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ISSUES / SUBJECTS
MONETIZATION
The way financial wealth has been facilitated
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TPB Note: The following from KPMG in 2014 shows that some accountants are concerned about the way conventional financial accounting ignores externalities, in other words the multitude of impacts outside the conventional reporting entity and merely the financial (economic) capital. The important impacts on social capital and natural capital are ignored.
There are many problems with using money as the measure of impact on capital starting with the idea that money itself is not a constant but varies over time.
The TVM approach has similarities except that there are multiple units of measure as well as multiple capitals. The approach has a lot in common with multiple currency accountancy. In multiple currency reporing, the results change depending on the exchange rates that have to be used.
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A NOTE ON MONETIZATION from KPMG in 2014
From a KPMG report from 2014: Page 44
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http://www.truevaluemetrics.org/DBpdfs/ImpactAccounting/KPMG-A-New-Vision-of-Value-2014.pdf
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Open PDF ... KPMG-A-New-Vision-of-Value-2014
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Looking to the long term: the goal of double-entry accounting for all capitals
'Monetization provides a common metric through which a company can more easily understand, compare and contrast the magnitude of its various externalities. Furthermore, given that the ultimate goal is to develop strategies that create both societal and corporate value, then there are clear advantages in using the same metrics to express both. Perhaps most importantly, the use of financial metrics to quantify externalities enables social and environmental factors to be brought into decision making in terms that business managers are already familiar with.
There are challenges in seeking to quantify externalities in financial terms. For example, it is not an exact science and the results should therefore be considered as an indication or approximation. Additionally, monetization cannot fully express ethical aspects of externalities such as human rights or health and safety. However, while we acknowledge the limitations of monetization, we believe that it is the method that currently offers the most potential to bring considerations of societal value into corporate decision making.
Monetization is becoming more widely accepted as an approach to help companies understand, measure and manage their externalities, thanks partly to the increasing number and reliability of data sources.
The concept is not perfect, and the data is not yet as reliable as that used for financial reporting.
However, monetization does offer a useful means to draw comparisons of scale between a company’s various externalities and identify which of them are most material both to the business and to society.
We believe it is the best approach available right now and for this reason, monetization forms the starting point of KPMG’s True Value methodology as well as initiatives from other organizations.
However, monetization is not necessarily the ultimate solution. We might end up with a more complex and multi-lensed approach to evaluating business performance, in which case the goal must be to develop a standardized approach that aligns more closely with the elegance of the double-entry financial accounting system.
The double-entry system, in which every debit must have a credit and every credit a debit, continues as the basis of financial accounting even though standards have been added over time to define particular debits and credits.
That is why we should aim, eventually, to adopt the same system when accounting for societal value creation. The International Integrated Reporting Council’s (IIRC) framework gives us a good point of departure in that it identifies six types of capital (or ‘ stores of value’) that a company requires in order to create corporate value: financial capital, manufactured capital, intellectual capital, human capital, social and relationship capital, and natural capital.'
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