In this post I express my long standing enthusiasm for the value added statement and my disappointment that they are currently unfashionable. I am enthusiastic because of their relevance to a wider group of users than are traditional income statements. They can be particularly relevant and useful to employees. Value added statements possess simplicity and elegance and are underpinned by a co-operative philosophy between workers and capitalists. Along with employee representation on corporate boards of directors, value added statements can contribute to the enfranchisement / empowerment of workers. I believe such an outcome is a good thing.
The traditional income statement
All firms will (or should) produce an income statement. An income statement looks at a firm’s performance from the point of view of the owners. Owners may be sole traders, partners, or a company’s shareholders. An income statement’s purpose is to report how much profit has been made by a firm in an accounting period and how this profit was achieved. Clearly, such statements with profit as their primary focus are orientated towards business owners. Of course, in countries where profits and income are taxed, the traditional income statement is useful for taxation purposes too.
In income statements, wages and salaries are not seen as payments to contributors towards wealth creation. Instead, labour costs are seen and treated as a cost burden that reduces owner profit. Labour costs are often subsumed within cost of sales, administration costs and distribution costs and so may not be visible on the face of the income statement.
Although tax is accounted for differently, it too is viewed negatively. Instead of tax being seen as a contribution to wider society, it is seen and treated as a deduction from owner profit. In short, it is seen as a burden that reduces the disposable income of owners.
The treatment of wage costs and taxation charges in the traditional income statement reflects and promotes the interests of the dominant capitalist class, that is, the object of economic activity is to enrich the owners of firms. Benefits received by labour and by wider society are seen as incidental to the firm’s activities, to be minimised, where possible, so as to maximise owner disposable income
Here is Tesco PLC’s group income statement for 2012. This can be contrasted with Tesco’s value added statement shown in the next section.
Value added statements
The traditional income statement is not the only way of presenting a firm’s results. Items of cost in an income statement can be unpacked, rearranged and recast for the benefit of a wider group of people – the stakeholders. The new information is reported in a value added statement.
Stakeholders consist of a firm’s workers, its providers of loan capital, its owners, the government, and society at large. Each stakeholder contributes to the wealth creation of a firm. The government is included in the list of wealth creators because of its role in providing the transport, legal and financial infrastructures, education, health, and other services. Without these services business activity would not thrive. In a value added statement, none of the stakeholders are given primacy.
Value added: an alternative metric
In a value added statement profit does not feature as the primary metric. Instead, value added, a measure of wealth creation, replaces the profit metric. The value added metric changes the implied orientation of a firm from owners to stakeholders. Value added is measured as the difference between a firm’s sales revenue and the costs of materials, goods and services bought-in from outside the firm. Where a firm has other sources of income, it is convenient to add these into sales revenue, as demonstrated in the statement below.
Financial reports have political and social significance The financial reports prepared by accountants are not neutral – they reflect the perspective and interests of the dominant social class – capitalists.
Capital increasingly has gained the upper hand over labour in recent times. Accounting practice reflects capital’s dominance, and financial statements may seem quite opaque and irrelevant to workers and to society at large. Of course, worker incomprehension of financial reports suits the purpose of capital. Opaque financial reports create information assymetry which favours capitalists over workers in wage and related negotiations.
Value added statements go some way to redressing this information assymetry and power imbalance. It is probably too optimistic to hope that legislatures around the world will legislate to require companies to include a value added statement in their corporate reports. This is a predictable consequence of capital’s dominance and its hold over governments.
Despite this, it is usually feasible to convert a firm’s income statement into a value added statement, although this depends on using information that is found elsewhere in a company’s corporate report, most notably in the notes to the accounts.
In the above example, I was able to produce Tesco’s group value added statement, but not a value added statement for Tesco UK. This is because Tesco’s financial statements have not segmented labour costs by country. I was hence unable to identify the UK specific element from the published consolidated figure for Tesco’s labour costs..
I shall continue to extol the virtues of value added statements, despite their being out of fashion. I hope you and others will do the same