On the contrary - GAAP earnings give the most accurate picture of cold hard cash. That is the reason they exist , and securities regulators are specific about its definition.
Maybe but say YC put $20k into Airbnb for a stake now worth $1bn and $80k into 4 other statups that went bust. GAAP would show a net loss of $80k which would not reflect very accurately how they were doing. GAAP has been designed more to provide a consistent way of calculating corporate income tax than to accurately show how a company is doing.
That seems like an ungenerous interpretation of the parent's comment. I didn't take that comment to mean that GAAP is not a good way to calculate income tax, but that it's not a good way to judge the true financial prospects of a company.
I took it the same way. If there is a better way to judge the true financial prospects of a company we should be taxing them accordingly.
My point was that GAAP is probably the best we're going to do because of the consistency problems.
The moment you start applying special rules or caveats per company you stop being able to compare companies properly as an investor, at which point the measure becomes useless as a talking point as well as being useless for tax calculations.
My original post was framed against tax because it doesn't really make a difference. If the new method is good enough for comparison between companies it's good enough to replace GAAP - unless it's not.
I don't agree with this sentence at all, "If there is a better way to judge the true financial prospects of a company we should be taxing them accordingly."
The main thing investors want are some measures that are reasonably forward looking, with the caveat that some of those forward-looking measures will of course be inaccurate when the future comes.
Taxes, on the other hand, should be mostly past looking, taking into account events that are fully settled and guaranteed.
If, as an investor, you're only examining trailing metrics, you're going to be a pretty horrible investor.
It's actually an interesting question as to whether something different from GAAP should be used for tax. For companies based in one country it's a time honoured system that has worked for decades but for multinationals it's become in my opinion too easy for them to use loopholes and pay little or no tax.
Like with YC they are US based and if they sell their dropbox stake they'll be taxed but more tax avoiding companies might say have held the dropbox stake through a Cayman Islands trust or some such and try avoiding it. I'd vote for something like for multinationals they do accounts as if all their multinational bits were in one country and then allocate the earnings to different countries in proportion to the sales there. So if Microsoft had a lot of Windows sales in Germany say they'd pay tax on the profits there rather than saying they were all generated at a DVD stamping plant in Ireland for example.
Anyone valuing startups on GAAP earnings is an investor who will never invest in a startup. Appreciating it as a measure in this context is not a virtue.
I'm under the impression that the IFRS (international accounting standard that replaces GAAP) changes this: equity instruments need to be measured at fair value, even if they have unrealized gains or losses.
No, that’s completely incorrect especially with new accounting standards. Cash flow is much harder to fake than earnings and new GAAP standards mix the two.
My comment in relation to the comment that stated GAAP earnings are more sane. I think using GAAP as a standard for valuing an investment fund is a little asinine. Unrealized losses/gains yes, but GAAP doesn’t save you from mark to market. There’s a reason PE returns are smoother than public equities. Public PE firms wrote down assets way less than the decline in public equities in Q4. My problem with the new GAAP rules is that it distorts operating earnings and investment earnings. For example, when Stripe goes public, Amex will have fluctuating security in its earnings statement, or Booking and Ctrip, etc.
Paper gains are notoriously easy to stretch.