Financial Information of BMW and Mercedes-Benz - Essay Example

Comparative assessment of the effectiveness of the financial information of BMW and Mercedes-Benz Introduction High quality financial reporting is crucial for effective decision making process of different stakeholders. Jonas and Blanchet (2000) explain that there are different approaches dealing with quality of accounting principles and financial reporting. These approaches can be divided into two categories including user needs and investor protection (Jonas and Blanchet, 2000). User needs category includes primarily creditors, investors and their advisors who need to determine firm’s value or assess potential credit risks (Jonas and Blanchet, 2000). Thus, the quality of financial reporting is determined in relation to usefulness of the financial information t necessary for making credit, investment, and similar decisions (Jonas and Blanchet, 2000). The FASB defines the following qualitative characteristics of useful financial information: relevance and reliability. Shareholder/Investor Protection category consists of actual shareholders and investors. For this category, quality financial reporting is presented in full and transparent fashion that is not designed to bewilder or mislead users (Jonas and Blanchet, 2000). While some of the criteria for the shareholder /investor category are similar to those for user needs category, there is a fundamental distinction between the two categories (Jonas and Blanchet, 2000). Beest, Braam, Boelens (2009) have summarized the needs of both categories that were previously combined by Jonas and Blanchet (2000) and designed a framework which allowed users of financial information to assess the quality of company’s reporting. The key qualitative characteristics include: relevance, faithful representation, understandability, comparability and timeliness. This framework will be used in order to evaluate quality of the financial information published by two automobile-producers: BMW and Mercedes-Benz. Relevance The first characteristic of the quality of financial reporting that needs to be assessed is relevance of the information presented in financial reporting. Under this category is assessed information which enables investors to form expectations and predictions concerning the company’s future (Beest, Braam, Boelens, 2009). In order to measure predictive value of the financial reporting information there are taken into consideration three items: forward-looking information, information in terms of risks and opportunities, company’s use of fair value (Beest, Braam, Boelens, 2009). Forward-looking statement provided in the annual report of BMW does not have an apart subsection. Because of this users need to go through a big amount of information in order to find relative information and then to form expectations and predictions. Mercedes-Benz annual report 2011 also does provide a user with an apart subsection within Opportunities and Risks Outlook section; its format is quite friendly for the users in terms of search and understanding forward-looking information. There are provided clear headings that enable reader to make extensive predictions useful for making expectation (Daimler AG Annual Report, 2011). In its financial report BMW provides useful non-financial information in terms of its business risks, enabling a user to develop relative expectations. However, the description of business opportunities is not provided within the same document. It is provided in the section “Outlook for the BMW Group in 2012”, which makes analysis process more complicated for users (BMW AG, 2011). Mercedes-Benz places its opportunities and risks analysis within its annual report under separate section, which allows users to find it quickly through the contents. The outlook provides useful non-financial information in a clear and understandable fashion. BMW annual report 2011 does not provide a user with a clear differentiation of use either fair value or historical cost approach. Mercedes-Benz provides consolidated financial statements based on the historical cost basis with the exception of certain items, including derivative financial instruments, available-for-sale financial assets, hedged items and similar obligations (Daimler AG Annual Report, 2011). Such a combination of both approaches adds a predictive value and allows users to assess adequately company’s current value of assets. BMW annual report provides relevant feedback on how various market events and transactions have affected the company, thus helping users to understand better the business and form expectations. However, Mercedes-Benz report provides more comprehensive feedback and presents it in a very clear and simple-to-follow manner. Faithful representation This characteristic focuses on whether the financial information is consistent with the facts, reflects the substance of events, and portrays the underlying economics of the transaction Jonas & Blanchet, 2000). Here are assessed the following criteria: clarity of made assumptions and estimates, clarity of explanation about company’s choice of accounting principles, availability of unqualified auditor’s report, level of disclosure of information on corporate governance statement (Jonas & Blanchet, 2000; Beest, Braam, Boelens, 2009). BMW provides general explanation of estimates necessary to support certain assumptions in its annual report. Mercedes-Benz provides more specific explanation for certain estimates in the report. BMW provides minimum explanation of its choice for certain accounting principles, while Mercedes-Benz not only provides explanation but also defines the consequences of changes (Daimler AG Annual Report, 2011:183). Both companies explain the impact of both positive and negative events, indicating on neutrality value of the financial information. BMW has presented a summary of a qualified audit within its annual report, as well as presented some information on its internal audit procedures. Mercedes-Benz provides users with both consolidated statement of the Group and unaudited information with respect to the results of operations and financial position of its business activities (Daimler AG Annual Report, 2011:184). BMW presents the information on corporate governance in apart subsection and provides useful information for users. Mercedes-Benz places its corporate governance report into separate section, and provides comprehensive information on this issue (Daimler AG Annual Report, 2011). Understandability This category of operational measure focuses on the understandability, organization and comprehension of the information and assesses the format of the annual report, clarity of notes to the balance sheet and income statement, presence of tabular or graphic formats and its usefulness for the reader, clarity and simplicity of the language used in the report (Jonas & Blanchet, 2000; Beest, Braam, Boelens, 2009). Annual report issued by the BMW AG is not so well organized as the annual report issued by Mercedes-Benz. The first one lacks structured and eye-friendly format; the headings and order of components does not seem to provide users with the best experience; there is no summary available at the end of each conclusion. An overall format makes it a bit difficult to find key highlights and to follow through the information. Annual report of Mercedes-Benz is presented in a well organized manner, making a search for user very convenient and quick; table of contents is complete and easy to follow; there is provided sub-contents for particular section which allows user to better orient during the analysis. The annual reports of both automobile producers provide explanation notes to the financial statements in separate sections. BMW provide less extensive explanation than Mercedes-Benz does. Regarding the visual aids, Mercedes-Benz provides a user with a quite technical stuff but in a very understandable manner; there are used not only ordinary graphs and tables, but also mind-mapping maps and other additional tools aimed at insuring user’s understandability level. BMW also provides many graphs and tables, mainly refereed to statistics data; it is less interactive and easy to follow than the annual report presented by Mercedes-Benz. Mercedes-Benz makes uses visual aids and pictures in order to ease understanding of technical jargon. Annual reports of both companies provide a two-page glossary and thus increase the understandability level of its users. Comparability This characteristic focuses on accounting for similar situations and transactions in the same way, as well as accounting differently for dissimilar situations and transactions (Jonas & Blanchet, 2000). Consistency is included to this category and is referred to the use of the same accounting procedures and policies, either in a single period across entities or from period to period within an entity (Beest, Braam, Boelens, 2009). In order to measure consistency of the financial reporting it is helpful to compare current year’s figures to previous year’s figures (Beest, Braam, Boelens, 2009). In addition to assessing the consistency of accounting policies use, it is useful to compare annual reports of different companies (Jonas & Blanchet, 2000). BMW provides a comprehensive explanation note in terms of change in accounting policies and the consequences of change. The company informs its users of financial information that all the financial statements have been accordingly adjusted and thus can be comparable with the previous fiscal periods (BMW AG, 2011). Annual report published by the Mercedes-Benz provides less information on this issue than BMW. Timeliness Timeliness is the final qualitative characteristic which allows users to assess the quality of financial reporting information in terms of its time relevance. According to the IASB (2008) definition, timeliness refers to the time it takes to reveal the information and is related to decision usefulness in general. Decision makers have to get information before it loses its capacity to influence their decisions (IASB, 2008). Both companies publish relative financial information on its websites, ensuring public access to the fiscal information that is necessary to its users. References Bennett, B, Bradbury, M, & Prangnell, H 2006, Rules, principles and judgments in accounting standards, Abacus, 42, 2, pp. 189-204, Business Source Elite, EBSCOhost BMW AG (2011). Annual Report 2011. Available at: < http://annual-report2011.bmwgroup.com/bmwgroup/annual/2011/gb/English/pdf/report2011.pdf> Viewed 3 November 2012] Daimler AG Annual Report (2011). Annual Report 2011. Available at: < http://www.daimler.com/Projects/c2c/channel/documents/2125319_Daimler_2011_Annual_Report.pdf> [Viewed 3 November 2012] IASB (2008). Exposure Draft on an improved Conceptual Framework for Financial Reporting: The Objective of Financial Reporting and Qualitative Characteristics of Decision-useful Financial Reporting Information. London. Jonas, G, & Blanchet, J 2000, Assessing Quality of Financial Reporting, Accounting Horizons, 14, 3, pp. 353-363, Business Source Elite, EBSCOhost, viewed 3 November 2012. Lennard, A 2007, Stewardship and the Objectives of Financial Statements: A Comment on IASBs Preliminary Views on an Improved Conceptual Framework for Financial Reporting: The Objective of Financial Reporting and Qualitative Characteristics of Decision-Useful.., Accounting In Europe, 4, 1, pp. 51-66, Business Source Elite, EBSCOhost, viewed 3 November 2012. Read More