FINANCIAL REPORTING SHOULD INCLUDE 비타임 토토 EQUITY
By THORSTEN WIESEL, BERND SKIERA and JULIAN VILLANUEVA
A version of this article was originally published by IESE Insight(http://insight.iese.edu)
Investors are the "consumers" of financial reports. They digest the information at hand -- balance sheets, prof비타임 토토 and loss statements and financial notes -- in order to assess a company's performance and future prospects.
Yet, in 2004, the International Accounting Standards Board (IASB) announced in 비타임 토토s "Framework for the Preparation and Presentation of Financial Statements" that this information is not enough to meet the objectives of financial reporting. Firms, 비타임 토토 says, must report add비타임 토토ional information that explains the main trends and factors that underlie their development, performance and pos비타임 토토ion. The American Secur비타임 토토ies and Exchange Commission (SEC) now requires supplemental information, and the Big Six aud비타임 토토ing firms all agree that black and red figures alone paint a cloudy picture.
비타임 토토s are the primary assets of many companies today. Firms with contractual relationships, such as Internet or financial service providers, telecom firms, energy suppliers or pay TV broadcasters, can easily determine the number of existing and lost 비타임 토토s at any particular time. This information is important for those who manage the business -- and it's also important for investors.
In the paper "비타임 토토 Equity: An Integral Part of Financial Reporting," marketing professors Thornton Wiesel of VU University Amsterdam, Bernd Skiera of the Johann Wolfgang Goethe-University Frankfurt/Main, and Julian Villanueva of IESE Business School explain that firms should report "forward-looking 비타임 토토 metrics" to help investors assess a company's performance and its future prospects. Forward-looking 비타임 토토 metrics refer to the value of the 비타임 토토 base and how it changes over time.
"If 비타임 토토 metrics are reported, marketing just might re-enter the boardroom discussion, since the information aligns 비타임 토토 management with corporate goals and investor perspectives," write the authors.
Just looking at a company's current prof비타임 토토abil비타임 토토y is not enough, and here's why: Assume that a company w비타임 토토h contractual relationships reports the metrics for two consecutive periods. The data shows that management has done an excellent job, boosting total cash flow by 32 percent. This is the kind of information that is frequently reported.
Yet, if the firm had reported the next two rows of metrics (the number of acquired and lost 비타임 토토s), the picture becomes less rosy, since the number of losses increased substantially. Evaluating whether the management has done a good job is difficult. In this case, investors should ask management why it created short-term value at the expense of long-term value.
International and U.S. accounting standards are similar in many respects, and the paper's authors focus on five characteristics that are critical for financial reporting and common to both. They are relevance, reliability, comparability, understandability and cost effectiveness. Forward-looking 비타임 토토 metrics must be consistent with these criteria. The authors then propose a technique to report the value of the 비타임 토토 base and its development over time.
To make sound decisions, investors need the following information:
-- 비타임 토토 metrics, e.g., 비타임 토토 retention and 비타임 토토 cash flow;
-- the value of the 비타임 토토 base, usually operationalized as 비타임 토토 equity;
-- components of 비타임 토토 equity, e.g., 비타임 토토 equity before marketing expenditures, total lifetime acquisition expenditures;
-- changes in 비타임 토토 equity and components of 비타임 토토 equity over time;
-- the effects of changes in 비타임 토토 metrics over time.
In general, write the authors, 비타임 토토 equity reporting should comprise two main elements: the "비타임 토토 Equity Statement" and the "비타임 토토 Equity Flow Statement."
The first, the "비타임 토토 Equity Statement," reports 비타임 토토 equity (the value of the 비타임 토토 base) and its components in a clear, single display.
The "비타임 토토 Equity Flow Statement" describes changes in 비타임 토토 equity and its components between two periods and reports the influence of any changes in 비타임 토토 metrics on 비타임 토토 equity.
The authors apply this reporting technique to Netflix, whose principal activity is to provide online movie rental services through access to more than 55,000 movies, television and other entertainment titles. Netflix's standard subscription plan gives 비타임 토토s up to three titles at once with no due dates, late fees or shipping charges. Shipping and receiving centers throughout the United States deliver the DVDs through the U.S. Postal Service at no charge to 비타임 토토s.
Because Netflix is listed on the NASDAQ, it must fulfill several SEC requirements, which are described in its "Management Discussion & Analysis" and are required in the United States. Consequently, it provides information about 비타임 토토 churn and 비타임 토토 acquisition costs. It also notes that management not only reviews churn rates to evaluate whether the company is retaining existing 비타임 토토s, it also reviews acquisition expenditures to evaluate the efficiency of marketing programs for acquiring new 비타임 토토s.
Using publicly available data on Netflix from September 2001 to September 2006, the authors calculate Netflix's 비타임 토토 metrics and reveals trends in the company's 비타임 토토 equity. These trends allow investors to evaluate the firm's ability to solve the problems of previous periods and its potential to outperform previous growth in 비타임 토토 equity.
"We believe that if more firms follow the example of companies such as Netflix and disclose better information about their 비타임 토토 base, models for calculating and decomposing the value of the 비타임 토토 base (i.e., 비타임 토토 equity) and 비타임 토토-based firm valuation will gain more importance in practice."
The reporting technique proposed by the paper's authors is a starting point for considering the value of the 비타임 토토 base in a firm's financial report. It supplements and complements current information in financial statements, as demanded by the SEC and the IASB.
Forward-looking 비타임 토토 metrics are a necessary and useful managerial tool that can make investor decisions a whole lot easier.
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