slide 14.1 pauline weetman, financial and management accounting, 5 th edition © pearson education...

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Pauline Weetman, Financial and Management Accounting, 5th edition © Pearson Education 2011

Chapter 14

Reporting corporate performance

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Operating and financial review

• Analysis of the business through the eyes of the board of directors.

• Focus on matters that are relevant to the interests of members.

• Have a forward-looking orientation, identifying those trends and factors relevant to the members’ assessment of the current and future performance of the business and the progress towards the achievement of long-term business objectives.

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Operating and financial review (Continued)

• Complement as well as supplement the financial statements, in order to enhance the overall corporate disclosure.

• Be comprehensive and understandable.

• Be balanced and neutral, dealing even-handedly with both good and bad aspects.

• Be comparable over time.

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OFR framework

(a) The nature of the business, including a description of the market, competitive and regulatory environment in which the entity operates, and the entity’s objectives and strategies.

(b) The development and performance of the business, both in the financial year under review and in the future.

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OFR framework (Continued)

(c) The resources, principal risks and uncertainties and relationships that may affect the entity’s long-term value.

(d) The position of the business including a description of the capital structure, treasury policies and objectives and liquidity of the entity, both in the financial year under review and in the future.

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Key performance indicators (KPIs)

Quantified measures of factors that help to measure the performance of the business effectively. Idea of ‘success factors’.

Examples: • Return on capital employed (see Chapter 13)• Market share• Average revenue per customer • Sales per square foot of selling space • Employee costs per £ of sales • Environmental spillage

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Other guidance in annual report

Highlights statement• Turnover• Profits• Earnings per share• Return on capital employedHistorical summaries and trend analysis• 5-year summaries frequently provided.• Trends, for example, percentage changes, may give

indication of expectations.Finance director’s review• Usually contains a discussion of cash flow.

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Segmental information

Users’ need for information

• Better understanding of the entity’s past performance and a better assessment of its future prospects.

• Awareness of changes in significant components of a business on the business as a whole.

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Segmental information (Continued)

Information provided in the financial statements

Parent company

In the annual report, there is a column or a page for the balance sheet of the parent company. Relatively uninformative and not used for ratio analysis.

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Group• One statement of financial position represents

assets and liabilities of all companies of the group.

• Income statement for the group as a whole.• Benefit of bringing together a large amount of

information in a financial statement for the total.• But loses detail of what is happening in separate

segments.

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Segmental information in Safe and Sure

• Reports to main decision maker are based on business segments.

• Some information also provided on geographical areas.

(see illustration in chapter, section 14.4)

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Off-balance-sheet finance

Remove an asset and liability from the statement of financial position (balance sheet). Reduces gearing (reduces appearance of financial risk). But have the benefits and risks also gone?

• Sale and leaseback of property.

• Special purpose entities.

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Corporate social responsibility

Companies integrate social and environmental concerns with their business operations and their interactions with stakeholders.

Disclosures may be:

• Environmental report

• Social report

• CSR report

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Global reporting initiative

Provides guidelines on good practice in CSR reporting. Recommendations on reporting:• Vision and strategy• Profile of the organisation• Governance structure• Management system• Performance indicators

‘Triple bottom line’ equals economic, environmental and social performance.

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Corporate social responsibility (Continued)

Kyoto Protocol

• Agreement on carbon emissions. Creates assets and liabilities based on the right to make emissions (up to a limit) and penalties for making emissions over that limit.

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Corporate governance

• The way in which directors manage a company.• Combined Code of corporate governance –

guidance set by the Financial Reporting Council. ‘Comply or explain’ in the annual report.

• Directors’ remuneration:– The amount paid to each director must be

disclosed.

– Nominations Committee sets policy for rewarding directors’ performance.

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True and fair view

•Required by law and by European

regulation.

•Directors prepare financial statements as a true and fair view.

•Auditors give an opinion on true and fair view.

•No precise definition, courts of law will seek opinions of experts.

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Present fairly

Wording used in other countries. Some say ‘present fairly in accordance with generally accepted accounting principles’.

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Measurement of value

Historical cost has limitations, only relevant at the date of acquisition.

Subsequently remeasure – which value to choose?

• Entry price (cost of buying in)

• Exit price (proceeds of selling in orderly market)

• Fair value – the amount for which an asset could be exchanged between a willing buyer and a willing seller.

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Measurement of value (Continued)

Value to the business could be:

• selling price,

• replacement cost,

• present value of future cash flows.

Difficult to find an agreement so historical cost tends to continue to dominate.

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