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XBRL & Enhanced Business Reporting: A Consortium Approach Dr. Robert G. Eccles XBRL International April 27, 2005 Boston, USA Wait a minute… enhanced business reporting, improving the reporting model… • Didn't Sarbanes-Oxley § 404 lead to improved internal controls and result in better information? – No…..SOX targeted improved internal controls over financial reporting, however… – Investors, creditors and business executives do not use the financial statements as their primary tool when making decisions about the allocation of capital • Then, what information is important? 2 Research tells us what is important • Provide shareholders and others with information needed to make decisions – Financial and nonfinancial value drivers – Tangible and intangibles assets • In general, many measures require information from outside the Company's financial or business systems • Vast majority of measures are not subject to standards or reporting frameworks of any kind Enhanced Business Reporting = Better Information 3 PwC ValueReporting capital markets research Banking • Loan Loss • Earnings • Capital Adequacy • Risk Management Practice • Customer Retention • Customer Penetration • Asset/Liability Management Insurance • Fee-based Revenue Growth • Performance by Business Segment • Delivery Channels • Economic Profit • Expense Ratio • Performance by Business Segment • Risk Management Practices • Market Risk Exposure • Plans for Growth • Cost/Income • Investment Performance • Distribution Channels • Market Share • Assets Under • Asset Quality Management • Return on Risk Adjusted • Employee Satisfaction Capital • Brand Equity • Capital • Product Innovation • Management • Quality of Management • Investment Performance • Degree of Diversification • Plans for Growth • Regulatory Reputation • Market Growth • IT Expenditures Source: PwC ValueReporting Capital Markets Survey • Capital Management • Quality of Management • Earnings • Customer Retention • Capital Adequacy • Claims Ratio • Economic Profit • Employee Satisfaction • Customer Penetration • Market Risk Exposure • Assets Under Management • Asset Quality • Embedded Value • IT Expenditures • Asset/Liability Management • Brand Equity • Product Innovation • Return on Risk • Regulatory Reputation • Market Share • Adjusted Capital • Market Growth 4 PwC ValueReporting capital markets research Investment Management • Profit Margins • Investment Product Performance • Quality of Management • Asset Growth from Investment Performance • Asset Growth from Product Cash Flow • Employee Retention • Compensation Levels of Professional Staff • Asset Retention • Competitive Landscape • Compensation Strategy • Investment in Technology to Improve Business Processes • Assets under Management • Enterprise Risk Management • Market Share • Experience & Quality of Investment Research Professionals • Product Diversification Strategy Source: PwC ValueReporting Capital Markets Survey High Technology • Strategic Direction • Cash Flow • Market Growth • Gross Margins • Quality/Experience of Management Team • Market Size • Competitive Landscape • Earnings • Speed to Market (first to market) • Market Share Telecommunications • Competitive Landscape • Capital Expenditures • Market Growth • Customer Churn Rate • Regulatory Environment • Pricing Strategy • Network Reach, Quality & Capability • Earnings • Revenue Metrics by Driver (e.g. Average Revenue per user) • Significant Operating Costs by Category • Sales & Marketing Strategy • Cash Flow by Business Segment 5 PwC ValueReporting capital markets research Pharmaceuticals • Market Growth & Potential by Therapeutic Area • Market Growth by Geographic Market • Product Focus Strategy • Partnering Strategy • Earnings • Cost/Revenue Ratios • R&D Pipeline • Market Share by Therapeutic Area • Quality of Selection of Development Targets • Recruitment & Retention of Talented People • Regulatory Issues • Product Innovation Strategy • Risk Profile of Product • Efficiency of • Performance by Business Manufacturing Facilities Segment • Profitability of Licensing Arrangements • Reputation with Prescribers • Economic Profit • Value of Key Intellectual • Quality of Management Assets • Market Growth & Potential • Brand Awareness of by Geographic Area Levels with Patients • Effectiveness of Product Launch Source: PwC ValueReporting Capital Markets Survey Petroleum • Supply, Demand and Prices for Petroleum Products by Region • Cash Flow • Unit Cost by Refinery • Value of Proven & Probable Reserves • Refinery Margins by Region • Capital Expenditures • Strategic Direction • Performance by Business Segment • Exploration Success Rate • Return On Average Capital Employed or Similar Return Measure • Quality of Management • Petroleum Product Sales by Volume by Refinery • Risk Management • Quality of Workforce • Reserve Replacement • Hedging Strategy Costs • Market Share • Refinery Utilization • Operating Profit per • Refinery Acquisition Equivalent Measure by Cost of Crude Geographic Location • Earnings • Supply, Demand & Prices for Crude Oil & Natural Gas 6 PwC ValueReporting capital markets research Chemicals Metals Mining • Free Cash Flow • Market Share • Strategic Direction • Strategic Direction • Manufacturing Costs • Energy Prices & Supply • Earnings • Cash Cost per Ounce/Kg/Ton • Capital Expenditures • Earnings • Market Growth • Costs per Ton Delivered • Market Growth • Performance by Business Segment • Product Quality • Metals Prices • Capital Expenditures • Earnings • Existing/Potential Environmental Liabilities • Quality of Management • Capital Expenditure • Utilization of Facilities • Market Share • Customer Loyalty • Performance by Business Segment • Potential Supply Globally & Locally • Utilization of Facilities • Product Quality • Free Cash Flow • Age & Quality of Plant • Strategic Direction • Value of Tangible Assets • Implementation of New Processes & Technologies • Quality of Management Source: PwC ValueReporting Capital Markets Survey • Regulatory Environment • Health & Safety Performance Statistics • Metal Prices • Quality of Management • Acquisition Strategies • Ounces/Kilograms/Tons Produced per Year • Performance by Business Segment • Cost per Ounce/Kg/Ton • Labor Relations • Sustainable Development Strategy • Environmental Policy/Risks • Potential Supply/Production Globally & Locally 7 PwC ValueReporting capital markets research Diversified Manufacturing Consumer Goods • Free Cash Flow • Capital Expenditure • Earnings • Performance by Business Segment • Market Growth • Free Cash-flow • Sales Volume • Earnings • Manufacturing Costs • Growth of Strategy • Sales & Gross Margins by Product Category • Market Share • Quality of Strategy • Quality of Management • Strategic Direction • Performance by Business Segment • Market Growth • Capital Expenditures • Market Share • Performance by Geographic Market • Product Quality • Marketing Strategy • Customer Loyalty & Advocacy • Customer Service • Weighted average cost of capital • Employee Satisfaction & Advocacy Source: PwC ValueReporting Capital Markets Survey • Product Innovation • Marketing Costs • Brand Portfolio Management Date • Percent of New Products in Sales • Employment, Environmental Policies • Product Range Development • Stock Levels in the Supply Chain • Distribution Channel Complexity 8 PwC ValueReporting capital markets research Retail • Market Growth • Earnings • Same Store Sales • Gross Margins • Free Cash-Flow • Market Share • Performance by Business Segment • Store Portfolio Changes (e.g., new stores) • Weighted Average Cost of Capital • Customer Satisfaction • Expected Return on New Stores Refurbishment Real Estate • Quality of Management • Capital Expenditure • Sales per Square Foot • Inventory Turns • New Store Formats Tested & Performance Data • Brand Value • Product Availability Source: PwC ValueReporting Capital Markets Survey • Financing Strategy • Occupancy Rate • Macro-Economic Factors (e.g., GDP growth, inflation, population & job growth, interest rates) • Investment Strategy • Return on Invested Capital • Revenue from New Developments or Acquisitions • Investment in New Acquisitions & Development Properties • Earnings • Market Rental Rate • Quality of Management • Free Cash Flow 9 PwC ValueReporting capital markets research Automotive Entertainment Utilities • Earnings • Market Growth • Cost reduction • Free cash flow • Market Share • Market Share • Free Cash Flow • Investment/acquisition strategy • Margin improvement • Strategic direction • Product quality • Performance by Business Segment • Market growth • Operating cash flow growth • Customer satisfaction • Market Growth • Customer Demographics • Operating profit growth • Quality of management • Facility or capacity investment strategy • Earnings • Strategic Direction • Regulatory environment and price controls • Sales volume • New Business • Risk Management processes • Performance by business segment • Capital Expenditure • Strategic direction and focus integrated vs. specialist player • Quality of Management • ROIC Source: PwC ValueReporting Capital Markets Survey 10 Everyone needs better information • Management… to optimize allocation of capital and people resources • Boards of directors… to provide the level of oversight that shareholders demand • Investors… to more efficiently and effectively allocate and price capital • Regulators… to ensure that the capital markets are functioning as efficiently and effectively as possible The net result is a higher return on capital for society as a whole 11 What makes information better? • Information which is more relevant – Content matters – not the normal boiler plate – Management’s perspective – Different users have different needs • Information which is not overly costly to produce or consume – Format matters – Timing is important – Focus on analysis not data gathering and validation Both content and format of information enhance transparency 12 What do you mean… content and format? • Enhanced Business Reporting is about content – Provides information that is actually used for decision-making – It is information that is not always disclosed – Business community may want to develop standards for this type of content (rather than waiting for territory regulatory actions) • XBRL (eXtensible Business Reporting Language) is about format – Current taxonomies are based on accounting standards – Taxonomies for MD&A/OFR content are very high level – Taxonomy extensions will provide more relevant information 13 What is Enhanced Business Reporting? • Enhanced information for consumers – Internationally recognized, voluntary guidelines for industry-specific value drivers and key performance indicators (KPIs) – A framework for disclosure of non-financial information, e.g., opportunities, risks, strategies and plans and about the quality, sustainability and variability of cash flows and earnings • Simplified report preparation – Stronger focus on quality of information, not quantity – Prepare and disseminate information using efficient and effective business processes 14 A standardized format matters if information is to be more useful • Management… to quickly populate a wide range of analytical and reporting tools with relevant information • Boards of directors… to access and analysis of information buried deep within the enterprise • Investors… to more efficiently and effectively access and analyze information in business reports • Regulators… to more effectively analyze information in business reports The net result is greater transparency of business information 15 The challenge • CEOs and management must resolve to report externally the same information that is used to manage the business • Boards of directors must determine the optimal level of transparency required to ensure that all stakeholders have the information needed to make decisions • Investors must demand and use qualitative, non-financial information and key performance indicators • Regulators must be willing to trade long-time requirements for more relevant and useful information 16 The benefits are worth the effort • Better Management – Improving the ability of companies to benchmark performance against all key performance indicators • This level of benchmarking is impracticable in a paper-centric world • Better Governance – Directors can better fulfill their fiduciary responsibilities to shareholders, e.g., more appropriate executive compensation through benchmarking • Better Markets – The over-emphasis of quarterly earnings will decline, as companies provide richer information that enables to investors take a longer term view – More efficient and cost-effective regulation 17 One possible model for business reporting… Tier Three CompanySpecific Information Tier Two IndustryBased Standards Tier One Global Generally Accepted Accounting Principles 18 One possible framework enhanced business reporting… The Market Strategy Performance Financial • Competition • Overview • Summary • Regulatory • Strategic priorities • Supply chain • Financial statements • Operational goals • Acquisitions • Risks and risk management • People • Macroeconomic • Customers • Segment analysis • Innovation • Opportunities • Sensitivity analysis • Value drivers • Estimates • Projections Source: Report of the Public Company Task Force to the AICPA Special Committee on Enhanced Business Reporting, June 2004 19 What do we need to do? • Work together along industry lines to create thoughtful proposals for greater transparency involving both simplification and enhancement • Lead positive change, through a collaborative solution, by establishing an international Enhanced Business Reporting Consortium of diverse stakeholders to improve the quality and transparency of information used in decision-making Market collaboration is the best solution for all participants 20 Are there any alternatives to the EBR Consortium? • Do nothing and… – Live with uncertainty in the markets about strategic intent and future performance, but remember, uncertainty breeds market volatility – Fail to demonstrate that users and providers of market capital are committed to hold themselves accountable for the quality of the information provided to the capital markets – Fumble an opportunity to build upon the SEC's interest in a marketled effort • One thing is certain… – Failure of the business community to develop and present constructive proposals will result in future regulatory mandates 21 Companies are trying to explain why they did not make a target that they didn’t set in the first place “Enhanced Business Reporting will help companies move beyond the earnings game; placing more emphasis on measures that give a better picture of their value, their risks, and their opportunities.” Bob Herz Chairman Financial Accounting Standards Board 22 What does the SEC think of the Enhanced Business Reporting Consortium? “I am encouraged by the Enhanced Business Reporting Consortium's efforts to develop a voluntary, internationally recognized framework for presentation of industry-specific key performance indicators and disclosure of non-financial information about opportunities, risks and management's strategies and plans. This effort represents the type of discussion and action that should be occurring in the marketplace as we all seek to continually improve the value of information for the sake of investors.” Don Nicolaisen Chief Accountant Securities and Exchange Commission 23 We are on the verge of a fundamental transformation of business reporting practices Will you join us in providing leadership for change? www.ebrconsortium.org 24 XBRL & Enhanced Business Reporting: A Consortium Approach Dr. Robert G. Eccles XBRL International April 27, 2005 Boston, USA