The Value Added Statement as Part of Corporate Social Reporting

Author(s): Thomas Reichmann and Christoph Lange

Source: Management International Review, Vol. 21, No. 4 (1981), pp. 17-22
Published by: Springer
Stable URL: http://www.jstor.org/stable/40227610
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Th. Reichmann/Ch. Lange*

The Value Added Statement as Part

of Corporate Social Reporting

The Value Added Statement is regarded in the literature and by a growing number of
companies as an important part of corporate social reporting1 . The controversial question,
however, is whether its schemes and concepts answer the purpose for which they are
intended. The main issue under discussion in Germany is the extent to which the Value
Added Statement should be based on net value added or gross value added. An issue of
this kind can only be evaluated by the aims of a (corporate social) Value Added State-
ment as a supplement to the published company report. The following paper therefore
discusses the aims of the Value Added Statement as part of corporate social reporting to
enable conclusions to be drawn as to the suitable format to meet these aims.

The Aims of the Value Added Statement

The aims of a Value Added Statement as part of corporate social reporting are derived
from the role of a company in society, i. e. in relation to the "coalition members"2 such
as employees, shareholders, creditors and the Government. The "coalition members" di-
rect (financial) need to be kept informed relates to the company's function in achieving
their individud financial objectives3. The share of the various groups in the financial result
of a company can be determined from the statement of application of Value Added be-
cause this shows the extent to which the various groups participate in the company's total
income, i.e. in the sales plus some other kinds of revenues less bought-in materials and ser-
vices, including depreciation and other kinds of expenses. Thus, the purpose of the Value
Added Statement as part of corporate social reporting is to disclose the distribution of
income in the present period, among employees including the management, the providers
of risk capital, providers of loan capital, government and the firm itself and thus indicate
at least the trend for future ranges of distribution. In our view there is a basic need for
these groups to be kept informed by means of this kind of statement. Consequently, the
statement of creation of Value Added must take account of this aspect of distribution
among the 'Value-Adding team'. Moreover, the statement of creation of Value Added
shows the economic and financial position of the company in relation to its environment,
especially customers and suppliers. The final result of the Value Added Statement should
therefore be an enlarged figure which, in terms of the company's total income distributed

* Prof. Dr. Thomas Reichmann and Dr. Christoph Lange, Lehrstuhl fur Unternehmensrechnung,
Dortmund, Federal Republic of Germany. Manuscript received in German language December
1980, translated and revised February 1981.

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among the above groups, basically includes all the expenses and revenues of the profit and
loss account4 .
If we regard the Value Added Statement, according to the purpose of corporate social re-
porting, as a means of supplementing the information given in company reports on the
creation and distribution of the company's total income, it is bound to follow the
accounting concept of measuring business income. The basic concepts of calculating the
Net Value Added, which is the subject of the controversy over income distribution, can-
not be separated from the concepts of calculating the net income, which - as the final
result of the conventional profit and loss account - is available for payment of dividends
and retained profits. Calculating conventional profit figures necessitates the use of ac-
cruals concepts of accounting5 , thus of expenses and revenues instead of cash receipts and
cash disbursements. Thus the capital expenditure allocated by depreciation (deferred
cash disbursement), pension payments allocated by addition to pension provisions (anti-
cipated cash disbursement) are periodized. As a result cash outlays and receipts clashing
in certain periods, e. g. at times of high capital expenditure are avoided.
Bringing the Value Added Statement into line with these basic objectivity principles
ensures that it is open to examination by third parties, an essential criterion for every
document that constitutes part of the published company's report. Owing to the gene-
rally binding nature of codified and uncodified accounting and reporting principles, with
objectivized Value Added Statements there is the advantage - at least for companies of
the same legal form - to be comparable in the course of time and intercompany within
the scope of discretion of present annual reports.
If we adhere to the accounting concept of income in establishing the format of the Value
Added Statement, it follows that it should contain information that does not appear in
the published profit and loss account. This can be achieved by appropriately structuring
the Value Added Statement so that it reveals in particular the sources of the 'company's
income' by splitting it into operating ordinary and extraordinary as well as 'non-operat-
ing' components6 to give coalition members at least an indication of the future achie-
vement of their Value Added shares realized in the present period. Thus in our view the
Value Added Statement should not replace the conventional accounting profit by another
measure of profit, this would require a fundamental change in the concept of measuring
business profit relating to published financial statements. Just how useful changes in the
objectivity and accruals concept relating to the annual report might be in terms of con-
cepts of financial statements on a cash-flow basis7 and possible Value Added Statements
derived from them is outside the scope of our discussion, which deals with a supplement
to the present published company's report that is subject to a variety of legal restrictions.

Gross Value Added versus Net Value Added

Investigation of Depreciation

Contrary to the main economic opinion in Germany and to corporate reporting by the
majority of German companies, some authors maintain that depreciation of plant, equip-
ment and intangible assets should not be regarded as bought-in costs but as part of the
Gross Value Added and should be added in the statement of application as 'retained pro-

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fits' to the firm's share of Value Added8. The main reasons for this procedure are the dif-
ficulty in correctly allocating and charging the costs of an asset to the periods of its ex-
pected useful life as well as consideration of the impact of depreciation expenses on re-
ported net profit and taxable income. There are similar arguments in favour of the use
of Gross Value Added as part of financial statement analysis especially in French analy-
tical practice9 . However, the Gross Value Added - combined with the cash-flow concept
- serves primarily as an index figure concerning liquidity and self-financing. It cannot
therefore be used as a measure of the distribution of a company's total income according
to the present accruals concept of calculating accounting profits10. In this respect the
French method of analysis cannot be applied to the discussion of the Value Added
Statement as part of corporate social reporting. In our view this method of regarding the
depreciation and therefore the concept of Gross Value Added as part of corporate social
reporting supplementary to the company's annual report is economically untenable for
the following reasons:

1 . We have already concluded from all that has been said about the purposes of corpo-
rate social reporting that a Value Added Statement ought to give details of the income
that has been attained and (from the trend) is likely to be attained in future from the
company by the coalition members. It follows therefore that one should basically pro-
ceed from a Net Value Added and consequently from a figure that has been reduced
by depreciation. Even if one wished, contrary to the view expressed here, to tailor
company Value Added Statements primarily to the cash-flow concept11 , expenditure
for capital goods would have to be taken into consideration as bought-in goods from
other companies and feature as deductible items in this type of cash -flow-based Va-
lue Added Statement. In distributive Value Added Statements it is necessary, in view
of the accruals concept, to include depreciation as a bought-in cost.
2. It remains to be seen whether the problem of allocating the costs of an asset to the
estimated number of useful periods and of possible biases in the periodical deprecia-
tion for balance sheet reasons and/or tax purposes could be so serious that deprecia-
tion, despite its fundamental nature of a bought-in cost, should no longer be regarded
as such. It is essential first of all to separate the two arguments concerning the Allo-
cation problem' and 'accounting policy':
Excessive depreciation resulting from the accounting staff underestimating the expected
useful life of an asset and thus allocating the depreciation to the various periods in-
correctly should be regarded as forecasting errors and consequently as unavoidable.
Even though greater standardization of useful life would admittedly restrict room for
discretion, it will not totally eliminate the risk of incorrect forecasting in the future.
There remains, as an argument in favour of excluding depreciation from bought-in items,
the fact that for reasons connected with accounting policy those responsible for reporting
deliberately allow for accelerated depreciation. In fact the reporting company has consi-
derable scope for discretion in estimating a plant asset's useful life and choosing the me-
thod of depreciation although there is one important restriction - at least as far as publish-
ed company reporting in the Federal Republic of Germany is concerned: According to
present German accounting principles, depreciation is restricted to a maximum limit, the
historical costs. The sum of the depreciation charges of several accounting periods must
tally with the historical costs so that higher depreciation charges during the early years of
a plant asset's life are balanced by lesser amounts in later years. Excessive depreciation
costs of a plant are therefore compensated for in the course of time, so that there is no
absolute reduction in profit, only a temporary deferment. This also applies in principle

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to accelerated depreciation for tax purposes, which take the form of tax allowances and
consequently as fiscal financing assistance12, enabling companies to pursue a certain be-
haviour demanded by reasons of economic policy (e. g. capital expenditure for pollution
control equipment, capital expenditure in Berlin) and in the Federal Republic of Germa-
ny must feature in the financial reports because of so-called 'umgekehrte Maftgeblich-
keit\ Significant temporary anticipation depreciation charges, possibly resulting from
accelerated depreciation for tax purposes, can be shown 'below the line' outside the cal-
culation of Value Added13 .
Despite of a possible temporary shift depreciation costs maintain their character of prepaid
expenses and bought-in costs. Depreciation costs are, as was explained above, nothing
more than bought-in costs which allocate the historical costs of an asset to the various
periods of an asset's useful life. Because of (unavoidable) estimation errors or tempo-
rary anticipation or deferment of depreciation due to accounting policy and in particu-
lar tax considerations, they do not become elements of net income available for appli-
cation to employees, capital providers, etc. If the depreciation is regarded as available
for application to the above groups, the real capital value of the company and thus the
amount and certainty of future payments to the coalition members, i. e. their share of the
Net Value Added may be put at risk.

Investigation of Pension Provisions

Just as controversial a subject as that of taking account of depreciation is the treatment

of inpayments for pension provisions. Whereas in the Federal Republic of Germany it is
generally felt that addition to the pension provisions by means of anticipated expenses is
regarded in the statement of application as elements of the employees' share of the Net
Value Added, some authors are of the opinion that this should apply only to pension pay-
ments and support14. As a result the balance from the special reserve set aside for provi-
sions and the dissolution of provisions due to the payment of pensions should - as was
the case with depreciation - again be allocated to the firm's share of Value Added15. We
have already explained that it is essential for the Value Added Statement to take account
of the accruals concept. As a result pension payments of employees should be record-
ed not at the time of payment but at the time of the accrual of the pension liability.
Irrespective of this we feel that there is presumably a need to provide details especially
of income paid to employees in the form of cash and non-cash elements16.
However this has nothing to do with the calculation of Net Value Added or the distri-
bution of the company's total income to the various recipients; it is merely a question of
appropriate disclosure of the emplyoees' share in the statement of application of Net
Value Added.

Summary

To sum up it can be said that the Statement of Gross Value Added cannot be regarded as
supplementary to published company reports as part of corporate social reporting. The
Value Added Statement as a supplement to the company's annual report, showing the di-

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stribution of the company's total income must be drawn up according to the conventio-
nal principles of measuring accounting profit. As we have already explained in detail, the
Value Added Statement should not be used to replace the net income by a 'gross income
figure' (before depreciation and additions for pension provisions). The problem of allo-
cating depreciation to the different periods does not, as a result of incorrect forecasting
and/or factors connected with accounting policy, affect the aim of reporting to such an
extent that depreciation may, loose its basic character of prepayed expenses and bought-
in costs. Only the Statement of Net Value Added as part of corporate social reporting
indicates the income from the company that has already been attained and may be
achieved in the future by the coalition members.

Footnotes

1 See for instance Secretary of State for Trade, The Future of Company Reports, A Consultative
Document, Presented to Parliament, July 1977, London 1977, p. 7f.; Morley, Michael F., The
Value Added Statement, London 1978; Dierkes, Meinolf, Corporate Social Reporting in Ger-
many: Conceptual Developments and Practical Experience, in: Accounting, Organizations and
Society, Vol. 4 (1979), pp. 87-107; Ullmann, Arieh A., Corporate Social Reporting: Political
Interests and Conflicts in Germany, in: Accounting, Organizations and Society, Vol. 4 (1979),
pp. 123- 133; Groves, Ray I., Corporate Disclosure in the 1980s, in: Financial Executive, Vol. 48
(1980), pp. 14-19, here pp. 17 f.
2 For the company coalition theory see esp. Cyert, Richard M.; March, James G., A Behavioural
Theory of the Firm, Englewood Cliffs, N. J. 1963, pp. 26-32.
3 See Moxter, Adolf, Die Grundsatze ordnungsmaftiger Bilanzierung und der Stand der Bilanz-
theorie, in: Zeitschrift fur betriebswirtschaftliche Forschung, Vol. 18 (1966), pp. 28-59, esp.
pp. 37-39; Confederation of British Industry (ed.): The Responsibilities of the British Public
Company, London 1973; Committee on Social Measurement. AICPA (ed.), The Measurement of
Corporate Social Performance. Determining the Impact of Business Actions on Areas of Social
Concern, New York, N. Y. 1977, pp. 3 - 13; United Nations, Economic and Social Council,
Commission on Transnational Corporations, International Standards of Accounting and Report-
ing for Transnational Corporations (E/C. 10/33), New York, N. Y. 1977, pp. 34-38.
4 For the calculation of added value in relation to the items in the statement of income according
to German Company Law, see Reichmann, Thomas; Lange, Christoph, Kapitalflussrechnung
und Wertschopfungsrechnung als Erganzungsrechnungen des Jahresabschlusses im Rahmen einer
gesellschaftsbezogenen Rechnungslegung, in: Zeitschrift fur Betriebswirtschaft, Vol. 50 (1980),
pp. 518-542, here p. 524 and 529.
5 See e. g. Financial Accounting Concepts No. 1 Objectives of Financial Reporting by Business
Enterprises, Stamford, Conn. 1978, pp. 21-24; Pyle, William W.; White, John Arch; Larson,
Kermit D., Fundamental Accounting Principles, 8th ed., Homewood, 111. 1978, pp. 77-82.
6 See the method of calculation suggested by Reichmann, Thomas; Lange, Christoph, Kapital-
flussrechnung und Wertschopfungsrechnung, esp. p. 529.
7 See esp. Moxter, Adolf, Die Grundsatze ordnungsmaftiger Bilanzierung, pp. 51-53; Thomas,
Arthur L., The Allocation Problem: Part Two. Studies in Accouting Research No. 9, American
Accounting Association, 1974; id., The FASB and the Allocation Fallacy, in: Journal of Ac-
countancy, Vol. 134, Nov. 1975, pp. 65-68; Hooper, Paul; Page, John, Better Financial State-
ments for Corporate Valuation, in: Management Accounting, Vol. 61, Sept. 1979, pp. 52-56.
8 See Schlossarek, Gerd, Zweifelhafte Arbeitgeber-Rechnung. Zur Wertschopfungsrechnung des
hessischen Chemie-Arbeitgeberverbandes, in: Gerwerkschaftliche Umschau, 1/77, pp. 8-10;
Briefs, Ulrich; Kuller, Hans-Detlev; Scheibe-Lange, Ingrid, Betriebliches Rechnungswesen und
Mitbestimmungsinformationen, in: Betriebswirtschaftliche Probleme der Mitbestimmung, pub-
lished by Norbert Koubek, Hans-Detlev Kuller, Ingrid Scheibe-Lange, Frankfurt 1974, pp. 84-
107, esp. pp. 96 f. ; Strohauer, Heinrich, Gewinn und externe Rechnungslegung in mitbestimmten
Unternehmen, in: ibid, pp. 108-137, esp. p. 112; Scheibe-Lange, Ingrid, Wertschopfung und Ver-
teilung des Unternehmenseinkommens, in: Zeitschrift fiir Betriebswirtschaft, Vol. 48 (1978),
pp. 631-637, here pp. 635 f. ; Beier, Joachim, Grundlagen und Praxis der Kapitalfluftrechnung.

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 Empfehlungen fur Aufbau und An wen dung der Fin an zie rungs-, Oberschufi- und Wertschopfungs-
redinung, published by Rationalisierungs-Kuratorium der Deutschen Wirtschaft, Frankfurt
1978, here pp. 7-9; Beier, Joachim; Schlossarek, Gerd, Wertschopfungs- und Finanzierungs-
rcchnungen, in: Der Betrieb, Vol. 33 (1980), pp. 1129-1135; and pp. 1177-1185, here p. 1132.
9 See e. g. Banque de France Direction Generate des Etudes, Centrale de Bilans, Methode d'Ana-
lyse et Presentation des Resultats, Paris 1978; Credit National, Centrale de Bilans, Presentation et
Principes Methodologiques, Paris 1978; Force, Jean, Une Novelle Methode d'Analyse, pourquoi?,
in: Analyse Financiere, 3C trimestre 1979, pp. 3-7.
10 See Morley, Michael F., The Value Added Statement, pp. 109-111.
11 Beier, Joachim; Schlossarek, Gerd, Wertschopfungs- und Finanzierungsrechnungen, p. 1134.
12 It usually takes the form of interest-free tax credit. For 'subvention values' resulting from accele-
rated depreciation for tax purposes see e. g. Lange, Christoph, Umweltschutz und Unternehmens-
planung. Neue betriebswirtschaftliche Forschung, Vol. 8, Wiesbaden 1978, pp. 84-98.
13 Details of accelerated depreciation for tax purposes in the period under report are given in the
explanatory notes section of many annual reports published by German companies. See e. g.
Bosch GmbH, Geschaftsbericht 1979, p. 42; Degussa, Geschaftsbericht 1978/79, pp. 54 f.;
Hoechst AG, Geschaftsbericht 1979, p. 49.
14 See Beier, Joachim; Schlossarek, Gerd, Wertschopfungs- und Finanzierungsrechnungen, p. 1 134.
15 See e. g. Schlossarek, Gerd, Zweifelhafte Arbeitgeberrechnung, p. 10; Scheibe- Lange, Ingrid,
Wertschopfung, p. 635; Welzmiiller, Rudolf, Unternehmensgewinne in den volkswirtschaftlichen
Gesamtrechnungen (VGR), in: WSI-Mitteilungen 11/1979, pp. 601-609, here p. 606.
16 See Colantoni, C. S.; Cooper, W. W.; Deitzer, H. J., Budgetary Disclosure and Social Accounting,
ed. by Meinolf Dierkes and Raymond A. Bauer, New York - Washington - London 1973, pp.
365-386, here pp. 367-378.

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