From Financial Reporting to Enhanced Business Reporting

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From Financial Reporting toEnhanced Business
Reporting
Interactive Data The Revolution in Business
Reporting 14th XBRL International Conference,
Philadelphia, PA December 4 December 6, 2006

• A market driven process to extend a conceptual
  framework.
• http//www.ebr360.org

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The Need for Enhanced Business Reporting
Business Reporting A Changing Dynamic
Historical Financial Statements
Enhanced Business Reporting

• Lagging indicators
• One size fits all (GAAP)
• Ignores non-financial measures
• Reports results of past decisions
• Periodic
• Historical
• Cost-basis
• Financial only
• Statements
• Backward-looking

• Leading indicators
• Tied to mission, vision and values
• Tied to factors critical to success
• Moves decision criteria to forefront
• On-demand
• Real-time/future
• Value-basis
• Comprehensive
• Custom reports
• Forward-looking

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What is Enhanced Business Reporting?
Value Creation
Value Preservation
Value Realization
InvestmentCommunity
Companies
A Better Managed Company
Companies create sustainable economic value by
developing, operationalizing and executing
superior strategies which guide the company
towards delivering valuable products and
services. These strategies yield future cash
flows greater than investment or economic profit.
Companies ensure that investors realize the
value created by the business units and the
corporate center by managing and delivering upon
market expectations.
Companies preserve the value of the underlying
business unit cash flows through effective
management controls, risk and tax management.
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What is Enhanced Business Reporting?

• Providing shareholders and other stakeholders the
  information they need to make decisions
• Financial and nonfinancial value drivers
• Tangible and intangible assets
• Integrated management and reporting of risk and
  value
• Voluntary transparency beyond regulatory
  reporting requirements
• A way to move beyond The Earnings Game

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A Three-tier Reporting Model
Source Building Public Trust by Samuel DiPiazza
and Robert Eccles
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Example industry-specific value drivers

• Key value drivers vary by industry
• Following are example industry value drivers that
  extend the business reporting framework.
• Note that many of these value drivers are not
  included in GAAP.
• Financial and non-financial information is
  important
• Tangible and intangible assets are important
• For most value drivers, standard definitions and
  metrics for measurement and reporting do not
  exist

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Example industry-specific value drivers
Source PwC ValueReporting Capital Markets Surveys
Source of data PricewaterhouseCoopers
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Example industry-specific value drivers
Source PwC ValueReporting Capital Markets Surveys
Source of data PricewaterhouseCoopers
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Example industry-specific value drivers
Source PwC ValueReporting Capital Markets Surveys
Chemicals
Metals
Mining

• Free Cash Flow
• Strategic Direction
• Manufacturing Costs
• Earnings
• Market Growth
• Performance by Business Segment
• Product Quality
• Quality of Management
• Capital Expenditure
• Utilization of Facilities
• Market Share
• Customer Loyalty

• Market Share
• Energy Prices Supply
• Earnings
• Costs per Ton Delivered
• Market Growth
• Metals Prices
• Capital Expenditures
• 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
• Regulatory Environment

• Strategic Direction
• Cash Cost per Ounce/Kg/Ton
• Capital Expenditures
• Earnings
• Existing/Potential Environmental Liabilities
• 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

Source of data PricewaterhouseCoopers
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Example industry-specific value drivers
Source PwC ValueReporting Capital Markets Surveys
Source of data PricewaterhouseCoopers
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Example industry-specific value drivers
Source PwC ValueReporting Capital Markets Surveys
Source of data PricewaterhouseCoopers
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Example industry-specific value drivers
Source PwC ValueReporting Capital Markets Surveys
Automotive
Entertainment
Utilities

• Market Growth
• Market Share
• Free Cash Flow
• Performance by Business Segment
• Customer Demographics
• Quality of Management
• Earnings
• Strategic Direction
• New Business
• Capital Expenditure

• Cost reduction
• Investment/acquisition strategy
• Margin improvement
• Market growth
• Operating cash flow growth
• Operating profit growth
• Quality of management
• Regulatory environment and price controls
• Risk Management processes
• Strategic direction and focus - integrated vs.
  specialist player

• Earnings
• Free cash flow
• Market Share
• Strategic direction
• Product quality
• Customer satisfaction
• Market Growth
• Facility or capacity investment strategy
• Sales volume
• Performance by business segment
• ROIC

Source of data PricewaterhouseCoopers
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Example industry-specific value drivers
Source PwC ValueReporting Capital Markets Surveys
Source of data PricewaterhouseCoopers
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Disclosure of key value drivers through current
company filings by industry
What is Needed Versus What is Delivered Currently
Disclosure of Key Value Drivers through Company
Filings by Industry
Source PwC ValueReporting Capital Markets
Surveys, Analysis Courtesy of EDGAR? Online ?
Source of data PricewaterhouseCoopers
ValueReporting Capital Markets Survey, Analysis
of data Edgar-Online
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Performance Measures the Pharmaceutical Industry
CFOs recognize that a broad range of financial
and non-financial measures are useful for
managing their companies
CFOs Perceptions of the Relative Importance of
Performance Measures
High Importance
Medium Importance
Low Importance
1. Partnering strategy
1. Degree of diversification
1. RD pipeline
2. Quality of selection of development
targets
2. Product focus strategy
2. Attrition rates in development
3. Earnings
3. Cost / revenue ratios
4. Market growth and potential by
therapeutic area
3. Outsourcing of non-value adding
activities
4. Recruitment and retention of talented
people
5. Performance by business segment
5. Market share by geographic area
6. Effectiveness of product launch
6. Risk profile of product
7. Product innovation strategy
7. Efficiency of manufacturing facilities
8. Quality of management
8. Profitability of licensing agreements
9. Market share by therapeutic area
9. Economic profit
10. Regulatory issues
10. Brand awareness levels with patients
11. Reputation with prescribers
12. Market growth and potential by
geographic area
11. Value of key intellectual assets
Respondents were asked to evaluate measures on a
percentage scale. Measures of High Importance had
scores between 90 and 100, measures of Medium
Importance had scores between 70 and 89, and
measures of Low Importance had scores of 69 or
below.
Source of data PricewaterhouseCoopers
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The Top Ten Performance Measures in the
Pharmaceutical Industry
Perceptions of the Relative Importance of
Performance Measures
Companies
Analysts
Investors
1. Performance by business segment
1. Market growth potential by
therapeutic area
1. Market growth potential by
therapeutic area
2. RD pipeline
2. RD pipeline
2. Performance by business segment
3. Product focus strategy
3. Earnings
4. Earnings
3. Effectiveness of product launch
4. Effectiveness of product launch
5. Performance by business segment
4. Product innovation strategy
5. Regulatory issues
6. Market growth potential by
therapeutic area
6. Effectiveness of product launch
5. RD pipeline
7. Product innovation strategy
6. Product focus strategy
7. Product innovation strategy
7. Risk profile of product
8. Quality of management
8. Quality of management
8. Quality of management
9. Market share by therapeutic area
9. Market share by therapeutic area
9. Earnings
10. Regulatory issues
10. Partnering strategy
10. Partnering strategy
Source of data PricewaterhouseCoopers
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Communication gaps prevent market value from
reflecting underlying value
Managements Valuation
Value gap
Investors/Analysts Market Value
Quality of Information
Quality Gap
Importance of a Measure
Importance of a Measure
Information Gap
Reporting Gap
How Actively a Measure is Communicated
How Adequately Information is Communicated
Source of data PricewaterhouseCoopers
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Information, Reporting and Quality Gaps in the
Pharmaceutical Industry
Information Gap
Reporting Gap
Companies
Analysts
Investors
Companies
1. Market growth potential by
therapeutic area

• Market growth potential
• by therapeutic area

2. RD pipeline

• RD pipeline

3. Product focus strategy

• Product focus strategy

4. Earnings
5. Performance by business segment
6. Effectiveness of product launch
?

• Effectiveness of
• product launch

7. Product innovation strategy

• Product innovation
• strategy

8. Quality of management
Quality of management
?
9. Market share by therapeutic area

• Market share by
• therapeutic area

10. Regulatory issues
Regulatory issues
? Measures with quality gap
Source of data PricewaterhouseCoopers
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Barriers to Enhanced Business Reporting

• Cynicism about how the capital markets work
• Fear of increased litigation risk
• Perceived benefits of playing the earnings game
• Reluctance to be held accountable for a broader
  set of performance measures
• Concerns about how competitors can use the
  information
• Concerns about being the first or only one to
  report on a key value driver
• Lack of the necessary information to measure a
  key value driver

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Interdependencies between XBRL and EBR Enabling
Greater Transparency

• XBRL is about format
• EBR is about content
• XBRL taxonomies exist for US GAAP content
• The EBR framework enables the development of
  meaningful taxonomies for other content (e.g.
  MDA)
• XBRL taxonomies can be developed for the broader
  EBR framework

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From Financial Reporting to Enhanced Business
Reporting in XBRL

• Financial statement taxonomy to be completed by
  June 30, 2007
• During this period a working group in XBRL U.S.
  is formed to explore taxonomy extensions
• Could be tied to MDA and 10K
• Establish a few industry-specific subgroups
• Work with SEC to establish an extension of the
  voluntary filing program for Enhanced Business
  Reporting Content in a few industries
• Develop industry roll-out program if warranted