XBRL & Enhanced Business Reporting: A Consortium Approach Dr. Robert G. Eccles XBRL International April 27, 2005 Boston, USA
Wait a minute… enhanced business reporting, improving the reporting model… • Didn't Sarbanes-Oxley § 404 lead to improved internal controls and result in better information? – No…. . SOX targeted improved internal controls over financial reporting, however… – Investors, creditors and business executives do not use the financial statements as their primary tool when making decisions about the allocation of capital • Then, what information is important? 2
Research tells us what is important • Provide shareholders and others with information needed to make decisions – Financial and nonfinancial value drivers – Tangible and intangibles assets • In general, many measures require information from outside the Company's financial or business systems • Vast majority of measures are not subject to standards or reporting frameworks of any kind Enhanced Business Reporting = Better Information 3
Pw. C Value. Reporting capital markets research Banking • • • • Fee-based Revenue Growth Earnings • Delivery Channels Capital Adequacy • Economic Profit Risk Management • Performance by Practice Business Segment Customer Retention • Market Risk Exposure Customer Penetration • Cost/Income Asset/Liability • Market Share Management • Assets Under Asset Quality Management Return on Risk Adjusted • Employee Satisfaction Capital • Brand Equity Capital • Product Innovation Management Quality of Management • Investment Performance • Degree of Diversification Plans for Growth • Regulatory Reputation Market Growth • IT Expenditures Loan Loss Source: Pw. C Value. Reporting Capital Markets Survey Insurance • Performance by Business Segment • Expense Ratio • Capital Management • Risk Management Practices • Plans for Growth • Investment Performance • Distribution Channels • Quality of Management • Earnings • Asset/Liability Management • Return on Risk • Adjusted Capital • Market Growth • • • • Customer Retention Capital Adequacy Claims Ratio Economic Profit Employee Satisfaction Customer Penetration Market Risk Exposure Assets Under Management Asset Quality Embedded Value IT Expenditures Brand Equity Product Innovation Regulatory Reputation Market Share 4
Pw. C Value. Reporting capital markets research Investment Management • Profit Margins • Investment Product Performance • Quality of Management • Asset Growth from Investment Performance • Asset Growth from Product Cash Flow • Employee Retention • Compensation Levels of Professional Staff • Asset Retention • Competitive Landscape • Product Diversification Strategy • Compensation Strategy • Investment in Technology to Improve Business Processes • Assets under Management • Enterprise Risk Management • Market Share • Experience & Quality of Investment Research Professionals Source: Pw. C Value. Reporting Capital Markets Survey High Technology • • • Strategic Direction Cash Flow Market Growth Gross Margins Quality/Experience of Management Team Market Size Competitive Landscape Earnings Speed to Market (first to market) Market Share Telecommunications • • • Competitive Landscape Capital Expenditures Market Growth Customer Churn Rate Regulatory Environment Pricing Strategy Network Reach, Quality & Capability Earnings Revenue Metrics by Driver (e. g. Average Revenue per user) Significant Operating Costs by Category Sales & Marketing Strategy Cash Flow by Business Segment 5
Pw. C Value. Reporting capital markets research Pharmaceuticals • Market Growth & Potential by Therapeutic Area • Product Focus Strategy • Earnings • R&D Pipeline • Market Share by Therapeutic Area • Regulatory Issues • Product Innovation Strategy • Performance by Business Segment • Effectiveness of Product Launch • Reputation with Prescribers • Quality of Management • Market Growth & Potential by Geographic Area • Market Growth by Geographic Market • Partnering Strategy • Cost/Revenue Ratios • Quality of Selection of Development Targets • Recruitment & Retention of Talented People • Risk Profile of Product • Efficiency of Manufacturing Facilities • Profitability of Licensing Arrangements • Economic Profit • Value of Key Intellectual Assets • Brand Awareness of Levels with Patients Source: Pw. C Value. Reporting Capital Markets Survey Petroleum • Supply, Demand • Performance by Business • • • Prices for Petroleum Products by Region Cash Flow Unit Cost by Refinery Value of Proven & Probable Reserves Refinery Margins by Region Capital Expenditures Strategic Direction Reserve Replacement Costs Refinery Utilization Refinery Acquisition Cost of Crude Earnings Supply, Demand & Prices for Crude Oil & Natural Gas Segment • Exploration Success Rate • Return On Average Capital Employed or Similar Return Measure • Quality of Management • Petroleum Product Sales by Volume by Refinery • Risk Management • Quality of Workforce • Hedging Strategy • Market Share • Operating Profit per Equivalent Measure by Geographic Location 6
Pw. C Value. Reporting capital markets research Chemicals • • • Free Cash Flow Strategic Direction Manufacturing Costs Earnings Market Growth Performance by Business Segment Product Quality of Management Capital Expenditure Utilization of Facilities Market Share Customer Loyalty Source: Pw. C Value. Reporting Capital Markets Survey Metals • • • • Market Share Energy Prices & Supply Earnings Costs per Ton Delivered Market Growth Metals Prices Capital Expenditures Performance by Business Segment Potential Supply Globally & Locally Utilization of Facilities Product Quality Free Cash Flow Age & Quality of Plant Strategic Direction Value of Tangible Assets Implementation of New Processes & Technologies • Quality of Management • Regulatory Environment Mining • • • • Strategic Direction Cash Cost per Ounce/Kg/Ton Capital Expenditures Earnings Existing/Potential Environmental Liabilities Health & Safety Performance Statistics Metal Prices Quality of Management Acquisition Strategies Ounces/Kilograms/Tons Produced per Year Performance by Business Segment Cost per Ounce/Kg/Ton Labor Relations Sustainable Development Strategy Environmental Policy/Risks Potential Supply/Production 7 Globally & Locally
Pw. C Value. Reporting capital markets research Diversified Manufacturing • Free Cash Flow • Performance by Business Segment • Market Growth • Earnings • Manufacturing Costs • Quality of Management • Strategic Direction • Capital Expenditures • Market Share • Product Quality Consumer Goods • • • • Source: Pw. C Value. Reporting Capital Markets Survey Capital Expenditure Free Cash-flow Sales Volume Quality of Strategy Growth of Strategy Performance by Business Segment Market Growth Performance by Geographic Marketing Strategy Customer Loyalty & Advocacy Customer Service Weighted average cost of capital Employee Satisfaction & Advocacy • Earnings • Sales & Gross Margins by Product Category • Market Share • Product Innovation • Marketing Costs • Brand Portfolio Management Date • Percent of New Products in Sales • Employment, Environmental Policies • Product Range Development • Stock Levels in the Supply Chain • Distribution Channel Complexity 8
Pw. C Value. Reporting capital markets research Retail • • • Market Growth Earnings Same Store Sales Gross Margins Free Cash-Flow Market Share Performance by Business Segment Store Portfolio Changes (e. g. , new stores) Weighted Average Cost of Capital Customer Satisfaction Expected Return on New Stores Refurbishment Real Estate • Quality of Management • Capital Expenditure • Sales per Square Foot • Inventory Turns • New Store Formats Tested & Performance Data • Brand Value • Product Availability Source: Pw. C Value. Reporting Capital Markets Survey • Financing Strategy • Occupancy Rate • Macro-Economic Factors (e. g. , GDP growth, inflation, population & job growth, interest rates) • Investment Strategy • Return on Invested Capital • Revenue from New Developments or Acquisitions • Investment in New Acquisitions & Development Properties • Earnings • Market Rental Rate • Quality of Management • Free Cash Flow 9
Pw. C Value. Reporting capital markets research Automotive • • Earnings Free cash flow Market Share Strategic direction Product quality Customer satisfaction Market Growth Facility or capacity investment strategy • Sales volume • Performance by business segment • ROIC Source: Pw. C Value. Reporting Capital Markets Survey Entertainment • • • Utilities Market Growth • Cost reduction Market Share • • Free Cash Flow Performance by Business Segment Customer Demographics Quality of Management Earnings Strategic Direction New Business Capital Expenditure Investment/acquisition strategy Margin improvement Market growth Operating cash flow growth Operating profit growth Quality of management Regulatory environment and price controls • Risk Management processes • Strategic direction and focus integrated vs. specialist player 10
Everyone needs better information • Management… to optimize allocation of capital and people resources • Boards of directors… to provide the level of oversight that shareholders demand • Investors… to more efficiently and effectively allocate and price capital • Regulators… to ensure that the capital markets are functioning as efficiently and effectively as possible The net result is a higher return on capital for society as a whole 11
What makes information better? • Information which is more relevant – Content matters – not the normal boiler plate – Management’s perspective – Different users have different needs • Information which is not overly costly to produce or consume – Format matters – Timing is important – Focus on analysis not data gathering and validation Both content and format of information enhance transparency 12
What do you mean… content and format? • Enhanced Business Reporting is about content – Provides information that is actually used for decision-making – It is information that is not always disclosed – Business community may want to develop standards for this type of content (rather than waiting for territory regulatory actions) • XBRL (e. Xtensible Business Reporting Language) is about format – Current taxonomies are based on accounting standards – Taxonomies for MD&A/OFR content are very high level – Taxonomy extensions will provide more relevant information 13
What is Enhanced Business Reporting? • Enhanced information for consumers – Internationally recognized, voluntary guidelines for industry-specific value drivers and key performance indicators (KPIs) – A framework for disclosure of non-financial information, e. g. , opportunities, risks, strategies and plans and about the quality, sustainability and variability of cash flows and earnings • Simplified report preparation – Stronger focus on quality of information, not quantity – Prepare and disseminate information using efficient and effective business processes 14
A standardized format matters if information is to be more useful • Management… to quickly populate a wide range of analytical and reporting tools with relevant information • Boards of directors… to access and analysis of information buried deep within the enterprise • Investors… to more efficiently and effectively access and analyze information in business reports • Regulators… to more effectively analyze information in business reports The net result is greater transparency of business information 15
The challenge • CEOs and management must resolve to report externally the same information that is used to manage the business • Boards of directors must determine the optimal level of transparency required to ensure that all stakeholders have the information needed to make decisions • Investors must demand use qualitative, non-financial information and key performance indicators • Regulators must be willing to trade long-time requirements for more relevant and useful information 16
The benefits are worth the effort • Better Management – Improving the ability of companies to benchmark performance against all key performance indicators • This level of benchmarking is impracticable in a paper-centric world • Better Governance – Directors can better fulfill their fiduciary responsibilities to shareholders, e. g. , more appropriate executive compensation through benchmarking • Better Markets – The over-emphasis of quarterly earnings will decline, as companies provide richer information that enables to investors take a longer term view – More efficient and cost-effective regulation 17
One possible model for business reporting… Tier Three Company. Specific Information Tier Two Industry. Based Standards Tier One Global Generally Accepted Accounting Principles 18
One possible framework enhanced business reporting… The Market Strategy Performance Financial • Competition • Overview • Summary • Regulatory • Strategic priorities • Supply chain • Financial statements • Operational goals • Acquisitions • Risks and risk management • People • Macroeconomic • Customers • Segment analysis • Innovation • Opportunities • Sensitivity analysis • Value drivers • Estimates • Projections Source: Report of the Public Company Task Force to the AICPA Special Committee on Enhanced Business Reporting, June 2004 19
What do we need to do? • Work together along industry lines to create thoughtful proposals for greater transparency involving both simplification and enhancement • Lead positive change, through a collaborative solution, by establishing an international Enhanced Business Reporting Consortium of diverse stakeholders to improve the quality and transparency of information used in decision-making Market collaboration is the best solution for all participants 20
Are there any alternatives to the EBR Consortium? • Do nothing and… – Live with uncertainty in the markets about strategic intent and future performance, but remember, uncertainty breeds market volatility – Fail to demonstrate that users and providers of market capital are committed to hold themselves accountable for the quality of the information provided to the capital markets – Fumble an opportunity to build upon the SEC's interest in a marketled effort • One thing is certain… – Failure of the business community to develop and present constructive proposals will result in future regulatory mandates 21
Companies are trying to explain why they did not make a target that they didn’t set in the first place “Enhanced Business Reporting will help companies move beyond the earnings game; placing more emphasis on measures that give a better picture of their value, their risks, and their opportunities. ” Bob Herz Chairman Financial Accounting Standards Board 22
What does the SEC think of the Enhanced Business Reporting Consortium? “I am encouraged by the Enhanced Business Reporting Consortium's efforts to develop a voluntary, internationally recognized framework for presentation of industry-specific key performance indicators and disclosure of non-financial information about opportunities, risks and management's strategies and plans. This effort represents the type of discussion and action that should be occurring in the marketplace as we all seek to continually improve the value of information for the sake of investors. ” Don Nicolaisen Chief Accountant Securities and Exchange Commission 23
We are on the verge of a fundamental transformation of business reporting practices Will you join us in providing leadership for change? www. ebrconsortium. org 24
XBRL & Enhanced Business Reporting: A Consortium Approach Dr. Robert G. Eccles XBRL International April 27, 2005 Boston, USA
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