At a dialogue session in Singapore earlier this month, executives of the Chartered Institute of Management Accountants, International Integrated Reporting Council, Singapore Accountancy Commission, Institute of Singapore Chartered Accountants and CFOs of the city state’s most venerable firms were of the view that a new way of financial reporting is needed if corporates are to stay relevant to their stakeholders in the future.
They also agreed that a firm’s management accountant will become increasingly important in spearheading that change.
Intangible assets such as human, intellectual and environmental capital are not adequately valued on the company’s books, even though such assets now account for 84% of the value of S&P 500 companies
“We are now living in very fast-moving and complex world, one in which the value of many businesses is moving from being predominantly on [the balance sheet] to off the balance sheet,” Charles Tilley, CEO of the Chartered Institute of Management Accountants (CIMA), told CFO Innovation. “The value of companies like Apple and Microsoft for example, is in their intellectual property and talent and not in the physical capital that typically sits on the balance sheet.”
In that light, today’s CFOs must look beyond their firms’ tangible assets and begin accounting for the intangibles on their books. “This will help them make better decisions, respond appropriately to current challenges and protect the value generated by such assets in the business,” says Tilley.
The value that's unaccounted for
Under the existing corporate reporting system, however, much of that value remains unaccounted for. According to Ocean Tomo, an intellectual property merchant bank, intangible assets such as human, intellectual and environmental capital are not adequately valued on the company’s books, even though such assets now account for 84% of the value of S&P 500 companies. In comparison, intangibles represented just 20% of the companies’ assets in 1975.
Consequently, investors are not receiving the information required to fully understand the value of a company’s business and gauge its potential for growth. “So, moving forward, CFOs need to think about accounting for the entire business rather than just its physical capital, such as property and machinery. The profession must develop a new way of accounting effectively for the intangible value generated by a company,” Tilley says.
Demand for a more comprehensive method of accounting is rising. According to a CIMA survey of around 400 global business leaders, some 94% agreed that such a method is important to be able to effectively explain how their business creates value through corporate reporting.
Meanwhile, 92% believe that combining financial and non-financial information will help to explain the value-creation process, drive improvements in decision- making, as well as identify and manage risks within the firm.
Enter integrated reporting, which aims to give a company’s stakeholders a better understanding of the factors that materially affect its ability to create value. “Integrated reporting is essentially telling a story about how your business creates value over a period of time and the risks at hand,” says Tilley.
In other words, an integrated report effectively communicates how an organization's strategy, governance, performance and prospects lead to the creation of value in the short, medium and long term.
Underpinning all that is integrated thinking, which refers to financial decision-making based on information that encompasses both the tangible and intangible assets of a business and that is more interconnected and forward-looking than traditional financial analysis.
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