Part E: Interpret Financial Statements For Different Stakeholders

Question 1

Checklist for analysis of performance - what to check/look for

Answer 1

• 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

Question 2

Ratio analysis technique

Answer 2

1. Has ratio improved or deteriorated
2. Why has this change occurred?
3. Explain the longer term impact and make recommendations where appropriate

Question 3

Earnings per share EPS

Answer 3

PAT / No of shares

Always needs to be compared over time

Inherent ethical risk as remuneration packages may be linked to EPS growth

Question 4

ROCE

Answer 4

Operating Profit / Capital employed

Operating profit = PBIT

Measures the profits earned on the long term finance invested in the business

Question 5

Capital employed

Answer 5

Total assets less current liabilities

Question 6

Return on sales

Answer 6

Also known as Net margin

Operating profit / Sales
PBIT/ sales

Measures the profitability of sales

Question 7

Asset turnover

Answer 7

Sales / Capital employed

Measures a firms ability to generate sales from its capital employed

Question 8

Why prepare a social report?

Answer 8

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

Question 9

How companies interact responsibly with society

Answer 9

Provide fair pay to employees

Safe working environment

Improvements to physical infrastructure in which it operates

Question 10

Human capital reporting

Answer 10

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

Question 11

Implications of human capital reporting

Answer 11

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

Question 12

Human capital management reports should show

Answer 12

Size of workforce

Retention rates

Skills needed for success

Training

Renumeration levels

Succession planning

Question 13

Operating financial review (OFR)

Answer 13

Looks at results and talks about future prospects

Question 14

Corporate governance report

Answer 14

Looks at how the company is directed and controlled

Question 15

Environmental and social report

Answer 15

Looks at the environmental and social concerns and the sustainability of these

Question 16

Management commentary

Answer 16

Looks at the trends behind the figures and what is likely to affect future performance and position

Question 17

Typically an OFR (operating and financial report) would comprise of some or all of…

Answer 17

1. Description of the business and its objectives
2. Managements strategy for achieving the objectives
3. Review of operations
4. Commentary on the strengths and resources of the business
5. Commentary about human capital, research and development activities, development of new products and services
6. Financial review with discussion of treasury management, cash flows and current liquidity levels

Question 18

Social reporting

Answer 18

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

Question 19

Benefits of an environmental report

Answer 19

• 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

Question 20

The building blocks of an integrated report

Answer 20

Guiding principles

Content elements

• key categories of information
• series of questions rather than a prescriptive list

Question 21

Guiding principles of an integrated report

Answer 21

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?

Question 22

Content elements of an integrated report

Answer 22

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

Question 23

Business segment definition

Answer 23

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

Question 24

Geographical segment definition

Answer 24

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

Question 25

Operating segment definition

Answer 25

• 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

Question 26

Operating segments can be aggregated together only if..

Answer 26

…They have similar economic characteristics such as:

• similar product/service
• similar production process
• similar sort of customer
• similar distribution methods
• similar regulations

Question 27

Any segment which meets these thresholds must be reported on

Answer 27

1. Profit is 10% or more of all profitable segments

2. Assets are 10% or more of the total assets of all operating segments

Question 28

What if the total external revenue of the operating segments reported on is less than 75% of total company revenue?

Answer 28

Then additional operating segments results (not meeting the quantitative thresholds) are reported on until 75% is met

Question 29

Disclosures for each segment

Answer 29

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

Question 30

Measurements for segments

Answer 30

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

Question 31

IFRS 8 requires entities to provide an explanation of:

Answer 31

• the basis of accounting for transactions between reportable segments
• the nature of any differences between the segments reported amounts and the consolidated totals

Question 32

Entity wide disclosures

Answer 32

• 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

Question 33

Pros and cons of IFRS 8

Answer 33

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