Chartered Institute of Management Accountants
Chartered Institute of Management Accountants
ACCOUNTING FOR THE FULL VALUE OF THE BUSINESS BRAND FINANCE ASIA GIFT™ REPORT
Contents “We live in a world where trust in business, politicians and institutions is lower than ever before. It is clear that global business now, more than ever, needs to be able to rely on trusted information and trusted people. “ 2 Accounting for the business – unlocking the value of intangibles: Asia is an economic powerhouse and continues to drive value creation. In doing this, disruptive by Tony Manwaring, Executive Vice business models have been created and conventional business thinking challenged. President – External Affairs, CIMA
As leaders, like China, India and Singapore, continue their journeys and high growth markets 4 Introduction: by Evan Law, Chief Executive, such as Indonesia join the race, organisations must be able to take decisions which drive both Singapore Accountancy Commission intangible and tangible value in the short, medium and long term. For sustainable success, leaders must be able to trust the information they are presented with, to take the right 6 Brand Finance Asia Global decisions, and account for the whole business as opposed to just the traditional balance sheet.” Intangible Finance Tracker (GIFT™) Report 2016: By David Haigh, “ Chief Executive, Brand Finance 12 Market insights
Rebecca Hu FCMA, CGMA, Group Associate Finance Director at Ogilvy & Mather, Shanghai
Dr. William Chen, FCMA, Chief Financial Officer & General Manager, Hui Lau Shan Food Manufacturing Co., Ltd. (Hong Kong)
Wei-Shan, Ma, Associate Director, Cross Divisional Reporting Lead at UBS (Singapore)
FM brings key insights from Tata and Mahindra on value Andrew Harding FCMA, CGMA Chief Executive, CIMA Dr. Aidan Goddard FCMA, CGMA, CFO & COO, Asia Pacific, L’Occitane en Provence
Keoy Soo Earn, Deloitte South East Asia’s Financial Advisory Regional Managing Partner and Mergers & Acquisitions Leader
Yvonne Chan FCMA, CGMA, Director & CFO, Corporate Development, Maritime Port Authority of Singapore
Franz Lathuillerie FCMA,CGMA, AXA Indonesia Country CFO
32 An integrated approach to driving intangibles: by Dr Noel Tagoe, Executive Vice President – Academics, CIMA
34 Creating value and achieving success
36 Creating value and the business model
38 Management accounting is integrated thinking
40 Within touching distance: By Andrew Watson, ipVA Licensing observations and commentary
42 Definitions ACCOUNTING FOR THE BUSINESS – There is huge opportunity – and UNLOCKING THE considerable likelihood – of future growth fuelled by intangibles VALUE OF INTANGIBLES
Imagine that you have sat down for a flight and The key findings we present are powerfully brought to The analysis describes forces in value creation that the pilot of the aircraft informs you and the life and reinforced by contributions from our leading will become ever more important. Robert McGarvey other passengers on the plane that most of the partners – including CFOs from major enterprises and writing in Futuromics argues that we have entered ‘the instruments in the cockpit are faulty – but don’t leading brands, as well as the Singapore Accountancy third major assets revolution’1 – the first marked the worry, the captain is very experienced, knows what Commission and Singapore Stock Exchange, with whom shift from feudal to trading, the second from trading to they are doing, so settle back and enjoy the trip! we are delighted to launch this important analysis. industrial, the third from physical plant and machinery to intangibles. He argues that after each revolution, the All too often major decisions by businesses Across Asia, total enterprise value in 2015 was $28,194bn existing systems and processes to manage and report By Tony Manwaring, and also investors are taken on the basis of (up from 4,640 in 2001) – of which tangibles accounted the new asset class and to connect capital to assets partial or limited information – and at worst, for $19,596bn (from 3,084) and intangibles $8,598bn were found not fit for purpose. Adaptation was required Executive Vice President, on impulse rather than informed insight. (from 1,556). Disclosed intangibles in Asia continued but took place after the event of the revolution itself. External Affairs, CIMA Financial data captured on the balance sheet to grow throughout the financial crisis and have been Arguably the same situation has occurred in the 40 years is essential of course, but it provides a necessary – experiencing tremendous annual growth rates ever since. since the intangible assets revolution first occurred. not a sufficient – basis to reach judgement to With most Asian jurisdictions already requiring IFRS Regions and countries that recognize this will enjoy take decisions which will create and preserve reporting and others such as China slowly converging competitive advantage in the twenty first century. value for the short, medium and long term. towards the IFRS framework, disclosed intangibles are showing significant resilience to systematic shocks. The ‘Accounting for the Full Value of the Business: Brand CGMAs understand this and recognize the global financial downturn in 2008 had a severe impact on Finance Asia GIFT report’ provides a comprehensive importance of reaching key decisions taking into undisclosed value but this too has increased substantially and revealing analysis of these new patterns of growth account the full value of the business – and not in recent years. and development – it powerfully confirms the rapidly just on the basis of what is on the balance sheet. growing value of intangibles across Asia and strongly The skills, tools, resources and decision making Remarkably Asia now ranks second in the world in terms reinforces the critical role that management accounting capability to put this into effect is what CIMA of undisclosed value, in absolute terms – behind the USA. can and must play in driving prosperity, building trust, based management accounting is all about. Taking into account disclosed intangibles and goodwill and opening up opportunity across the region. as well, Asia is the world’s third most ‘intangible region’ – This report draws on and presents the latest behind the USA and Europe. analysis produced by our partners Brand Finance 1 https://www.amazon.com/Futuromics-Guide-Thriving-Capitalisms- for their Global Intangible Financial Tracker There is huge opportunity – and considerable likelihood Third-ebook/dp/B01J4UOFUC (GIFT™) report. We are presenting the data – of future growth fuelled by intangibles. Retail, and focusing on Asia – and in so doing highlight internet and software, are still relatively smaller in Asia, powerful trends which are shaping how value when compared globally. Internet giants such as Baidu is being created, by country and sector, which and Weibo are just two examples of companies that have will have significant implications for prosperity, rapidly caught up with global peers. The Telecoms sector development and growth in the region and for in particular stands out, having reported twice as much the world. intangible assets than the second most intangible sector.
ACCOUNTING FOR THE FULL VALUE OF THE BUSINESS – BRAND FINANCE ASIA GIFT REPORT | 3 HOW DO WE CONNECT INTANGIBLE VALUE TO THE OVERALL SUCCESS INTRODUCTIONOF OUR BUSINESS?
Valuing intangibles has never been an easy With formal certification, we will have a clearer idea This will help organisations measure, understand and process. In our current knowledge-based economy, of how intangibles can and should be valued. demonstrate the link between its strategies and its intangibles can form a substantial component of a commitment to a sustainable global economy. It will also company’s balance sheet. For a decade or longer, it Although valuation techniques have become more deliver the transparency of information global investors has been mandatory for well-run organisations to sophisticated and versatile over the years, not all are demanding in order to make informed decisions. establish the true nature of their intangibles and organisations yet appreciate the benefits of knowing Ultimately, organisations which participate will benefit goodwill. Good business decisions depend on it. the value of their intangibles. Some fail to run the by developing sustainable strategies for the long term Investors demand to know. International Financial calculations, so can’t appreciate the performance of coupled with a strengthened brand equity or value. their enterprise. Others struggle to communicate the By Evan Law, Reporting Standards explicitly demand valuations in a growing number of situations. information with investors. I believe organisations have The mission to value intangibles is about clarity. All Chief Executive, to understand why it is a mistake to think this way. stakeholders gain by understanding the complete picture Singapore Accountancy Commission With Business Valuation fast gaining prominence, of how an organisation operates and knowing that the Singapore is taking the lead to advance the Intangibles affect every organisation. Every time a child organisation is sustainable. profession in the region with the development of orders a Coca-Cola in a restaurant, that’s an intangible competency frameworks, a talent pipeline and working its magic. Every time a consumer chooses to fly Singapore, of course, is a nation built on intangibles. professional certification. with Singapore Airlines rather than another airline, that’s Since we lack natural resources like oil or expanses of an intangible contributing to the balance sheet. land, we’ve had to found our prosperity on the virtues of In April 2016, the Singapore Accountancy hard work, honesty, rule of law, ease of doing business, Commission launched the Chartered Valuer and In addition to formal certification, Singapore is leading internationalism, and hunger to innovate. The balance Appraiser Programme, the first of its kind in Asia. the way in helping organisations understand how sheet of Singapore is impossible to understand without It equips accounting and finance professionals to improve. In June the Singapore Stock Exchange factoring in these assets. with technical competencies in valuation concepts, introduced a new “comply or explain” requirement on principles and applications and tackles, among sustainability issues. Listed companies must publish Brand Finance and CIMA deserve credit for bringing many others, the layers of complexity arising a sustainability report at least once a year, detailing intangibles into the mainstream. Both have worked hard from nuances specific to valuing intangibles. five components: material environmental, social and to refine the technical side of intangible reporting, and to governance factors; policies, practices and performance; promote usage in business. The Singapore Accountancy targets; sustainability reporting framework; and their Commission is delighted to participate in this report. We Board statement. hope it contributes to a wider appreciation of intangibles.
Evan Law is the Chief Executive of the Singapore Accountancy Commission, the statutory body spearheading the advancement of the Accountancy Sector in Singapore.
ACCOUNTING FOR THE FULL VALUE OF THE BUSINESS – BRAND FINANCE ASIA GIFT REPORT | 5 BRAND FINANCE ASIA GLOBAL INTANGIBLE FINANCE TRACKER (GIFT™) REPORT 2016
Over the past 15 years Asia has seen a staggering 13% annual growth rate in total intangible value, with disclosed intangible assets growing at an even faster rate of 20% annually. Intangible value in Europe and North America on the other hand grew by only 5% and 3% respectively. To put this into perspective, if this trend is sustained, Asia is poised to overtake Europe by 2016 and North America by 2025.
By David Haigh, Chief Executive, Enterprise Value Breakdown by Region in 2015 (%)
Brand Finance 100% 25% 25% 21% 28% 34% 36% 80% 47% 2% 3% 6% 2% 3% 12% 3% 7% 60% 8% 3% 9% 5% Once thought of simply as the world’s manufacturing hub, Asia’s status as a centre of intangible as well as tangible 11% 40% 7% 70% 73% value creation is rapidly taking shape. Asia has become third largest region in the world in terms of absolute intangible 58% 62% 51% 53% value and stands at the forefront of global innovation and technological advance. 20% 35%
0% North America Europe Australia Africa Latin America Asia Middle East Asia Enterprise Value Over Time – USDbn Disclosed Intangible Assets Undisclosed Value Disclosed Goodwill Tangible Net Assets (excluding Goodwill) 30,000
25,000 Enterprise Value Breakdown by Region in 2015 – USDbn
20,000 35,000
15,000 30,000
10,000 25,000
5,000 20,000
0 15,000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Disclosed Intangible Assets 10,000 Undisclosed Value Disclosed Goodwill Tangible Net Assets (excluding Goodwill) 5,000
0 Included countries: Azerbaijan, Bangladesh, Cambodia, China, Georgia, Hong Kong, India, Indonesia, Japan, Kazakhstan, Macau, Malaysia, North America Europe Australia Africa Latin America Asia Middle East Mongolia, Pakistan, Philippines, Singapore, South Korea, Sri Lanka, Taiwan, Thailand & Vietnam. Disclosed Intangible Assets Undisclosed Value Disclosed Goodwill Tangible Net Assets (excluding Goodwill)
Over the past 15 years, the levels of intangible value in Asian enterprises has trended towards growth despite being relatively volatile. The global financial downturn in 2008 had a severe impact on undisclosed value, which fell to as low as 17% in the height of the crisis of Despite the significant growth in disclosed intangibles in Asia, the region still lags behind in terms of intangibles share within the overall 2008. Nonetheless disclosed intangibles in Asia continued to grow throughout the financial crisis and have been experiencing tremendous enterprise value. The heavy industrialised nature of the Asian economies cannot be ignored when making a comparison across regions, annual growth rates ever since. With most Asian jurisdictions already requiring IFRS reporting and others such as China slowly converging while at the same time some of the major markets, such as China, remain relatively inaccessible to outside investors thus putting towards the IFRS framework, disclosed intangibles are showing significant resilience to systematic shocks. downward pressure on undisclosed value.
ACCOUNTING FOR THE FULL VALUE OF THE BUSINESS – BRAND FINANCE ASIA GIFT REPORT | 7 An ever increasing number of technological giants are post 2007. Unlike the Old PRC GAAP, the new set of The growth picture in Japan is, perhaps unsurprisingly, not cyclically sensitive, Japan is one of Asia’s top now targeting Asia in their efforts to grab a share in the standards requires that: intangible assets with indefinite very different. In contrast to China’s dynamism, Japan has performers in both absolute and relative terms. This is a region’s highly intangible industries; in just the last few useful lives should not be amortised, expenditure incurred long struggled with an ageing population and stagnant result not just of Japan’s advanced economic status and months, Apple made its biggest minority investment ever during the development phase should be capitalised as growth. The expected significant shrinkage of the clutch of high-tech firms, but also the unique reporting in Didi, China’s largest ride-hailing company. an intangible asset and that the value of intangible assets population will have a downwards effect on long-term environment in the country, which allows companies contributed by investors should be measured at fair value economic growth and, partly as a result, Japan has one to prepare their financials under IFRS, Japanese GAAP, One of the main reasons for both the growth in Asia’s where the value stated in the contract differs from the of the lowest ratios of intangible value to GDP. When it Japan’s Modified International Standards or US GAAP intangible value and foreign interest in its brands is the fair value estimate. Following the adoption in 2007, comes to disclosed intangible value however, which is reporting frameworks. significant improvement in the quality of corporate total disclosed intangibles in China grew 160% in a reporting environment across the continent. For example year, followed by another two years of significant the adoption of the new PRC GAAP in China was one of growth of 93% and 87% respectively. the key drivers of intangible asset growth in the country Most Intangible Nations – Disclosed Intangibles USDbn
Japan 280 191 Top 10 Countries by Undisclosed Value – USDbn China 267 138 Hong Kong 94 92
China 4,374 India 86 54 India 900 South Korea 76 45
Japan 873 Singapore 20 31 Taiwan 221 Malaysia 23 23
Indonesia 191 Taiwan 32 12
Thailand 146 Thailand 21 15 Malaysia 127 Philippines 16 10 Goodwill Disclosed Intangible Assets (excluding Goodwill) Philippines 125
Hong Kong 80 Singapore 64 Undisclosed Value China has an undisclosed value of 60% more than the combined value of the rest of the Top 10 countries.
ACCOUNTING FOR THE FULL VALUE OF THE BUSINESS – BRAND FINANCE ASIA GIFT REPORT | 9 Top 10 Sectors by Disclosed Intangibles in Asia – USDm Top 10 Sectors by Undisclosed Value in Asia – USDm
Telecommunications 132,772 74,079 Internet 630,535 Retail 35,908 60,053 Pharmaceuticals 560,261 Engineering & Construction 81,365 6,980 Telecommunications 388,290 Oil & Gas 53,998 23,787 Computers 306,900 Banks 34,438 35,387 Commercial Services 45,067 13,098 Food 303,245 Pharmaceuticals 29,574 27,330 Chemicals 299,144 Holding Companies-Divers 27,395 15,808 Retail 285,563 Internet 15,872 27,019 Diversified Finan Serv 282,439 Computers 23,830 15,346 Food 18,345 19,314 Electronics 275,385 Diversified Finan Serv 18,685 18,509 Software 220,184 Auto Manufacturers 32,820 2,454 Electrical Compo & Equip 202,983 Distribution/Wholesale 24,075 11,148 Auto Manufacturers 189,456 Coal 30,825 3,024 181,696 Chemicals 16,895 16,086 Goodwill Agriculture Electric 17,392 15,376 Disclosed Intangible Assets (excluding Goodwill) Machinery-Diversified 173,458 Miscellaneous Manufactur 10,874 18,574 Miscellaneous Manufactur 169,402 Building Materials 10,559 16,854 Commercial Services 168,681 Insurance 20,922 6,327 Auto Parts&Equipment 151,250 0 50,000 100,000 150,000 200,000 Transportation 145,429 Undisclosed Value USDm Beverages 140,355 Semiconductors 132,872
Telecommunications is the most intangible industry (by disclosed intangibles) in Asia, as is also the case globally. Telecoms sector 0 100,000 200,000 300,000 400,000 500,000 600,000 in the region reports twice as much intangible assets than the second most intangible sector – Retail, which clearly shows the importance of the telecommunications industry to the overall performance of the region.
Though tech is leading the way, Telecoms is not far America for example the figure is around 35% and in A spate of IPOs is partly responsible for the surge in is a perfect example of the fast-growing nature of the behind. In fact, the three largest companies in Asia by Europe 51%. The recent history of heavy industry in Asia’s intangible value. Some of the region’s largest continent’s most intangible companies. With total market disclosed intangible value (Softbank, CK Hutchison and some Asian economies goes some way to explain the e-commerce and internet moguls have recently listed. capitalisation of $167bn on the day of its IPO in 2014, NTT) as is Singapore’s most intangible company (by high proportion of tangible assets; however it is also the Alibaba, currently the world’s largest IPO by size, Alibaba’s market cap has grown to $208bn in 2015, of intangibles reported on its balance sheet), Singtel. result of the inaccessibility of several major markets which $180bn or 87% is intangible value. within the region to foreign investors. More action must Despite the unprecedented growth in intangible value be taken by certain governments to reform reporting and in Asia, it is worth mentioning that the region still lags streamline bureaucracy to rectify this. This does, however, behind the rest of the world in terms of relative share further outline the huge potential for future growth in of intangibles within overall business value. Currently intangible value in Asia, which is set to eventually lead around 70% of the region’s business value is tangible, the world in intangible value. a ratio surpassed only by the Middle East. In North
ACCOUNTING FOR THE FULL VALUE OF THE BUSINESS – BRAND FINANCE ASIA GIFT REPORT | 11 14 The new age of marketing in China: By Rebecca Hu FCMA, CGMA, Group Associate Finance Director at Ogilvy & Mather, Shanghai MARKET 16 How do we connect intangible value to the overall success of our business? By Dr. William Chen FCMA, Chief Financial Officer & General Manager, Hui Lau Shan Food Manufacturing Co., Ltd. (Hong Kong) INSIGHTS 18 Connecting intangible assets to capital markets: By Wei-Shan, Ma, Associate Director, APAC Cross Divisional Reporting Lead at UBS (Singapore)
20 The human element of accounting: FM brings key insights from Tata and Mahindra on value
22 Wealth creation and intangibles: By Dr Aidan Goddard, FCMA, CGMA, CFO & COO, Asia Pacific, L’Occitane en Provence
24 Analysing impact on value – a SE Asia perspective: By Keoy Soo Earn, Deloitte South East Asia’s Financial Advisory Regional Managing Partner and Mergers & Acquisitions Leader
26 What is your organisation’s value story? By Yvonne Chan FCMA, CGMA, Director & CFO, Corporate Development, Maritime Port Authority of Singapore
28 Indonesia’s plan for long term growth: By Franz Lathuillerie FCMA,CGMA, AXA Indonesia Country CFO
ACCOUNTING FOR THE FULL VALUE OF THE BUSINESS – BRAND FINANCE ASIA GIFT REPORT | 13 THE NEW AGE Companies which want to establish OF MARKETING high-end brands must learn how to market in this difficult new environment IN CHINA
Traditional advertising channels are shrinking. We It’s frustrating, and economically damaging. On the have a big budget for promotions, for example, product are seeing this trend in all countries, but in China other hand, a great brand reputation can be part of the campaign or country wide activities or celebrity it’s particularly noticeable. Young people aren’t solution. Take two leading Chinese brands like Huawei appearances by stars in hypermarket events. watching TV. Magazine and newspaper sales are and Xaomi. They have spent big resources to differentiate falling as people get their information from the their brands from the others by identifying the specific Companies which want to establish high-end brands internet. It’s a huge, and hugely exciting, transition. needs for target customer Group. Now consumers seek must learn how to market in this difficult new out those names. They don’t want cheap imitations. environment. Not all are keen to learn. Many local At the same time China is experiencing another companies stay stuck in the mindset of the past. The By Rebecca Hu FCMA, CGMA, seismic change. The rising cost of labour and A big part of building a brand is knowing how to reach investment in the brand for multinational companies the performance of the Renminbi have made consumers. Great brands are able to navigate the new usually is a long term relationship between the client Group Associate Finance Director, it increasingly hard to make money from media landscape to reach their target audiences with and advertising agent. Most China companies don’t reach Ogilvy & Mather, Shanghai commoditised services. The old days of producing their brand message. It’s what sets them apart from that far yet, due to the consideration of cost control or goods, when international clients put their labels their rivals. intellectual property protection. on Chinese made products, are receding. The rewards for building a brand can be huge. A brand Instead we see companies launching their own offers the chance to sell to the middle class, which tends brands. They are learning about the value of Companies with strong to be cash-rich and appreciative of good brands. And not intangibles and the power it brings to command brands are in a great place just in China. The Ogilvy & Mather Velocity 12 Report: The premium prices, and create customer loyalty in Reshaping of Global Growth looks at the most exciting a competitive marketplace. to profit in the next decade economies in the world. The list includes Nigeria, Mexico, Egypt, Bangladesh and Indonesia. The key to the V12 list The two trends together are causing an is middle-class income growth. It factors in GDP growth unprecedented change in the way companies For example, China’s social media networks are replacing and rate of change. India’s middle class alone will grow design and sell products. They know they need old media. But you need to be pretty up to date to get from 431m people in 2015 to 828m in a decade. Overall to invest in brand creation, and must learn new the most from them. A popular network is Wechat. It’s a the V12 will gain a billion new middle-class consumers. techniques to reach their target audiences. messaging platform, like WhatsApp. You can share your They will be the agents of social change, arbiters of ‘moments’ with your friends. Wechat allows brands to fashion, influences of government ... and an empowered The intellectual property situation in China is send advertising to user groups based on Big Data behind. demographic of consumers. making the situation particularly complex. China’s It tracks user behaviour, so you know the things users are government has worked hard to impose harsher interested in. By using data analytics brands have a cheap The emergence of the V12 is a fabulous opportunity. For laws for intellectual property violation. But the and incredibly focused way of reaching their chosen the citizens it will be time of unprecedented prosperity: implementation is still inadequate. When a mobile demographic. The online shopping platforms Alibaba and our survey found on average 71% of respondents in the phone maker launches a new model they’ll see a Taobao also offer the chance to use Big Data to target V12 believe the changes to lifestyle will be positive. The hundred copycat versions appear in no time at all. consumers. Intelligent use of channels such as this can number is 91% in China. In one way this acts as a disincentive to innovate. be an advantage for brands to know how to promote a Why bother spending vast sums of money to Companies with strong brands are in a great place to name for themselves. create a new product range if competitors are profit in the next decade. As we’ve seen in China, no going to launch look-a-like models a few Offline activities are growing too. Promotions are a big matter what the obstacles, be they IP challenges or a months later? part of marketing budgets. The advantage of this way is transition to new media channels, brands can be built. to link the sales to the promotion spending. Clients can Calculating a brand value can help managers assess easily chase the promoting results. FMCG companies where they are.
ACCOUNTING FOR THE FULL VALUE OF THE BUSINESS – BRAND FINANCE ASIA GIFT REPORT | 15 HOW DO WE CONNECT INTANGIBLE VALUE TO The most critical intangible value to the success of the business include quality of people, brand equity and customer satisfaction, which are THE OVERALL SUCCESS not adequately reflected in the traditional financial statements OF OUR BUSINESS?
The retail industry faces challenges of the fast like pricing, product reviews, etc. Today’s consumer is evolving customer profile, customer acquisition, markedly different than even a few years ago. Their finding and keeping good employees. According to Management accounting tools expectations are extremely high. By answering the the recent Brand Finance Global Intangible Finance are increasingly critical to assist questions correctly, we could avoid lack of focus by Tracker (GIFT™) report, retail companies are management to address this providing all-things-to-all-customers. We don’t seek one- relatively underperforming in terms of intangibles, time sales but instead focus on long-term relationship which suggests huge opportunity for intangible, performance measurement gap building through continuous understanding of customer and overall value growth, in years to come. needs. It is particularly critical to retail industry. In addition, it could assist the management to put the right By Dr. William Chen FCMA, This gap also implies the opportunities to study financial and human resources into the right drivers. Chief Financial Officer and The balanced scorecard is the performance management how leaders in retail industry could connect It therefore not only increases the revenue and brand tool to connect and integrate four perspectives; learning General Manager (Hong Kong), intangible value to the overall success of business. equity but also reduces the resource waste. Hui Lau Shan Food The most critical intangible value to the success and growth (people), internal processes, customer of business include quality of people, brand and financial with the organization’s objectives. Every In the internal process perspectives, the management Manufacturing Co., Ltd. equity and customer satisfaction, which are perspective is connected to everything else. This creates identify the key processes at which the organization not adequately reflected in the traditional a mechanism for translating the strategic vision into must excel in order to add value to customers financial statements. concrete actions necessary to achieve success. continuously. KPIs based on this perspective allow the managers to know how well their business is running, The learning and growth perspective basically deals Traditionally, people are not reflected in the and whether its products and services conform to with three areas of capital: human, information and balance sheet but are only reflected as expense customer requirements (the mission). Companies in the organizational. This perspective forces management under staff costs and training in profit & loss retail industry may focus on process on new products to ensure organizations possess human capital, skills, statements, although it is advocated that development, customer knowledge and retention as well competencies and talents necessary for effective employees (people) are an organization’s key as supply chain operations. assets. This category is even not considered execution. Questions to address would be: could we under IFRS 3. Neither brand nor customer are retain good employees? Could we have the right talent The balanced scorecard is a shorthand way of putting adequately reflected in the financial statements to understand the changing needs of customers? Do all KPIs into a ‘dashboard’ that can be used to monitor until the valuation exercise is conducted under we have adequate resources to facilitate product results. By including non-financial measures, it can be IFRS 3. However, it wouldn’t be carried out innovation? Do we have appropriate culture and platform used to measure and report on these intangible drivers regularly. Hence, management accounting tools for knowledge sharing? These intangible dimensions of to enable management to manage them in order to are increasingly critical to assist management performance must be transformed into tangible value generate value for their organisations. to address this performance measurement gap. and be measured objectively. Without proper measurement, the management The customer perspective addresses the expectation cannot assess the success of strategies to release or demand of our target customers and our value such intangible value. proposition in serving them. Today’s consumers are also highly informed, enabled by new technologies and tools which provide them easy access to information
ACCOUNTING FOR THE FULL VALUE OF THE BUSINESS – BRAND FINANCE ASIA GIFT REPORT | 17 CONNECTING Intangible value gets translated INTANGIBLE ASSETS to business performance and gets measured in capital markets TO CAPITAL MARKETS
When it comes to intangible value of the value but existing accounting rules do not address the activities. Through this process we are able to track organisation we look at brand value, talent people, valuation gap. As a result, there is a serious disconnect percentage contribution of each employee which rolls technology, customer relationships and franchises between what happens in capital markets and what up to each supporting function that related to business across the globe. The definition of business success accounting book value reflects. front-line revenue generating activities. The ability can be translated in capital market terms as to break down the service contribution will provide “how much are we willing to pay for a successful Post the 2008 financial crisis most of the financial us valuable insight on how to assign the undisclosed company”? It’s a question of business valuation and instruments are required to report on mark-to-market intangible market value to meaningful intangible how we connect the market value of the business basis. The market value of a 10 million dollar bond asset generating processes. It will also help the logistic By Wei-Shan, MA, to mostly booked value driven balance sheets. portfolio could drop to 6 million on next day close during functions to justify the size of their existence when it that period. If the company still reports the same 10 comes to annual planning and budgeting process. Associate Director, APAC During the merger and acquisition review, M&A million dollar bond portfolio on its balance sheet for the Cross Divisional Reporting Lead, professionals look into how to price the company, next month or quarter, there is significant downside risk Some might argue that why can’t we simply use UBS (Singapore) therefore cash flow projection and growth rate and lack of transparency in existing accounting book the headcount to shred functional contribution of are taken into consideration of discount cash value approach. A similar argument here on deviation undisclosed intangible asset market value? Because the flow model for business valuation. Interesting to of book value from enterprise market value, the main level of transparency is not sufficient to make a call on mention what makes up the assumption of cash component to account for such gap is undisclosed how it relates to intangible asset generating process. For flow projection and growth rate is mainly driven intangible value. The question is shall we mark-to-market example, allocating five million intangible market value by corporate intangible assets. For people involved company’s balance sheet to better link up the reality allocated to Operations and three million intangible in the corporate appraisal deals who approved on organisation’s market value? I think the answer is market value allocated to Risk by functional headcounts such assumptions, they have already exercised obvious. I wouldn’t be surprised if someone from strategy will not tell us two million intangible market value (one their judgement and confidence on corporate or treasury office has already done so with couple of million from Operations and another one million from intangibles. scenarios when it comes to volatile market conditions Risk) is related to customer onboarding due diligence. or growing business environment. Intangible value gets translated to business performance and gets measured in capital markets. To bridge the forward looking enterprise value to its book For a public listed company, it’s fairly easy to value it’s best to start with enterprise market value. Once This is the step forward to real- observe market value from global security markets. we have the market value information we subtract the time balance sheet management The business valuation is reflected in its share updated value of tangible assets and disclosed intangible price – this price implies investors are willing to assets from it to get the market value of undisclosed for better decision making fund the business at such price because they agree intangible assets. enterprise value is worth at that level including the value delivered by intangible assets. When we We can then look at each category of these intangible With ongoing technology improvement it will be easier look at market capitalisation it represents overall assets and see how each undisclosed intangible asset for organisations to map out business value drivers to market value of the business; we then compare contributes directly or indirectly to the business. What undisclosed market value gap from intangible assets. such difference between market value and book we need here is the internal allocation methodology to This is the step forward to real-time balance sheet value. This gap can help explain the contribution link up intangible service to front line business activities. management for better business decision making. However, before we move toward that stage the mindset from undisclosed intangible assets. One of the most popular approaches to achieve such of transforming existing financial reporting to business allocation is through activity based tracking – meaning For instance, the reported intangible assets driver focus and real time enterprise market value we link up middle office or back office logistic activities account only for 1% of total assets on balance connection is the critical success factor for to front office business consumers. Each function such as sheet currently for the financial service company organisational intangible commercialisation. I work with. The majority of intangible assets are Finance, Operations, Risk, Technology, Marketing, Human key drivers for the organisation to create enterprise Resource – even front office Sales – submitted their staff man hours spent on supporting which business related
ACCOUNTING FOR THE FULL VALUE OF THE BUSINESS – BRAND FINANCE ASIA GIFT REPORT | 19 CONNECTING THE VALUE THE HUMAN ELEMENT When we talk about intangibles we must never OF INTANGIBLES VALUE forget the human stories behind every number TOOF ACCOUNTINGBUSINESS SUCCESS
What lies behind a number? The Brand Finance “You have to keep communicating and saying how you “We wanted to ensure that we would develop our GIFT™ survey throws up many intriguing statistics, delivered significant outcomes,” said Rajan. “If you are business with the growing needs of the farming sector, but at the heart of every figure lies a story. It’s unable to define that precisely, you face constraints so we instigated initiatives such as developing micro only when we tell a tale the numbers come to life. and possible vulnerabilities, because your people won’t finance for farmers, establishing mutual funds for have a good understanding of why they are there, apart rural communities and ensuring sustainable returns Look at India. It is home to $900bn of from the need to earn a wage. They’ll question whether and security. undisclosed intangibles, exceeding Japan. there’s a commitment to anything. Tata has been blessed Unpick that number and what you find with a sense of purpose, which has been baked into “To ensure farmland could become more productive is a mosaic of inspirational stories. its identity through the trusteeship concept: we know we acquired a company called Micro Irrigation to that a significant portion of any surplus generated will enable farmers to work on a larger scale. This has Tata is a superb example. It’s one of the stars be paid to charity and so improve lives. At the highest now spread to 20 states and involves working to of Indian commerce. Founded by Jamsetji Tata level there is an instinct to do good in society. We do develop a low-cost rice transplanter that farmers in 1868 it now employs 600,000 people in 80 FM brings key insights care about the next quarter, but we are equally caring can afford so they don’t have to sow by hand.” countries, with annual revenues in excess of about where we’ll be in the next 25 years – and our from Tata and Mahindra $100bn. It’s an incredible story of growth. The Mahindra wants partners to prosper. Even small actions impact on the communities we serve over that time.” on value key has been a firm grasp of intangibles. can have a big impact. Parthasarathy gave this example: “A soil-testing advice line was set up to improve Mukund Rajan, chief ethics officer and brand prosperity for farmers as part of one project and this custodian of the parent company Tata Sons, ‘To improve the quality of life eventually became a separate company founded on recently spoke to CIMA about the values of the communities we serve the co-creating ethos. All these are examples of shared under-pinning the group. He explained that value creation. We also hold an annual conference financial matters used to dominate the agenda globally, through long-term for smaller operators that are looking for funding at Board meetings. Now it’s a third at most. stakeholder value creation as part of that effort to increase shared value.” Now Boards want to know what customers think of them, how the wider world perceives based on leadership with trust’ Tata, and what values are shaping its journey. Intangibles by contrast are the Rajan revealed that the chairman, Cyrus Mistry, This mindset is not exclusive to India. But it is seen human elements of accounting started an exercise two years ago to work out how as a hallmark of Indian multinationals. Another Indian the group should present itself to the world. “We behemoth Mahindra puts its moral code at the forefront came out with a mission statement: ‘To improve of everything it does. This code demands far more from Tangibles are physical assets. Cash in the bank, the quality of life of the communities we serve employees than any statutory instrument ever could. plant equipment, inventory and hardware are all easy globally, through long-term stakeholder value to list on the balance sheet. Intangibles by contrast creation based on leadership with trust’. This VS Parthasarathy, CFO of the vehicle division Mahindra are the human elements of accounting. It is built connected our sense of purpose, our reason for & Mahindra, speaks eloquently of the way the company on the warm feeling of customers to your brand, existence, all the way back to the initial conception strives to generate goodwill, based on thoughtful and and the generosity of partners, built on years of of our founder about the role of business in responsible conduct to everyone it touches. He told trustworthy conduct and altruism. These things the community.” CIMA, “Take farming equipment, the division I started out matter. No business can exist without them. in, we had grown to become the world’s biggest producer. Tata believes a company needs a sense of Becoming number one is a great goal to achieve, but we When we talk about intangibles we must never destiny, paired with a moral duty, in order would ask: what does it mean to the customer?” forget the human stories behind every number. to survive – indeed be worthy of survival.
ACCOUNTING FOR THE FULL VALUE OF THE BUSINESS – BRAND FINANCE ASIA GIFT REPORT | 21 As all intangibles derive from human endeavour WEALTH CREATION it is not surprising that people and the ideas they generate are essential to value creation AND INTANGIBLES
In the creation of wealth, or value as it is often economy the determination of value can only arise For some businesses, technological superiority whether in referred to, it is the senior managers who are through the completion of arm’s-length transactions. And terms of the products or services offered to the market or expected to carry the greatest level of even then, an additional degree of uncertainty is added the efficiency and effectiveness of their creation and responsibility for its creation and maintenance. by the fact that value is only relevant if it can be seen to delivery, is key to building value and therefore adding to The CFO of a business enterprise is and should have a lasting nature, which then defaults into attempts intangible assets. be an important contributor to wealth creation. to calculate value from future cash flows arising from the value model. However, given the speed at which new technological At the heart of value creation, there resides a solutions are developed, it is unlikely that many Dr. Aidan Goddard FCMA, CGMA, functioning business model which in itself To add value, the CFO along with the remainder of the businesses can simply rely on existing intellectual represents the most valuable intangible asset management team needs to understand the drivers of property. The need to continually explore technologically CFO & COO, Asia Pacific, created by and available to respective businesses. wealth creation as aligned around the business model based solutions and to develop new products means that L’Occitane en Provence As an example, on the one hand the ubiquitous and ensure that proper attention is given to the most most businesses will very likely remain dependent on the iPhone can be seen as no more than an assembly important elements. In short, it is the creation and quality and adequacy of key staff as the source of of plastic and metal, albeit some of the metals maintenance of value through the employment of a intangible asset creation. may be of a particularly rare nature and thereby robust business model that occupies most attention. command a premium over their lesser valued Business models, like products do, experience life cycles Brands are very important but only to the extent that relations. However, the high selling prices and can fail. Therefore they too need to be kept relevant. they are correctly positioned within the mindset of the commanded are a reflection of the equally high For successful businesses the ensuing focus translates target customer base. Relying on spending for advertising consumer perception of utility and functionality, into the marketing, development and sale of successful and public relations, above and below the line or in other words, value as seen from the products or services, to significantly grow revenues and promotional activities and other forms of customer consumer perspective. increase profitability. Regardless of the industry engagement can result in a huge amount of spend or business segment, the most important value levers without the creation of any lasting intangible asset It is precisely the detachment of the value created can be usually found in a limited number of areas. foundation. And even if an excellent recipe for success is above and beyond that which can be traced back developed it could only be successfully implemented to the routine employment of tangible assets that with the support of key functions such as finance, gives rise to the realization that a portion of production if applicable, supply chain and general value creation is derived from assets of an Intangibles are important but they management. intangible nature. are difficult to precisely identify Smart pricing is a significant condition for success. If Intangibles are important but they are difficult to due to their transient nature prices are set too low a business will run the risk of
precisely identify due to their transient nature. The becoming unprofitable. Conversely, if prices are set too
emergence of all intangibles is rooted in some form high there will be a risk of sales volume limitation, As all intangibles derive from human endeavour it is not of human creativity, whether direct or indirect, but resulting in equally unprofitable operations. Pricing may surprising that people and the ideas they generate are such creativity is not necessarily the property of a be related to branding but it correlates much closer to essential to value creation. It is not just people at an business – although specific elements may be positioning which ultimately flows from management individual level that are important but also the converted into a form of legal property such as determination. effectiveness of the organizational arrangements in patents, copyright and trademarks. The which they are located and the appropriateness of determination of intangibles is also not helped There is no doubt that for many companies value support measure which can all make the difference by the premise that in a free market economy, creation is driven by intangibles but as they only have between success and failure. just as prices cannot be predetermined, so too is effect when intelligently employed in a holistic manner, it not possible to predetermine value. In such an it is difficult to take them apart and arbitrarily assign separate values to sub-segments.
ACCOUNTING FOR THE FULL VALUE OF THE BUSINESS – BRAND FINANCE ASIA GIFT REPORT | 23 ANALYSING IMPACT The value of these businesses will be driven ON VALUE – A SE ASIA by their intangible assets rather than tangible assets like plants and equipment PERSPECTIVE
Southeast Asia is a sizeable growing market that There is a growing middle class population that is However, the current Financial Reporting regime does will enjoy an expected increase in its labour force becoming affluent and demands products and services not allow recognition of intangible assets at fair value at and benefit from productivity improvements via of a certain level of quality. Well known and established each reporting date, resulting in many intangible assets the adoption of technologies for continued brands that represent and deliver consistent quality are going unreported. An exception is during acquisitions, economic growth. likely to see a growing demand even as their products where intangible assets are recognized at fair value and services continue to command a premium in pricing. and accounted for under IFRS 3. These differences in As this economic scenario plays out, pressures on accounting treatment of internally generated intangible natural resources will increase, bringing along with Intellectual Properties (IP) such as patents and assets and acquired intangible assets can be a stumbling By Keoy Soo Earn, it environmental issues such as air, water and land trademarks, and other intangible assets, will play an block for users of financial statements, especially in a pollution, transboundary haze pollution, and the important role as businesses in Southeast Asia transform Financial Advisory Regional climate where IP and intangible assets are set to be key depletion of national resources. This presents huge their business models. More business value will be driven value drivers of future businesses in Southeast Asia. Managing Partner and challenges for the governments of the ASEAN by IP and intangible assets, making it crucial for Mergers & Acquisitions Leader, member nations. It has not been, and will not be, companies operating in the region to be strategic, Despite the current restrictions in intangible assets easy to keep a delicate balance between delivering be it in adopting and acquiring existing IP or reporting, business managers cannot afford to ignore Deloitte South East Asia economic growth and ensuring environmental investing and building new ones. the key role that IP and intangible assets play in the sustainability. business. It is important for them to understand how Businesses that are able to find technologies that can changes in these IP and intangible assets affect It is therefore not surprising that the key focus improve productivity while minimising damages to the business operations. is on investments into solutions that can contribute environment will be sought after as the preferred solution to sustainable development or minimise the providers. Businesses that can build quality products and damage to natural resources and the environment. services consistently that can be identified by their Such investments, tangible and intangible, will brands will see an increase in consumer confidence. Business managers cannot undoubtedly impact on the value of the companies. The value of these businesses will be driven by their afford to ignore the key role intangible assets rather than tangible assets like that IP and intangible assets Traditional businesses operating in Southeast Asia plants and equipment. also find themselves needing to acquire and/or play in the business invest in new technologies, or open themselves to Generally speaking, the share prices of listed companies collaboration with other businesses with better are affected by market forces including investor technology capabilities in order to remain relevant sentiments. When the sentiments are positive, it Business managers should also quantify the financial and ride the ASEAN growth wave. increases the equity value of the business, and this in impact these assets have on the value of their business. turn may result in an increase in the implied size of And, in order for them to have this understanding, it has intangible assets vis-à-vis the tangible assets. become critical for businesses to strengthen capabilities that allow them to actively monitor and manage these IP and intangible assets. By having these capabilities, the company will be in a better position to drive its own destiny and harness the opportunities this growing region will bring.
ACCOUNTING FOR THE FULL VALUE OF THE BUSINESS – BRAND FINANCE ASIA GIFT REPORT | 25 WHAT IS YOUR Today, with names like Samsung, LG, ORGANISATION’S Snapchat, Baidu and Alibaba, accounting for intangibles is gaining prominence in Asia VALUE STORY?
If one were to ask a class of 12-year-olds which As an example, in 2005, P&G valued Gillette at $24bn but it lies behind Europe – a clear sign of the work yet to brands come to mind immediately, it would likely bought it for $57bn. With such numbers, the nightmare be done. Retail, software and the internet are relatively be consumer products like Apple, P&G, Unilever, has only just begun with a new set of problems such under-reported, signalling undervaluation of such firms. Fisher Price or service providers like Starbucks, as possible impairment, often high advertising cost Facebook, Instagram and Twitter. incurred to ‘maintain’ the brand and constant innovation to ensure that the brand remains attractive. In the past, The Brand Finance Asia GIFT 2016 Each brand is synonymous with a linkage to a these seemed like accounting woes of the Western world past experience, quality expectation or anticipated where branding was the differentiator for commanding report shows how much Asia By Yvonne Chan FCMA, CGMA, satisfaction. In a nutshell, these companies have a higher price and ensuring customer loyalty. Today, with could benefit from moving to a succeeded in their brand creation and awareness Director & CFO, names like Samsung, LG, Snapchat, Baidu and Alibaba, and each has a value proposition to sell and a accounting for intangibles is gaining prominence in Asia. more comprehensive reporting Corporate Development, story to tell. Then, you would say, this is the Could brand valuation then be the part of the story
Maritime Port Authority world of marketers. that the new world call for the accountants to tell in an With that said, leading Chinese firms which have Integrated Report which lays out what an organisation’s of Singapore Switching context to the accounting world, these built remarkable global reputations such as Alibaba, value proposition is? very same brands have to be accounted for as Weibo, and Baidu have complied with international intangibles on the balance sheet in order to assign In 2013, the International Integrated Reporting accounting requirements and inspire other Chinese a value to them. Such valuations rely on judgement Council (IIRC) issued the
ACCOUNTING FOR THE FULL VALUE OF THE BUSINESS – BRAND FINANCE ASIA GIFT REPORT | 27 INDONESIA’S PLAN FOR LONG TERM Indonesia was reliant on tangibles. Now we are making the switch to intangibles GROWTH
Indonesia is an unusual economy. Most nations The full plan is set out in the Masterplan for Acceleration External analysts agree we are on track. A CNBC report would be celebrating growth of 5%. For a high- and Expansion of Indonesia’s Economic Development recently stated: “Indonesia is slowly but surely cementing performance economy like ours it’s a slowdown. (abbreviated MP3EI). We are off to a flying start. a reputation as a standout in the global economy, aided by For the past decade we’ve been posting 6% plus. a strong domestic economy and a government embracing Indonesians are heavily connected to social media and pro-market reforms. With that in mind, the country recently The cause for the dip is obvious. Commodity prices in this context brand image and brand management saw its strongest growth in more than three years.” are down, and China is in a lower growth phase, the capability will constitute a powerful differentiator (and effects of which have rippled throughout South-East this is a significant intangible pool of value). Current equity The World Bank approves too. Its verdict on Indonesia notes Asia. The bigger question is what is going to drive us valuations reflect this with strong household brands trading we have “charted impressive economic growth” since the back to peak growth? Now there the conversation at over 35 times PE ratio. 1990s, adding: “Indonesia has made enormous gains in By Franz Lathuillerie FCMA, CGMA, bursts into life. poverty reduction, cutting the poverty rate to more than IMF’s Asia-Pacific Department Deputy Director, Kenneth half since 1999, to 11.2% in 2015.” AXA Indonesia Country CFO Our former finance minister Chatib Basri expressed Kang, spoke recently about the performance of Indonesia, it well saying, “We’re living in a different world now. and he highlighted the powerful gains made so far. He Of course it is possible to grow an economy without I don’t think commodity prices will come back to endorsed the move to a high-value add economy, stressing improving productivity. The Nobel Prize winning economist where they were and we can’t compete with the the need for this approach to be taken nationwide: “As Paul Krugman noted that the Soviet Union grew entirely by likes of Bangladesh on low wages, so we need to such, what Indonesia needs to do in the near future is to using more resources. It failed to grow productivity in any focus on developing our human capital.” craft more focused and inclusive policies that are aimed to meaningful way. And that condemned it. Krugman concluded: sustain its high economic growth.” “It was simply not possible for the Soviet economies to Indonesia was reliant on tangibles. Now we are sustain the rates of growth of labor force participation, making the switch to intangibles. That transition As a nation, the world’s fourth most populous nation with average education levels, and above all the physical capital will power us back to sustainable high-level growth. 260m people, covering 300 ethnic groups, and more than stock that had prevailed in previous years. Communist 13,000 islands, we know the challenge this represents. But growth would predictably slow down, perhaps drastically.” Our path is set out in a three-step master plan we intend to include everyone as we move forward. The to fulfill by 2025. whole nation will participate. We are taking a radically different path. Our prime minister states our goal is to return to a 7% growth rate. We’ll Goal one is to increase the value-added component To achieve our aims we will be looking to implement best focus relentlessly improving productivity. Understanding of industrial production. This involves upgrading practice sourced from around the world. For example, intangibles, and growing them in a sustainable way, will keep human resources. We need to move from processing the Valuing your Talent manifesto, created by CIMA and us strong and on course to fulfil our Masterplan in 2025. materials to designing, creating, and re-engineering partners, provides a template for how organisations can From what I can see, we have every reason to be confident. for efficiency. measure human capital. It covers six forms of capital: financial, manufactured, natural, intellectual, social and Goal two is to improve marketing. Building brands relational, and people. It offers ways to measure education takes time and capital. But it is essential to move investment, quantify recruitment costs, and flag up towards premium branding. We are promoting the Sources: difficulties. Some techniques offer new insights, such idea of intangible value as an important measure Indonesia’s Masterplan as conducting employee satisfaction surveys to gauge of prosperity. Otherwise we’ll be stuck as a engagement, and track strengths and weaknesses. http://www.indonesia-investments.com/projects/ commodity economy. government-development-plans/masterplan- Global businesses such as Coca-Cola, Unilever and for-acceleration-and-expansion-of-indonesias- And goal three is to strengthen our national system ArcelorMittal are fans of the Valuing your Talent economic-development-mp3ei/item306 of innovation. We want to be inventors, creators, methodology. As Indonesia expands the intangible side designers, and thinkers in everything we do. Even World Bank of its economy this sort of initiative will be key. heavy industries’ processes need an innovative https://www.worldbank.org/en/country/indonesia/ mindset to improve them, or risk obsolescence. Our intention is that young Indonesians grow up in a overview Government support for these activities will be vital. diversified economy, able to compete in a range of high Krugman tech industries, and where the human side of the economy is appreciated to the full. http://www.pkarchive.org/trade/myth.html
ACCOUNTING FOR THE FULL VALUE OF THE BUSINESS – BRAND FINANCE ASIA GIFT REPORT | 29 32 An integrated approach to driving intangibles: by Dr. Noel Tagoe, Executive Vice President – Academics, CIMA CREATING 34 Creating value and achieving success 36 Creating value and the business model VALUE AND 38 Management accounting is integrated thinking SUCCESS
ACCOUNTING FOR THE FULL VALUE OF THE BUSINESS – BRAND FINANCE ASIA GIFT REPORT | 31 AN INTEGRATED One can only attract the attention APPROACH TO of stakeholders if the information is relevant to their needs and interests DRIVING INTANGIBLES
The research reported by Brand Finance shows how (ii) manufactured; (iii) natural; (iv) human; (v) through decision making and action. Insight is created important intangible assets are to organisations. intellectual; and (vi) social and relational. The last from information. One can only attract the attention of They constitute at least 50% of global enterprise three are ‘intangible’ capitals. stakeholders if the information is relevant to their needs value and, across Asia, 30% of enterprise and interests. This creates the basis for interaction. value. Stakeholders who are interested in how However the IIRC report does not offer deep insights The interactions focus on co-creating shared value. organisations generate value cannot ignore the into how these capitals integrate with each other and drivers of intangible value. with the business activities that convert them from When value is co-created it must be shared fairly. inputs into outputs and outcomes. Stakeholders have often been seen as competing with For example, policy makers will be interested each other for the benefits of co-created value. Such in effective policies to accelerate investment in In late 2014 the Chartered Institute of Management competition, if not handled properly, will impede further By Dr. Noel Tagoe FCMA, CGMA, intangibles, how competition policy influences the Accountants (CIMA) and the American Institute of co-creation and destroy value. Trust ensures that value co- Executive Vice President – Academics, formation and use of intangible assets, ways in Certified Public Accountants (AICPA) published a set creation takes place. This occurs through the experience CIMA which intangible assets facilitate entrepreneurship of global management accounting principles (GMAPs) and communication of mutual vulnerabilities by the and new business models, and how efficiently which addresses the issues in an integrated manner. parties involved in the interactions as they co-create markets work for key intangibles. Managers need to Value generation is at the heart of GMAPs. It asserts that value and share its benefits among them fairly. A cycle understand and influence these drivers if they are organisations who want to achieve long-term business of communication, information sharing, interactions that to be successful. success need an effective management accounting build trust and create shared value takes place. function which brings together competent people, who The report splits intangibles into three classes: apply the principles to their practices in order to drive the In this way GMAPs bring together in a coherent disclosed intangibles (e.g. trademarks and performance (i.e. value generation) of their organisations. manner the drivers of intangible value – relationships, licences); goodwill (calculated after acquisitions); The four inter-linked principles which constitute the communication, trust etc. – identified by the DTI and undisclosed value (difference between the GMAPs are shown in Figure 1 and explained briefly below. report generate and deliver shared value. market and book value of shareholders’ equity). Undisclosed value and goodwill may make up more Figure 1: The Global Management Accounting Principles than 80% of the value of intangibles. They are both CIMA has taken the GMAPs a step further and calculated after the fact and contain little or no developed a diagnostic tool that will enable information about the drivers of intangible value. organisations to: They are therefore of limited value to stakeholders who wish to influence how intangible and P Highlight the key issues affecting the finance function enterprise value is generated. P Build the confidence of the CEO and Board on What is needed – to build on and fully drive the impact finance can achieve value from this report – is a forward looking and P Deliver comfort to the Audit Committee that integrated approach to understanding the value the key issues it identifies are being tackled drivers of intangible assets and the dynamics between the drivers. P Provide independent evidence and ammunition for the CEO for engagement with investors The International Integrated Reporting Council and regulators (IIRC) published a report on how business models can provide the means by which value creation can Given that value is co-created by stakeholders through For further information on the GMAPs and to take place in an integrated manner. In its simplest multiple interactions in multiple forums, communication find out how the diagnostic tool can help your form this was primarily a model about how inputs is a critical activity that enables the stakeholders organisation make better long-term decisions, are converted through business activities into to converse together and align their interests. This visit www.maprinciples.com or email outputs and outcomes. The major contribution of conversation focuses on the provision of insight that [email protected] this work is its use of capitals to describe the inputs opens up possible ways in which value can be generated and the outcomes. The six capitals are (i) financial;
ACCOUNTING FOR THE FULL VALUE OF THE BUSINESS – BRAND FINANCE ASIA GIFT REPORT | 33 CREATING VALUE AND ACHIEVING SUCCESS
Achieving long-term success Management accounting measures the full performance of the business to help drive success over the short, medium and long term.
Management accounting skills bring rigour to decision making in business, by ensuring that decisions are informed by the proper analysis of the relevant information and the business is managed in the short, medium and long term interests of its shareholders and wider stakeholders.
Building Skills Decision Making Practice Chartered Global Management Accountants The CGMA Global Management Accounting Principles These are the key practice areas of the management (CGMAs) are trusted finance professionals with the provide the best in class management accounting accounting function, as captured in the Principles. The skills needed to meet global business needs. They framework that empowers organisations to take the role of the CFO is changing. It is expanding to include confidently apply accounting and finance skills, in best possible decisions and succeed over time. IT, human resources and operations. All CFOs have a the context of business, to influence the decisions, responsibility for management accounting. actions and behaviours of others. By following the Principles, organisations are able to work with their CGMAs to unlock full value from their • Cost transformation and management The CGMA Competency Framework was developed finance functions. The Principles ensure information • Project management in consultation with leading global organisations in organisations is influential, relevant and underpins • External reporting to represent the skill set business needs. It includes analysis on a basis of trust across the business. • Regulatory adherence and compliance feedback from over 3,000 participants. • Financial strategy The competencies identified by leading employers • Resource management are core accounting and finance skills, business • Internal control acumen, people skills and leadership skills – all • Risk management of which are reflected in the CIMA Professional • Investment appraisal Qualification syllabus. CGMAs are proficient in • Strategic tax management each of these core areas. • Management and budgetary control The CIMA Professional Qualification syllabus • Treasury and cash management consists of three core pillars: Enterprise, • Price, discount and product decisions Performance and Financial. The pillars have been • Internal audit developed to address the competencies global employers need and expect. In addition to the core accounting skills (Financial pillar), CGMAs have a good understanding of business (Enterprise pillar) and the analytical skills to contribute the insight needed to drive performance (Performance pillar).
ACCOUNTING FOR THE FULL VALUE OF THE BUSINESS – BRAND FINANCE ASIA GIFT REPORT | 35 CREATING VALUE AND THE BUSINESS MODEL
The focus for all organisations should be on achieving success over time, creating value for customers, stakeholders, society and the environment. The business model is the organisational value engine. It determines how business defines, creates, delivers and captures value to succeed.
Management accounting is about accounting for the business, not just the balance sheet. Integrated thinking leads to more joined-up decision making and actions that consider the creation of value over the short, medium and long term.
Bringing all the skills that are needed, with decision making that is required and drawing on all relevant areas of practice, CGMAs are uniquely placed to drive success.
By analysing relevant information to understand the impact on value, management accountants drive business success by ensuring the best decisions are taken at the right time.
ACCOUNTING FOR THE FULL VALUE OF THE BUSINESS – BRAND FINANCE ASIA GIFT REPORT | 37 MANAGEMENT ACCOUNTING IS INTEGRATED THINKING
CGMA® REPORT FinAnCE businEss PARTnERinG
The conversations that count CIMA CERTIFICATE IN BUSINESS ACCOUNTING 2015 CIMA PROFESSIONAL QUALIFICATION SYLLABUS | 2017 SYLLABUS
Copyright © CIMA 2015 First published in 2015 by: CIMA CERTIFICATE IN The relationship between pilot fish and Chartered Institute of 2015 CIMA PROFEssIOnAl manta rays is an example of a type of Management Accountants The Helicon BUSINESS ACCOUNTING QuAlIFICATIOn syllABus symbiosis; where both organisms receive One South Place benefits from their relationship. London EC2M 2RB United Kingdom 2017 SYLLABUS
JOINING THE DOTS – DECISION MANAGEMENT ACCOUNTING IS CGMAs ARE THE SOLUTION The qualification consists of three learning pillars and MAKING FOR A NEW ERA ABOUT ACCOUNTING FOR THE BUSINESS, three levels of progression – operational, management The CIMA Professional Qualification powers up NOT JUST THE BALANCE SHEET and strategic – each of which is grounded in the CGMA High-quality decision making has never been more individuals by unleashing their potential and equipping Competency Framework, defining what employers like important or more difficult. Senior business leaders are Management accounting is the solution; it’s about them with high-level abilities in both business and you have identified as being key to maintaining business striving to position their organisations to thrive in the relevant management information needed to take finance. As CGMAs, they in turn power up businesses success and enhancing employability. short, medium and long term, but they are having to decisions and drive business success. with the right skills, principles and expertise to help do so in an operating environment that is volatile them achieve sustainable success. At Operational level, the focus is on the short term. and uncertain. Management accountants work at the heart of business • Students would be expected to be involved in to develop all the skills needed to take the decisions The CIMA Qualification: producing better costing, preparing budgets, advising on product mix or Our research has found a number of major flaws in required to create value for the short, medium and skills for better business performance, variance analysis, working capital or cash companies’ decision making, which is costing them long term. management, producing reports of performance against dearly. Based on a survey of 300 C-suite executives The CIMA Qualification is made up of the CIMA budget, risk assessment in short-term decision making. at major organisations around the world, it suggests Finance Business Partnering – Certificate in Business Accounting (Cert BA) and the CIMA Professional Qualification. Both are recognised that decision making in many businesses could be The conversations that count • Students would need to understand the role of fundamentally improved. worldwide as the most relevant finance qualifications finance within the wider organisation, who the In many organisations, the accounting and finance for a career in business. stakeholders are, the regulatory environment and As our key findings demonstrate, many organisations function is being transformed to be more efficient. The qualification delivers much more than just how to communicate with non-financial staff. are struggling to: This is being enabled by developments in information accounting knowledge, providing professionals with the • Overcome bureaucracy and achieve agile technology, allowing management accountants to extend At Management level, the focus is on the medium term, their role to include finance business partnering. right mix of skills, acumen and experience they need to decision making add value across business and drive sustainable success. monitoring and implementing strategy. • Build greater levels of trust and improve collaboration • Student would be expected to be involved in analysing Finance people can be positioned to work closely with As students progress through the qualification, the cost information and advising on product investment • Take a long-term view and define the right metrics business managers and help them improve decision focus on developing skills shifts from knowledge-based decisions, assessing/advising on risk, pricing decisions • Turn huge volumes of data into strategic insight making and business performance in the long-term learning to application and analysis, meaning they can interests of stakeholders. and performance measurement. • Build the decision making skills of senior leaders. directly apply their skills to supporting the needs of Finance business partnering makes an important your business. • Students would need to understand the regulatory Find the solutions to these decision contribution to improving decision making and ensuring environment in depth, the business environment, making challenges at www.cgma.org/dots the sustainable success of business. This report, based CIMA Certificate in Business Accounting performance measures and improvement, change on 25 interviews and roundtables globally with senior The CIMA Certificate in Business Accounting offers management and options for long-term finance. executives, shows the kinds of decisions management a grounding in the fundamentals of management At Strategic level, the focus is on the long term accountants support and how they contribute to the accounting, financial accounting and business, and setting the strategy for the business. most important conversations to drive success. and forms a solid entry route in to the CIMA Professional Qualification for those with little • Students would be expected to be involved in or no finance experience. measuring, analysing and managing risk, advising on strategic decisions, investigating potential business To read the report, download here http:// CIMA Professional Qualification developments and investments, and advising on www.cgma.org/Resources/Reports/Pages/ The CIMA Professional Qualification bridges the Financebusinesspartnering.aspx long-term sources of finance and financial strategy.the skills gap between newly qualified professionals context of the real world of business – enhancing their and the world of business. employability and fostering better business. 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ACCOUNTING FOR THE FULL VALUE OF THE BUSINESS – BRAND FINANCE ASIA GIFT REPORT | 39 There is also real progress being made through WITHIN TOUCHING collaborations of like-minded people possessing parts of the intangibles puzzle DISTANCE
The GIFT report is an excellent piece of The split by sector is interesting. If we take the intangible. After the event of each revolution, it research work and illustration of the need numbers at face value, banks have 104% of becomes clear that the systems and processes for new frameworks to enable us to decipher tangible net assets and only 1% of disclosed of the old assets world are not fit for purpose in intangible assets. intangibles and goodwill respectively. However, managing, measuring and reporting on the new applying an intangible assets lens, banks have assets and do not efficiently connect capital to It is remarkable that over 40 years into an assets valuable human capital, they have brands, assets. Change then follows. revolution we are still using the systems and software trading platforms and copyrighted processes of the industrial asset age to manage, models providing insight into their investment To begin to make progress, we can start by By Andrew Watson, measure and report on intangible assets that decision making. They also have relationships answering two questions: behave quite differently. But it is also really ipVA Licensing observations with customers, partners, regulators and others. • Firstly, what really are intangibles and can encouraging that Asia recognizes the revolution All are intangible assets of some value. we create a complete classification? and commentary having taken place and is willing to share in innovating towards new frameworks. In short, are any of the disclosed or undisclosed • Secondly, what is goodwill and is it really not figures reliable? Or is it more accurate to say that able to be separated as current accounting An intangibles lens on the Brand Finance GIFT all markets operate with equal inefficiency? standards assume? report findings illustrates the problems in understanding a business’ assets and which of Inefficiency in decision making applies everywhere. Plotting a roadmap from those answers to them are creating value. With that lens everything I agree with the commentary that my old field meaningful change is actually not as hard as it is open to question, including the supposedly of M&A needs to adapt to the intangible asset may appear. reliable baseline for tangible asset values. Even base now being acquired and merged. A typical We are just about to experience the first legal and in sectors with high tangible asset bases such as M&A business case will not identify the assets regulatory regime that will require intangibles to shipping or chemical production, the difference being acquired and merged and manage the be understood, explained and fairly valued as part in performance of those assets will be enabled transaction structure, diligence and integration to of the tax anti-avoidance counter-measures in the by something intangible. Try to sell the hardware ensure that those assets are tested and preserved. BEPS Guidelines. That will provide a catalyst. components of a specialty chemicals production Without that map to asset values, it should not be facility without the expertise of people and surprising that a majority of transactions fail to There is also real progress being made through codified IP that optimize its operation and without achieve their business case. collaborations of like-minded people possessing the relationships with the companies in associated I recently met another visionary in the intangibles parts of the intangibles puzzle. Through these value chains, and they may be worth scrap collaborations, I can now clearly see and touch value only. community called Robert McGarvey who enabled me to see the historical context of this period the route ahead. Using that same lens we should also question: of inefficiency. In his book Futuromics, Robert describes that the world has experienced three • What in fact constitutes undisclosed value major assets revolutions, from feudal to trading, and what could be its components? from trading to industrial and from industrial to • How can the disclosed goodwill figure be correct when goodwill (better described as reputation) should be viewed as an outcome? Of what inputs? • Whether the value of disclosed IPRs is correct when this represents their costs of creation or of acquisition and there are no reliable comparables for these values?
ACCOUNTING FOR THE FULL VALUE OF THE BUSINESS – BRAND FINANCE ASIA GIFT REPORT | 41 DEFINITIONS
Book Value of Equity
Intangible assets can be grouped into three broad The diagram opposite (Figure 2) illustrates how intangible In order to be ‘identifiable’ it must either be separable But because only acquired intangibles, and not those categories – rights, relationships and intellectual property: value is made up of both disclosed and undisclosed value. (capable of being separated from the entity and internally generated, can be recorded on the balance sold, transferred or licensed) or it must arise from sheet, this results in a lopsided view of a company’s 1. Rights ‘Undisclosed intangible assets’ are often more valuable contractual or legal rights (irrespective of whether value. What’s more, the value of those assets can Leases, distribution agreements, employment than the disclosed intangibles. The category includes those rights are themselves ‘separable’). Therefore, only stay the same or be revised downwards in each arrangements, contracts, supply covenants, contracts, ‘internally generated goodwill’ and it accounts for the intangible assets that may be recognised on a balance subsequent year, thus failing to reflect the additional financing licences, certifications, franchises. difference between the fair market value of a business and sheet under IFRS are only a fraction of what are often value that the new stewardship ought to be creating. the value of its identifiable tangible and intangible assets. considered to be ‘intangible assets’ in a broader sense. 2. Relationships However, the picture has improved since 2001, when Clearly, therefore, whatever the requirements of Trained and assembled workforce, customer and Although not an intangible asset in a strict sense – IFRS 3 in Europe, and FAS141 in the US, started to require accounting standards, companies should regularly distribution relationships. that is, a controlled ‘resource’ expected to provide future companies to break down the value of the intangibles measure all their tangible and intangible assets economic benefits (see below) – this residual goodwill they acquire as a result of a takeover into five different (including internally-generated intangibles such as 3. Intellectual property value is treated as an intangible asset in a business categories – including customer and market related brands and patents) and liabilities, not just those that Patents; copyrights; trademarks; proprietary technology combination on the acquiring company’s balance intangibles – rather than lumping them together under have to be reported on the balance sheet. And the higher (for example; formulas, recipes, specifications, sheet. Current accounting practice does not allow for the catch-all term ‘goodwill’ as they had in the past. the proportion of ‘undisclosed value’ on balance sheets, formulations, training programmes, marketing internally generated intangible assets to be disclosed the more critical that robust valuation becomes. strategies, artistic techniques, customer lists, on a balance sheet. Under current IFRS only the value demographic studies, product test results); business of acquired intangible assets can be recognised. knowledge – such as suppliers’ lead times, cost and pricing data, trade secrets and knowhow. In accounting terms, an asset is defined as a resource Marketing-Related Customer- Contract-Based Intangible Technology- Artistic-Related that is controlled by the entity in question and which Intangible Assets Related Assets Based Intangible Intangible Assets Internally generated intangibles cannot be disclosed on is expected to provide future economic benefits to Intangible Assets Assets the balance sheet, but are often significant in value, and it. The International Accounting Standards Board’s should be understood and managed appropriately. Under definition of an intangible asset requires it to be non- Trademarks, Customer lists* Licensing, royalty, standstill Patented Plays, operas and IFRS 3, only intangible assets that have been acquired monetary, without physical substance and ‘identifiable’. tradenames agreements technology ballets newspapers Order or and other literary can be separately disclosed on the acquiring company’s Service marks, production Advertising, construction, Computer works consolidated balance sheet (disclosed intangible assets). collective marks backlog management, service or software and supply contracts mask works Musical Certification marks Customer works such as contracts & Lease agreements, Unpatented Trade dress (unique compositions, related customer Construction Permits technology* song lyrics and colour, shape, or relationships Figure 2: Breakdown of corporate assets, including intangibles package design) Permits Databases* advertising jingles Non-contractual Newspaper Franchise agreements Trade secrets, such Pictures and customer photographs relationships* as secret formulas, Market Premium to Book Value Undisclosed Intangible Assets Mastheads internet Operating and broadcast processes, recipes domain names rights Video and audio- visual material, Non-competition Use rights such as drilling, Book Value of Debt including films, Enterprise Value Disclosed Intangible Assets agreements water, air, mineral, timber music, videos etc cutting & route authorities Book Value of Equity Tangible Assets Servicing contracts such as mortgage servicing contracts Employment contracts
ACCOUNTING FOR THE FULL VALUE OF THE BUSINESS – BRAND FINANCE ASIA GIFT REPORT | 43 “Accounting for the Full Value of the Business: Brand Finance Asia GIFT “ report’ provides a comprehensive and revealing analysis of these new patterns of growth and development – it powerfully confirms the rapidly growing value of intangibles across Asia and strongly reinforces the critical role that management accounting can and must play in driving prosperity, building trust, and opening up opportunity across the region.”
Tony Manwaring, “ Executive Vice President, External Affairs, CIMA CIMA Singapore Brand Finance Asia Pacific 50 Raffles Place, Level 30, 3 Raffles Place, #07-01, Singapore Land Tower Bharat Building, Singapore 048623 Singapore 048617
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CIMA SE Asia Brand Finance UK Lot 1.05, Level 1, KPMG Tower, 3 Birchin Lane, London, 8 First Avenue, Bandar Utama, 47800 UK, EC3V 9BW Petaling Jaya, Selangor Darul Ehsan, Malaysia T: +44 (0)20 7389 9400 T: + 6 (03) 7723 0230 E: [email protected] F: + 6 (03) 7723 0231 www.brandfinance.com E: [email protected]
CIMA London The Helicon, One South Place October 2016 London, EC2M 2RB © The Chartered Institute of Management Accountants 2016 T: +44 (0)20 8849 2251 [email protected] cgma.org www.cimaglobal.com