Strategic decision points of the enterprise occur where management’s decision making can meaningfully shape the outcome of events. In financial reporting, strategic decision points arise when GAAP is silent or ambiguous in its treatment of a transaction or set of transactions relevant to the company. In these instances, management’s decisions will shape the way its operations “hang” on the balance sheet and income statement, which impacts the enterprise’s valuation, as well as its annual budget & performance metrics.

GAAP will provide clear and definitive guidance for a company that manufactures widgets from raw inventory and sells them at a fixed price, getting cash for the sales when the widgets are shipped. There won’t be any strategic considerations. But more common to the contemporary marketplace are features such as mutli-part revenue arrangements with a clawback feature, or engineered financial instruments funding a company’s venture into a new business segment.

GAAP can offer many relevant references for an economic fact set, with each reference contemplating a different facet of the transaction and stipulating various ways to report it in the financial statements. The CFO is left with no definitive guidance, or a patchwork of related strands that are incomplete. A call is put in to the auditors for clarity. They draw their own conclusions and inform the CFO of their views, indicating there is one approach they approve of.

A year later, the SEC reviews the financials in conjunction with an acquisition. The company gets a letter saying the staff didn’t agree with its method. They cite a policy of theirs that’s not published but is widely known inside the walls of the agency and indicate a restatement of previously issued financials is required. Investor relations and the CFO move to calm investor concerns and prevent value erosion in the enterprise’s market capitalization.

I routinely sat on the SEC side of these events. Countless similar experiences formed my understanding of strategic financial reporting and its value to the enterprise and their shareholders. Investors don’t gain from volatility in their holdings. They are interested in the same principals as management, long term stability built of sustainable growth.

When GAAP is silent or ambiguous about how to report the company’s business, a strategic and actionable event occurs. If management does not respond with a focused and studied approach, it will have the outcome dictated to it. The company will lose the opportunity to assure the shape of its balance sheet and annual performance metrics match the shape of the economics underlying its operations.