The importance of a value based reporting system for quoted companies

Agenda

List of Abbreviations

List of Figures

1. Introduction
1.1 Problem Description
1.2 Objectives
1.3 Methodology

2. Characterization of Value Reporting
2.1 Definition and Principles
2.2 Prerequisites and Instruments of Value Enhancement Management
2.2.1 Investor Relations
2.2.2 Internal Control

3. Use of Value Reporting Systems
3.1 Concepts
3.2 Corporate Valuation according to the Shareholder Value Approach

4. Conclusion

Bibliography

List of Abbreviations

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List of Figures

Fig. 1 Goal Hierarchy of Investor Relations

Fig. 2 Reporting Category Value Generating Activities

Fig. 3 Reporting Categories of Value Reporting

Fig. 4 Influencing Factors on the Company Value

Fig. 5 Single- and Multi-period Financial Ratios

1. Introduction

1.1. Problem Description

Quoted companies are constituted by their stockholders who invest in the company. Definitely, a precondition for an investment decision is the trust of the investors in the ability of the company to sustainably generate returns and to stand its ground at the market over the long term. With regards to globalization in particular, the internationalization of markets and integration of different industries led to a growing information need of investors that currently presents the corporate communications with new challenges. Therefore the external corporate reporting has a special importance as investors and analysts claim reliable and relevant information to be taken as a basis for corporate valuation and price determination.

Concerning this matter there can be regularly noticed broad discrepancies between the stock exchange value and the book value of equity. Investors are obviously willing to overbid the fair value¹ of a company referring to the actual economic accomplishments in the past (cf. Burmann 2002: 227). This goes hand in hand with the growing significance of intangible assets often characterizing the aggregate value of a company stronger than tangibles (cf. Maul/Menninger 2000: 529).

The conventional accounting, however, is increasingly perceived insufficient since it does not provide information about prospective generation of value due to its retrospective orientation (cf. Labhart/Volkart 2001a: 116); that is to say companies internally as externally underlay mainly actual figures and do not consider target or reference values. In addition, key figures are often affected by the company's accounting policies and disregard risks and financing costs. So, a study of the DAI previously revealed that private investors already prefer publications in print media and TV shows for opinion making, discounting the business report of a company including annual financial statements; institutional investors rather like to get in direct contact or to visit road shows (cf. Ernst et al. 2005: 10).

In the same way legislature activities set high requirements for the finance and IR departments such as the "Financial Services Action Plan" pursued by the European Union since 1999, which has already implicated many changes for corporate publicity. A survey on the subject of investor relations and corporate reporting conducted by Kirchhoff Consult and PricewaterhouseCoopers in 2005 showed that almost 51% of the interviewed companies considered the numerous regulatory and transparency requirements to be the biggest future challenge for financial reporting (cf. Nix/Wolbert 2005: 5). In this context an information overload is expected that will make it difficult for reporting addressees to directly extract information.

1.2 Objectives

Ever since standard setter like the IASB as well as the government and consultants try to react correspondingly to those developments and are designing since the beginning of the nineties a concept of value reporting . In line with this concept the value-oriented corporate governance aims at maximizing the shareholder value , which is defined as the market value of equity of a company and simplified as the company value (cf. Fischer et al. 2001: 1209). As a communication instrument between the company and (potential) investors the value reporting shall close the value gap between stock exchange value and shareholder value by reducing information asymmetries in order to avoid an agency situation² between the two parties.

The presentation of the problem is how this can be done. In the scope of this assignment it will therefore be examined important prerequisites for a value based reporting system, concepts for its correct application as well as its importance considering examples of concrete corporate valuation approaches.

1.3 Methodology

At first, a basic definition and principles of value reporting systems are given. After that, the term value reporting will be explained as to its functions of shareholder value maximization and embedded into a general IR and controlling context, outlining the necessary prerequisites for its successful use.

Secondly, a value reporting concept developed by PwC will be presented pointing out the magnitude of intangible assets and value-generating activities. Finally,

2. Characterization of Value Reporting

2.1 Definition and Principles

According to the definition of F. Ruhwedel and W. Schultze value reporting is a valueoriented additional reporting which goes beyond legal disclosure obligations and informs about value generating in the past, instruments of value-oriented control as well as about estimations regarding future payment flows (cf. Ruhwedel/Schultze 2002: 604). As opposed to conventional accounting the user of value reporting has a considerably larger number of reporting possibilities. In this way, the optional statements can be made in the management report or annual closure, in parts that are not audited as well as at analyst conferences, via letters to shareholders, press releases or e-mail.

Since the adoption of the BilMoG in 2009, the revised version of the management report provides first norms on how to prepare a group management report according to the value reporting idea. The German Accounting Standard (DRS) "management report" thereto states: „ Darzustellen und zu analysieren sind alle Sachverhalte, die aus Sicht der Unternehmensleitung einen wesentlichen Einfluss auf die H ö he des Unternehmenswerts nehmen k ö nnen. Informationsasymmetrien zwischen den Adressaten der Rechnungslegung und der Unternehmensleitung sollen so reduziert werden “ (DRS 15.3). Objective of the management report consequently is to provide addressees relevant and dependable information that make it possible to get an applicable idea of the business performance and situation of the company.³ This might affect especially globally operating concerns that are obliged to a statement according to §§264, 289 and 315 HGB.

Nevertheless there are not yet substantial rules but merely guidelines; the AK EU of the Schmalenbach-Gesellschaft für Betriebswirtschaft e.V. therefore developed principles that should help to standardize value reporting (cf. AK EU 2002):

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¹ Under US-GAAP (FAS 157), fair value is the amount at which the asset could be bought or sold in a current transaction between willing parties.

² In political science and economics, the problem of motivating a party to act on behalf of another is known as ‘the principal-agent problem’: it arises when a principal [ e.g. stakeholder ] compensates an agent [ e.g. company owner ] for performing certain acts that are useful to the principal and costly to the agent. Here, principals do not know enough about whether (or to what extent) a contract has been satisfied [dictionary entry].

³ Cf. http://www.standardsetter.de/drsc/docs/drs_summaries/15.html [accessed March 20, 2011]