Why Smart CFOs Pay Attention to "Non-Financials"

Recent research by Open Matters with analysis by Deloitte points to the crucial importance of understanding ‘intangibles’ if investors and other stakeholders are to fully appreciate the way that companies create value. The findings, based on a 40-year analysis of Standard & Poor’s 500 Index companies, confirms the long-term trend that 80% of market capitalization is vested in intangible assets (versus just 17% in 1975). Yet, despite ‘intangibles’ accounting for up to 80% of a company’s market valuation, its composition and definition remains elusive and unreported on the balance sheet.


Accounting does not show how value is created

Accounting standards are only just catching up. A new European Directive “Disclosure of non-financial information” which comes fully into effect in 2017 seeks to plug the gap in disclosure by requiring around 6,000 large multi-national entities to report policies, risks and outcomes in relation to environmental matters, social and employee-related aspects, human rights, anti-corruption and bribery issues. The International Integrated Reporting Council (IIRC) is another organisation seeking to pull the various strands of value creation together through a more integrated approach to business thinking, decisions, performance and disclosure.

And while it can be argued that all of these initiatives encourage transparency and help investors gain a more rounded perspective of the health of a company and its prospects it is well ‘behind the curve’ in relation to the way that value is really created. The Open Matters/Deloitte research points to more profound changes. It finds that digital transformation is driving value and that multi-nationals that embrace digital transformation are likely to attract valuations two to three times more than traditional service businesses or those that rely on physical assets.


New non-financial KPIs are needed

But measuring digital transformation is challenging. For example, how does an organization put a value on customer information, a “like” in a Facebook campaign, a positive comment on a forum or the value of information harvested from the ‘Internet of Things’? According to an EMC/IDC Digital Universe Report, data is doubling in size every two years but within this decade, most new data will be generated not by people, but by sensors and embedded intelligent devices connected to the Internet.

Developments such as these do not lend themselves to traditional measures of ROI. CFOs will need to be prepared to build new metrics, risk and performance measures in order to give a complete picture of the health of the business and its prospects for growth. But one thing is certain, the challenges for disclosure management, whether on the inside (management reporting, governance and risk) or on the outside (regulatory reporting, statutory reporting and investor relations) will be formidable.


By Gary Simon, BSc, FCA, FBCS, CITP,CEO FSNelite

Tagetik for Integrated Reporting

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