Week 5 - Return on capital employed & contemporary development in financial reporting Flashcards
Limitations of traditional financial statements
- Historic nature of accounting
- The timing of financial statements
- Accounting flexibility
- Context of the information provided
How is the Historic nature of accounting a limitation of traditional financial statements?
- Is entirely backwards looking as it looks at the effect of historic events and transactions
- Investors and lenders make decisions to provide financial capital to a business based upon the returns that they expect to receive in the future
- Questionsble whether the information provided in the financial statements is relevant
How is the timing of financial statements a limitation of financial statements? (2)
- Financial statements are out of date as companies have 6 months to publish them
- The statement of financial position is a ‘snapshot’ of a company at the year end which may not represent the position throughout the year
How is account flexibility a limitation of financial statements?
- Accounting values may not necessarily reflect true economic values
- Scope for earnings management increases the risk of financial statements not be faithfully represented
- Each country can select accounting principles that are applied therefore financial statements are less comparable
How is the context of information provided a limitation of financial statements?
Financial statements provide little context for understanding a business things that can be quantified in monetary teams are the only things that is reported
Information that financial statement users want (Beattie and Pratt, 2002) (is in order of importance)
- Financial data
- Objectives and strategies
- Management discussion and analysis
- Company background
- Value drivers such as customers, employees, risks & opportunities, capital
- Environmental and social
What is a stakeholder? (2)
- Is a person, group or organisation that has interest or concern in an organisation
- Can affect or be affected by the organisations actiona, objectives and policies
Examples of stakeholders
- Suppliers
- Shareholders
- Customers
- Government
- Public
- Employee
What is integrated reporting?
Is a reporting method that brings together material information about a company’s strategy, governance, performance and prospects in a way that reflects the commercial, social and environmental context within it operates
Benefits of integrated reporting
- Encouraging your organisation to think in an integrated way
- Clearer articulation of strategy and business model
- A single report which is easy to access, clear and concise
- Creates value for stakeholders - through identification and measurement of non-financial factors
- links non-financial performance more directly to the business
- Better identification of risks and opportunities
- Improved internal processes leading to a better understanding of the business and improved decision making process
Impact of integrated reporting (5)
- Macro perspective: financial stability and sustainability
- Concise communication of value - more than financial capital
- Focus on strategy and future orientation
- Reduce volume
- Promote connectivity of information
What is the difference between financial reporting and integrated reporting?
- Thinking
- Stewardship
- focus
- time frame
- Trust
- Adaptive
- Concise
- Technology
- Financial Reporting is disconnected where as integrated is integrated
- Financial reports have financial capital but integrated has all forms of capital
- Financial has a past financial focus where as integrated has short, medium and long term focus
- Financial has a short term time frame but IR has a short, medium and long term time frame
- FR has narrow disclosures but IR has greater transparency
- FR is rule board but IR is responsive to individual conditions
- FR is long and complex but IR is concise and material
- FR is paper based but IR is Technology-enabled
