Narrative reporting

A growing presence

Extensive narrative content in annual reports

•       Chairman’s statement

•       Directors’ report

•       Auditor’s report

•       Statement of corporate governance

•       Strategic report (business review)

Plus more or less whatever else you wish

Most narrative content is not subject to audit

Although informally auditors might review

Much narrative =  voluntary disclosures

 As opposed to a mandatory requirement

•       if voluntary – can always omit

•       more significantly – disclose what you wish

Appearing to say a lot but actually very little

The Corporate Report

A key milestone in development of UK reporting

Published by ASSC in 1975

Provides underpinnings of corporate reporting

And in retrospect the case for narratives

Several alternative statements identified

•       value added statement

•       money exchanges with government

•       transactions in foreign currency

•       employment report

Employment reporting

Provision of information on employment issues

Most specifically about employees

•       human resource accounting

•       beyond ‘putting people on the balance sheet’

These were more enlightened times

•       corporatism – the new capitalism?

Alternatively employee reports

A wide range of possible content

•       age and gender profile of employees

•       workforce size and distribution by type of jobs

•       geographical distribution

•       employee turnover

•       training and development expenditure

•       skills/competence profiles

•       health and safety performance

•       sickness absence/health and wellbeing

Operating and financial review

A major UK innovation in narrative reporting

Introduced in 1993 as a voluntary disclosure

Prospective information not historical

Opportunities for using non financial measures

Two elements were identified

•       operating review – discussion of performance

•       financial review –  financial management

Valuable additional information for investors

Proposal to make mandatory from 2006

With an extended content

Was abandoned in November 2005

A Business Review requirement introduced

Coalition Govt proposed OFR reintroduction

Evolved into Strategic Report requirement

Once again a very open ended document

Now quietly being abandoned by government?

Management Discussion and Analysis

The US counterpart to the OFR

Introduced by FASB in 1999

  MD&A should provide a clear and concise

  description of the reporting entity and its

  mission, activities, program and financial

  performance, systems, controls, legal

  compliance, financial position, and financial

  condition [in a balanced fashion].

Management commentary

The 2010 IASB requirement on such disclosure

Identified in an IFRS Practice Statement

Does not have standing of an IFRS

So it is a mandatory requirement not voluntary

But again detailed compliance not demanded

•       acknowledge the practice statement

•       required to follow ‘principles’ not ‘rules’

Corporate social reporting

The practical complement to social accounting

•       accounting to society

Has evolved into two complementary emphases

•       environmental/sustainability accounting

•       business/corporate ethics

A predictable ambivalence from business

And a site for developing narrative reporting 

United Nations Global Compact

Identifies 10 universally accepted principles

•       on human rights (2)

•       on labour (4)

•       on the environment (3)

•       on anti-corruption (1)

ISO26000 complements this statement

Provides guidance on reporting principles

Global Reporting Initiative

The most mature initiative in CSR space

Dates back to late 1990s, with UN links

The provision of guidance for reporting

Focus is on environmental/sustainability issues

Aims to make sustainability reporting routine

Has adopted a corporate approach to challenge

4000+ organisations have signed up

Has embraced the Triple Bottom Line model

•       economic - profit

•       social - people

•       environmental – planet

None is to be accorded primacy

More recently a 4^th bottom line – governance

Beginning to look a little familiar?

Social audit

The complementary accounting intervention

Provide assurance of CSR activity

First social audits predate current initiatives

•       independent scrutiny of annual reports

•       often politically motivated

Accounting firms have moved into the space

•       provide legitimacy and credibility

Danish Guideline Project

An alternative approach to IC reporting

Heavily reliant on narratives

Funded by Danish government 1998-2002

A two phase intervention

•       initial work with 17 companies

•       broader project with 100 companies

The principal output was a reporting framework

•       intellectual capital statement

Meritum project pursued in parallel

Intellectual capital statement

A four element generic framework

•       knowledge narrative

•       management challenges

•       initiatives

•       report – similar to the second iteration BS

Various ideas on the status of the ICS

At the extreme – replace annual reports

The ICS: 2003 – 2013

A review of the fate of the ICS over a decade

•       modest success – only a minority persevered

•       accountants rarely took ownership

•       success was normally robustly championed

•       ‘people’ was the most enduring focus

•       certainly not a waste of resources

The downfall: not made a mandatory disclosure

Self-accounting narratives

“Imprisoning people in other people’s accounts”

Empower human capital to produce narratives

•       work experiences

•       intellectual development

•       organisational culture

•       health and wellbeing

Complemented by customer self-accounts

Financial statements

Key financial statements

Can identify 4 statements

•       balance sheet

•       profit and loss account

•       statement of cash flows

•       budget

First 3 are identified with financial accounting

Budgets more with managerial accounting

Balance sheet

Now termed statement of financial position

A self explanatory concept

Financial position as at a particular date

•       financial year end

•       alternatively more frequently

Permits periodic comparison

•        strengthening (weakening) balance sheet

Composed of a set of year end balances

Extracted from the nominal ledger

•       master ledger

Each ledger has a closing balance

For the accounting year (period)

Serves as opening balance for next year (period)

•       book-keeping

•       double entry

Communicates the balance between

•       assets

•       liabilities (liabilities + equity)

Balances principally take the form of values

Underpinned by money measurement concept

•       cost and value calculus

•       ‘hard’ (financial) numbers

Communicates the balance between

•       assets

•       liabilities (liabilities + equity)

Balances principally take the form of values

Underpinned by money measurement concept

•       cost and value calculus

•       ‘hard’ (financial) numbers

Assets

The resources at the disposal of the business

•       what the business owns

Conventionally a distinction between

•       fixed assets

•       current assets

Fixed assets are long term assets

Current assets are more short term/liquid

Fixed assets

A wide ranging category

Assets with varying lifespans

•       fixtures and fittings vs land and buildings

Understood to wear out over time

Need to reflect this in balance sheet valuations

•       depreciation

•       flow through principle

•       reflects accruals basis of accounting 

Tangible vs intangible assets

Intangible assets have become more important

Goodwill was previously best known

•       extra you might pay to buy a business

•       value beyond tangible assets

Past 25 years we refer to intellectual capital

An open ended category of assets

Accountants uncomfortable with intangibles

•       often ‘home grown’ – no cost

•       difficult to value

•       subject to volatility

•       appreciate in value

Need to include them in balance sheet

Or maybe not – what alternatives

Current assets

Shorter lifespans, liquid assets

Again a wide ranging category

Most common examples

•       stock and work in progress

•       debtors

•       cash and bank balances

•       short term investments

•       prepayments

Stock and work in progress

Finished goods, work in progress, component

Very carefully/accurately valued

•       conservative valuations

Overvaluation can eliminate profit

Risks of loss, obsolescence, damage, etc

Nowadays JIT philosophy is widespread

•       reduces this particular risk

Debtors

Necessitate careful management

Debtors owe business money

Most businesses indebted to other businesses

Allowed to take transactions into account

If debtors disappear, so does revenue

And the profit

Liabilities

Claims against the business

•       what the business owes

Initially distinguish between

•       short term (current) liabilities

•       long term liabilities

Plus liability to those who own the business

•       equity

Short term liabilities

Two are particularly important

Cash – or lack of cash = overdraft

•       may be profitable on paper but no cash

Trade creditors – you are usually a debtor too

•       creditors can always call in the cash

•       reduces liquidity if not profitability

 These reflect accruals basis of preparation

Long term liability

Longer term indebtedness

Various forms of long tem loan

•       bank loan

•       personal loans

•       debentures

Usually carry a short term cost – interest

Also long term commitments

•       company pension provisions

Basic equation

Fixed assets

+ current assets

-          current liabilities

-          long term liabilities

= Equity

Equity

Liability of business to owners/investors

Represented by two basic elements

•       investment by owners

•       accrued profit (loss)

In principle if you sell up and settle liabilities

You should realise initial investment and profit

The value realisation principle

Link to profit and loss account

Profit is transferred from profit and loss account

This provides the link between statements

Profit after distribution of any dividends

Why do you retain profit/earnings?

Two key issues to be concerned with

•       source of investment funds

•       stock and work in progress – prudence 

Scoreboard frameworks

New management accounting

MA developed in shadow of FA for decades

By early 1980s MA was largely moribund

Perceived as lacking much relevance

The opportunity to rejuvenate now existed

A new commercial environment

•          the rise of the customer

•          the search for competitive advantage

New foci, new techniques, new numbers

Recognition financial numbers inadequate

Cost and value calculus irrelevant

Still need to ‘count’ but not account?

Exclusivity now became challenged

Interdisciplinary collaborations necessary

And suddenly it got interesting again

Balanced scorecard

Developed by Kaplan and Norton 1991

Two short HBR articles in 1992 and 1993

Kaplan previously advocated ABC/M

BS clearly not another new technique

A new framework for internal reporting

Vehicle for reporting NMA information

With possible promise for external reporting

Offers comprehensive view of performance

•          holistic

•          many ways of seeing

Incorporates a combination of

•          financial measures

•          non-financial measures

•          operational indicators

‘Balance’ concept sometimes misunderstood

Multi-perspective approach to reporting

•          the numbers are not meant to ‘balance’!

Still almost exclusively quantitative

No obvious place for narrative information

More rather than less numbers

•          the charge of information overload

A new perspective on control

Financial measures promote control

Traditional top down, management control

By contrast balanced scorecard emphasises

•          strategy

•          vision

“Measures designed to pull people toward

the [organisation’s] overall vision

A more strategic approach to accounting

Perspectives

BS constituted by four generic perspectives

•          financial

•          customer

•          internal business performance

•          innovation and learning

No one perspective is to be privileged

Further/alternative perspectives possible

Goals and measures

Each perspective to incorporate these

Goals and measures must be aligned

Linking strategy and action

Goals = critical success factors

Measures = key performance indicators

An element of process is implicit

The key questions

Each perspective has a relevant question:

•          how do our customers see us?

•          what must we excel at?

•          can we continue to improve/add value?

•          how do we look to shareholders?

The iconic diagrammatic representation

•          four spaces to be populated with metrics

Continuing development

Balanced scorecard concept soon evolved

Principally in a series of

•          ‘popular’ monographs

•          Harvard Business Review articles

Continued engagement with strategy

Less emphasis on measurement aspects

Pushes the boundaries of MA function

Take 2.1

Initial reformulation occurs in 1996

Becomes grander and more sophisticated

Strong links with the strategy theme

The ‘cornerstone’ of strategic management

Balanced scorecard links

•          long term strategy

•          short term action

Take 2.2

Several interesting refinements evident

•          learning and growth perspective

•          modified descriptors

•          targets and initiatives incorporated

•          vision and strategy at core

Embrace BS and become strategy focused!

Take 2 3

Balanced scorecard now defined as

A systematic performance measurement

system that translates an organization’s

strategy into clear objectives, measures,

targets and initiatives organized by four

perspectives’.

New iconic representations provided

Take 2 4

Enrols a largely traditional view of strategy

•          translating the vision

•          communication and linking

•          business planning

•          feedback and learning

BS provides necessary enabling mechanism

Identifies a major role for MA profession

Cause and effect relationship

Only mentioned briefly in passing in 1996

Soon to assume a core significance

A causal chain linking the perspectives

Tells story about a business unit’s strategy

•          a logical relationship asserted

•          a sequence of if-then statements

Definitely no longer 4 spaces to populate

Causal chain runs from bottom to top

•          employee skills (L&G)

•          process quality/cycle time (IBP)

•          on-time delivery/customer loyalty (C)

•          return on capital employed (F)

Emphasis on a bottom up logic

•          on the creation and delivery of value

Lead and lag indicators

A further dimension of the BS concept

Distinguish between two types of indicators

Lead – prospective – customer, IBP, L&G

Lag – historical - financial

Need to incorporate both in scorecard

An alternative to traditional budgeting

‘Beyond budgeting’ resonances

Strategy maps

A third iteration sees SM concept emerge

Much fuller exploration of cause and effect

•          how to create and deliver value

•          (customer) value proposition

•          if successful, shareholder value created

Emphasis on the role of intangibles

And the necessity for effective alignment

Incorporate refined strategy thinking

Identify importance of measurement

•          as part of a couple

•          “balanced scorecard strategy map”

Not yet fully embedded in the literature

Overly complex for many managers?

And for too many management accountants

Intellectual capital

A new focus emerging in early/mid 1990s

The growing importance of ‘intangibles’

•          escalating market/book value ratios

•          challenge to working of capital market

•          need to take into account

Financial valuations inherently difficult

The necessity to look to the NMA

An initial focus was to identify different types

Agreement on a simple typology

•          human capital

•          relational capital (customer capital)

•          structural capital (organisational capital)

But not intellectual property – quite distinct

Further types identified – cultural capital

Measure and report IC growth

A number of IC scoreboards developed

•          Skandia Navigator

•          Intangible Assets Monitor

•          Cockpit Communicator

•          Value Chain Scoreboard

All strongly resemble balanced scorecard