The $EVAź value that is calculated depends upon the number of accounting adjustments
(reversal of accounting entries) that are made. Consequently there can be many different
$EVAź's calculated across a broad spectrum of companies and certainly within the
one company. This is unfortunate and up until now has been a major problem with adopting
Economic Value Added (EVAź). Many large corporations have seen the power and importance
of using EVAź as a Value Based Management (VBM) system to run their business and to
monitor and assess strategies and financial performance. However they face the well
documented problem that their EVAź depends upon what Accounting entries are reversed.
Another problem is that Economic Based decisions tend to always difer from decisions based
on accounting principles and taxation factors. Such decisions as capitalisation of
operating leases, capitalisation and amortisation of Research and Development
expenditures, transfer pricing and valuation of trading stock.
What limits a Corporation in making these adjustments is the time involved, the cost
involved, the knowledge required and also the necessity to maintain the integrity of their
legally required reporting systems. Many corporations end up with a system that is
difficult to maintain and understand and involving only a few (2 to 5) adjustments.
Let their be no misunderstanding as to the importance and impact on value of making the
reversal of these accounting entries. In the United States there are over 100
accounting entries that distort cash flow timing and where the entry itself has absolutely
No Cash Flow associated with it (e.g. provisions).
The combination of all these adjustments adds up and in majority of
Corporations is
substantial. Without questions all these type of entries should be reversed.
If you have any doubt about this statement then take a quick look at
the following 2 Corporations and just see how big an impact the reversal process has.
Although the year ended was back in 2000 the principle and situation still
applies today and the two cases emphasis the situation very clearly.
Woolworths Limited
Telstra
Corporation Limited
EVAź is a registered trade mark of Stern Stewart & Co
