THE DECISION RELEVANCE OF VALUE ADDED REPORTS

There is evidence of increasing inclusion of value added statements in published accounts, both in the U.K. and Europe generally (see, e.g. Gray and Maunders (1979)if. In the U.K. such a practice was undoubtedly stimulated (though not initiated) by the publication of the discussion document ‘The Corporate Report” by the Accounting Standards Committee in 1975. (1) Thus, the annual survey of 300 large companies by the Institute of Chartered Accountants in England and Wales (2), shows the numbers of those companies including value added statements in their published accounts as rising from 14 in 1975/76 to 84 in 1978/79. ' It will be rem em bered that the recommendations of The Corporate Report were based on a general decision relevance approach to the identification of desirable disclosure practices. This approach requires, in principle, a series of steps including specification of user decision models and through them an identification of relevant information (3). These steps, if followed by the authors of The Corporate Report in relation to the value added statement, were not made fully explicit by them. Rather, the rationale for their recommendations in this respect appears to be contained in paragraphs 6.7 and 6.10. i.e. “6.7 The simplest and most immediate way of putting profit into proper perspective vis-a vis the whole enterprise as a collective effort by capital, m anagement and employees is by presentation of a statement of value added (that is, sales income less materials and services purchased). Value added is the wealth the reporting entity has been able to create by its own and its employees’ efforts. This statement would show how value added has been used to pay those contributing to its creation. It usefully elaborates on the profit and loss account and in time may come to be regarded as a preferable way of describing performance.” “6.10. the statement of value added provides a useful measure to help in gauging performance and activity. The figure of value added can be a pointer to the net output o f the firm; and by relating other key figures (for example, capital employed and employee costs) significant indicators of performance may be obtained.” Both paragraphs 6.7 and 6.10 thus imply that value added is a decision relevant measure o f company performance, capturing the wider (social) effects better than is done by more traditional measures such as profits. The purpose of the present paper, therefore, is to attempt to articulate more fully than is done in The Corporate Report the decision relevance approach to the value added disclosure argument and hence to arrive at a firmer basis