The Power of Fair Value Accounting

It's somewhat a pleasant atmosphere to know that the occasionally at-odds relation (due to competition) between two major accounting bodies in Australia seems to be put aside when furthering the interests of the  accounting profession. If you read on, you'll see why it behooves them to be so for the sake of this more glorious cause.

In a joint letter signed by the CEOs of CPA Australia, ICAA, and NIA, the Joint Accounting Bodies wrote to Kevin Rudd ahead of the Prime Minister's attendance at the US-spearheaded G20 meeting in Washington 14-15 November 2008.

The first key aspect highlighted to the PM is a resounding conviction of the importance and usefulness of fair value accounting as opposed to historical cost method as being asserted by some commentators. Worse, some government leaders are also alleged to point their fingers to fair value measurement as the main culprit to the current market volatility we're experiencing recently.

The heads of these accounting bodies are unanimous, however, in their view that it would "place an unnecessary burden on capital providers to provide capital without having relevant fair value information to make decisions" based on up-to-date situation if everything is valued at their historical values.

In contrast, using fair value for measurement of assets and liabilities will provide more transparency and comparability of the actual state of a company's economic worth. This is despite them acknowledging that copping fair values of some financial assets and derivatives is not always as easy or possible.

The second issue also brought to attention is the need for 'financial reporting' to be segregated from 'prudential reporting' in the context of external reporting. The latter's purpose is to provide decision-useful financial information to the owners of the balance sheet's right hand side, namely investors and lenders (external users). The former's goal is to promote and maintain financial stability even in adverse circumstances, something that chiefly become the concern of the owners of the left hand side of the balance sheet, i.e. the management (internal users).

CPA, ICAA, and NIA wanted to ensure that the financial reporting standards are stringently adhered to cater to the capital providers' needs and, hence, recommended against such modifications as profit stabilisation or creative accounting that will only dress up the performance of the management. Doesn't the term 'prudential reporting' then sound too good to be dubbed  'prudential' in this kind of setting?

 

And lastly, they are also throwing in their firm support for the independence of IASB as the undisputed IAS setter. This is given the unexpected, alleged development that the G20 summit will appoint a new body in place of IASB (hmm, I didn't know that from the media!).

Overall, I am personally wondering whether this sort of deeply technical letter laden with accounting terms would ever attract the attention of our PM. And if it actually was, did the PM really voice these concerns to the world leaders? Once again, I have never read accounting issues ever discussed among them on newspapers. Anyway, what's important to the accounting profession has been done and conveyed properly and clearly to the highest authority in this country. (EJ)

Source: http://cpaupdate.cpaaustralia.com.au/cpalink/1019_31058?Division=New+South+Wales&Segment=The+Rest

The 'keyless' Key Performance Indicators

The Essence of KPIs

Hmm, so what we say KPIs may not be the 'real' KPIs. Contrary to what many people believe, Key Performance Indicators should be truly the "key" and not just one of those numerous measures that are applied across different functions in an organisation.

Many companies set some KPIs to define their performance in certain areas. But too often, they are not true KPIs but simply PIs (performance indicators). Real examples may include timely creation of PO (purchase orders), percentage of POs approved within 24 hrs, timeliness of payments to suppliers, etc. They all are important performance measures but not necessarily KPIs. Read on and you would know why.

Much of the following is taken from 'Decision based reporting' white paper (2007), presented by David Parmenter of Waymark Solutions to CPA Australia.

There are three types of performance measures:
1. KRI (Key Result Indicator) => Tells you how you have done in a perspective.
Eg: Customer satisfaction, EBT, customers profitability, employee satisfaction, ROCE (Return on capital employed).

KRI information is intended to be presented to the Board, not for management, because they only show you if you're going in the right direction, but not tell you the solution to correct the situation if you're going the wrong way! KRIs are ideal tools for the Board (being BOD's role as "governance manager") to communicate the competence of the SMT (Senior Management Team).

2. PI (Performance Indicator) => Tells you what to do.
Eg: Profitability of top 10% of customers, net profit on key product lines, % increase in sales with top 10% of customers, participation of employees in suggestion scheme, duration of cash to cash cycle.

Performance indicators lie between KRI and KPI with varying merits which may be useful in balanced scorecards.

3. KPI (Key Performance Indicator) => Tells you what to do to increase performance dramatically.

Characteristics of the real KPIs:
* NON-financial measures (not expressed in any currency)
* Measured frequently (daily or 24/7)
* Acted upon CEO & Senior management team
* Understood by all staff and what corrective action is required
* Responsibility tied down to individual or team
* Have significant impact. Eg: impacting most of the core CSFs [Critical Success Factor] and more than one balanced scorecard perspective.
* Have positive impact (affecting all other performance measures positively)

One celebrated KPI case is when Lord King of Wartnaby, former chairman of British Airways turned around the company by focusing on one single key measure: delayed departure. He agreed that whenever a BA flight was delayed, he should be notified who would then call the managers to ask why. Very soon all sorts of inventive ways were introduced to catch up time on late planes and it was just 18 months before BA jets had a reputation for flying on time.


Board v. Management
KPI and PI are different from KRI as they are meant for the management, not for the BOD.

The Board get a "governance" dashboard made up of 5 to 8 KRIs. As for SMT, they will get a balanced scorecard comprising up to 20 performance measures (KPIs & PIs).

Next blog: How should we report KPIs?

Musing: The question is whether the so-called "KPI" imposed on you or your team is really KPI? If not, let's call it otherwise and get the fact straight! (EJ)