Contents
Introduction to the EU Accounts Modernisation Directive
Meeting the challenge of performance reporting
Preparing forward looking statements with confidence
Balanced and comprehensive reporting with certainty
Ensuring consistency with the Financial Statements
Choosing how to communicate results
Introduction to the EU Accounts Modernisation Directive
The requirement for an expanded Directors' Report which came into effect for EU companies in January 2005 is not a completely new idea. The concept of non-financial reporting and in particular the recognition, measurement and disclosure of environmental issues in the annual accounts and annual reports of companies was recommended by the European Commission as far back as May 2001.
The broad thrust of the expanded Directors' Report, the so called 'business review' is to present shareholders with a fair review of the development of the business and of its position, in a manner consistent with its size and complexity. The EC noted that such information should not be restricted to the financial aspects of the company's business. "It is expected that, where appropriate, this should lead to an analysis of the environmental and social aspects necessary for an understanding of the company's development, performance or position.
Thus was born the requirement to prepare an expanded Directors' report, essentially adding narrative with a ground-breaking range of information disclosures. The purpose of this whitepaper is to translate these broad requirements into systems and process terms and to describe how Hyperion System 9 applications, methodology, tools and technology lend support to companies seeking to comply.
The legislative background derives from the Accounts Modernisation Directives or more specifically, the 4 th and 7 th directives on the annual and consolidated accounts of companies (Directives 78/660/EEC and 83/349/EEC respectively) and the Directive on the annual and consolidated accounts of banks and other financial institutions and insurance undertakings.
In the light of the evolving nature of non-financial reporting, especially environmental reporting, and the potential burden that this type of reporting could place on companies below a certain size, the EU has empowered individual Member States to waive the requirement to provide non-financial information in the annual report.
The EU Accounts Modernisation Directive applies to all large and medium sized European companies regardless of whether they are quoted or not, though small companies are not normally required to produce an expanded Directors' Report.
Articles 11 and 27 of the 4 th Directive set out the thresholds for small and medium sized companies respectively, (expressed as turnover, balance sheet total and number of employees). These thresholds are normally revised every five years and the position in May 2003, the last time the thresholds were revised, is as follows;
Category
Turnover (not more than)
Balance sheet total (not more than)
Number of employees(not more than)
Small company
€7.3 million
€3.65
50
Medium company
€29.2 million
€14.6 million
250
Companies normally fall into a category if they meet two out of the three requirements. It should be noted that Member States have the discretion to increase the thresholds by up to 10 percent.
The requirements of the EU Accounts Modernisation Directive came into effect on the 1 st January 2005. i.e. companies have to comply for the first time for year ends commencing on or after the 1 st January 2005
The objectives of the business review in the Directors' Report
(1)The directors' report for a financial year must contain -
(a) a fair review of the business of the company, and
(b) a description of the principal risks and uncertainties facing the company
(2) The review required is a balanced and comprehensive analysis of - (a)the development and performance of the business of the company during the financial year,
(b) the position of the company at the end of the year,
consistent with the size and complexity of the business.
(3) The review must, to the extent necessary for an understanding of the development, performance or position of the business of the company, include -
(a) analysis using financial key performance indicators, and
(b) where appropriate, analysis using other key performance indicators, including information relating to environmental matters note 1 and employee matters.
"Key performance indicators", means factors by reference to which the development, performance or position of the company can be measured effectively.
Note 1 depending on the Member State , small companies are likely to be exempt from all of the above requirements and medium sized companies need not provide key performance indicators in so far as they relate to non-financial information.
Audit and penalties
The companies auditors are required to report whether in their opinion the information given in the Directors' Report is consistent with the accounts. Non compliance with the regulations is a criminal offence and carries significant fines and penalties.
Meeting the challenge of the performance reporting
Since the relevant EU Directives make little or no reference to the systems and process implications of the new requirements it might be inferred that the systems impact of the legislation is very limited. Indeed, at first glance it could be assumed that the requirements should be part and parcel of regular reporting within any publicly listed organisation, or at least easily implemented with minor modifications. However, years of under investment in management information systems allied to the complexity of systems architectures and tools has rendered many organisations unable to respond immediately to the exacting demands imposed by these changes.
Whilst many large organisations have invested substantial sums in their transaction systems the same is not universally true of their management reporting systems. Many rely heavily on a hotchpotch of applications and spreadsheets to furnish their monthly board reports and relevant data is scattered widely through the organisation. It is clear that the new regulations require a more co-ordinated and consistent approach underpinned by regular and repeatable processes. This is depicted in the diagram below.
In this continuous process a series of iterative steps establishes goals and performance measures for the organisation which are built into business plans, budgets and forecasts which are monitored continuously, analysed and reported upon. The results of these analyses are then used to inform and refine the strategy which is adjusted as appropriate before the whole performance cycle starts again. It is the completeness of this vision and the Hyperion System 9 Business Performance Management solution that support it which enables companies leveraging Hyperion technologies to respond to the challenges of the Accounts Modernisation Directive.
Preparing forward looking statements with confidence
The disclosure of an organisation's key performance indicators used to monitor its success is central to the EU legislation. These fundamental disclosures are intended to equip shareholders with better information to assess the performance of the company. Inevitably, companies will be judged by the level of success they achieve. It is therefore crucial that the KPI's disclosed and the strategy underpinning it are equally well communicated and understood within the organisation. Also, that there are appropriate systems and processes in place to ensure that the strategy can be delivered and any material departures explained. So how can boards be confident that their strategy will be realised?
Clearly, it is management's responsibility to develop a practical and realistic strategy for the organisation. However, technology has a vital role to play in ensuring that, the strategy is communicated throughout the organisation, that operational plans and performance measures are strategically aligned and that monitoring systems highlight management actions that need to be taken to keep the strategy on course. In effect, confidence in the strategy derives from the knowledge that the performance cycle taken as a whole, is made up of a series of uninterrupted component processes which are in turn adequately supported by applications software and technology.
Hyperion's blueprint for success
Given the pivotal role of strategy development for the conduct of the whole performance management cycle it is perhaps surprising that it is such a neglected process in so many organisations. It is often characterised by an unauditable collection of standalone spreadsheets and documents which are not conducive to a strategically aligned organisation.
Hyperion appreciates the difficulty organisations have in compiling their strategy and is leading the charge amongst software suppliers in recognising that strategy development sets the tone for the rest of the performance management cycle. It has developed a business performance management (BPM) blueprint tool that helps management articulate its strategy, develop its business objectives and confirm the most relevant key performance indicators. More importantly, the knowledge gleaned at this stage can be used to inform the systems design and ensure that there is an inextricable link between the strategy, the operational plans and performance measures used by the organisation. Experience has shown that the most common reason for failure to deliver on strategy is not because the strategy is fundamentally flawed but because the organisation fails to act appropriately, i.e. the link between the strategic objectives, operational plans and activities is fractured.
Hyperion's BPM blueprint encourages management to consider the key business objectives across every functional area of the business and how they might be measured. The framework differentiates between performance measures in each functional area that are strategic, operational or merely tactical and allows these to be recorded on pre-printed matrices. But strategy is an iterative process, almost a black art, some would say, and it would be a mistake to think that strategy could be developed according to a preordained recipe. The elegance of Hyperion's blueprint is that it freely supports the creative aspects of strategy execution. Management can record insights as they appear, highlight dependencies between departments and KPIs as they emerge and re-work the conclusions as often as desired.
Furthermore, being paper-based the blueprint framework is infinitely extensible. Dimensions can be added, for example, to consider business objectives around external stakeholders such as key customers, environmental bodies and regulators as required by the new disclosures. The strategic impact of competitors on business objectives and measures can also be taken into account. Effectively, the framework allows management to engage in a flexible yet thorough analysis of the business and its processes. At its conclusion, it delivers a robust set of business objectives and the performance measures needed to monitor their achievement.
Testing the strategy
Developing the strategy from its raw state in the blueprint to a robust statement requires specialist software support. Afterall, strategies need to be tested and flexed under a variety of business conditions. Hyperion System 9 software allows a suitable economic model of the business to be developed so that management can plan for different scenarios, carry out business sensitivity analysis and adjust inputs and assumptions using goal-seeking techniques.
Unlike spreadsheet based modelling management can be confident in the results generated by the model. Its integrity is apparent because auditable business rules can be established and financial features "financial intelligence" within the package ensure that balance sheets, profit and loss accounts and cash flows are synchronised and automatically updated for any changes in the model.
Modelling the business in this way helps to build confidence that the strategy is resilient to foreseeable business events. It also provides a valuable audit trail in support of the assumptions that management have used to develop their plans.
Aligning the organisation to the strategy
Developing strategy is one matter but executing on the strategy is a completely different proposition. More than ever, management needs tools and processes that provide them with unshakeable confidence that their entire organisation understands the plans they have set, that its resources are aligned with it and that adverse variances will be detected quickly so that remedial action can be taken. This is where Hyperion's System 9 Performance Scorecard comes into play. It is designed to help companies articulate their strategy using KPIs, communicate strategy across the enterprise and link it to operational objectives and initiatives. Leveraging this technology, individual and departmental goals can be aligned with corporate goals and objectives thus ensuring accountability for delivering results throughout the organisation.
Once developed, it is crucial that performance objectives are built into the operational plans and forecasts of the organisation. For all businesses it essential that boards consider the effect of current trends and factors on performance in the future. In order to meet this objective organisations require a budgeting and forecasting application that allows for frequent re-forecasting and can improve the analysis and business insights that can be obtained from the process.
Hyperion System 9 Planning, a web based planning application encourages collaboration between budget holders, accelerates the re-forecasting process and through higher levels of participation can improve data quality. Workflow and process management capabilities improve control over the whole process and yield considerable time savings over comparable spreadsheet based solutions. Indeed, it is unlikely that a spreadsheet based system could cope with the constant re-working implied by a rolling forecast process on a large scale.
Balanced and comprehensive reporting with certainty
The new disclosures require balanced and comprehensive reporting across the enterprise for all periods under review. In this context Hyperion System 9 Financial Management, a consolidation application is one of the most widely used and respected tools in large companies for management and statutory reporting. It is designed to capture information automatically from a variety of underlying data sources at the end of each accounting period and submit it in a streamlined process to the Group for consolidation.
The audit controls and workflow management within the application ensure that management have complete visibility and end to end control of the process even though the consolidation may involve hundreds of widely dispersed reporting entities. The highly automated nature of the process means that it can be repeated every period and relied upon with complete certainty to have captured and consolidated all of the information that is required to be reported.
Specialised functionality within the application caters for the particular demands of accounting rules such as the elimination of inter-company trading and the translation of local results into the reporting currency. Web based data entry bolstered by vendor certified adapters that allow integration with third party transaction systems such as SAP can significantly reduce reporting cycles leaving management with more time to analyse performance and take remedial action as necessary. The latest forecasts created elsewhere in the Hyperion System 9, can be introduced into the consolidation environment so that actuals and budgets can be brought together for variance analysis, scorecarding and dashboards, or simply reported in traditional style board reporting packs.
Ensuring consistency with the Financial Statements
The performance management cycle as a business process draws on numerous specialised applications and potentially hundreds of underlying data sources to provide management insights. Each application is normally governed by its own business rules and data structures rendering comparisons of data held in different application areas unworkable. Making sense of all of this data presents significant management and IT challenges, particularly as the reporting landscape is constantly changing in the face of new reporting requirements. In addition a possible lack of consistency in reporting seriously jeopardises the reliability of reporting. In the context of the Directors' Report, independent auditors have to attest that the disclosures reported are consistent with the financial statements. For example, is a financial KPI reported in the Directors' Report, such as Return on Capital Employed (ROCE) completely consistent with the same values derived from a scorecard, the monthly board pack and the current forecast?
Master data defines the structural information, such as organisational hierarchies, account codes, time periods and product group dimensions that form the backbone of most performance management applications. Differences in master data prevent reporting across applications and whilst they can be temporarily forced into alignment with clever mapping tools and technology the metadata quickly slips out of alignment as changes are made to different business areas and applications.
Therefore, Hyperion's investment in Hyperion System 9 Master Data Management (MDM) is significant. This technology allows master data and data definitions to be staged in one repository so that the interrelationships between applications are defined and their metadata is synchronised throughout the performance management suite. Just as importantly, amendments made to data structures by end users in any application are automatically reflected in the MDM area so that any of the other applications working off the same data platform are automatically made 'aware' of the change. Using this technique, structures are brought automatically into alignment and therefore reporting maintains its integrity. Consistency of reporting is assured.
Choosing how to communicate results
In recent years the advent of cost effective, web deployable reporting has opened up performance management applications to a much larger population of end users. Increasingly, this extended population has grown to include individuals from all levels of an organisation and most functional areas. Indeed, the Directors' Report, with its diverse reporting requirements, underlines the need to engage with more individuals from across the organisation.
At the same time, technology improvements present end users with a plethora of tools and techniques for viewing, analysing, extracting and reporting business information. Hyperion System 9 BI+, for example, can satisfy reporting demands in so many ways that it is often a matter of personal choice to decide which technique best suits an individual user. Furthermore, significant developments such as MDM, shield the end user from the complexities of underlying data sources rendering all of the tools using the same technology platform broadly equivalent.
The analytical and reporting tools in Hyperion System 9 BI+ integrate with Hyperion System 9 Foundation Services (the Business Performance Management Platform) which is central to the delivery of any performance management regime. Hyperion System 9 BI+ provides performance dashboards, and analytics which are tightly integrated into management reporting. The 'engine room' of the Hyperion System 9 Foundation Services platform is the Essbase multidimensional database. This OLAP technology allows large volumes of business data to be analysed in multiple dimensions so that management can take different views of performance across the business whilst ensuring that they are consistent. The ability for different users across the business to be able to "slice and dice" the business so as to assess performance is absolutely vital to unearthing trends and factors affecting performance which are at the heart of compliance. Non-technical users are provided with an easy to use interface for ad-hoc query and analysis of the multidimensional information held within the database.
A variety of analytical tools allow the creation of ad-hoc interactive reports as well as regular management reporting, such as product profitability analysis, performance management reporting, forecasting and balanced scorecarding. A range of analytic features such as colour coding exceptions, and predefined calculation metrics support the generation of more strategic reporting as well. A variety of display choices, such as multidimensional spreadsheets and a selection of chart types coupled with customisable graphical displays, animated pinboards and traffic lighting combine to provide a powerful array of choices for end user performance reporting.
Alternatively, performance dashboards can be used to bind information together in one place. They provide an intuitive, user defined view of over or under-performance in a strikingly visual way using a variety of colour coded 'meters', 'gauges' and charts. Performance anomalies can be investigated further by drilling down through the system. The ease with which dashboards can be created means that they can be tailored readily to individual requirements or a specific role. Finally, other tools allow KPIs to be assembled as a set of performance measures centrally and distributed through the organisation to business mangers as appropriate so that they can monitor their performance against corporate KPIs, and identify trends, exceptions and issues for further drill down and investigation.
Common threads running through Hyperion System 9 include web deployment and the use of thin client technology wherever feasible. Whilst these technology aspects do not themselves have a direct bearing on Hyperion System 9's suitability to support performance processes there is no doubt that ease of deployment and maintenance are factors which encourage a joined up process. Similarly, the ability of the technical platform to scale up from a few users to many hundreds (or even thousands) enables more collaboration from every functional area.
The Accounts Modernisation directive is demanding in systems and process terms. The need to report more widely for the first time on a whole range of environmental, social community and human resource issues creates significant challenges. In addition, the requirement to disclose KPIs exposes management performance to closer scrutiny than ever before.
In these circumstances boards will seek to ensure that their performance management processes are comprehensive and supported by robust technology solutions which allow them to report with confidence. Hyperion has for some time been at the leading edge of business performance management and through the completeness of Hyperion System 9 it is well placed to support compliance with the new requirements. Its continuing efforts to simplify the technology, increase its usability by non-experts and to broaden its appeal across the organisation will support a much more robust and reliable reporting process.
Whilst compliance issues are often seen as a burden this is not necessarily the case with the latest changes in reporting. In essence, it encourages best practice processes and systems around performance management and those companies that embrace the initiative should benefit from superior performance and enhanced market standing.
About FSN Publishing Limited
FSN Publishing Limited is an independent research, news and publishing organisation catering for the needs of the finance function. The report is written by Gary Simon, Group Publisher of FSN and Managing Editor of FSN Newswire. He is a graduate of London University , a Chartered Accountant and a Fellow of the British Computer Society with more than 23 years experience of implementing management and financial reporting systems. Formerly a partner in Deloitte for more than 16 years, he has led some of the most complex information management assignments for global enterprises in the private and public sector.
Gary.simon@fsn.co.uk
www.fsn.co.uk
Whilst every attempt has been made to ensure that the information in this document is accurate and complete some typographical errors or technical inaccuracies may exist. This report is of a general nature and not intended to be specific to a particular set of circumstances. FSN Publishing Limited and the author do not accept responsibility for any kind of loss resulting from the use of information contained in this document.
