Elements of Value Reporting

In the previous chapter accounting principles for Value Reporting are mentioned in order to show the main principles on which reporting is based. This chapter goes into more detail and presents concepts which cluster the information desired in the context of Value Reporting. All classification of Value Reporting contents are theoretical constructs so that in practice companies should adapt the reporting contents to the needs of their industry and their own situation.831

Table four contains examples for possible classification of Value Reporting contents. In total, the named information elements are very similar.832

Author (Year) Categories of Value Reporting

Müller, M. (1998)  Total Return Reporting

 Value Added Reporting

 Strategic Advantage Reporting Labhart, P. (1999)833  _{Financial Perspective}

 Management Perspective  Customer Perspective  Process Perspective  Development Perspective Pellens, B., Hillebrandt, F., Tomaszweski, C. (2000)834

 Shareholder Return Reporting  Corporate Return Reporting

o Detailed Financial and per

830 _{Cf. Labhart, P., Volkart, R. (2009), p. 211.}

831 _{Cf. Achleitner, A.-K., Bassen, A., Pietzsch, L., et al. (2002), p. 34.}

832 _{Cf. Steinhauer, L. (2007), pp. 104-105; cf. for a presentation and description} of selected classification patterns of Value Reporting contents Morich, S. (2007), pp. 270-282.

833 _{Cf. extensively Labhart, P. (1999), pp. 263-271.}

834 _{Cf. extensively Pellens, B., Hillebrandt, F., Tomaszewski, C. (2000), pp. 181-} 186.

Author (Year) Categories of Value Reporting Share Reporting

o Value Tools Reporting o Future Objectives Reporting Arbeitskreis Externe

Unternehmensrechnung der

Schamlenbach-Gesellsechaft (2002)835

 Capital Market oriented data o Market Valuation o Chance-Risk Profile

 Information about not disclosed assets on balance sheet

 Information about strategy and performance

Table 4: Possible classifications of Value Reporting elements836

In this dissertation the structuring of Value Reporting according to Müller is used. He divides the reporting in three separate areas Total Return Reporting, Value Added Reporting and Strategic Advantage Reporting. Possible elements in these three areas are illustrated in the following illustration.837

835 _{Cf. extensively Arbeitskreis Externe Unternehmensrechnung der} Schmalenbach-Gesellschaft (2002), pp. 2338-2339.

836 _{Cf. for an extensive overview Fischer, T. M., Klöpfer, E. (2006), p. 7.} 837 _{Cf. extensively Müller, M. (1998).}

In the style of: Müller, M. (1998), p. 125; Zirkler, B., Nobach, K. (2008), p. 379 Illustration 10: Elements of Value Reporting838

Total Return Reporting deals with the profit investors achieve with their investments in a company at the capital market.839 _{Referring to the Shareholder} Value Network and the principles of VBM, it is important for investors to receive an adequate return on their investment by dividend payments or increases in share prices.840 _{That is the reason why a company should include this information}

838 _{Further information concerning Value Reporting contents taken from} Fischer, T. M., Wenzel, J. (2002), p. 329.

839 _{Cf. Morich, S. (2007), p. 629.} 840 _{Cf. Horváth, P. (2011), pp. 443-445.}

in its Value Reporting.841 _{Within this section a company reports about} development of stock prices, dividends, rating and risk of the investment.842

By presenting the past development of stock prices and dividends, the company facilitates the evaluation by recipients of the report of past performance.843 _{Commentary concerning the volatility of the share price is also} helpful. The company can comment high breaks.844 _{A further proposal is to} present a virtual portfolio in which dividends are invested in purchasing further shares and the performance of the company in comparison to the underlying index or to comparable companies in the same industry.845

The detailed performance explanation should not be limited to the past. In the context of Value Reporting investors are especially interested in prospective developments, so a company can state target values for certain key figures.846 _The IFRS already oblige companies to compute the key figure EPS.847 _{For satisfying the} special information needs of debt capital providers, a company can provide readers with rating information.848

Total Return Reporting mostly summarises information which is already available via other information sources. The collection of this information is a kind of service function from the company.849 _{But the commentary and} explanation of developments in stock price are particularly important for private investors.850 _{Besides this, the first section has the purpose to demonstrate the} created Shareholder Value to the financial community.851

841 _{Cf. Müller, M. (1998), p. 129.}

842 _{Cf. Fischer, T. M., Wenzel, J. (2002), p. 327.} 843 _{Cf. Wenzel, J. (2005), pp. 219-222.}

844 _{Cf. Fischer, T. M., Klöpfer, E. (2006), p. 9.}

845 _{Cf. Pellens, B., Hillebrandt, F., Tomaszewski, C. (2000), pp. 182-183.} 846 _{Cf. Fischer, T. M., Zirkler, B. (2008), pp. 591-593.}

847 _{Cf. Zirkler, B., Nobach, K. (2008), p. 381; cf. IAS 33.} 848 _{Cf. Zirkler, B., Nobach, K. (2008), p. 381.}

849 _{Cf. Müller, M. (1998), p. 127; Pellens, B., Hillebrandt, F., Tomaszewski, C.} (2000), p. 182.

850 _{Cf. chapter 2.3.2.2. Private and individual investors concentrate on filtered} and processed information. Thus the Total Return Reporting corresponds to this information need.

The second part of Value Reporting, Value Added Reporting, has the objective to show the financial community the realised value added to Shareholder Value in a period.852 _{In this context it is useful to present and explain} the company’s internal control system and top key figures.853 _{Value based} performance measures are well suited in this context as they are able to show the value generated in the sense of the Shareholder Value approach.854 _{In practice,} many companies do not show a value based performance measure but instead a pro forma key figure like EBIT or EBITDA.855 _{Independent of which kind of key} figure a company uses it is necessary to show and explain its calculation.856 _{In the} light of the fact that companies often conduct individual adaptations to value based performance measures or other key figures, the explanation of the calculation is important for investors by assessing the values of key figures.857 _As already mentioned in the context of the first section, it is desirable for the financial community if a company states target values for the presented key figures so that the Value Added Reporting is not limited to a retrospective.858 _{Furthermore, a} variance analysis could be helpful for readers of financial reports.859 _{With the help} of internal steering systems external persons are able to control the performance of the company in the last period and have an estimate about the performance in the coming periods.860 _{A comparison of performance between companies based} on internal control systems is not possible because many different concepts exist and within one concept various ways of calculation are possible.861

Closely connected with the internal control system and the top key figure are incentive systems for management. Value Added Reporting is the place in

852 _{Cf. Fischer, T. M., Zirkler, B. (2008), pp. 589-590.} 853 _{Cf. Fischer, T. M., Klöpfer, E. (2006), p. 8.}

854 _{Cf. Labhart, P. (1999), pp. 266-267; Pellens, B., Hillebrandt, F., Tomaszewski,} C. (2000), pp. 184-185.

855 _{Cf. Wenzel, J. (2005), pp. 215-216.}

856 _{Cf. Fischer, T. M., Klöpfer, E. (2006), p. 8.}

857 _{Cf. Baetge, J., Solmecke, H. (2006), p. 24; Müller, M. (1998), p. 132.}

858 _{Cf. Heumann, R. (2005), p. 137; Pellens, B., Hillebrandt, F., Tomaszewski, C.} (2000), p. 186.

859 _{Cf. Baetge, J., Solmecke, H. (2006), p. 24.}

860 _{Cf. Heumann, R. (2005), p. 137, Paetzmann, K. (2012), pp. 135-136, 265.} 861 _{Cf. Kley, K.-L. (2003), p. 843.}

which a company provides readers with the detailed design of the incentive system.862

Capital costs are an important value in the context of VBM. Also for value based performance measures like EVA or CVA the disclosure of capital costs and a detailed calculation increase the reader’s understanding.863 _Therefore, companies need to split up the calculation and also give information about costs of equity capital and debt capital.864 _{For calculation of costs of equity capital the} CAPM is used in most cases. The single calculation components, riskless rate of interest, beta factor, market risk premium, have to be explained in this context.865

The Strategic Advantage Reporting puts the emphasis on the prospective development of the company and its Shareholder Value creation in future.866 _In the context of the fundamental analysis and the used calculation methods, like DCF approaches, investors use the information given in this section in order to estimate prospective Cash Flows. So, this part reduces the uncertainty inherent in projections.867

One purpose of this part is to illustrate the chances and risks the company faces in the future.868 _{For investors it is important to know the risks.} Consequently, risk reporting is a main part of Strategic Advantage Reporting.869 In Germany companies are obliged by local German GAAP to explain their risks and chances in the management’s report section of the annual business report.870 Whereas the first two parts of Value Reporting focus on financial information, this part gives insight into many non-financial areas.871

862 _{Cf. Pellens, B., Hillebrandt, F., Tomaszewski, C. (2000), p. 185.}

863 _{Cf. Bej, T. (2015), p. 112; Fischer, T. M., Klöpfer, E. (2006), p. 8; Fischer, T. M.,} Zirkler, B. (2008), p. 590.

864 _{Cf. Morich, S. (2007), p. 277.}

865 _{Cf. Fischer, T. M., Zirkler, B. (2008), pp. 590-591.} 866 _{Cf. Fischer, T. M., Wenzel, J. (2002), p. 327.}

867 _{Cf. Fischer, T. M., Wenzel, J. (2002), p. 327; Müller, M. (1998), p. 135.} 868 _{Cf. Wenzel, J. (2005), pp. 222-223.}

869 _{Cf. Fischer, T. M., Klöpfer, E. (2006), p. 10.} 870 _{Cf. Fischer, T. M., Zirkler, B. (2008), pp. 582-583.} 871 _{Cf. Wenzel, J. (2005), pp. 223-227.}

Müller divides Strategic Advantage Reporting into three sub-areas: Objectives, company environment and strategies and measures. At first, a company explains its objectives in terms of market share, turnover and profit growth for the future. In a second step information about the industry in which the company acts and its competitors are given. At last, the company explains with which strategies and measures it plans to fulfil its objectives.872 _{This division} shows that for the financial community it is decisive which intellectual capital resources a company has in order to conduct planned strategies and measures. Possible information can concern employer satisfaction, structure of suppliers, processing time in production etc.873

Strategic Advantage Reporting can also avoid sells of shares by investors. If the current development of the stock prices does not correspond to the expectations of investors, they might consider selling their shares. Strategic Advantage Reporting shows the positive factors that will lead to an increase in the share price in the long-term and reinforce the investor in its purchase decision.874

A survey among users reveals that the reporting efforts of companies in the context of Strategic Advantage Reporting could be improved. Investors like to have more information about prospective financial development as well as a clear illustration of trends in growth and profitability.875

By providing the financial community with forecasts in the financial statements, a company’s management could prove its forecast ability. Investors can derive from the quality of forecasts management’s forecast ability in reference to investment projects. Beside satisfying information needs a company can demonstrate its ability to estimate the success of investment projects.876

872 _{Cf. Morich, S. (2007), p. 272: Müller, M. (1998), pp. 137-138; cf. for an} overview of examples for possible Strategic Advantage Reporting contents Fischer, T. M., Klöpfer, E. (2006), p. 11.

873 _{Cf. Morich, S. (2007), p. 272; Zirkler, B., Nobach, K. (2008), p. 383.} 874 _{Cf. Müller, M. (1998), p. 128.}

875 _{Cf. Pro-Active Accounting Activities in Europe (PAAinE) (2009), p. 6.} 876 _{Cf. Goodman, T. H., Neamtiu, M., Shroff, N., et al. (2014), p. 334.}