Why Words Matter

How words matter as much as the figures in ‘Strategic value analysis’ Convergent best practice and statutory annual reporting requirements provide a basis to fulfil what accountants have long sought to achieve – a means of estimating the future value of a company on a comparable basis. As the average difference between book value and market value of listed companies has inexorably grown in the last fifty years from a typical ratio of 1.25 to 1 to more than 3 to 1, so the need to be able to account for this intangible value has become ever more pressing.

What makes up this growing pot of hidden value? A suitable and robust methodology has defied even the brightest accounting minds. In their quest they have grappled both with an industrial era tax system that encourages the treatment of value-creating assets as expenses rather than assets, and a system of accounting that has, in its basic form, remained unchanged since it was first invented by Lombardy merchants in the sixteenth century.

So, while numbers are important in recording past financial achievement through double-entry bookkeeping, profit and loss accounts and balance sheets, they are less helpful as a basis to forecast future performance. When it comes to the future, words are more important than numbers – particularly when those words are expressed using the discipline of corporate strategy.

Accounting convention, statute and audit ensure that companies produce the numbers that capture past performance on a largely comparable basis. Similarly, best practice guidance backed up by statute now ensures that companies put together words to indicate expected future performance on a largely comparable basis. Just as companies file their accounts annually, so they must also file a narrative report as part of that same document. That narrative report should contain details of their objectives and strategy, operational performance and key performance indicators, principal risks and uncertainties, resources and strengths as well as commitment to social ethical and environmental matters.