SESSION OVERVIEW
Performance Measurement &
Reporting
ADMS 4510
Revenue Recognition (CICA s. 3400)
Peformance reporting
• GAAP earnings
• Proposed expanded income
presentations
• Sustainability & Triple-Bottom-Line
reporting
Related issues: Intangibles, Fair Value
Accounting
Performance Measurement &
Reporting – Readings update
Read:
CICA s. 3400 & 1000
CA Mag Sep 2002: Raising the standards
Skim:
FASB Project update: Financial Performance
Reporting for Business Enterprises
Optional:
Remainder of readings on list
REVENUE RECOGNITION &
PERFORMANCE REPORTING
The recent phenomenon of "pro forma"
financials is indicative of the need to
rethink our current system.
Unstructured and undisciplined, this
form of financial disclosure starts by
rejecting the bedrock of all our
financial disclosure requirements Generally Accepted Accounting
Principles.
SEC Chairman Harvey L. Pitt, Oct 22/01
http://www.sec.gov/news/speech/spch516.htm
REVENUE RECOGNITION &
PERFORMANCE REPORTING
We need to consider the void that pro
forma statements may be attempting to
fill…behind this new "pro forma"
disclosure is often - but unfortunately not
always - a legitimate desire by companies
to demystify mandated financial
statement disclosures, and to encourage
shareholders to focus on what
management believes are the most
salient details to be gleaned from their
company's financials.
SEC Chairman Harvey L. Pitt, Oct 22/01
REVENUE RECOGNITION & PERFORMANCE
REPORTING
RESPONSES BY STANDARD SETTERS
 In the US the SEC issued guidelines on
appropriate dot.com revenue recognition
methods and policy disclosures and
ordered some dot.com companies to
restate ( see SEC SAB No.101 )
 Canadian Securities Administrators [CSA]
provided guidelines on alternate non-GAAP
earnings presentations
REVENUE RECOGNITION &
PERFORMANCE REPORTING
 GAAP very flexible for revenue
recognition and income
measurement
 Potential for questionable practices
here. . .
 Facts of the situation are key – then
determine accounting alternatives
REVENUE RECOGNITION
CICA s.3400 [Oct. 1986]
 Timing of revenue recognition
 Revenue’s measurement usually
determined by parties involved
 Revenues arise from:
• selling goods
• providing services
• use by others of enterprise’s resources
REVENUE RECOGNITION
CICA s.3400
Recognition criteria:
• performance
• no significant uncertainties
Presentation and disclosure
• amount of revenue recognized in period
• disclosure of recognition basis/revenue
sources “may be required”
REVENUE RECOGNITION
Case Study
Handout:
Revenue recognition issues in an
Internet- based business
• Assess the company’s revenue
recognition policy from its auditor’s
point of view.
REVENUE RECOGNITION
Responses by Standard Setters
 CICA plans to follow FASB/IASB joint
project
 FASB/IASB project builds on SEC’s SAB
101 and AICPA SOP 97-2
• goal is one comprehensive accounting
standard for revenue recognition
RESPONSES BY STANDARD SETTERS
AICPA SOP 97-2
Software Revenue Recognition
Basic criteria:
 persuasive evidence of arrangement
 delivery has occurred
 vendor’s fee is fixed or determinable
 collectibility is probable
See IBM 2001 Annual Report for an example of this
application, e.g. “MULTIPLE ELEMENT ARRANGEMENTS”
PERFORMANCE REPORTING
WHAT’S WRONG WITH GAAP?
GAAP income as a performance
measure:
 What are its strengths ?
 What are its weaknesses ?
PERFORMANCE REPORTING
WHAT’S WRONG WITH GAAP ?
 Changes in how value is created create
the need for new types of information
 Limitations of traditional historic cost
accounting model
• ‘Quality of earnings’ ? (e.g. O’Glove)
• Declining relevance of GAAP information to
market value (e.g. Lev etc.)
• Trend to reporting “PROFORMA” earnings
information (CA Mag. Mar 2002)
ADMS 4510
IS GAAP GOOD ENOUGH?
Recent research finds GAAP earnings to be the
best predictor of future performance when
compared to some unconventional alternatives
[Schipper et al. 2001]
 Still, GAAP’s limitations may explain:

• Market to book value discrepancies
• Market volatility

Suggests need for new performance measures
and asset recognition methods….
RESPONSES BY STANDARD SETTERS
 ‘Comprehensive Income’
[FASB SFAS 130]
• ‘gains and losses’ not affecting Retained
Earnings are reported in Shr. Equity section
 FASB project ‘ Financial Reporting by
Business Enterprises’
 IASB project
‘The Income Statement
(Reporting Performance)’
PERFORMANCE REPORTING:
EXPANDING THE INCOME STATEMENT
Limitations of current GAAP income
measure?
Who are the users ?
What information can they use ?
How will they use it?
PERFORMANCE REPORTING:
EXPANDING THE INCOME STATEMENT



Users want to predict future income and cash
flows
use multiples (P:E) or ratios (ROI, ROE)
need to distinguish incomes components, e.g.
- ordinary operating income vs. ‘treasury’ gains
& losses
- current income items vs. remeasurements
- changes in fair value
PERFORMANCE REPORTING “Sustainability”
Recent attention on corporate
accountability and social
responsibility
-> is company operating with regard
not only to economic sustainability,
but also social and environmental ?
PERFORMANCE MEASUREMENT AND
REPORTING
Corporate Responsibility
ECONOMIC
SOCIAL
ENVIRONMENTAL
PERFORMANCE MEASURES
PERFORMANCE MEASUREMENT AND
REPORTING
ECONOMIC, SOCIAL, ENVIRONMENTAL
PERFORMANCE MEASURES
Triple Bottom Line
Reporting
PERFORMANCE REPORTING - GRI
GRI ‘Sustainability Reporting Guidelines’
(2002 )
- performance reporting on
environmental, social and economic
aspects of sustainable development.
www.globalreporting.org
GRI Guidelines Reporting Ratio Indicators
 Productivity/Efficiency
• value to impacts
 Intensity
• impact per unit of activity/value
 Percentages
• relate two alike issues
Intangibles measurement:
CICA Handbook s.3062
“Goodwill and other intangible assets”
•
•
•
•
intangibles at cost
Amortized unless ‘indefinite life’
Goodwill not amortized
Annual impairment test
Intangibles measurement:
FASB (US) has added intangibles recognition and
disclosure to its technical agenda
Scope limited • Separable
• Contractual
Intangibles disclosure issues • Fair values
• Costs to generate
• Qualitative, non-monetary information
PERFORMANCE REPORTING
Challenges in creating new performance
measures?
 what information is relevant?
 standardized, objective measurement
methods
 understandable and accepted reporting
practices
 verification and assurance reporting
ADMS 4510
PERFORMANCE REPORTING AND
ENVIRONMENTAL ISSUES
RECAP OF TONIGHT’S DISCUSSION