 Value network modeling and analytics are in the forefront of non-financial business reporting. The Value Networks data model is fully XBRL enabled and it is the only scalable business modeling methodology that systematically links business activities with both financial and non-financial scorecards and intangible asset management. We follow trends in this area closely and the recent financial crisis has only served to intensify the call for expanding business reporting to include management practices and intangibles.
50% to 70% of business value is being ignored.
Most estimates place intangible value – such as reputation, social capital, and human competencies at 50-70% of company value and activity. The work of Baruch Lev and many other experts have shown that the “intangible value gap” between book value and market value easily can run to 80%. This held true since the mid 1990s until the recent financial crisis. In January 2009 Intellectual Asset Magazine reports that corporate intangible values in the US have collapsed over the last 12 to 18 months, but with the recovery of the stock market may again range from 50-70% of Business Value.
Business leaders are aware of this value – they just don’t know how to deal with it. As reported in The Real Value of Intangibles by Denise Caruso from Booz & Co. strategy + business issue 52, Autumn 2008, in 2004, “the (Economist Group’s) Economist Intelligence Unit conducted a survey of senior managers on intangibles. A whopping 94 percent of respondents said that managing intangible assets or intellectual capital is important. More than one-third ranked it as one of the top three management issues. In fact, nearly half of the respondents said they considered intangibles to be the primary source of long-term shareholder wealth creation for their companies. But when asked about the systems they used to measure the performance of this important class of assets, 95 percent of the executives surveyed said they did not have such a system in place.”
Lack of Standards and Consistency
The Booz & Co. report goes on to note that “more than a dozen approaches have been developed to measure and report intangible assets. But according to a 2005 report on intangibles by Rob McLean for the Value Measurement and Reporting Collaborative, a multinational organization of accounting bodies, the results derived from one approach have virtually nothing in common with results from another. Some models, including the balanced scorecard framework, link intangibles to performance by measuring key indicators, such as reductions in the cost of safety management or in customer complaints. Others use value drivers, such as sales growth or gross margins, or various “capitals” (such as human, intellectual, or social capital) to value intangibles. And although all approaches (except traditional accounting, of course) recognize the importance of broader context in setting a value, each has developed its own way for dealing with and representing that context. Such fundamental differences derail the potential for each approach to inform a broader economic conversation about intangible value. Nonetheless, the best of them seem to be tremendously useful to the companies that deploy them.”
The Benefits of XBRL
XBRL (eXtensible Business Reporting Language) is gaining momentum as an open data standard for financial reporting. XBRL allows information modeling and the expression of semantic meaning commonly required in business reporting. XBRL is XML-based. It uses the XML syntax and related XML technologies. As reported by David McCain in CFO.com, August 24, 2009, after years of development, data tagging using XBRL may be set to transform internal finance operations. The premise is that tagging information in financial and other IT systems in a standardized format would make it easier for companies to share data across units and departments. That in turn would improve internal reporting, the argument goes. Notably, companies would be able to view performance as reflected in various line items on a continuous real-time basis, rather than waiting for the end of a reporting period to get the full picture. Higher quality business decisions then could be made more quickly.
Former Securities and Exchange Commission chairman Christopher Cox staked much of his reputation on the investor benefits of XBRL. Others claimed it would streamline international accounting convergence and render differences in financial statement presentation all but moot. And it may yet do all of those things. The SEC has, after all, mandated that all U.S. public companies file data-tagged financial reports by 2011, starting with the 500 largest for periods ending after June 15 of this year. Now, advocates are pointing to a completely different area that may benefit from XBRL: internal management reporting.
Signs of Movement
In August 2009 a major industry group, the Institute of Management Accountants, formed an XBRL Advisory Committee to build awareness that data tagging can do more than satisfy compliance requirements. Gartner Group, an IT advisory firm, recently issued a report that urged companies to work toward internal use of XBRL.
The current status was summed up for CEO.com by John Van Decker, a research vice president with Gartner Group. He states that “Right now organizations are only funding projects they see as strategic. An XBRL initiative actually would be strategic, because it could improve management reporting, but I don't see that most companies understand what it can provide.” A Gartner survey of 256 companies portrayed the low demand: less than 5% said they currently plan to use XBRL for internal reporting purposes. About half of the surveyed companies were privately held, and they were even less likely to report interest in internal usage, Van Decker says, though he notes that the benefits would be equal for public and private entities.
Gartner's Van Decker went on to state that “Companies are waiting because the ERP vendors have not seen the demand.” Both Oracle and SAP, he notes, have formed partnerships with UBMatrix, an XBRL taxonomy firm. However, he says, “The XBRL capability they've inserted has been primarily for external reporting. They've tacked it on to the financial consolidation as opposed to building taxonomy values into the ERP and general ledger systems. The management reporting perspective is pretty much being ignored.” (Emphasis ours.) Aside from regulatory reporting, there are essentially no legal requirements for management reporting. This is a likely reason why XBRL adoption outside of financial statements is low.
In The Business Case for XBRL by Charles Hoffman, CPA, Bryce Pippert, and Phil Walenga, it was stated that “The need for something like XBRL is fairly obvious if you exchange information with others which are external to your organization. If you cannot control another organizations IT infrastructure, organizations have to come up with some agreed upon format for exchanging data. Over the years 100s of different formats have been tried with varying degrees of success. Each option has its set of pros and cons. Until now there has been no standard that everyone has agreed on.”
Now, XBRL is standing out from the pack. Denise Caruso affirmed in the Booz & Co. report that for external reporting “Whether companies’ reasons for avoiding the intangibles issue are valid or not, they may not be able to bar the door from disclosure much longer. In part that’s because investors are exerting increasing pressure on executives to provide them with performance indicators for these assets. Thus it is to no one’s advantage for there to be a lack of reporting standards or audits for intangibles and for disclosure to remain voluntary.”
The stage is set.
Pushed by the SEC and other governmental agencies, worldwide XBRL tagging for external reporting of intangible asset value can be seen as set for general adoption. With XBRL adoption as a backdrop, for management who understands the paradigm shift from process to networks and from tangible to intangible value, the benefits for internal reporting focused on intangible value and value creation capacity is obvious. Widespread adoption of methods for visualization and analysis of intangibles for internal reporting require a well understood taxonomy (with XBRL tagging capability), software that eases adoption and use, and integration capability with business intelligence platforms from major vendors. This is exactly what is being offered today with the value networks methodology and analysis software available from http://www.valuenetworks.com. We have been following these efforts closely since 2003 and believe that the recent financial crisis is a key driver for alternative business, financial, and economic models to gain increasing support. Our application is fully XBRL compliant and automatically generates intangible asset management analytics along with other powerful indicators for monitoring and predicting value network performance.
Also of interest: |
