Looking at Data Availability

Judging Data Availability

  • How much effort will it take to track these adjustments?
  • Does the adjustment create a minor or major tracking issue?
  • What costs will we (finance or operations) have to bear or impose to incorporate this adjustment?
  • Can this adjustment be "clean slated?"

Minor Issue

Many adjustments simply require changing how a line item in the income statement or balance sheet will be treated for reporting purposes without a significant effect on EP.

E.g.:

  • Interest costs moved from a charge to income to a capital charge in EP

  • Eliminating the charge for bad debt from income and grossing up receivables in Capital

Major Issue

Some adjustments require:

  • New data to be collected
  • Data to be segregated or aggregated in a different way
  • New schedules to reflect different timing of revenues or expenses

Such adjustments will create additional tracking costs

E.g.:

  • Capitalization of restructuring charges

  • Establishment of amortization schedules for capitalized item

Costs of data availability

Adjustments costs are born or shared by both information providers, i.e., finance staff generating reports, and information users, i.e., operating management getting the reports. These costs can include:

  • Changeover costs: Setting up new schedules and coding changes into the reporting system

  • Reporting costs: Checking that inputs are collected reliably, accurately, and timely

With today's information processing technologies, it is easy to program changes in methodology and print reports showing anything you want. EP adjustments are just new code in your reporting software.  Still, the code must be written, the data collected on an ongoing basis, and changes communicated.

Owners Preferences

In some cases, owners are in the habit of restricting information to their employees. This is a serious issue because if the employees don’t know how they are doing, the motivational effects of the measure are severely restricted.

Management has a couple of remedies for such situations:

  • Open the books: Provide minimum data needed to calculate EP as defined for the business unit and make it available to each decision maker to be held accountable for EP improvement

  • Modify the measure: Exclude certainitems from the measure that owners may find particularly sensitive. These are generally items over which management would have no control anyway.

Clean Slating

Certain past events that would have been treated differently under EP, such as the capitalization of restructuring charges, may be difficult to adjust now. Furthermore, since decisions have already been made regarding those events, how you account for them now is no longer behaviorally relevant.

In such cases, adjustments are usually accepted on a "clean slate" basis, i.e., records are tracked going forward and accounted for on an adjusted basis.

  • Leaving prior restructuring costs uncapitalized

  • Leaving historical acquisition costs amortized, written down, or unrecognized

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© 2015 by Hodak Value Advisors.