PracticeConsultingMaking sure the numbers add up

Making sure the numbers add up

Irrespective of the nature of a business, providing outside parties with clear and concise information on both performance and value is now more important than ever. In the context of 'business at the speed of thought', historical cost financial statements alone are now far from adequate in achieving either clarity or precision.

The decreasing relevance of historical cost accounts is affecting both the New Economy and the Old. When major portions of the value of businesses are not in tangible assets which sit in the accounts, finance directors should ask what else they could do to ensure that all aspects and value of their businesses are properly recognised.

The various proposals for abridged reporting in part reflect the reducing emphasis placed on the content of annual accounts. Readers are looking elsewhere to assess broader aspects of performance and value.

New measures, to which users refer to assess the progress of a business, are quickly evolving. The ICAEW New Horizons report ‘Inside Out’ is moving in the right direction in calling for clear disclosures on strategy, competitive positioning, key performance indicators and value-based measures of performance. Identifying measures of performance truly appropriate to the business, many of which will be non-financial, and leading rather than lagging indicators will be more useful and create a better understanding of performance.

In many businesses this will apply particularly to the development or exploitation of Intellectual Property which is often totally hidden in today’s accounts. Many organisations have hidden reservoirs of value from vast investment in R&D captured in patented technology. We have already seen the increasing trend in North America for technology based businesses to focus on this as an opportunity both to demonstrate and create value. Organisations on this side of the Atlantic face a similar challenge, both in terms of the systematic exploitation of an under-used, unrecorded asset but also to articulate clearly on a regular basis the way in which the value of this asset is being enhanced.

This provides a major opportunity to the whole breadth of the accountancy profession to take custody of a wider segment of the information spectrum. In doing so we shall not only help convey the true performance and value of a business, but also continue to enhance the perceived value of our own profession.

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