Naratives Flashcards
Critically discuss the need for Environmental Social and Governance (ESG) reporting and the role of the accounting profession in developing meaningful forms of ESG reporting.
This issue starts with inequality in society, This can corrupt politics and hinder potential economic growth. This looks at businesses to be making changes and to be aiding in these issues.
The main thing that we need to consider is governance issues with operations, Business have lots of flexibility in how they are managed and trusted in ensuring that they monitor their own performances to ensure that they are complying with rules and regulations. We need to ensure that we implement good governance as this will be ultimately the final hurdle in determining how effective these practices will be implemented.
Now we need to consider what an accountant’s role could potentially be in all of this. The majority of the decisions that are made by businesses and the market are determined by information that is gathered via accountancy, This highlights the potential control that accountants can have on processes in which the business participates in.
When it comes to Financial reporting we have 3 types: Finacial, Sustainable and finally integrated. Financial reporting is mandatory whereas sustainability is mostly voluntary. Sustainable reporting has started to become more commonplace in business and this is where integrated reporting looks to tie the two aspects together. Aiming to highlight how both social and financial inputs are affecting the business. There is a few factors that have been affecting the way in which this type of reporting has evolved.
Short-termism - This is where business decisions are linked to the performance in the stockmarket as they will look to increase their immediate value instead of long term sustainability
Externality - This is when we let a third party deal with the expenses involved in the process without them necessarily gaining any actual benefit.
What is Global Reporting Incentives (GRI) and what are some of the main features of this
We do have the global reporting Initiative (GRI) Which aims to help businesses and governments understand and communicate their impact on critical sustainability issues like climate change, human rights and governance. The GRI 101 is the starting point for business and touches on aspects like stakeholder inclusiveness, Sustainability, materially and completeness.
Stakeholder inclusiveness - This looks at ensuring the organisation are considering the reasonable expectations and interest of the shareholders - including those who they are not able to articulate with - the organisation is expected to take on a process of taking into account such views.
Materiality - this allows us to see what issue will affect stakeholders and what is viewed as the most important topic. We need to consider how we prioritise stakeholders and how we measure the impact of our decisions.
Comparability - Under the GRI guidelines, The report and its information can be compared on a year-to-year basis. As well as this it can be used as a benchmark for the organisation. when it is appropriate the report is generally accepted for measuring and presenting information including that is required by the GRI standards
Explain the accounting treatment for the impairment of goodwill and critically evaluate the issues in relation to this.
Goodwill is covered under IFRS 3 which states that it is future economic benefits arising from assets that are not capable of being individually identified or separately recognised.
We can have two types of goodwill, The first is purchased goodwill and this is the costs of questions less interest in fair values. This can be recognized in our accounts. The second type of goodwill is internally generated goodwill and this can never be recognised in the accounts.
Goodwill will have impairment reviews that are usually carried out annually, Goodwill has an indefinite life and therefore we need to review it annually in order to get the fair value of the assets.
1 - We would see if we can separate and identify any intangible assets, we then have our cash-generating units which are the smallest group of assets that are able to produce cash flow independently. Depending on the type of company that we have this can be either easy or hard
2 - Now that we have broken it down into its individual sections we now need to compare the value of the CGU with its recoverable amounts, This recoverable amount is the higher of:
Net Faire Value - Sales price less cost of disposal in an arms-length transaction
or
Value in use - NPV of expected cash-flows over the life of CGU and its disposal
This process is very difficult and is extremely time-consuming as there is always so much uncertainty around the life of the goodwill as well as what the predicted output will be from these GCU
There has been lots of controversy in how goodwill is impaired with lots of companies taking advantage of the system and not fairly measuring their Goodwill
1 - companies with high leverage (debt) tend to have extremely low levels of impairment of goodwill, the impairment of goodwill is essentially writing off an asset and these companies that will have large amounts of debt will often need to meet targets and ratios and the act of impairing goodwill might affect the companies ability to be meet targets set out by the loans
2 - Income smoothing, This situation looks at the investors of the companies who don’t like the profits of the company to seem volatile. If the company is having high profits followed by really low profits this will make the company’s profits seem volatile. This can lead to companies manipulating the level of goodwill that is recorded in order to smooth the level of income. This would involve increasing goodwill when profits are high and decreasing them when profits are low
3 - Big bath provision - this is where companies have already reported a bad year of profits and therefore decided to create a large goodwill impairment as they will be less visible among all of the other decreases, However, it tends to be a trend that is in line with companies being poorly so it is less of a complex issue
4 - Management change - this is when the company choose to impair a large amount of goodwill when management changes hand and therefore gives the new management a lower baseline to be reported from and can blame large goodwill costs on the old management. This is also not as large of an issue due to the fact that goodwill can very often be attached to the management in charge
The goodwill approach - This is a potentially contentious area as we have goodwill being capitalised and with annual impairment reviews which agree with the framework but there is an argument for having and SFP approach that reflects when the group actually receives the goodwill
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What are the 4 alternative approaches to goodwill
A - Maintain historical costs
B - Immediate write-off to reserve
C - Immediate write-off to Income Statement
D - Capitalised & Amortise over Useful Economic Life
Explain the accounting treatment required on consolidation when one group company sells goods to another group company
The first thing that we must do is to eliminate the internal transfer of the good or service known as the consolidation adjustment
Dr Reveneue
Cr Cost of sales
Next we need to determine the unrealised profit of the transaction, This arises when we sell the internal stock for a profit and this stock is unsold at the end of the year, This will be an issue for the value of our stock as it will be reported at a higher value then it is currently worth, Therefore we must adjust the inventory back to its original value:
Dr Cost of sales
Cr Inventory (SFP)
Finally, if the goods were sold from the sub to the parent it will have a direct impact on the accounts but if this is from the parent to the sub it will not have an impact on the unrealised profit
Dr NCI (SFP)
Cr NCI (IS)
Critically evaluate three issues in relation to the accounting treatment of Intangible Assets.
The identifiable non-monetary assets are without physical substance. Under IAS 38 it states that it must be identifiable, and separated. It must be controlled by the company and be able to produce future economic benefit
The first issue that we have is valuation, unlike tangible assets we have a physical presence that can be easily valued, this is not the case with intangible assets, The issue is that there is no standard way of valuing intangible assets with different methods producing significantly different results. - one way of measuring this is by taking the company’s book value from its market values, however, this is a highly disputed method as the market is constantly subject to change which is sometimes indicative of the whole market
The next area of issue is the recognition of these intangible assets. An asset can only be recognised if it is probable that it will produce a future economic benefit.
a) if the intangible asset has been purchased then it can be recognised initially at costs
b) if the asset has been generated internally then we can not capitalise the asset. this is due to the fact that it is difficult to establish the benefit or even specific costs that can be attributed to an intangible asset. Another area of controversy is if there have been training costs, even though these may bring forward future economic benefits this can not be capitalised. This is due to the fact that the costs can not be separated and the company does not have a legal or contractual right to these. As well as this staff have the right to leave the company at any point.
c) There is only one internally generated intangible asset that can be capitalised and these are development costs. These can be capitalised as long as 6 methods are met: Pirate.
Probable economic benefit
Intention to complete the project
resources available to complete the project
Ability to use or sell the item
Technologically feasible
Expenses on the project can be identified
d) The final issue with recognition comes with consolidated items, There is inconsistency with how these are recognised. Under IFRS 3 intangible assets is part of a business combination must be recognised at fair value. This means that some of a subsidiary’s internally generated internal assets can not be recognised in their own account and are now recognized in the consolidated accounts
The final issue is the amortization of the intangible asset, unlike tangible assets, intangible assets have a limited useful life and therefore determining how to properly release and recognised benefits from the asset over its lifetime is difficult. This means that the assets are subject to annual impairment testing making it difficult for companies to accurately reflect the value of their asset on balance sheets and income statements
What are the different types of accounting methods that can be used in the approach to environmental, Social and Governance reporting (ESG)
Emancipatory Accounting - this is where accounting has a broader role and should have more of an emphasis on encouraging good behaviour. The accounting process should be making sure that people are being held accountable for the reports and actions that the business take. The main essence of this is that it realises its role in adding to society in all forms of crisis. This model believes that the current approach to accounting is to focus on very specific financial measures when it should be focusing on broader aspects. The standard type of reporting focuses on a very narrow group of society at the top when it should be focuses on a much more wider group
what is the accountant’s role - accountancy focuses on human-made metrics that have been designed for human concepts such as companies. We as a society have accepted that these are absolute and that we should follow the rules. So this shows the level of power and control that accountants can have on society, as previously mentions we currently on deep very specific metrics as meaningful but if we decide to integrate societal factors into our reporting then these will be determined rules that will be followed. Society has the power to set the rules as standards. This would be when we factor in emancipation as we look to hold society accountable not just the performance of financial factors. We decide what is important for society and recognising the role and responsibility we have to understand if our rules and regulations are incorporating enough of society’s problems
An academic study from Atkins and Maroun 2018 - This study looks at the human intervention that is solely playing a part on the impact on the planet and its effects. This then leads to the sixth mass extinction that is causing the loss of species through habitat loss and global warming as at a rate far greater than natural causes. This looks at accountants to directly hold those responsible to ensure that we are slow down this 6th mass extinction - This ties into biodiversity accounting in this view as humans are interested with crops with higher yields focusing farms to only plant a limited number of crops and therefore eliminating biodiversity in the ecosystem.
Extinction accounting - This looks at focusing on companies and ensuring that companies are innovating in sectors to ensure there is better products in place that will better impact society like CGU that use to be found in aerosol cans, as well as this we aren’t looking for companies just to record the impact that they have done to the environment but to showcase, Improve and transform corporations to protect biodervisty
What are the different types of approaches we need to consider in regard to the implementation of these accounting theories?
Striking a balance - We need to ensure that we get an appropriate balance between the deep ecological theories that have been put forward along with the stakeholder theory of maximising stakeholder wealth.
Pragmatism - This realises that we need to take a realistic approach to the pace and scope that can be implemented through limiting factors such as practical considerations in the scale of the task that we face, This understands the emancipatory project as a continuum rather then an immediate goal
Critical Theory - This essentially is looking at those who do not offer a solution but rather a critical view on the current state of society and the impact that we are having on society, Gallhofer 2018 looks at the issue as a critical lack of engagement with the western construction of the interrelationship between humans and natures.
Dualism - This looks at how situations are usually split up into two categories where there will always be one side that dominates over the other and it just so happens to be the case that humans have developed quicker then nature and are therefore able to dominate over nature. This has led us to feel separated from nature.
What is Corporate Nature Responsibility Reporting (CNRR) And how can we use this alternative reporting to tack ESG?
This looks at valuing relations and valuing group needs and issues, This allowed from reporting from multiple viewpoints that would then be included in the overall report of the company,
what are the challenges: will the accounts be taken seriously and there is always the ability of dominant parties to have the ability to silence these accounts
What are the journals for the Sale of goods internally
The first journal relates to eliminating the internal transfer
Dr - Revenue
Cr - Cost of sales
The next journal will ensure that we return the stock to its original value
Dr - Cost of sales
Cr - Closing Inventory
The final journal will be for allocating the NCI share of any unrealised profit (This is only the case if the sub sells to the parent)
Dr - NCI (SFP)
Cr - NCI (IS)
How do we allocate our figures to the table
1 - NCI Goes below taxation and the NCI goes at the bottom of the table
2 - All Figures against Retained earnings goes against Retained earnings b/f
3 - We need to take the profit for the year below to the statement of movement of reserves
4 - Finally our retained earings figures that we calculated in the statement of movement of reserves get carried down to the retained earnings in the SFP
What are the 3 journals we need to post for an exchange rate question
1 - Credit exchange brought forward
2 - Eliminating of investment
3 - closing goodwill exchange
What is the journal for a loss on goodwill at the end of a Exchange rate question
Dr Exchange rate
Cr Goodwill
What is the journal for the sale of an internal asset
The first stage is to record the Loss or gain on sale and then adjust to record the asset cost to the group
Dr Net Asset Cost
Dr Gain on sale
Cr Loss on sale
Cr Aggregate Depreciation
Now we need to calculate the new level of depreciation. If the New Depn is lower then the old we do the following:
Dr NCA Accum depreciation expense
Cr NCA Accum Depreciation - other assets
This section only applies of the sub has sold to the parent, If we, as the parent, has made a loss this means the Sub will have made a profit in which we will receive the percentage benefit from but they will also receive benefit which we need to show in the journal:
Dr NCI (IS)
Cr NCI (SFP)
What does the pirate acronym relate to in regard to recognition of intangible assets
Probable economic benefit
Intention to complete the project
resources available to complete the project
Ability to use or sell the item
Technologically feasible
Expenses on the project can be identified
Why do companies perform group accounts
1 - Financial predictabilty so we can make more informed decisions on the company
2 - stakeholder and investor protection as it gives a more comprehensives view of all of the company accounts
3 - accountability allows us to see what groups are performing better and allows us to better allocate resources
