1. APRIL 2015 / THE CPA JOURNAL10
Sustainability
S
ustainability and sustainability report-
ing are still in their infancy and suf-
fering from growing pains, such as a
lack of definitional clarity, uncertainty about
how to measure nonfinancial information,
and confusion over new standards by new
standards setters with varying ideas about
what is important to disclose. Behind this
movement is the inference that a more
socially responsible company which practices
an ethic of sustainability will carry
a higher value,
deliver greater
permanence, and
achieve long-term
stability. Here, I
focus on ways to
define this subject
from our profes-
sion’s perspec-
tive—as financial
executives, corpo-
rate advisors,
accountants, and
auditors.
We also look at
entry into the sus-
tainability field as
a critically impor-
tant new growth
opportunity. Some
members of the profession view sustainabil-
ity as “the new practice development oppor-
tunity.” They realize that sustainability
reporting offers innovative, creative opportu-
nities that go beyond standard reporting: It
presents entrepreneurial opportunities to devel-
op firm expertise in this new area of practice
and offers higher incremental billing oppor-
tunities. Investors and the public who seek
additional non-financial information about a
company will embrace the resulting reporting
and disclosures.
Sustainability Redux
Foraclearerdefinitionofsustainability,Isug-
gest the one presented by Michael Kraten, in
“ReimaginingtheFinancialStatements”onpage
14 of this issue). According to Kraten, sustain-
ability is the nexus of financial, social, and
environmentalfactorsthatimpactanentity’sabil-
ity to ensure its own long-term survival.
Intellectualcapital,workforceloyalty,andarep-
utationforsocialresponsibilityallrepresentvalu-
able intangible assets that may not be
capitalizable under GAAP but significantly
impact sustainability. In order to address these
factors,entitiesmustconsideranextremelybroad
array of stakeholders. For example, an entity’s
customers, supply chain vendors, local com-
munity residents, and governmental representa-
tives all impact its reputation, and thus must all
be addressed by the organization. Thus, each
entity is not simply responsible for its own sus-
tainable future. It also shares responsibility for
thesustainablefuturesofitscommunityandsoci-
ety as well. (Consider, for example, the com-
plicated interrelationships between General
Motors and its suppliers, labor unions, and the
city of Detroit.)
If you prefer, a second definition focuses
on accounting and balance sheet report-
ing—or what I might characterize as the “un-
balance sheet.” According to this approach,
most of a corporate enterprise’s value is not
on its books. As accountants and auditors,
“what is counted often does not matter, and
what matters is often not counted.” This
approach suggests that the most important
assets and the most important liabilities are
not recorded on the balance sheet of any
enterprise—for example, an entity’s intel-
lectual property, brand equity, patents,
trademarks (other than those acquired), inven-
tions, goodwill, historical reputation, critical
mass, R&D, and quality of management.
Similarly, the most important liabilities, the
ones that can seize markets and lead to glob-
al crises (e.g., inadequate reserves to cover
liquidity crunches, derivatives, off–balance
sheet financing, repurchase agreements with
no reserves booked against them, investments
in offshore subsidiaries, minority ownership
of entities) often do not appear on the balance
sheet. Neither, for that matter, do the trans-
actions in between quarters that tighten up
quarterly reporting. Could these categories
of liabilities be measured in terms of their risk
to an enterprise’s sustainability?
A third definition of sustainability is best
explained by example. Most readers would
agree that wind and solar power represent the
greenest sustainable energy sources—but are
the companies that provide this power eco-
nomically sustainable? What happened when
government subsidies lapse? What happens
when oil prices collapse, as they have
recently (dropping from nearly $100 per
barrel to less than $50 in less than a year)?
A fourth and final definition of sustain-
ability is suggested by Thomas Friedman in
Hot, Flat, and Crowded 2.0, wherein the
author describes companies who “Practice an
ethic of sustainability … institutions that are
too good to fail and too strong to fail—not
institutions that are too big to fail.” As
CPAs, the largest independent outside
observers of corporate behavior, we are nat-
urally in the best position to observe and report
t h e v o i c e o f t h e p r o f e s s i o n
N E W S
&V I E W S
A Message from the Editor-in-Chief
T
he first article on sustainability
reporting that I can find published
by The CPA Journal was written
by Maef Woods and appeared in June
2003. It chronicled the birth of Global
Reporting Initiative (GRI), the first not-for-
profit entity established in this space,
which in 2002 opened its doors in
Amsterdam as the official center of the
United Nations Environmental
Programme. The article focused on
GRI’s charter, sustainable development,
sustainability performance measures and
triple bottom line reporting (TBL), an
accounting framework that strives for
financial, social, and ecological benefits.
In 2008, the Journal first began cover-
ing socially responsible investing, and
suggesting how CPAs acting as corpo-
rate financial advisors and financial
executives could assist in identifying,
measuring, and evaluating the invest-
ment returns of socially responsible
companies.
THEN AND NOW

2. APRIL 2015 / THE CPA JOURNAL14
Reimagining the
Financial Statements
The “Soft Skills” of Sustainable
Accounting
By Michael Kraten
In 2014, three members of the Rhode Island
Society of CPAs (RISCPA)—Executive
Director Robert Mancini, Providence College
Professor Michael Kraten, and Building
Bridges Founder Joy Pettirossi-Poland—dis-
cussed the need to develop and integrate
valuation methodologies for the intangible
assets of accounting firms that cannot be cap-
italized under GAAP.
During their conversations, the trio noted
that non–accounting professionals have
extensively studied and assessed intangi-
ble assets such as intellectual capital, work-
force loyalty, and reputation for social
responsibility. They also noted that the field
of sustainability, which focuses on the
nexus of financial, social, and environ-
mental factors, appeared to provide par-
ticularly helpful metrics and frameworks.
The conversations inspired Michael
Kraten’s article, “Sustainability—The
Accounting Perspective” (The CPA
Journal, March 2014, p. 11).
The group evolved into the RISCPA’s
Task Force on Sustainability, which
Accounting Today reported “has unveiled
the initial findings of a task force that aims
to produce an innovative accounting model
that reconceptualizes traditional financial
statements” (Michael Cohn, “Rhode Island
CPAs Look to Transform the Financial
Statement in its Debits and Credits
Section,” Accounting Today, March 2015).
The task force’s mission was to integrate
sustainability metrics and frameworks from
accounting and nonaccounting sources to
“reimagine” the financial statements by
incorporating GAAP and non-GAAP com-
ponents of sustainable value. The results
of the task force are briefly described by
one of its members in this article.
What the Task Force Found
Somewhat ironically, the task force
determined that an effective approach for
repositioning contemporary financial
reporting models would involve a return
to the balance sheet emphasis that existed
several decades ago, before the financial
professions shifted their emphasis to the
earnings and cash flow statements.
By emphasizing the valuation of intan-
gible balance sheet assets that cannot be
recorded under current accounting stan-
dards (but do exist), the income and cash
flow statements would be transformed as
well. Accordingly, standard ratios of finan-
cial analysis would be modified in ways
that might more accurately reflect an orga-
nization’s investment value.
Case Study: Apple
Apple Inc. provides a useful illustrative
example of these concepts. According to
the annual report in its Form 10-K for the
year ended September 27, 2014, Apple
generated net income of $39.5 billion and
comprehensive income of $41.1 billion
(http://investor.apple.com/secfiling.cfm?
filingid=1193125-14-383437&cik=).
According to Nasdaq Apple’s actual
price/earnings ratio for 2014 was 19.71, a
figure that analysts expect to decline to
12.78 by 2017. (Regarding amounts as of
March 12, 2015, see http://www.nasdaq.
com/symbol/aapl/pe-ratio.)
At first glance, the actual 2014 ratio may
appear to be a high-end outlier in compari-
son to the future ratios. But why was the
actual historical ratio so high? Can finan-
cial metrics be employed to explain this?
According to Interbrand’s Best Global
Brands report, Apple’s brand was worth
$118.8 billion in 2014. Indeed, Apple
owned the most valuable brand asset in the
world—and the brand’s value had
increased by 21% since 2013 (http://
bestglobalbrands.com/2014/ranking/).
Interbrand’s brand valuation methodol-
ogy is particularly useful for accounting
professionals because it is grounded on a
foundation of financial metrics. The firm
begins the valuation process for each orga-
nization by quantifying its economic
profit, which is defined as “the after-tax
operating profit of the brand minus a
charge for the capital used to generate the
brand's revenue and margins” (http://
bestglobalbrands.com/2014/methodology/).
Interbrand then applies a pair of factors
to account for the role that the brand plays
in purchase decisions, and the strength of the
organization’s brand. Based on this method-
ology, Interbrand quantified the increase in
the value of Apple’s brand asset as $20.6
billion during 2014 (i.e., a 21% increase,
from $98.3 billion to $118.8 billion).
Under contemporary accounting princi-
ples, the $20.6 billion increase in brand value
cannot be recorded as earnings, because its
underlying brand asset cannot be capitalized
v i e w p o i n t
N E W S
&V I E W S

3. APRIL 2015 / THE CPA JOURNAL 15
v i e w p o i n t
N E W S
&V I E W S
on the balance sheet. But if it could, then Apple’s earnings would
increase by approximately 50%. And accordingly, its P/E ratio would
fall by one third. In other words, the actual 2014 P/E ratio, an
ostensibly high outlier value at first glance, would approach the level
of its ostensibly “much lower” 2017 analysts’ estimate.
One could argue that the 2017 ana-
lysts’ estimate for Apple’s P/E ratio would also need to be adjust-
ed for any increase in the value of the brand. But if analysts’
prediction of a gradual slide in the future P/E ratio represents a
consensus expectation that intensifying competition will inevitably
erode Apple’s dominant market position, Apple’s brand value
might not significantly increase at all in the future. In fact, it could
decline.
Likewise, one could argue that the P/E ratio should utilize net
income for its denominator, while the annual change in the value
of the brand is more suitably accounted for as a component of
comprehensive income. Changes in unrecognized gains or losses on
derivative instruments, for instance, are recorded in that manner. But
whether one utilizes net income or comprehensive income to cal-
culate the P/E ratio, a change in the value of any asset inevitably
changes the value of the organization.
On the one hand, these two arguments do indeed raise important
concerns about statistical comparability, questions that can create
valuation quagmires if left unaddressed by investment analysts. But
on the other hand, there are rational rebuttal arguments that support
a more flexible approach to asset valuation and market analysis than
is currently sanctioned under GAAP.
When the Rhode Island task force concluded its activities, it
noted that numerous intangible assets might be suitable for treat-
ment in the manner that is described above for brand value. Work
force skill sets, political and community support, and regulatory exper-
tise, for example, represent unrecorded assets that vary in value
from year to year and thus may impact the P/E ratio and other met-
rics in a manner similar to brand value.
Furthermore, it may be appropriate to consider similar treat-
ments for contingent liabilities. After all, if intangible assets that
are not currently capitalized under GAAP are recorded as assets
for purposes of computing P/E ratios and other metrics, then
contingent liabilities that are not currently accrued may need to
be recorded, too.
The Debate Continues
In a sense, of course, this debate is simply an extension of the
existing argument about the benefits and risks of recording
assets and liabilities of relatively uncertain value on the balance
sheet. The issuance of SFAS 157 unambiguously established
that such “Level 3” assets must be recorded in the financial
statements.
In the author’s view, the Rhode Island task force conclusion
supports the position that, if relatively illiquid Level 3 assets
“whose fair value cannot be determined by using observable mea-
sures” must nevertheless be recorded in order to reflect the true
financial position of an organization, then other assets of intan-
gible but obvious value—such as brand value—may need to be
considered as well. ❑
is an associate professor in the accountancy
program at the Providence College School of Business in Providence,
R.I. Previously, he was a management consulting partner at BDO
Seidman and worked in the consulting, accounting, and audit divi-
sions of Deloitte & Touche. He is a member of the CPA Journal
Editorial Board.
A
s of May 2015, the Sustainable Value Task Force
will become the Sustainable Value Committee of the
Rhode Island Society of CPAs, with Michael Kraten
serving as committee chair and Joy Pettirossi-Poland serving
as liaison director. Readers are invited to contact Robert
Mancini, RISCPA executive director, for more information
(https://www.riscpa.org/contact).
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