Shareholders would revolt — and fire the CEO, CFO and Boards of Directors — of companies who ignore more than 80 percent of the factors that drive more value and profit.
Prepare for a revolution, as 84 percent is the proportion of corporate value in the S&P500 corporations that is intangible. That’s right — the plant, property and equipment, as well as inventory, receivables and cash recorded on regulatory- required financial statements are only 16 percent, or one-sixth, of the value of your S&P500 index.
The remaining 5-in-6 dollars are knowable yet ignored assets to accountants, auditors and regulators — and to executives and shareholders. They are the “intangibles” — which are quite tangible — such as Human Capital, and the value provided by their innovations.
CEO Paul Herman**,**
SB '15 San DiegoEnvironmental Capital is also an off-balance-sheet asset, or liability. For today’s fossil-fuel producers, if the oil, gas and coal underground cannot be consumed due to a regulatory decision around climate change, then those fossil-fuel reserves, which are currently an asset, will become a liability!
Yet some innovative accountants, academics and thought leaders are blazing the trail to 21st-century financial statements that include 100 percent of the value. In 2014, Building Bridges and the MVP (More Value & Profit) team, in collaboration with the Rhode Island Society of CPAs (RISCPA) and Providence College, created the first-in-the-nation “Intangibles-Valuation” Task Force. The goal was two-fold; (1) innovate the old, stodgy 19th-century balance sheet and income statement into a young, vibrant measurement system for 21st-century opportunities and risks; and (2) clearly identify to execute the strategies and tools that can resuscitate our outdated 20th-century business models to create More Valuable & Profitable (sustainable) businesses.
The Intangibles Valuation task force of experts evolved traditional financial statements into a manager- and investor-friendly measurement system. A key improvement is distilling 5 new key performance indicators (KPIs) of knowable-yet-ignored value. The Intangibles task force has built a template to report these measurable values that integrate into the known accounting framework of assets and liabilities.
I originally created a “PEOPLE-DRIVEN©” business model as a pilot program in June of 2012. This was spurred by a challenge issued by HIP Investor CEO R. Paul Herman to CPAs in Rhode Island to bring accounting into the 21st century for their clients and investors alike.
If we are going to generate more value and profit — with lower risk — then all businesses must be informed, educated and engaged on a wide range of impacts from human, social and environmental factors. These also link to financial risk and return, and need to be managed by companies, and audited by CPAs.
A comprehensive sustainability assessment and a business model aligned to specific sustainability strategies uses integrated financial statements to report on the 84 percent of value that is ignored by most investors, companies and CPAs today.
Just as Rhode Island was the first to sign the Constitution, Robert Mancini, President of the Rhode Island Society of CPAs (RISCPA), saw the potential early: “An innovative accounting model that re-conceptualizes the traditional financial statements in a manner that recognizes the value of assets and liabilities that are not fully valued under GAAP has arrived, thanks to the Intangibles Valuation expert task force.”
“What better way to innovate and pioneer these new sustainability strategies than starting with the CPA firm first, which better enables them to bring these ideas and strategies to their clients, especially human capital,” Mancini noted.
At Providence College, which produces MBAs and CPAs in its accounting program, professor Dr. Michael Kraten highlights: "Although many organizations are developing sustainability metrics, to the best of our knowledge, no one has yet created a hybrid set of financial statements that integrate quantitative and qualitative assets and liabilities. So how does one place a 'qualitative' asset or liability on a balance sheet? That was a central goal of this initiative."
One such intangible asset, for instance, is the brand reputation of Apple Inc. In the April 2015 issue of the CPA Journal, Kraten noted that financial experts can better understand the value of that firm by adjusting the financial statements to reflect the worth of the brand.
Michael T. Tousignant, CPA and Director of Assurance Services at KLR, was one of the first CPAs to offer to participate in the MVP Pilot Program.
“We have been impressed with the survey and engagement tools to capture and analyze the perspectives and values of our own employees and their related generational differences and preferences. The initial results enabled us to learn more about what our team views as critical to the continued success of our firm, their personal success within the firm, as well as the success of our clients.”
Kevin A. Papa — CPA, CVA, ABV, CFF, and partner at Piccerelli Gilstein & Company, a CPA firm — saw the power of a more comprehensive valuation now.
“As a specialist in the business valuation field, I regularly consider the value of intangible assets that do not appear on GAAP financial statements. The RISCPA and MVP Program have made tremendous progress in recognizing and measuring the value of these assets to a business.”
A formal RISCPA Sustainable Value Committee will be launched in May of 2015 to:
1. Continue to flesh out our financial valuation concepts of intangibles as assets and liabilities
2. Highlight additional evidence that shows the link to actual financials and the traditional entries on the financial statements and how to convert to real assets of the business owners
3. Design the platform for seamless recommendations and action plans
4. Expand the members and organizations collaborating.
5. Formalize education and business training series for CPAs and C-Suite executives and consultants.
“We have a shared vision of how to build on this strong initial foundation. In 2015, we will further tie intangible and tangible capital to the balance sheet and income statement, and link to existing data on investments, corporate and M&A value,” explains Mary Adams, founder of smarter-companies.com and co-author of the book, Intangible Capital. “Our aim is to develop practical tools that support clear, hard-headed thinking about creating critical human, social, environmental, technological and strategic drivers of value, profits and prosperity.”
Back in 2012, a forward-looking bank of CPAs and business innovators realized the potential to revolutionize our business models and traditional financial statements, and brought truth to Peter Bakker’s assertion that “Accountants will Save the World.”