Cockpit
Statements
EVA Adjustments
Adjustments eliminate non-operating and accounting-related positions in profits that dilute the economic picture of performance. Adjusted items include:
- Goodwill and intangible assets
- Non-operating positions
- Volatile cost components
- Large investments
Accountants typically find all the necessary adjustments by hypothetically asking themselves if they would accept for their remuneration to depend on the resulting profit. The necessary adjustments quickly become apparent. The guiding principle is only to adjust profits in a way that is discounted cash flow neutral: costs can be capitalized but not eliminated, while depreciation can be omitted but the associated assets remain on the balance sheet. It is important that the resulting NOPAT stays close to the official profit declaration, because every change requires an explanation. The resulting NOPAT is the input for EVA.
Click here for more information about Tax Treatment in EVA.
Click here for more information about calculating Cost of Capital.
Click here for more information about calculating Capital Charge.
Click here for the following section on EVA sub-metrics: the Value Driver Tree.
Click here for the final VBM section on value-based incentive compensation.
Recommended Readings: EVA by Stephen F. O'Byrne, Competitive Value Management by Hermann J. Stern