For years, many have been making the case that corporations need to do a better job on financial reporting, including on intangibles. In part, the concern comes from the fact that company book value and market value are so widely disparate — and that account rules don’t cover intangible assets. Accounting for intangibles (i.e. adding them to companies’ books) has been either the holy grail or the chimera of financial reporting.
I have long stressed the need for better measurement — of intangible and of innovation.
In our report Reporting Intangibles: A Hard Look at Improving Business Information in the US, I called for FASB and IASB to confront the disparity in treatment of acquired versus internally generated intangibles and for the need to address the issue of expensing R&D. But in general, I came down on the side of increased disclosure rather than attempting to add everything to the balance sheet. As I said back then, even if all the accounting problems can be fixed, there is too much important data and information that can never be reduced to an accounting valuation.
I also noted that there were efforts underway to create a more comprehensive framework for expanded business reporting, but no consensus. Now Robert G. Eccles and Michael P. Krzus have a new book out on One Report: Better Strategy through Integrated Reporting. The “One Report” would be a compilation of financial and non-financial information that could then use Internet technology and Extensible Business Reporting Language (XBRL) to provide more specific information to relevant stakeholders. It also seeks to tie non-financial and financial metrics to overall company goals and performance. As the authors describe it, there are four primary benefits to companies:
1. Greater clarity about the relationship between financial and nonfinancial key performance indicators. This will help managers understand and confront the trade-offs necessary to balance financial and societal demands.
2. Better management decisions. As noted by the creators of the Balanced Scorecard, HBS professor Robert S. Kaplan and David P. Norton, there is compelling evidence that better measurement, and therefore better information, leads to better decision-making.
3. Deeper engagement with the broad stakeholder community. First, it will help shareholders focus on more than short-term returns and better understand the investments necessary to ensure long-term viability. Second, other stakeholders will begin to appreciate the need for a company to make a profit if it is to create value over the long term.
4. Lower reputational risk resulting from integrated reporting. Stakeholder engagement leads to better mutual understanding. Clear and consistent communications about a company’s financial and nonfinancial performance will be the basis for a constructive two-way conversation.
Both Eccles and Krzus are veterans of the efforts to improve corporate reporting. We will have to see if this latest effort can help move the ball forward.