MyCIMA

Timescales for decision making - are they long enough?

Posted: Wednesday 12 October 2011 by Gillian Lees
Replies : 1
Category: Corporate finance, Financial reporting, Management accounting
Keywords: decision making, investment appraisal, reporting
Gillian Lees's picture

Still thinking about time – as you might remember I have been mulling over what the term ‘long-term’ actually means.  Pretty important for an organisation like CIMA which sets great store by the creation of long-term sustainable success  and also when you consider the core theme of the CIMA World Conference in South Africa towards the end of this month (Business in tomorrow’s world – a sustainable future, in case you were wondering).

One question that often arises in this regard is whether the way that equity markets work helps or hinders companies in their quest for long-term success.  Short-term investors looking for a quick return aren’t compatible with companies needing to build firm foundations for the future, so the argument goes.  One government that is looking at this issue is the UK one which has established the Kay Review ‘to examine the mechanisms of corporate control and accountability provided by UK equity markets and their impact on the long term competitive performance of UK businesses, and to make recommendations’.

Now bear with me if you’re not a UK reader – this one’s still relevant!  Now it’s true that the bulk of questions relate to the activities of UK equity investors, but there are also a number of others that consider issues of interest to management accountants wherever you’re based.  For example:

·         What is the relationship between external reporting timescales and those used for internal planning and appraisal?

·         A great one for you investment appraisal gurus here – what timescales are used by companies in investment appraisal?

·         How do companies review investment in intangible assets such as reputation and workforce skills?

·         Have changes in external reporting obligations influenced the timescales of managers and boards and how has this impacted on long-term decision making?

Now I don’t know about you, but these are the sorts of questions where some global comparisons might be very insightful. Would love to hear your views.

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But reputation and workforce skills aren't on the balance-sheet

Posted by Adrian Rutter on Sunday 16 October 2011 13:04

Gillian, as usual you're posed some interesting and thought-provoking questions. But you've also raised something that's been on my mind since the news of Bombardier and BAe responding to challenging times by cutting cost (= firing their workforce).

Many of us have spent much time in the last year or so coming to grips with IFRS. Some of its focus, such as looking at the effective control of leased assets rather than the wording of the lease, seems to support better short-term and long-term decision-making; some of it, like its insistence on accruing for holiday pay that will never, ever become a cash outflow, seems so far from reality as to be laughable if it weren't for the time and resources it takes up for no apparent benefit. But the one thing it doesn't do is address the issue you've raised - How do companies review investment in intangible assets such as reputation and workforce skills?

To me, it's a major strategic failing of UK managers inside and outside finance to ignore the business potential (and therefore asset value) of a skilled, adaptable workforce. The costs are visible, the benefits are not; so I know it's a major challenge to value such an intangible asset when by training and inclination most accountants are far more comfortable costing a CNC machine rather than the skilled man or woman standing alongisde it, but without the people, the machine is just a useless lump of metal. Arguably, by showing only the cost, our current accounting philosophy actually encourages short-termism and damages long-term sustainability.

Surely it's time for a balance-sheet that recognises  21st-century entities, not one better suited to Luca Pacioli's 15th century Venician sole-traders and partnerships.