External Financial Reporting Decisions Flashcards
Explain the fundamental concepts and process of value creation
Value creation is the process of transforming less valuable inputs into more valuable outputs. The value creation process is a set of processes that turn the 6 forms of capital into goods and services that provide value for customers.
Identify the 7 elements of IR
- Organizational overview & the External Environment
- Governance
- Business Model
- Risks & Opportunities
- Strategy & Resource Allocation
- Performance
- Outlook
What does “Integrate Thinking” mean
More extensive consideration about how capitals, resources, outcomes, and impacts that are in integral part of the business model, which is to be formed in ways most suitable to value creation.
What questions does Organizational Overview & the External Environment ask?
What does the organization do, and what are the circumstances under which it operates? (Mission, vision, goals & positioning related to surroundings)
What questions does Governance ask?
How does the organization’s governance structure support its ability to create value in the short, medium and long term? (link between sustainability and how the organization is run)
What questions does Business Model ask?
What is the organization’s business model? (How does it make money, how activities contribute to the Vision over various time horizons.)
What questions does Risk & Opportunities ask?
What are the specific R&O that affect the org’s ability to create value over the short, medium. & long term, and how is the org dealing with them. (how prepared are they for what which is not certain)
What questions does Strategy & Resources Allocation
Where does the organization want to go, and how does it intend to get there. (Mini strategy plan)
What questions does Performance ask?
To what extent has the organization achieved its strategic objectives for the period, and what are its outcomes in terms of effects on the capitals? (Actual vs targets)
What questions does Outlook ask?
What challenges & uncertainties is the organization likely to encounter in pursuing its strategy, & what are the potential implications for its business model & future performance?
What are the benefits of IR?
- Linking financial & non financial measures
- Support for making decisions
- Greater alignment around strategy
- Tighter connections with external stakeholders.
- Effective response to criticism
What are the challenges of IR?
- Requires transformational change
- increased demand on control infrastructures
- Risk of disclosing trade secrets
- Concept is new & underdeveloped
Explain what a deferred tax asset is
Deferred Tax Assets are recorded when the income tax payable computed in the income tax return (IRC) is higher than the income tax expense in the income statement.
Explain what a deferred tax liability is
Deferred Tax Liabilities are recorded when the income tax payable computed in the income tax return (IRC) is lower than the income tax expense in the income statement.
Identify the user of F/S and their needs
Primary Users:
Investors: Shows how effective/efficient mgmt is in resources, helps chose best investments
Lenders: shows liquidity/solvency
Secondary Users: Customers: Know if company can meet needs Employees: Stability of company Government: Concerned about compliance General Public: uses varies
