Part E: Interpret Financial Statements For Different Stakeholders Flashcards
Checklist for analysis of performance - what to check/look for
- Compare ratios to prior periods and industry averages
- comment on ratios
- what does the movement/difference tell you - use the scenario- and consequence for company and stakeholders
- any non-financial consequences (quality, ethics)
- any transactions/events that would have significantly impacted the ratios
- any impact of different accounting policies
Ratio analysis technique
- Has ratio improved or deteriorated
- Why has this change occurred?
- Explain the longer term impact and make recommendations where appropriate
Earnings per share EPS
PAT / No of shares
Always needs to be compared over time
Inherent ethical risk as remuneration packages may be linked to EPS growth
ROCE
Operating Profit / Capital employed
Operating profit = PBIT
Measures the profits earned on the long term finance invested in the business
Capital employed
Total assets less current liabilities
Return on sales
Also known as Net margin
Operating profit / Sales
PBIT/ sales
Measures the profitability of sales
Asset turnover
Sales / Capital employed
Measures a firms ability to generate sales from its capital employed
Why prepare a social report?
Build reputation on on it (I.e. body shop)
Society expects it
Long term it will increase profits
Fear that government may force it otherwise
How companies interact responsibly with society
Provide fair pay to employees
Safe working environment
Improvements to physical infrastructure in which it operates
Human capital reporting
Sees employees as an asset not an expense and competitive advantage is gained by employees
Training, recruitment, retention and development of employees all part of what’s reported
Implications of human capital reporting
People are a resource and so need to be effectively and efficiently managed
Safeguarding of the asset as normal
Impairment could mean a simple drop in motivation
Human capital management reports should show
Size of workforce
Retention rates
Skills needed for success
Training
Renumeration levels
Succession planning
Operating financial review (OFR)
Looks at results and talks about future prospects
Corporate governance report
Looks at how the company is directed and controlled
Environmental and social report
Looks at the environmental and social concerns and the sustainability of these
Management commentary
Looks at the trends behind the figures and what is likely to affect future performance and position
Typically an OFR (operating and financial report) would comprise of some or all of…
- Description of the business and its objectives
- Managements strategy for achieving the objectives
- Review of operations
- Commentary on the strengths and resources of the business
- Commentary about human capital, research and development activities, development of new products and services
- Financial review with discussion of treasury management, cash flows and current liquidity levels
Social reporting
Discloses the social impact of a business’ activities:
E.g
- Charity donations
- giving employees time to support charities
- employee satisfaction levels and remuneration issues
- community support
- stakeholder consultation information
Benefits of an environmental report
- can highlight inefficiencies
- identifies opportunities to reduce waste
- can create a positive image
- increased consumer confidence in it
- employees like it
- investors look for environmental concerns
- reduces risk of litigation against it
- can give competitive edge
The building blocks of an integrated report
Guiding principles
Content elements
- key categories of information
- series of questions rather than a prescriptive list
Guiding principles of an integrated report
Are you showing an insight into the future strategy?
Are you showing a holistic picture of the organisations ability to create value over time?
Showing quality of your stakeholder relationships?
Disclosing information about matters that materially affect your ability to create value over the short, medium and long term?
Being concise?
Showing reliability, completeness, consistency and comparability?
Content elements of an integrated report
Organisational overview and external environment
Governance
Business model
Risk and opportunities
Strategy and resource allocation
Performance - achieved strategic objectives?
Outlook - future challenges and uncertainties when pursuing strategy and their implications
Business segment definition
A component of an entity that
- provides a single product or service
AND
- is subject to risks and returns that are different from those of other business segments
Geographical segment definition
A component of an entity that
- provides products and services
AND
- is subject to risks and returns that are different from those of components operating in other economic environments
May be based on where assets are located or where the customers are located
Operating segment definition
- earns revenue and incurs expenses from a business activity
- is regularly reviewed by the chief decision maker when handing out resources
- separate financial info available
Operating segments can be aggregated together only if..
…They have similar economic characteristics such as:
- similar product/service
- similar production process
- similar sort of customer
- similar distribution methods
- similar regulations
Any segment which meets these thresholds must be reported on
- Profit is 10% or more of all profitable segments
2. Assets are 10% or more of the total assets of all operating segments
What if the total external revenue of the operating segments reported on is less than 75% of total company revenue?
Then additional operating segments results (not meeting the quantitative thresholds) are reported on until 75% is met
Disclosures for each segment
Profit
Total assets and liabilities
External revenue
Internal revenue
Interest income and expense
Depreciation
Profit from associates and JVs
Tax
Other material non-cash items
Measurements for segments
Same as the one used when reporting to chief decision maker.
Internal rather than IFRS
Reconciliation is then provided between this measure and the entity’s actual figures for
1) profit
2) assets & liabilities
Also any asymmetric allocations I.e. depreciation charged to a segment for an asset not allocated to it
IFRS 8 requires entities to provide an explanation of:
- the basis of accounting for transactions between reportable segments
- the nature of any differences between the segments reported amounts and the consolidated totals
Entity wide disclosures
- external revenue for each product/service
- totals for revenue made at home and abroad
- NCA totals for those held at home and abroad
- if 1 customer accounts for 10%+ of revenue this total must be disclosed alongside which segment it is reported in
Pros and cons of IFRS 8
Pros:
- cost effective as can be reported in the same way as in managerial accounts
- segment data reflects the operational strategy of the business
Cons:
- gives a lot of subjective responsibility to the directors as to what they disclose
- internal nature of how it is reported may actually make it less useful to some users and lead to problems of comparability
- no defined measure of profit/loss
