Accounting - Bachelor in Management & Data Science (TUM)

Accounting Bachelor in Management & Data Science at the TUM Campus Heilbronn Unit 01 – Language of business Professorship of Accounting TUM School of Management Technical University of Munich Winter semester 2024/25 IN Professorship of Accounting TUM Scho...

Accounting Bachelor in Management & Data Science at the TUM Campus Heilbronn Unit 01 – Language of business Professorship of Accounting TUM School of Management Technical University of Munich Winter semester 2024/25 IN Professorship of Accounting TUM School of Management Technical University of Munich Language of business Overview of the chapters of the course “Accounting” at a glance: IN CD BT CA FR SR AP Recording Accounting Corporate Cost Financial Sustainability Introduction business policies and data accounting reporting reporting transactions incentives Every uploaded unit has a unique number which simplifies talking and discussions about the content of the unit. Accounting | Bachelor in Management & Data Science | TUM Campus Heilbronn | Winter semester 2024/25 2 Professorship of Accounting TUM School of Management Technical University of Munich Language of business Our basic perspective on a company and major business questions: What is a What is the company performance at all? of a company? What is the What is the business model value of the of the company? company? Accounting | Bachelor in Management & Data Science | TUM Campus Heilbronn | Winter semester 2024/25 3 Professorship of Accounting TUM School of Management Technical University of Munich Language of business Typical beliefs and realities of business administrators: Accounting | Bachelor in Management & Data Science | TUM Campus Heilbronn | Winter semester 2024/25 4 Professorship of Accounting TUM School of Management Technical University of Munich Language of business Why is management often a non-trivial or even complex task? I want A I want A We want immediately. tomorrow. something completely different. I want B at I want A any time. and B. Accounting | Bachelor in Management & Data Science | TUM Campus Heilbronn | Winter semester 2024/25 5 Professorship of Accounting TUM School of Management Technical University of Munich Language of business Why are management and regulations needed if the stakeholders are unequally informed? I want A I want A Uninformed players We want immediately. tomorrow. something completely different. I want B at I want A any time. Well-informed players and B. Accounting | Bachelor in Management & Data Science | TUM Campus Heilbronn | Winter semester 2024/25 6 Professorship of Accounting TUM School of Management Technical University of Munich Language of business Broader perspective on the languages applied by enterprises: Languages of business Applied mathematics Financial and non-financial Business English.. and statistics reporting standards sin 2 =− 5 1 lim 1 + =? → 1.. = −2 − ! =? 1− Accounting | Bachelor in Management & Data Science | TUM Campus Heilbronn | Winter semester 2024/25 7 Professorship of Accounting TUM School of Management Technical University of Munich Language of business How to learn a new language – Never be passive, actively go these steps: Having fun, and Studying Learning Classroom Training exploring the vocabulary grammar trainings in practice country and culture Active participation in this course helps with these steps! ? Accounting | Bachelor in Management & Data Science | TUM Campus Heilbronn | Winter semester 2024/25 8 Professorship of Accounting TUM School of Management Technical University of Munich Language of business Whenever you move to a new country, you need to learn the language: Warren Buffet (Berkshire Hathaway): „Unlike God, the stock market does not forgive those who do not know what they do.“ “When it comes to investing you need to learn the language of business, which is accounting.” “You have to understand accounting and you have to understand the nuances of accounting. It’s the language of business and it’s an imperfect language, but unless you are willing to put in the effort to learn accounting – how to read and interpret financial statements – you really shouldn’t select stocks yourself.” Accounting | Bachelor in Management & Data Science | TUM Campus Heilbronn | Winter semester 2024/25 9 Professorship of Accounting TUM School of Management Technical University of Munich Language of business Provision of data for managerial decision-making and to inform stakeholders: Business accounting Managerial accounting for internal purposes Reporting to all stakeholders Other Management stakeholders Equity Debt Suppliers Employees Customers Government Etc. providers providers Accounting | Bachelor in Management & Data Science | TUM Campus Heilbronn | Winter semester 2024/25 10 Professorship of Accounting TUM School of Management Technical University of Munich Language of business Accountants in movies – Le Chiffre in “Casino Royale” (2006): Accounting | Bachelor in Management & Data Science | TUM Campus Heilbronn | Winter semester 2024/25 11 Professorship of Accounting TUM School of Management Technical University of Munich Language of business Accountants in movies – Christian Wolff in “The Accountant” (2016): Accounting | Bachelor in Management & Data Science | TUM Campus Heilbronn | Winter semester 2024/25 12 Professorship of Accounting TUM School of Management Technical University of Munich Language of business Accountants in movies – Manfred Schmider in “Big Manni” (2019): Accounting | Bachelor in Management & Data Science | TUM Campus Heilbronn | Winter semester 2024/25 13 Professorship of Accounting TUM School of Management Technical University of Munich Language of business Changing working environment and new challenges for accountants: 1980 2030? Accounting | Bachelor in Management & Data Science | TUM Campus Heilbronn | Winter semester 2024/25 14 Professorship of Accounting TUM School of Management Technical University of Munich Language of business Traditional accounting jobs are disappearing – Accountants need a new set of competencies: Machines increasingly handle human tasks Traditional accounting jobs are disappearing Computerizability Occupation Rank Prob. 1 0,3 % Recreational therapists 2 0,3 % First-line supervisor of mechanics 3 0,3 % Emergency management directors … … … 671 98,0% Bookkeeping, accounting, and auditing clerks … … … 695 99,0% Tax preparers Kasparov vs. … … … IBM Deep Blue (1997) 702 99,0% Telemarketers Frey et al. (2013) Accounting | Bachelor in Management & Data Science | TUM Campus Heilbronn | Winter semester 2024/25 15 Professorship of Accounting TUM School of Management Technical University of Munich Language of business Can or should managers be replaced by machines with artificial intelligence? ChatGPT creates opportunities and risks Netdragon Inc. is managed by “Tang Yu” Accounting | Bachelor in Management & Data Science | TUM Campus Heilbronn | Winter semester 2024/25 16 Professorship of Accounting TUM School of Management Technical University of Munich Language of business Content generated by well-known generative artificial intelligence is not always helpful: “The course Financial Accounting at the Technical University at Munich introduces to the essentials of external reporting. Financial Accounting is the language of business and competencies in this field are important for informatics students. The lecture is arranged at the TUM Campus ChatGPT, “please explain what the Heilbronn by Prof. Dr. rer. oec. course Accounting at TUM Campus Jürgen Ernstberger and his team.” Heilbronn is about and how the course is arranged”. Accounting | Bachelor in Management & Data Science | TUM Campus Heilbronn | Winter semester 2024/25 17 Professorship of Accounting TUM School of Management Technical University of Munich Language of business Need to understand the context to evaluate whether an association has content or not: Abraham Lincoln John F. Kennedy Election to the US Congress 1846 1946 Data-based tools and applications Election as US President 1860 1960 (incl., most forms of AI) rely on correlations between variables. Day of assassination Friday Friday Without further information and Personal secretary Kennedy Lincoln an understanding of the true context, misleading insights Successor as US President Andrew Johnson (*1808) Lyndon Johnson (*1908) (e.g., mystic link between the assassinations of two US Murderer John Wilkes Booth (*1839) Lee Harvey Oswald (*1939) Presidents) and erroneous Place of assassination Ford Theater Ford car decisions are very likely. Accounting | Bachelor in Management & Data Science | TUM Campus Heilbronn | Winter semester 2024/25 18 Professorship of Accounting TUM School of Management Technical University of Munich Language of business Human advantages – Consideration of general targets, causal argumentations, and innovation: Accounting | Bachelor in Management & Data Science | TUM Campus Heilbronn | Winter semester 2024/25 Professorship of Accounting TUM School of Management Technical University of Munich Language of business Human advantages and disadvantages – Human decisions base on more than pure facts: Reality (neutral) Accounting Perception (cognitively biased) Accounting | Bachelor in Management & Data Science | TUM Campus Heilbronn | Winter semester 2024/25 20 Professorship of Accounting TUM School of Management Technical University of Munich Language of business Business decision making based on software-processed accounting data: Accounting | Bachelor in Management & Data Science | TUM Campus Heilbronn | Winter semester 2024/25 21 Professorship of Accounting TUM School of Management Technical University of Munich Language of business Focus of this course is on products, companies, and everything in between: Products Companies Jurisdictions Accounting | Bachelor in Management & Data Science | TUM Campus Heilbronn | Winter semester 2024/25 22 Professorship of Accounting TUM School of Management Technical University of Munich Language of business Time horizons of external and internal accounting: Time horizons Past Present Future Accounting | Bachelor in Management & Data Science | TUM Campus Heilbronn | Winter semester 2024/25 23 Professorship of Accounting TUM School of Management Technical University of Munich Language of business Time horizons in corporate management and reporting: Today Year 1 Year 2 Year 3 Year 4 Year 5 Horizon Current (≤1 year) Medium (>1 year and ≤ 5 years) Long-run (>5 years) Accounting | Bachelor in Management & Data Science | TUM Campus Heilbronn | Winter semester 2024/25 24 Professorship of Accounting TUM School of Management Technical University of Munich Language of business Problematic legacy far beyond any managerial planning horizon: Half-life period of Plutonium isotopes 236Pu 3a 240Pu 6.600a Radioactive 237Pu 45d 241Pu 14a waste 238Pu 88a 242Pu 375.000a 239Pu 24.000a 243Pu 5h Enormous amounts of toxic waste from several types of industrial production, power plants, Toxic synthetic goods, mining, and waste combustion. waste Heavy metals and several synthetic substances have a de facto unlimited dangerous endurance. Widely unknown characteristics and impacts of micro plastic in the oceans. Estimates of complete Micro decomposition range from 50 years when particles plastic remain on the surface and more than 1,000 years when the particles sink to the dark/cool see ground. Accounting | Bachelor in Management & Data Science | TUM Campus Heilbronn | Winter semester 2024/25 25 Professorship of Accounting TUM School of Management Technical University of Munich Language of business Companies are often organized as internationally engaged groups (“group perspective”): Accounting | Bachelor in Management & Data Science | TUM Campus Heilbronn | Winter semester 2024/25 26 Professorship of Accounting TUM School of Management Technical University of Munich Language of business Accounting considers business activities along the value creation chain: Upstream impact Downstream impact that is not related to the that is not related to the Impact related to the value value creation of the enterprise value creation of the enterprise creation within the enterprise Impact related to the value creation outside the enterprise Accounting | Bachelor in Management & Data Science | TUM Campus Heilbronn | Winter semester 2024/25 27 Professorship of Accounting TUM School of Management Technical University of Munich Language of business Managerial accounting – Purposes and examples for managerial accounting tasks: Business accounting Managerial accounting for internal purposes Reporting to all stakeholders Other Management stakeholders Equity Debt Suppliers Employees Customers Government Etc. providers providers Accounting | Bachelor in Management & Data Science | TUM Campus Heilbronn | Winter semester 2024/25 28 Professorship of Accounting TUM School of Management Technical University of Munich Language of business Managerial accounting – Controlling activity-cost tradeoffs along the value creation process: 1 5 Equity and debt funding Repayment of equity and debt funds, provided by investors interest charges (e.g., dividends 4 2 and debt interests), and taxes Sales of products and after-sales service Product development and purchase of raw materials, labor, and other inputs Production (incl., industrial production, 3 trading of goods, and providing services) Accounting | Bachelor in Management & Data Science | TUM Campus Heilbronn | Winter semester 2024/25 29 Professorship of Accounting TUM School of Management Technical University of Munich Language of business Managerial accounting – Evaluation of and decision about budgets for corporate undertakings: Need to collect Risk-adequate discounting (&) of future data to estimate positive or negative cashflows ( ). this parameter Present +, = value (1 + &) (% ) # ' * Need to collect $ ) X " ( data to estimate this parameter 0 Accounting | Bachelor in Management & Data Science | TUM Campus Heilbronn | Winter semester 2024/25 30 Professorship of Accounting TUM School of Management Technical University of Munich Language of business Managerial accounting – Break even analyses: Profit ( $ , ) Fixed costs (=> ) Contribution ( $ , ) ?@ABC ADAE FGEA ( $ , ) Contribution line when only is sold Contribution line when only $ is sold $ Accounting | Bachelor in Management & Data Science | TUM Campus Heilbronn | Winter semester 2024/25 31 Professorship of Accounting TUM School of Management Technical University of Munich Language of business Managerial accounting – Mathematical approaches to adequately assign costs: Indirect cost-centers Direct cost-centers Energy Property Maintenance Material Production Administration Sales Total Primary overhead costs 10,000.00 € 100,000.00 € 120,000.00 € 140,000.00 € 600,000.00 € 200,000.00 € 140,000.00 € Energy (in kWh) 0 3,000 2,000 20,000 88,000 4,000 3,000 120,000 Allocation rate (in € / kWh) 0.08 € 0.08 € 0.08 € 0.08 € 0.08 € 0.08 € Iteration 01 -10,000.00 € 250.00 € 166.67 € 1,666.67 € 7,333.33 € 333.33 € 250.00 € Allocation 0.00 € 100,250.00 € 120,166.67 € 141,666.67 € 607,333.33 € 200,333.33 € 140,250.00 € Property (in sqm) 500 400 500 1,000 3,000 600 400 6,400 Allocation rate (in € / sqm) 16.71 € 16.71 € 16.71 € 16.71 € 16.71 € 16.71 € Round 01 Iteration 02 8,354.17 € -100,250.00 € 8,354.17 € 16,708.33 € 50,125.00 € 10,025.00 € 6,683.33 € Allocation 8,354.17 € 0.00 € 128,520.83 € 158,375.00 € 657,458.33 € 210,358.33 € 146,933.33 € Maintenance (in h) 350 650 200 1,000 2,100 250 150 4,700 Allocation rate (in € / h) 28.56 € 28.56 € 28.56 € 28.56 € 28.56 € 28.56 € Iteration 03 9,996.06 € 18,564.12 € -128,520.83 € 28,560.19 € 59,976.39 € 7,140.05 € 4,284.03 € Allocation 18,350.23 € 18,564.12 € 0.00 € 186,935.19 € 717,434.72 € 217,498.38 € 151,217.36 € Accounting | Bachelor in Management & Data Science | TUM Campus Heilbronn | Winter semester 2024/25 32 Professorship of Accounting TUM School of Management Technical University of Munich Language of business Managerial accounting – Setting targets and evaluating performance: K K Profit 0 Profit 0 =U + (V + ROS OPQRST K) =U + V =U + V 1− ROS OPQRST K Below the Above the Below the Above the target profit target profit target profit target profit ∗ ∗ Accounting | Bachelor in Management & Data Science | TUM Campus Heilbronn | Winter semester 2024/25 33 Professorship of Accounting TUM School of Management Technical University of Munich Language of business Managerial accounting – Setting short-term and long-term selling prices for successful business: Calculation for 40,000 units Storage Material Prod Admin Selling Material costs 61,410,060 € Production fixed costs 85,877 5,499,163 7,425,879 533,644 0 Which selling price: Production variable costs 894,363 22,451,977 503,344 1,453,392 441,517 Leads to a profit of the Non-production fixed costs 79,688 16,629,125 44,392 813,897 1,614,575 product in the ongoing Non-production variable costs 467,358 926,936 710,986 673,195 160,751 Labor costs 75,966,290 € period (“break even”)? 1,115,484 709,038 4,315,324 1,042,391 558,912 Production fixed costs Is needed to capture all Production variable costs 284,941 1,284,707 38,838,402 1,374,648 484,524 1,716,365 181,404 1,118,810 10,104,203 2,781,032 variable costs (“short-term Non-production fixed costs Non-production variable costs 1,209,083 376,938 921,835 70,106 7,478,142 success”) of the product? 62,810,077 € Machinery costs Must be achieved for Production fixed costs 980,051 313,392 19,256,330 636,511 398,331 Production variable costs 581,572 730,174 16,899,046 227,498 5,483,020 “long-term sustainable Non-production fixed costs 0 652,828 2,185,414 458,797 2,646,753 success” of the product? Non-production variable costs 61,063 364,170 5,526,366 828,873 4,579,890 Accounting | Bachelor in Management & Data Science | TUM Campus Heilbronn | Winter semester 2024/25 34 Professorship of Accounting TUM School of Management Technical University of Munich Language of business Managerial accounting – Systematic analysis of performance drivers: Return Operating on sales income Assets Balance sheet Capital EBIT/Sales EBIT Equity Profitability Non-current assets Return Sales on assets Sales Non-current liabilities EBIT/Assets Cash Current assets Current liabilities Asset Assets Total assets Total capital turnover Assets Sales/Assets Accounting | Bachelor in Management & Data Science | TUM Campus Heilbronn | Winter semester 2024/25 35 Professorship of Accounting TUM School of Management Technical University of Munich Language of business External reporting – Purposes and examples for financial and non-financial reporting tasks: Business accounting Managerial accounting for internal purposes Reporting to all stakeholders Other Management stakeholders Equity Debt Suppliers Employees Customers Government Etc. providers providers Accounting | Bachelor in Management & Data Science | TUM Campus Heilbronn | Winter semester 2024/25 36 Professorship of Accounting TUM School of Management Technical University of Munich Language of business External reporting – Different financial reporting standards define the content of financial reports: Recognition Measurement Presentation (consideration) (valuation) (disclosure) Which items and How are the items Where and how transactions are and transactions are the items and included in a report? valuated? transactions shown? German German accounting standards 30 pages (principles based) GAAP US accounting standards US GAAP 25,000 pages (rules based) International accounting standards IFRS 5,000 pages (more rules than principles) Accounting | Bachelor in Management & Data Science | TUM Campus Heilbronn | Winter semester 2024/25 37 Professorship of Accounting TUM School of Management Technical University of Munich Language of business External reporting – Retracing the production and analysis of financial reports: Revenues: 155.5 billion Profit: 12.2 billion Revenues: 6.4 billion Revenues: 31.2 billion Profit: 266 million Profit: 6.0 billion Past Present Future Accounting | Bachelor in Management & Data Science | TUM Campus Heilbronn | Winter semester 2024/25 38 Professorship of Accounting TUM School of Management Technical University of Munich Language of business External reporting – Reporting encompasses more than issuing one thick book once per year: Different types of reports (e.g., annual reports, semiannual reports, and quarterly statements) A wide enterprise-specific bundle of quasi-permanent communication tools (e.g., websites, conferences, and social media) Accounting | Bachelor in Management & Data Science | TUM Campus Heilbronn | Winter semester 2024/25 39 Professorship of Accounting TUM School of Management Technical University of Munich Language of business External reporting – Reliable information about future disclosure and discussion dates and venues: Accounting | Bachelor in Management & Data Science | TUM Campus Heilbronn | Winter semester 2024/25 40 Professorship of Accounting TUM School of Management Technical University of Munich Language of business External reporting – Valuation function: Accounting | Bachelor in Management & Data Science | TUM Campus Heilbronn | Winter semester 2024/25 41 Professorship of Accounting TUM School of Management Technical University of Munich Language of business External reporting – Please work on outperforming him as an investor: Blindfolded Monkey Beats Humans With Stock Picks By Alfred Kueppers, Staff Reporter of The Wall Street Journal, June 05, 2001 For the second straight round, the primate stock picker made a monkey out of his professional and amateur rivals. Though he got the last laugh, the simian investment guru didn't manage to swing into the black. From Nov. 7, 2000, to May 7, 2001, his picks lost an average of 2.7%, dragged down by MediGene AG , a Neuer Markt-listed biotech company that fell 64%. Otherwise, the monkey made money. Canadian Alcan Aluminum Ltd. bought the monkey's original pick, Swiss Alusuisse Group AG , and Alcan rose 40.7%. The French road builder Colas SA climbed 8.5% and Securitas AB, a Swedish security company, rose 4.3%. The Neuer Markt also put the biggest dent in the amateur's portfolio. On Track Innovations AG , listed on the German growth exchange, fell 50.8%. The other Neuer Markt pick, Qiagen NV, did slightly better, but still lost 34.5%. Philips Electronics NV fell 21.4%, and L'Oreal SA was down 7.7%. On average, the amateurs lost 28.6%. Accounting | Bachelor in Management & Data Science | TUM Campus Heilbronn | Winter semester 2024/25 42 Professorship of Accounting TUM School of Management Technical University of Munich Language of business External reporting – Stewardship function: After the (supposedly) value-destroying After the balance sheet scandal takeover of Monsanto by the DAX at Wirecard, the former CEO company Bayer, the shareholders voted Markus Braun was cited by the against CEO Werner Baumann (2019). parliamentary investigation committee (2020). Accounting | Bachelor in Management & Data Science | TUM Campus Heilbronn | Winter semester 2024/25 43 Professorship of Accounting TUM School of Management Technical University of Munich Language of business External reporting – Accounting data enable holding decision-makers accountable and responsible: Accounting | Bachelor in Management & Data Science | TUM Campus Heilbronn | Winter semester 2024/25 44 Professorship of Accounting TUM School of Management Technical University of Munich Language of business External reporting – Fraudulent accounting data and their consequences: Release of a report that casts doubt on the reliability of accounting figures Accounting | Bachelor in Management & Data Science | TUM Campus Heilbronn | Winter semester 2024/25 45 Professorship of Accounting TUM School of Management Technical University of Munich Language of business External reporting – Contracting function: Contracts using accounting numbers Debt contracts (“financial covenants”) Performance-based compensation Supplier contracts Royalty agreements Accounting | Bachelor in Management & Data Science | TUM Campus Heilbronn | Winter semester 2024/25 46 Contact details Prof. Dr. rer. oec. Michael Stich Professor of Accounting Technical University of Munich TUM School of Management Professorship of Accounting Bildungscampus 9 74076 Heilbronn, Germany [email protected] www.wi.tum.de/tum-campus-heilbronn Accounting Bachelor in Management & Data Science at the TUM Campus Heilbronn Unit 04 – Shareholders, stakeholders, and the company Professorship of Accounting TUM School of Management Technical University of Munich Winter semester 2024/25 IN Professorship of Accounting TUM School of Management Technical University of Munich Shareholders, stakeholders, and the company Major aspects addressed in this unit: Understanding of a company Boundaries of a company Major aspects of this unit Corporations versus partnerships Shareholder versus stakeholder approach Accounting | Bachelor in Management & Data Science | TUM Campus Heilbronn | Winter semester 2024/25 2 Professorship of Accounting TUM School of Management Technical University of Munich Shareholders, stakeholders, and the company Baseline understanding of a company that undertakes economic activities: Accounting | Bachelor in Management & Data Science | TUM Campus Heilbronn | Winter semester 2024/25 3 Professorship of Accounting TUM School of Management Technical University of Munich Shareholders, stakeholders, and the company Baseline understanding of economic activity: 1 5 Equity and debt funding Repayment of equity and debt funds, provided by investors interest charges (e.g., dividends 4 2 and debt interests), and taxes Sales of products and after-sales service Product development and purchase of raw materials, labor, and other inputs Production (incl., industrial production, 3 trading of goods, and providing services) Accounting | Bachelor in Management & Data Science | TUM Campus Heilbronn | Winter semester 2024/25 4 Professorship of Accounting TUM School of Management Technical University of Munich Shareholders, stakeholders, and the company Overview of economic units: Private persons (incl., private households) Economic units Public budgets Companies Public authorities Enterprises and administrations Accounting | Bachelor in Management & Data Science | TUM Campus Heilbronn | Winter semester 2024/25 5 Professorship of Accounting TUM School of Management Technical University of Munich Shareholders, stakeholders, and the company Definition and understanding of a “company”: There is no generally accepted and/or uniform definition of the term “company” It depends on the purpose(s) of specific legislations. From a scientific/technical perspective, there are two ways to define the term “company”: Oxford dictionary Functional definition Institutional definition A business organization A company is deemed to exist A company requires a commercial that makes money if a natural person or a legal person is activity in the economy and a minimum by producing or selling entrepreneurially planning and operating. level of institutional organization. goods or services. Accounting | Bachelor in Management & Data Science | TUM Campus Heilbronn | Winter semester 2024/25 6 Professorship of Accounting TUM School of Management Technical University of Munich Shareholders, stakeholders, and the company Boundaries of a company – Non-unique group perspectives depending on the reporting task: Legal reporting boundary Parent company Multi-scope reporting boundary Accounting | Bachelor in Management & Data Science | TUM Campus Heilbronn | Winter semester 2024/25 7 Professorship of Accounting TUM School of Management Technical University of Munich Shareholders, stakeholders, and the company Boundaries of a company – Group perspective in accordance with reporting standards: Accounting | Bachelor in Management & Data Science | TUM Campus Heilbronn | Winter semester 2024/25 8 Professorship of Accounting TUM School of Management Technical University of Munich Shareholders, stakeholders, and the company Boundaries of a company – Netting of transactions in accordance with the group perspective: Inflow = 600 Outflow = 400 Reporting entity (“group”) in line with the “single Parent firm reporting entity” concept) Inflow = 300 Outflow = 250 Inflow = 400 Outflow = 300 Subsidiary A (100%) Subsidiary B (100%) Difference Inflow = 500 Outflow = 350 Inflows of the group (interrelation with outside parties) = 600 + 500 = 1,100 Net-inflow = 1,100 – 750 = 350 Outflows of the group (interrelation with outside parties) = 400 + 350 = 750 Accounting | Bachelor in Management & Data Science | TUM Campus Heilbronn | Winter semester 2024/25 9 Professorship of Accounting TUM School of Management Technical University of Munich Shareholders, stakeholders, and the company Boundaries of a company – Incorporation of transactions along the value creation chain: Upstream impact Downstream impact that is not related to the that is not related to the Impact related to the value value creation of the company value creation of the company creation within the company Impact related to the value creation outside the company Accounting | Bachelor in Management & Data Science | TUM Campus Heilbronn | Winter semester 2024/25 10 Professorship of Accounting TUM School of Management Technical University of Munich Shareholders, stakeholders, and the company Fundamental distinction between partnerships and corporations (there “pure forms” do not exist): Partnership Mixed forms Corporation No legal person but bearing specific Legal person bearing all rights, rights, duties, assets, and liabilities duties, assets, and liabilities Partners are liable Shareholder are liable with all private assets only with the invested capital One or more partners Managers hired by the corporation manage the company Several other differences (e.g., mandatory functions/committees, increasing/decreasing capital, dividends, and taxation). Accounting | Bachelor in Management & Data Science | TUM Campus Heilbronn | Winter semester 2024/25 11 Professorship of Accounting TUM School of Management Technical University of Munich Shareholders, stakeholders, and the company Examples for important legal forms: Type Company Liability of the investor Management Sole Proprietor Examples (eU – Einzelunternehmer) for sole All private assets Sole proprietor enterprises Sole Merchant (eK – Einzelkaufmann) General partnership All private assets of all partners Every partner (OHG – Offene Handelsgesellschaft) Examples for partnerships Limited partners (Kommanditist) only with Partly Limited Partnership the invested capital; unlimited partner Only unlimited partner (KG – Kommanditgesellschaft) (Komplementär) with all private assets Limited Liability Company Only invested capital (minimal nominal Examples for (GmbH – Gesellschaft mit beschränkter Haftung) capital at foundation of 25,000 €) Appointed manager corporations Stock Corporation Only invested capital (minimal nominal (AG – Aktiengesellschaft) capital at foundation of 50,000 €) Accounting | Bachelor in Management & Data Science | TUM Campus Heilbronn | Winter semester 2024/25 12 Professorship of Accounting TUM School of Management Technical University of Munich Shareholders, stakeholders, and the company Note on “combined” legal forms – The important case of the GmbH & Co. KG: A regular Partly Limited Partnership (KG) is a partnership with (at least): − An unlimited partner (Komplementär) who is liable with all private assets and − a limited partner (Kommanditist) who is liable only with the invested capital. In a GmbH & Co. KG, the unlimited partner is a Limited Liability Company (GmbH): − An unlimited partner (Komplementär) whose liability is limited by legal form (GmbH) and − a limited partner (Kommanditist) who is liable only with the invested capital. Thus, the GmbH & Co. KG is ultimately a KG without a partner who is liable with all private assets. Although the GmbH & Co. KG is still a partnership, the German Commerical Code (HGB) defines that partnerships without an unlimitedly liable partner have to fulfill the same (more extensive and restrictive) regulations as corporations. Accounting | Bachelor in Management & Data Science | TUM Campus Heilbronn | Winter semester 2024/25 13 Professorship of Accounting TUM School of Management Technical University of Munich Shareholders, stakeholders, and the company General distinction between shareholder value and stakeholder value approach: Monistic Purpose and managerial Pluralistic focus of a company approach approach Maximization of shareholder value Maximization of stakeholder value (under the assumption of homogenous shareholders) (or meeting the needs of all stakeholders as a weaker form) “In a free enterprise, private property system, a corporate executive is an employee of the owners of the business. “Stakeholders are individuals He has direct responsibility to his or groups that affect or are affected employers. That responsibility is to by the achievement of an conduct the business in accordance with organization’s objectives.” their desires, which generally will be to (Freeman 1984) make as much money as possible.” Milton Friedman Robert Freeman (Friedman 1970) (1912-2006) (1951-) Accounting | Bachelor in Management & Data Science | TUM Campus Heilbronn | Winter semester 2024/25 14 Professorship of Accounting TUM School of Management Technical University of Munich Shareholders, stakeholders, and the company The key mission of a management is to maximize the present value for a predefined group: Evaluation of the present value of (expected) future benefits and (expected) burden for a predefined group (“risk-adequate discounting”) Present value of the benefits and burdens for a predefined group Benefit Benefit Benefit Benefit X Benefit Benefit Burden Burden 0 Accounting | Bachelor in Management & Data Science | TUM Campus Heilbronn | Winter semester 2024/25 15 Professorship of Accounting TUM School of Management Technical University of Munich Shareholders, stakeholders, and the company Decision-useful information and resource allocation with shareholders: and the shareholders can lead to economic frictions Information asymmetry between the company (e.g., adverse selection and moral hazard). Resources today Decision-useful information Company Shareholders (i.e., information from financial and non-financial reports) Resources in the future Accounting | Bachelor in Management & Data Science | TUM Campus Heilbronn | Winter semester 2024/25 16 Professorship of Accounting TUM School of Management Technical University of Munich Shareholders, stakeholders, and the company Theoretical fundament of the shareholder value concept: “The directors of such joint stock companies, however, being the managers rather of other people’s money than of their own, it cannot well be expected, that they should watch over it with the same anxious vigilance with which the partners in a private partnership frequently watch over their own. Like the stewards of a rich man, they are apt to consider attention to small matters as not for their master's honor, and very easily give themselves a dispensation from having it. Negligence and profusion, therefore, must always prevail, more or less, in the management of the affairs of such a company.” Smith (1776) Adam Smith (1723-1790) Accounting | Bachelor in Management & Data Science | TUM Campus Heilbronn | Winter semester 2024/25 17 Professorship of Accounting TUM School of Management Technical University of Munich Shareholders, stakeholders, and the company Theoretical fundament of the shareholder value concept: “The purpose of a firm is to efficiently operate in a given environment. The responsibility of the firm is to maximize profit. Thereby, the firm contributes to the society, for example, by offering jobs with favorable prospects and paying taxes.” Friedman (1989) “There is one and only one social responsibility of business – to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.” Friedman (1962) Milton Friedman (1912-2006) “The manager’s responsibility is to conduct the business in accordance with the owners’ desires, which will generally be to make as much money as possible while conforming to the basic rules of the society, both those embodied in law and in ethical custom.” Friedman (1970) Accounting | Bachelor in Management & Data Science | TUM Campus Heilbronn | Winter semester 2024/25 18 Professorship of Accounting TUM School of Management Technical University of Munich Shareholders, stakeholders, and the company Drivers of shareholder value (Rappaport 1999): Objective Shareholder value of the value creation Components Operating Discount Debt financing of valuation cashflow rate Drivers Business model Investments Revenues, of value and duration in current and Cost of profit margin, of the value non-current equity capital and taxes creation assets Management Operating Investing Financing decisions activities activities activities Accounting | Bachelor in Management & Data Science | TUM Campus Heilbronn | Winter semester 2024/25 19 Professorship of Accounting TUM School of Management Technical University of Munich Shareholders, stakeholders, and the company Managerial challenge to maximize shareholder value: Value of the shareholders given a managerial policy ( ) Maximum shareholder value ( ( ∗ )) ( ) Managerial policy ( ) ∗ Accounting | Bachelor in Management & Data Science | TUM Campus Heilbronn | Winter semester 2024/25 20 Professorship of Accounting TUM School of Management Technical University of Munich Shareholders, stakeholders, and the company Decision-useful information and resource allocation with shareholders and stakeholders: Information asymmetry between the company and the shareholders and stakeholders can lead to economic frictions (e.g., adverse selection and moral hazard). Resources today Shareholders Decision-useful information Other stakeholder Company (i.e., information from financial and non-financial reports) group Resources in the future Other stakeholder group Accounting | Bachelor in Management & Data Science | TUM Campus Heilbronn | Winter semester 2024/25 21 Professorship of Accounting TUM School of Management Technical University of Munich Shareholders, stakeholders, and the company Theoretical fundament of the shareholder value concept: “Stakeholder theory is a concept of organizational management and business ethics that addresses morals and values in managing an organization. It identifies the stakeholders of a company and models their interrelations and relations with the company. The key idea is often summarized as the principle of “who or what really counts” for the firm’s future development.” Freeman 1984 Robert Freeman (1951-) Accounting | Bachelor in Management & Data Science | TUM Campus Heilbronn | Winter semester 2024/25 22 Professorship of Accounting TUM School of Management Technical University of Munich Shareholders, stakeholders, and the company Stakeholder-related research is a relatively new stream of literature: Accounting | Bachelor in Management & Data Science | TUM Campus Heilbronn | Winter semester 2024/25 23 Professorship of Accounting TUM School of Management Technical University of Munich Shareholders, stakeholders, and the company Company as a complex network of contractual relations: Suppliers Employees Customers Contract Contract Contract Managers Equity providers Contract Contract Contract Contract Community Other stakeholder Debt providers and government groups Accounting | Bachelor in Management & Data Science | TUM Campus Heilbronn | Winter semester 2024/25 24 Professorship of Accounting TUM School of Management Technical University of Munich Shareholders, stakeholders, and the company Examples for interrelations with stakeholder groups: Stakeholder Inflow to the company Outflow of the company group (resource provided to the company by the stakeholder group) (claim of the stakeholder group against the company) Equity providers Perpetual provision of risk capital Residual claim on equity and income Debt providers Temporary provision of risk capital Interests and retirements Community and government Legal and institutional environment and state grants Loyalty, taxes, and dues Suppliers Goods and services Purchasing price Employees Work force and knowledge Wage and compensation Customers Purchasing price Goods and services Accounting | Bachelor in Management & Data Science | TUM Campus Heilbronn | Winter semester 2024/25 25 Professorship of Accounting TUM School of Management Technical University of Munich Shareholders, stakeholders, and the company Interpretation of everybody related to a Sustainable Development Goal (SDG) as a stakeholder: Accounting | Bachelor in Management & Data Science | TUM Campus Heilbronn | Winter semester 2024/25 26 Professorship of Accounting TUM School of Management Technical University of Munich Shareholders, stakeholders, and the company Example for clustering of stakeholder groups based on their involvement with the company: Suppliers Customers External Internal Managers Equity Employees providers Community Debt providers and government Accounting | Bachelor in Management & Data Science | TUM Campus Heilbronn | Winter semester 2024/25 27 Professorship of Accounting TUM School of Management Technical University of Munich Shareholders, stakeholders, and the company Example for grouping of stakeholder groups based on a “conflict” assessment: Highly problematic Suppliers Problematic Managers‘ Equity Employees assessment providers Community Debt Customers and Unproblematic providers government Accounting | Bachelor in Management & Data Science | TUM Campus Heilbronn | Winter semester 2024/25 28 Professorship of Accounting TUM School of Management Technical University of Munich Shareholders, stakeholders, and the company Managerial challenge to maximize stakeholder value: Values of the stakeholder groups given a managerial ( ) policy ( ) ( ) ( ) Managerial policy ( ) ( ) Accounting | Bachelor in Management & Data Science | TUM Campus Heilbronn | Winter semester 2024/25 29 Professorship of Accounting TUM School of Management Technical University of Munich Shareholders, stakeholders, and the company Practical approaches to consider stakeholder aspects: No consideration which might lead to a concept close to shareholder value Consideration in the cashflow component Consideration of externalities Consideration in the cost of capital component Full consideration leading to a fully different (so-far unknown) approach Accounting | Bachelor in Management & Data Science | TUM Campus Heilbronn | Winter semester 2024/25 30 Professorship of Accounting TUM School of Management Technical University of Munich Shareholders, stakeholders, and the company Practical approaches to consider stakeholder aspects – Stakeholder-adjusted cashflows: Operating outfolw Negative (net) outflow Investments Positive Positive Negative Negative Operating inflow Positive Adjusted (net) cashflow (net) outflow Financing “Classic” considerations Economic Environmental Social in (pure) financial reporting externalities externalities externalities Accounting | Bachelor in Management & Data Science | TUM Campus Heilbronn | Winter semester 2024/25 31 Professorship of Accounting TUM School of Management Technical University of Munich Shareholders, stakeholders, and the company Practical approaches to consider stakeholder aspects – Multi bottom line approaches: Input values Output values Financial Financial Natural Natural Manufactured Value creating Manufactured or value destroying Inputs Outputs corporate Human processes Human Intellectual Intellectual Relationship Relationship Accounting | Bachelor in Management & Data Science | TUM Campus Heilbronn | Winter semester 2024/25 32 Contact details Prof. Dr. rer. oec. Michael Stich Professor of Accounting Technical University of Munich TUM School of Management Professorship of Accounting Bildungscampus 9 74076 Heilbronn, Germany [email protected] www.wi.tum.de/tum-campus-heilbronn Accounting Bachelor in Management & Data Science at the TUM Campus Heilbronn Unit 06 – Company value and valuation Professorship of Accounting TUM School of Management Technical University of Munich Winter semester 2024/25 IN Professorship of Accounting TUM School of Management Technical University of Munich Company value and valuation What is the value of the chicken? Accounting | Bachelor in Management & Data Science | TUM Campus Heilbronn | Winter semester 2024/25 2 Professorship of Accounting TUM School of Management Technical University of Munich Company value and valuation Company value(s) and valuation: Company value(s) are never objective but depend, e.g., on the purpose of the valuation, on the valuation perspective, and on the conceptual assumptions of the valuation approach. Reality Valuation Value(s) is generally are the result not directly of subjective observable Subjective assessment of the reality assessments based on given individual preferences Accounting | Bachelor in Management & Data Science | TUM Campus Heilbronn | Winter semester 2024/25 3 Professorship of Accounting TUM School of Management Technical University of Munich Company value and valuation Basic drivers of (economic) value: Basic drivers of (economic) value Timeline of realizing a benefit Realizing an advantage today Realizing an advantage in the future External business transaction: Internal business transaction: Type of business transaction Disposal (e.g., selling) the good Using the good Measurement concept Fair value of the good Value in use of the good Accounting | Bachelor in Management & Data Science | TUM Campus Heilbronn | Winter semester 2024/25 4 Professorship of Accounting TUM School of Management Technical University of Munich Company value and valuation Values are always relative – Need for systematic comparisons of comparable companies: Accounting | Bachelor in Management & Data Science | TUM Campus Heilbronn | Winter semester 2024/25 5 Professorship of Accounting TUM School of Management Technical University of Munich Company value and valuation Values are always relative – Need for systematic “comparisons of comparables”: Fiscal year Fiscal year Fiscal year Fiscal year Fiscal year Fiscal year Fiscal year Fiscal year 2017 2018 2019 2020 2021 2022 2023 2024 ? Longitudinal comparison (“within one company”) Cross-sectional comparison (“between companies”) Accounting | Bachelor in Management & Data Science | TUM Campus Heilbronn | Winter semester 2024/25 6 Professorship of Accounting TUM School of Management Technical University of Munich Company value and valuation Fundamental definition of present value: Discounting of future “” and “” Present value      X    0 Accounting | Bachelor in Management & Data Science | TUM Campus Heilbronn | Winter semester 2024/25 7 Professorship of Accounting TUM School of Management Technical University of Munich Company value and valuation Some remarks on the sunk cost fallacy: Different to prospective investments/costs (e.g., burdens in the future that might be avoidable by clever business decisions), retrospective costs (“sunk costs”) have already been incurred and cannot be recovered. Thus, economic theory suggests that such sunk costs are generally irrelevant for decision making (i.e., for the question at which price a stock should be sold). In other words, when information about stocks is efficiently processed, past values of the stock do not matter in determining the future value of the stock. Even though economic theory argues that sunk costs are not relevant to future rational decision making, in everyday life, decision makers often take previous investments/costs (e.g., past investment price of a stock) into account (“sunk cost fallacy”), e.g., as an anchor or a reference point X for the (minimum) payoff when the stock is ultimately sold. 0 Accounting | Bachelor in Management & Data Science | TUM Campus Heilbronn | Winter semester 2024/25 8 Professorship of Accounting TUM School of Management Technical University of Munich Company value and valuation Why discounting future cashflows? Possibility to “use” these funds over the time to generate cashflows Getting Getting resources funds     today today No possibility to “use” these funds over the time to generate cashflows and inflation losses. Getting Getting resources     funds in in the future the future Discounting to consider the “burden of waiting” without having the possibility to generate cashflows. Accounting | Bachelor in Management & Data Science | TUM Campus Heilbronn | Winter semester 2024/25 9 Professorship of Accounting TUM School of Management Technical University of Munich Company value and valuation Understanding of discounting: Receiving Receiving 100 € in the 100 € in the near future longer future Example (in 1 year): ≈ 93 ( %) Example (in 10 years): 93 € ( %) ≈ 46