ZESZYTY NAUKOWE UNIWERSYTETU SZCZECIŃSKIEGO NR 690 FINANSE, RYNKI FINANSOWE, UBEZPIECZENIA NR 51 2012 BARTŁOMIEJ NITA VALUE CREATION MEASUREMENT IN RESPONSIBILITY ACCOUNTING Inroducion Responsibiliy accouning suppors decenralizaion by providing informaion abou he performance of organizaional subunis and heir managers. This is a key managemen conrol ool for decenralized organizaions 1. There are various ypes of responsibiliy cenres including invesmen sraegy business unis. The mos imporan goal of any company is o creae value for is owners, so i is worh analyzing value creaion in invesmen cenres and examining heir impac on he value of he company as a whole. I means ha here is a need for deailed sudy of he areas in which value is creaed and hose in which value is desroyed. Due o he fac, ha he value creaion process involves he invesmen process, he performance evaluaion in respec o value creaion should be done primarily for invesmen cenres. The major objecive of he paper is o deermine a general formula, describing he relaionship beween marke value added and for value creaion drivers and o derive a condiion for posiive marke value added. The hesis of he paper is ha all he facors affecing value creaion should be analyzed simulaneously, because some of hem may demonsrae harmful effecs on company value. The mehodology adoped in he paper includes deducive reasoning based on numerical rearrangemens using a case sudy approach. An Overview of Marke Value Added Marke value added (MVA) is an exernal measure used o evaluae wheher a company has creaed or desroyed value from he poin of view of he owners. In order o figure ou marke value added he marke value of he company s oal capial, boh equiy and deb capial should be compared wih he amoun of capial employed. Thus marke value added is he difference beween he marke value of a company and book value of invesed capial 2 : 1 C. Raiborn, M.R. Kinney: Cos Accouning Principles, Souh-Wesern Cengage Learning, Andover, 2011, p. 545. 2 See for furher elaboraion: B. Nia: Meody wyceny i kszałowania warości przedsiębiorswa, PWE, Warszawa 2007.
460 Barłomiej Nia MVA = MV IC (1) where: MVA marke value added, MV marke value of he company s oal capial, IC book value of invesed capial a ime 0. I is possible o ransform he formula (1) ino he following equaion: EVA MVA 1 = (2) (1 + WACC) = 1 Marke value reflecs he marke s opinion on how successful managers have been in invesing he capial enrused o hem. Thus he higher he marke value added he beer. Negaive marke value added means ha he value of he invesmens underaken by managemen is less han he capial conribued o heir companies by he capial markes. This means ha he shareholders wealh has been desroyed. MVA increases only when invesed capial earns a rae of reurn on invesed capial greaer han he cos of capial rae. Marke value added is consisen wih ne presen value and when newly raised capial is invesed in value creaing projecs in erms of NPV, marke value added increases. On he conrary, if he capial is invesed in value desroying projecs, marke value added is reduced 3. Marke value added applied in responsibiliy accouning Marke value added may be applied o assess financial performance of invesmen cenres. This is he uni, whose manager is responsible for managing revenues and coss. Addiionally, he manager has he auhoriy o acquire, use and dispose of capial invesed o earn he highes rae of reurn on he cenres asse base 4. Tradiional he measure of an invesmen cenres performance is he rae of reurn on invesmen (ROI). Thus we can make an assumpion ha he wo criical value drivers influencing marke value added are capial employed and ne operaing profi afer axes. These caegories should be measured in relaion o sales. The relaionship beween operaing income and sales can be expressed in he following way: NOPAT where: ROS rae of reurn on sales in period, NOPAT ne operaing profi afer axes in period, S revenues from sales in period. ROS = (3) S 3 S.D. Young, S.F. O Byrne: EVA and Value-Based Managemen. A Pracical Guide o Implemenaion, McGraw-Hill, New York 2001, p. 29 30. 4 C. Raiborn, M.R. Kinney: op.ci., p. 550.
Value Creaion Measuremen in Responsibiliy Accouning 461 Capial requiremens of an invesmen cenre can be expressed by means of he formula: where: CR capial requiremens in period, IC invesed capial in period. IC CR (4) S Boh measures, described by formulas (4) and (5), are very useful o describe he invesmen cenre s performance, because he manager of his cenre is responsible for is operaing coss and revenues as well as invesed capial. The capial invesed is he sum of ne operaing working capial and operaing long erm asses. Ne operaing working capial is he difference beween operaing curren asses and operaing curren liabiliies. As marke value added represens value creaed over many years, i is needed o make an assumpion in respec of he growh rae and cos of capial. Finally, here are four basic value drivers affecing marke value added: growh rae, weighed average cos of capial, reurn on sales and capial requiremens. To evaluae he impac of hose facors on marke value added, we need o quanify he relaionship of MVA and all value drivers. Taking ino consideraion he relaionship beween economic value added and marke value added, i is possible o apply he formula for he presen value of annual consan growh perpeuiy and as a consequence o show MVA meric in he following way: EVA MVA 1 =, (5) WACC g where g consan growh rae. Economic value added (EVA) is he difference beween ne operaing profi afer axes and oal capial charge. Thus we can rewrie he equaion (5): NOPAT WACC IC1 MVA 1 WACC g (6) Ne operaing profi afer axes in he curren period is profi from he prior period increased by he consan growh rae. Thus he formula describing marke value added in he curren period may be rearranged o he following equaion: NOPAT 1 gwacc IC MVA (7) WACC g Afer furher rearrangemens and muliplying boh nominaors and denominaors by revenues from sales we obain he following equaion for marke value added:
462 Barłomiej Nia NOPAT 1 g MVA WACC g 1 g NOPAT S 1 g S WACC g S S 1 g NOPAT WACC g S WACC IC WACC g WACC IC WACC g S 1 g WACC IC. S g 1 Finally, o see how he idenified value drivers affec marke value in he invesmen cenre we can express marke value added as a produc of muliplicaion of he wo componens 5 : S 1 g CR MVA ROS WACC WACC g 1 g (8) Operaing coss Income axes NOPAT Sales Reurn Capial on sales (ROS) WACC Growh requiremens (CR) S 1 g WACC g CR ROS WACC 1 g Invesed + capial Marke value = k Invesed = MVA capial Figure 1. The impac of value creaion drivers on marke value added in he invesmen cenre Source: B. Nia, The Use of Marke Value Added in Performance Evaluaion of Invesmen Cenres, Research Papers of Wroclaw Universiy of Economics no. 177, Wrocław 2011, p. 102. The formula (8) can be explained by means of figure 1, which shows marke value added in erms of he value drivers. I urns ou, ha he oal marke value is he sum of he 5 Compare in: E.F. Brigham, P.R. Daves: Inermediae Financial Managemen, Souh-Weern Cengage Learning, Mason 2010, p. 380.
Value Creaion Measuremen in Responsibiliy Accouning 463 invesed capial and marke value added. MVA is a produc of wo componens. The firs componen represens he presen value of he increasing sales a he consan growh rae, discouned back o he presen using weighed average cos of capial. Acually, i is he marke value added of a division ha never requires any capial o be invesed and does no incur any operaing coss. Obviously, his siuaion does no happen in real life and he effec of coss and addiional invesmen is represened by he second componen. Providing he consan growh rae, marke value added increases if reurn on sales, i.e. operaing profiabiliy, increases and on he oher hand, if capial requiremens and weighed average cos of capial decrease. In order o derive he condiion for posiive marke value added one may ransform he general formula (8). Taking ino accoun he general formula (8) and making he assumpion, ha weighed average cos of capial (WACC) is greaer han growh rae (g) in a very easy way i is possible o draw a conclusion ha marke value added is greaer han zero if: CR ROS WACC 1 g (9) As a nex sep we can rearrange formula (9) by replacing reurn on sales and capial requiremens in he following way: IC NOPAT S WACC (10) S 1 g Transformaion of he formula (10) leads o he following relaionship: NOPAT (1 g) WACC IC (11) Finally, i urns ou ha marke value added is posiive if rae of reurn on invesed capial is greaer han weighed average cos of capial. On he conrary, marke value added is negaive or equals zero. I is possible o draw he same conclusion by aking ino consideraion formula (7). The impac of his economic spread (ROI WACC) on marke value added can be proved by he following rearrangemens: NOPAT WACC IC 1 WACC g NOPAT g WACC IC MVA 1 WACC g ROI IC WACC IC. WACC g
464 Barłomiej Nia Finally, i urns ou ha marke value added can be also expressed in he following way: IC ROI WACC MVA (12) WACC g Formula (12) indicaes ha marke value added depends on he spread beween expeced reurn on invesed capial and he weighed average cos of capial. If ROI is greaer han WACC, hen he rae of reurn on capial employed is greaer han he rae of reurn invenors expec, and as a resul a division creaes value for he enire organizaion and is shareholders. In his siuaion, an increase in growh rae (g) increases value. If ROI is equal o WACC, hen he division is breaking even from he poin of view of value creaion. If he rae of reurn on invesed capial is less han WACC, he economic spread is negaive, a division is desroying value and, as a consequence, growh is harmful. The faser he growh, he lower he division s value 6. The above rearrangemens explain when marke value added is posiive and when negaive as well as hey explain he differences in marke value added in he invesmen cenres wih posiive and negaive MVA. Explanaory case sudy This case sudy explains performance assessmen by means of marke value added in wo invesmen cenres. Table 1 presens he basic assumpions in respec of reurn on sales, capial requiremens, growh rae and weighed average cos of capial as well as he final resuls of marke value added calculaion. For each division here are wo alernaives under consideraion ha differ wih regard o he growh rae. Marke value added has been compued by means of he formula (8). Marke value added in respec of reurn on sales and capial requiremens Table 1 Specificaion Division A Division B Reurn on sales (%) 9 9 7 7 WACC (%) 14 14 14 14 Capial requiremens (%) 70 70 35 35 Growh rae (%) 3 5 3 5 MVA (in housands PLN) 120,5-97,2 525,0 680,6 Source: auhor s own. 6 Compare in: E.F. Brigham, P.R. Daves: op.ci., p. 380 381.
Value Creaion Measuremen in Responsibiliy Accouning 465 I urns ou ha division B demonsraes srong posiive marke value added for he wo cases and he higher growh rae causes marke value added o be greaer by 140,6 housand PLN. Division A has much higher capial requiremens and as a resul marke value added for his division becomes negaive and even smaller if he growh rae increases from 3% o 5%. In order o explain he differences observed in his analysis, we should compue he rae of reurn on invesmen for each division. The rae of reurn on invesed capial is calculaed in able 2. Boh divisions have he same weighed average cos of capial of 14%. The rae of reurn on capial employed in division A is less han WACC, so he division should pospone growh effors unil i improves he reurn on invesmens by reducing capial requiremens, by for example reducing working capial and improving profiabiliy expressed by means of rae of reurn on sales ROS. The rae of reurn on capial in division B is greaer han WACC, so he division may expand is operaions and coninue wih is fuure plans. Marke value added in respec of ROI Table 2 Specificaion Division A Division B Capial (in housands PLN) 1750,00 1750,00 875,00 875,00 Growh (%) 3 5 3 5 Sales (in housands PLN) 2575,0 2575,0 2575,0 2625,0 NOPAT +1 (in housands PLN) 231,8 236,3 180,3 183,8 ROIC (%) 13,2 13,5 20,6 21,0 MVA (in housands PLN) 120,5 97,2 525,0 680,6 Source: auhor s own. Thus, he difference beween he rae of reurn on capial and weighed average cos of capial, heavily affecs marke value added in a similar manner as in he case of economic value added. Division A demonsraes posiive incomes and cash flows, bu hese cash flows are jus sufficien o saisfy invesors, causing value o exacly equal he amoun of capial ha has been provided by invesors. In he case sudy, he reurn on invesmen was higher han he weighed average cos of capial in division B and his is he explanaion why marke value added in division B is posiive. In division A he rae of reurn on invesmen is lower han WACC, so MVA is negaive regardless of he growh rae. The differences in division wih negaive and posiive marke value added depends on he growh rae provided ha he oher facors remain he same. This is why MVA in division A wih a growh rae of 5% is less han MVA in he same division, provided ha he growh rae is jus 3%.
466 Barłomiej Nia Lieraure Brigham E.F., Daves P.R.: Inermediae Financial Managemen, Souh-Wesern Cengage Learning, Mason 2010. Nia B.: Meody wyceny i kszałowania warości przedsiębiorswa, PWE, Warszawa 2007. Nia B.: The Use of Marke Value Added in Performance Evaluaion of Invesmen Ceners, Research Papers of Wroclaw Universiy of Economics No. 177, Wrocław 2011. Raiborn C., Kinney M.R.: Cos Accouning Principles, Souh-Wesern Cengage Learning 2011. Young S.D., O Byrne S.F.: EVA and Value-Based Managemen. A Pracical Guide o Implemenaion, McGraw-Hill, New York 2001. prof. UE dr hab. Barłomiej Nia Uniwersye Ekonomiczny we Wrocławiu Kaedra Rachunku Koszów i Rachunkowości Zarządczej Summary Thise paper deals wih he applicaion of value creaion measures, in paricular marke value added in responsibiliy accouning. In he firs par of he aricle he erm invesmen cenre is explained and essence of marke value added is depiced very briefly. Furhermore, he major value creaion drivers affecing MVA are idenified: reurn on sales, capial requiremens in an invesmen cenre and weighed average cos of capial and divisional growh. In he second par he relaionships among hese facors are examined and finally heir impac on marke value added generaed in an invesmen cenre is analyzed. POMIAR KREOWANIA WARTOŚCI W RACHUNKU ODPOWIEDZIALNOŚCI Sreszczenie W opracowaniu zajęo się wykorzysaniem miar kreowania warości, w szczególności rynkowej warości dodanej, w rachunku odpowiedzialności. W pierwszej części arykułu wyjaśniono ermin rachunek odpowiedzialności oraz przedsawiono isoę rynkowej warości dodanej. Nasępnie zidenyfikowano podsawowe czynniki kreowania warości z punku widzenia miernika MVA, do kórych zaliczono renowność sprzedaży, wymagania kapiałowe cenrum inwesycji, kosz kapiału oraz sopę wzrosu. W drugiej części zbadano zależności zachodzące miedzy ymi czynnikami oraz poddano analizie ich wpływ na rynkową warość dodaną generowaną w cenrum inwesycji.