promising investment opportunity.

Many value funds, especially those closing now, mechanically relied on accounting numbers and missed out on investment opportunities such as Microsoft, Google (Alphabet), and Facebook, because those companies have little land, buildings, inventory, and warehouses, that are included in reported assets – instead they have knowledge capital. In the last decade, those investors not only missed out on great opportunities but could also ended up buying wrong stocks.

This factor has become particularly pronounced in the current year, best illustrated by the so-called “FAANG” stocks, which stands for Facebook, Amazon, Apple, Netflix, and Google. Their market capitalizations at this time are $835 billion, $1,661 billion, $2,018 billion, $227 billion, and $1,119 billion. In addition, Microsoft is worth $1,691 billion. These numbers are so large that their combined value exceeds GDPs of almost 80 countries in the world. An investor who bought those stocks would have seen 40%-70% returns just this year. In contrast, a value fund that relied only on the accounting numbers and took negative positions as a result would have suffered a dramatic loss. For example, Vanguard Value Fund, a highly respected 40-year old fund, gave negative returns this year, despite the overall stock market going up. Individual investors then start abandoning value funds, causing their closures.

So is there a way to bring promising stocks into value portfolios but also helps investors identify young companies that will become a future Microsoft or Facebook? One solution is to identify companies that spend large amounts on building knowledge-based or a unique idea-based competency. To bring them into value portfolios, fund managers would have to recreate financial statements. The best finance brains are now working to recalculate asset values and profits, and recreating measures used in investment analysis, such as market-to-book ratio, high-minus-low factors, internal rates of return, and Tobin’Q. Some of these efforts include our own papers. While these words may sound overly technical to those not steeped in finance, they form the basis for investments of trillions of dollars in value portfolios.

So, what is the problem with these recreated values? While they seem like an improvement compared to real values, they can never be the same as real values and could even suffer from fundamental mistakes. For example, these methods typically assume that all firms invest a uniform 30% of their operating expenses in knowledge assets. This one-size-fits all assumption goes contrary to a well established idea that investments differ based on a company’s lifecycle and industry. A biotechnology or electronics firm spends more on R&D than a restaurant or paper mill. Similarly, a new business spends more on building brands, customer relationships, and innovation than a company winding down its obsolete business. So, in recreating those values, investors are making wild, often wrong, guesses on how much firms spent on intangible investments.

The fundamental question then becomes, why shouldn’t American companies themselves provide the amount of R&D investments, as are required and allowed for foreign companies, instead of leaving investors to make wild guesses and recreate numbers. Even if companies are not allowed to report them as assets, should they not be encouraged to disclose what they spend on innovation, human resources, and organizational competencies. Wouldn’t providing that information help investors, who are the owners of the corporations, to take rational decisions?

In sum, we believe that the developments this year, particularly, the demise of value funds, show the urgency for a thorough overhaul in financial reporting. The current system is causing confusion among investors and may even lead to misallocation of investment capital. It’s time to make concrete revisions to what must be reported in financial reports. First and foremost, firms must provide information on revenue and its drivers. Second, a detailed statement on outlays, presented in three broad categories. The first category should describe the amount spent on supporting current operations. (For example, Twitter provides “cost per ad engagement.”) The second category should describe the investments on future-oriented projects, such as developing a new electric car or a new mobile phone. In the third category, the company must itemize its so-called one-time, special, or extraordinary items. The purpose of financial reports should once again become enabling investors to take good decisions, instead of causing confusion and leaving them in the dark.

https://www.healthcaredive.com/news/ftc-loses-bid-stop-philadelphia-hospital-merger-jefferson-einstein/591854/?utm_source=Sailthru&utm_medium=email&utm_campaign=Issue:%202020-12-09%20Healthcare%20Dive%20%5Bissue:31310%5D&utm_term=Healthcare%20Dive

The challenge to Jefferson Health’s bid for Albert Einstein was the first action to block a provider deal in years for the FTC. Now, it’s hit a hurdle in the courts, though the agency could still appeal after this dismissal.

“The Court’s ruling is disappointing, and we our considering our options,” an FTC spokesperson said.

FTC has argued that both Jefferson and Einstein compete in acute care and rehab services and vie for inclusion in insurers’ networks.

Pappert’s ruling Monday, and the examples he used, essentially argued that given the number of competitors in the region, insurers could walk away from potential price increases the merged entity may impose by opting to redirect their members to other facilities.

Because there are so many systems, “no insurer can credibly assert that there would be ‘no network’ without a combined Jefferson and Einstein — something the insurers could say when Hershey and Pinnacle, the two largest Harrisburg area hospitals … attempted to merge,” Pappert wrote. He frequently cited the Hershey-Pinnacle case, which also was denied a preliminary injunction in district court but went on to win one in a federal appeals court.

Pappert also noted that no employers testified that they would have difficulty marketing a health plan to employees that excluded Jefferson and Einstein. In fact, the one employer that did weigh in, a school district, said it would be fine without the two.

The court also takes issue with whether the FTC properly defined the relevant markets in the lawsuit, an important hurdle in any case seeking to block a merger.

Pappert, a President Barack Obama appointee, was skeptical of the region’s largest insurer’s opposition to the merger during testimony. Particularly when the second-largest insurer had no concerns with the merger and does not believe it will pay higher rates.

Pappert said Independence Blue Cross, the largest carrier, has a “clear motive, other than antitrust concerns, to oppose this merger.” Together, Jefferson and Einstein own a portion of Health Partners Plans, a Medicaid and Medicare insurance product. HPP operates the second-largest Medicaid plan in Philadelphia, behind IBC’s.

A merger of Jefferson and Einstein would give the combined entity a 50% stake in HPP, though Jefferson is seeking to buyout the other partner, court dockets claim.

IBC’s CEO, said of the potential insurer competition: “It remains to be seen how we are going to be able to collaborate with anyone who is in direct competition with us as an insurer.”

https://www.governing.com/now/Many-Rural-Californians-Find-Free-COVID-Tests-Are-Too-Costly.html?utm_term=READ%20MORE&utm_campaign=As%20Pandemic%20Wears%20On%2C%20Legislators%20Challenge%20Governors%27%20Authority&utm_content=email&utm_source=Act-On+Software&utm_medium=email

On Sept. 9, a mobile testing site rolled up to Huron Middle School in the 7,000-person rural city 50 miles south of Fresno, Calif. In four hours, only four people showed up for free COVID-19 testing.

At five other coronavirus testing events organized by the Fresno County Health Department that month in Huron and the slightly larger city of Mendota, attendance remained in the single digits.

Besides the big cities, the rural farmworker communities of Fresno County have been hardest hit by the pandemic. But eight months into the virus, frontline workers and their families in small towns continue to avoid what experts deem a key step in overcoming the virus — testing.

For some, access to testing remains too remote. Others just never find out that a testing event is happening until it’s too late. Overwhelmingly, however, people in Fresno’s most impoverished communities fear that taking a test will result in nothing but losing their job, missed rent and mounting bills. Public health officials say relief is available, regardless of immigration status. But it may be too little too late, and outreach efforts remain out of touch with the community, advocates said.

“I think that there was an immense failure from the county to educate folks on, ‘This is what we know, this is what needs to happen, and these are the resources we have put out for you all,'” said Leslie Martinez, a policy advocate with Leadership Counsel for Justice and Accountability.

“Through an advocate lens, it’s been really frustrating and heartbreaking to work with community residents.”

‘If I Do Have It, What am I Going to Do?’

Fifteen years ago, Rosario Rodriguez moved from Mexico to Three Rocks, a small unincorporated community 50 miles west of Fresno surrounded by almond and pistachio fields.

She, her husband, and their two daughters never got tested for the coronavirus. Fear, misinformation and a lack of financial relief are reasons.

“What if they tell me I have it, but I don’t? What if they put the virus in me? And if I do have it, what am I going to do? That’s the fear of everyone here,” she told The Bee in Spanish. “People don’t have insurance, and they can’t get access to unemployment. So what resources are left for us?”

Fresno County public health officials say they know what they’re up against.

“There’s no benefit if you’re a farmworker if you get tested,” said Wayne Fox, director of the county’s Division of Environmental Health.

“If you’re positive, you stay home. You lose your job. You lose your pay. You get quarantined from your family. I mean, we’ve got a real barrier to overcome with that,” he said.

False claims that the government is giving people the virus have also made the county’s job more difficult, Fox said.

Cash Assistance Available in Fresno County

The state of California has mandated two weeks of paid leave for all employees. But employers have little incentive to remind them of what’s available, Fox said, and workers with precarious immigration status are often scared to demand it, advocates explained.

In partnership with the state, Fresno Economic Opportunities Commission launched Healthy Harvest in the summer, a program for farmworkers to get a free hotel room, meals, and transportation if they test positive or as they await a test.

So far, only five people have used their services, according to Kristine Morgan, communications manager for EOC, “but the word is just starting to get out there.”

Armando Valdez, director of Community Center for the Arts and Technology in Fresno, said the program was failing because it doesn’t take culture into consideration.

“Listen, Latinos are very united. We raise our families, and we don’t want to let go,” he said. “What I suggested is keep those families in their homes but give them the financial support so they can stay there. That was the suggestion a lot of our families were giving us. We will be quarantining, but keep them here. Help us financially.“

That help finally has arrived.

The COVID-19 Equity Project, launched late this summer as a result of $10 million set aside from federal CARES Act grants, has made available $1,200 in cash assistance for Fresno County residents who are sick or were exposed to the virus.

But few community members know about it.

“If you’re a farmworker, you’re not accessing the media; you’re not going to websites, you probably don’t have internet. So, this is something we’ve got to do a better job of making sure we get the word out,” Fox said.

To distribute the aid, the county paired up with 22 community-based organizations to serve immigrants, refugees, Black residents and people with disabilities. The idea is to reach people through “community health workers” who already form part of their community.

Residents can get in touch with the participating organizations to apply for aid.

To be eligible, Fresno County residents must show financial hardship as a direct result of COVID-19, like close contact or a positive COVID-19 test. The groups use different criteria to assess each household. Assistance is then given out through cash and by paying bills, like rent or utilities, according to Tania Pacheco-Werner, a research scientist at Fresno State who leads contact tracing and training efforts on the Equity Project.

County Struggles with Testing Outreach

For the first half of this year, Rodriguez lived in the slightly more central town of Cantua Creek, around the block from Cantua Elementary School. She visited the school daily to get breakfast for her two daughters. But she never found out about a testing event there on May 13 until a friend asked if she had been tested.

“I never saw a single flyer. There wasn’t much outreach so that people would know. I don’t think very many people showed up. I was there every day!” Rodriguez said in Spanish. “If I didn’t know then, how would people who live in Three Rocks or Halfway find out?”

According to the county health department, a total of 16 people were tested that day in May, more than the average of 12 people who showed up to their other rural testing events that month. Dave Pomaville, director of the health department, said the weekday, midday events were likely unpopular because of timing and because they lacked local clinic partners at the time.

Since the Equity Project launched in August, the county has partnered nonprofits with federally qualified health clinics to provide somewhat regular testing events. Partnering with these organizations has been crucial in building community trust, according to Dr. Trinidad Solis, who coordinates the Equity Project for the county.

At first, testing was only available during the workday. Attendance went up as they expanded into later hours and weekends.

“They’re still not where we’d like them to be, but we went from single-digit numbers into double-digit numbers,” said Fox, who also coordinates the project.

Why Did Outreach Take So Long?

Community advocates and local growers have been insisting on ideas like regular, local testing, and cash relief for months.

In June, west Fresno rancher Don Cameron told the county testing times in the middle of the workday were inconvenient for workers, he said in an interview. He suggested workplace testing.

Fox said they are only now starting to plan regular, returning testing sites, and workplaces are beginning to organize their own testing events.

Isabel Solorio, who organizes a food bank in the small farmworker town of Lanare, said she started asking for testing for her community in April.

“After six months, we got one. This is shameful. You hear about testing all over Fresno, except in the rural areas,” she said in Spanish.

Pomaville said coordinating testing has been an immense effort. Rural health clinics are already few and far between, and early versions of the COVID-19 test required a traditional lab environment.

He said he believes the answer lies in employers allowing employees to go to a clinic to get tested during work hours and expanding testing options that are less invasive and can be done out in the field.

“It’s been a lot of scrambling, and as soon as we think we have a plan in place, then things are changing,” Pomaville said. “But I think there have been huge steps in testing.”

Community advocates like Valdez say they believe elected officials don’t do enough to protect these communities because the undocumented aren’t part of the electorate.

Pomaville said he understands why many of these communities feel disenfranchised.

“We need to be more inclusive. I’m going to tell you, today we are not as inclusive as we want to be or need to be,” he said. “Sometimes advocates that are advocating for this feel like they’re not being heard. Sometimes it takes a little bit of time for that message not only to sink in but for the action to follow.”

Larger Issue?

The county’s slow response is a symptom of a much bigger issue, according to Pacheco-Werner, from Fresno State.

“You’re trying to catch up a public health infrastructure with decades of ongoing disinvestment overnight. People may think the starting point was here. No. The starting point was at negative.”

Small, rural communities like Cantua, Lanare, Huron and others developed as workforce farm labor towns. They were never seen as communities, but labor centers, she explained. Besides poor access to health care, most residents have lacked access to basic infrastructure and clean drinking water for decades.

The virus is simply opening up more people’s eyes to rural realities because “we’re all drowning in these numbers,” Pacheco-Werner said. “With COVID, you can visibly see what happens when you don’t try to make communities whole.”

Once a vaccine rolls around, the county will have to overcome the same barriers it has faced with testing, Pomaville said, “but hopefully we as a community are better prepared, as well.

“Hopefully, when the pandemic’s over, we are able to keep this framework together to solve the other problems we had before COVID started.”