agenda—week 10 review of the reality to report (abstraction) model accounting for intellectual...
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Agenda—Week 10• Review of the reality to report (Abstraction) model• Accounting for intellectual capital...and by implication,
for many of the non-quantifiable but important assets of organizations
• Reporting in ways that people think—how can we match the reporting of information to the receiving of information
• Accounting is not neutral—how we account, report, audit...influences decisions and society
• Accounting for long-term sustainability… considering economics, broader human systems, and natural systems
• Open time for questions
Accounting model…AIS version
Business Activity (Something
happens)
Filter—criterionfor:
Processing, valuing,
aggregating
Interpretation,biases
ABSTRACTION
Observe andRecord
Report
Decision Making(SomethingHappens)
Filters, processing
• Filters—what do we observe and record– Determines what can be used for future
decisions, evaluations, controls…without leaving the system
• Processing—how we combine the data– Determines what information is available for
decisions, further restricts the content and availability of the information
Presentation and interpretation, biases
• Regardless of the content of the report, the communication is limited by:
– the perspective of the report,
– the clarity of the transmission, and
– the attributes of the reader
• Ways of reporting the info
– Presentation format
– Content versus Context…context matters
Filter
• Criterion for identifying what is included in the accounting information system—relevant to stakeholders, broadly construed
• Who are we accounting for? accounting to?– Stakeholder, societal audiences…who cares about
GM?– Regulated v. voluntary disclosures
• What are we missing in accounting information?– Historical cost– Social, natural aspects – Representational faithfulness
Comprehensive example…intellectual capital
• Long history (if you have a short memory) of attempting to quantify the value of human assets– What is the present value of the future
benefits of the people who work for us?• Notion of intellectual capital is a more nuanced
and deeper view of human assets…• Pioneers have started in the attempt to produce
statements of value to decision-makers and stakeholders
Skandia companies• Formalized the position of “Director of
Intellectual Capital” in 1991—Leif Edvinsson
• “Controller of Intellectual Capital” in 1994
• Note the term “controller”
• Annual supplements, quarterly reports internal and external
• Business Navigator—a framework for thinking about intellectual capital
Skandia Business Navigator• Not intended to provide a quantitative value for
components of intellectual capital• Balanced overview• Systematic processes and measurements• Provide information to management to support
creation of future value
• Current attributes that support future value—leading as well as lagging indicators
Navigator components
• Somewhat analogous to “balanced scorecard”
• Five components– Financial– Customer– Process– Renewal and development– Human
Relationship of components• Financial...imperative for survival• Customer...goal to please and support• Process...how activities are arranged to
support and please customer• Renewal and development...infrastructure
to create/support/develop processes• Human...attributes that make all these
possible in the long run, and the short run
The accountant’s place
• Design—assist in setting up effective, efficient, controlled systems for capturing, processing, and reporting the data…filter…
• Standards—creating, evaluating, monitoring the metrics for capturing intellectual capital
• Certification—provide a means for assurance services related to intellectual capital
• Navigation—assist in evaluating, identifying patterns, producing data to answer questions
• adapted from Intellectual Capital (Edvinsson and Malone, 1997)
FINANCIAL FOCUS
Net operating income (MSEK) 1,130 1,215 1,258 1,399
Market value (MSEK) 19,206 20,092 20,702 21,504 CUSTOMER FOCUS
Customer satisfaction index (max. value = 100) 69 58 56 n.a.
Average lease (years) n.a. 8.6 8.5 n.a.
Average rent (SEK/sq.m.) 951 960 970 1,041
Telephone accessibility (%) 60 71 60 n.a. HUMAN FOCUS
Employee turnover (%) 10.0 10.1 7.9 7.7
Average years of service with company 12.0 10.0 10.1 10.2
College graduates/ total number of office staff (%) 36 32 31 31 PROCESS FOCUS
Occupancy rate measured by area (%) 93.7 91.8 89.7 89.3
Financial occupancy rate (%) 96.2 94.9 93.0 91.2
Costs per sq. m., Sweden (SEK) 304 274 276 272 RENEWAL & DEVELOPMENT FOCUS
Property turnover: sales (%) 8.1 1.1 6.1 0.4
Change and development of existing holdings (MSEK) 235 311 333 313
Training expense/ administrative expense (%) 0.8 1.0 1.5 1.0
Another view of Intellectual CapitalCelemi
• Leave the balanced scorecard behind• Three classes of intangible assets
– External (customer), internal (organization), competence (people)
– Total equity>visible equity (capitalization > book value)…duh…
• Estimated value is imprecise• Change in intangible assets is measurable
– Invisible revenues—generally implicitly accrued– Invisible investments—generally explicitly
expensed
Classes of assets
• Three classes of intangible assets– External—reputation, customers,
image...web of relationships– Internal—processes, organizational, patents,
concepts, systems...infrastructure– Competence—skills, capabilities...people
Attributes of asset all classes
• Growth and renewal—what are we doing to improve, build, recreate the IC...
• Efficiency—how well are we using the IC that we currently possess...
• Stability—how likely is the IC that we currently possess will be around in the future...
Example...
• External structure– Renewal and growth
• Organic revenue• Image-enhancing customers
– Efficiency• Sales per customers
– Stability• Repeat orders sales percentage• 5 largest customer sales percentage
Brief example—Triple bottom line
• Environmental and social aspects of business operations are gaining importance– Wal-Mart $500M investment—reduce GHG, fleet
emissions, more…– GE Ecomagination
• Reduce GHG by 1% by 2012• Increase GHG intensity by 30% by 2008
• TBL—Economic viability, environmental stewardship, social equity– What criterion must exist to capture the important data?– Who is the audience?
Processing, valuing, aggregating
• How data are combined impact what can be reported and, ultimately, used to form an understanding of the business reality.
• Let’s consider the statement of cash flows…direct v. indirect methods
Statement of Cash Flows
• FAS 95 recommends the direct method…specifically identifying such things as cash from sales, cash to suppliers…rather than a reconciliation—the indirect method
• Identified accounting systems as impediments to implementation of requirements
• The Board received 450 comment letters, most from bank lending officers--an accounting information user--who favored requiring the direct method for the cash flow statement.
• Corporation accountants, on the other hand, favored the indirect method due to excessive implementation costs. They appealed to the board because they could not currently obtain gross operating cash receipts and payments directly from their accounting systems.
• Over 90% of listed companies use the indirect method
Statement of cash flows--Australia
• The direct method of presenting cash flows arising from operating activities reports gross cash inflows and gross cash outflows. This information can be obtained either by using an accounting system which directly records and analyses the cash flows in relation to each transaction, or by adjusting sales, cost of sales and other items in the profit and loss account for non-cash items and items which do not relate to operating activities.
• This Standard requires the direct method of presentation in the statement of cash flows because this method provides information that is not otherwise available in the balance sheet and profit and loss account. It provides a more useful basis for estimating future cash flows than a method of presentation that discloses only the net amount of cash flows arising from operating activities.
Types Of Measures
• Direct—absolute measures (revenues of $2000)• Relative (ratio)—one data item compared to another
data item (revenues of $2000 per store)• Indexed—related to a standard or baseline, e.g. trend
analysis (revenues increased by 15%)
• Lagging—measures of output, end-process measures, record effects, reflect past performance
• Leading—in-process metrics of performance, proactive, reflect current status/activities, predict future performance
GAAP—Representational faithfulness
• Faithful to what?• Does GAAP define relevant business reality?• What is the role of the AIS in relation to GAAP?
• Truth tellers—identify truth, • Liars—deny the truth• Bureaucrats—indifferent to the truth
• Corresponding to reality v. accordance with standards
Presentation format
• Impact the interpretation and usability of the info
• Narrative• Rows and columns• Chernov’s faces• Business instrument panel• SmartMoney investment tool
– Map of the Market.htm• Types of measures
Making Information Usable
• Credible– What users value and trust
• Accessibility– Physically– Cognitively
• Engagement– Must be noticed…thru format, medium, presentation…– Idiosyncratic to the observer
• Transparent—particularly for unfamiliar information– Clearly connected– Clearly constructed– Clearly collected
Accounting is NOT neutral…context matters
Income Statement—Choose your format…
Corporations maximize owner wealth
•Revenues 2,000•Materials ( 900)•Labor ( 400)•Taxes ( 150)•Interest ( 200)•Net Income 350
–Distributed to:•shareholders 350
Corporations optimize societal wealth
•Revenues 2,000•Materials ( 900)•Net Income 1,100
–Distributed to:•employees 400•government 150•creditors 200•shareholders 350
Accounting is NOT neutral—Context matters
• Value added statement
– Altron
• How do we look at “profit”…what do we maximize/optimize
• Which stakeholders are privileged?
Accounting for long-term sustainability
• Voluntary• Addresses social and environmental
issues• Irregular distribution• Inconsistent format• Unpredictable content
Why a report?
• PR• Stakeholder information• Cultural imperative• True belief
• Some evidence that being responsible has positive impacts on shareholder return
Corporate Social Responsibility
• Environmental reports– http://www.shell.com/home/Framework?siteId=home– http://www.interfacesustainability.com/– http://www.interfacesustainability.com/metrics.html
• Voluntary v. mandatory disclosure• Triple bottom line v. financial reporting• Motivations for reporting
– Legitimacy, reputation, enlightened, reduced risk
• Attestation, verification, certification
Human behavioral issues
• How does CSR impact people, companies, society?• How do companies react?• What are the drivers for CSR?
• Walmart, Nike, Electrolux, BP…
Abstraction
Business Activity (Something
happens)
Filter—criterionfor:
Processing, valuing,
aggregating
Interpretation,biases
ABSTRACTION
Observe andRecord
Report
Decision Making(SomethingHappens)