International Corporate Accounting Standards - Coursework Example

Corporate Reporting Corporate Reporting The great concern before the corporate accountant today, is not merely keeping accurate records, but also advises on a number of issues, both in governance and policies. A majority of corporations are multinational, with branches and sub centers at various locations. Corporate reporting also goes hand in hand with corporate governance and in UK it has been defined by the Financial reporting Council as: "The key aspects of corporate governance in the UK are: A single board collectively responsible for the success of the company. Checks and balances: * Separate Chief Executive and Chairman. • A balance of executive and independent non-executive directors. • Strong, independent audit and remuneration committees. • Annual evaluation by the board of its performance. Emphasis on objectivity of directors in the interests of the company. Transparency on appointments and remuneration. Effective rights for shareholders. A Code of good practice based on extensive consultation with practitioners, and operating on the basis of the 'comply or explain' principle."1 The Problems The problems that are relevant in the global scenario relate to the accounting practice of various nations, which vary in their method, definition and policies of their government and tax structure. In the corporation, the accountant is now not merely a record keeper on whom the management relied on to find out their profits or loss. Key information is required from the accountant in terms of policies, what if analysis, financial forecasts, creating viable economic and marketing models, tax planning, stock analysis, and so many functions, that the accountant has greater responsibility and accountability over his counterpart in the 1960s. then they were mere book keepers who dished out figures when someone higher up wanted them. The Responsibility Sectors The sectors where the Accountant is more responsible and relied on by the corporation Would be to enhance corporate value, which is a great responsibility. The value of a corporation is reflected in the stocks and shares, and they fluctuate largely on the short term performance of the company. It is therefore vital that the Accountant be gifted with the ability to present truthfully the financial status of the company, its future possibilities in a larger framework so as to make it attractive, and safe for the investor. Control Risk The second major role would be to control the risk in investment and management decisions especially in a volatile economy. Business is all about taking risk, but the accountant today has more tools with him to control the risk mechanism. This is done using such formula as the ROI (Return on investment) and best path paradigms. Thus risk ought to end in maximizing the RTC or return to capital. There are numerous areas, like long term investments, capital generation, Cash flow management, where the special skill of the accountant is desired, and sought after. Being an invaluable advisor of any undertaking, the Accountant has a major role not only in the corporate governance, but also in keeping himself abreast of the professional changes that occur day by day. INTERNATIONAL CORPORATE ACCOUNTING STANDARDS In Great Britain, the need for a standard accounting practice was felt at the global level. It is pointed out that most accounting practice in the commonwealth had its origin in English accounting especially during the times of the East India Company. Following that international accounting was modular, i.e. based on national, geographic and regional customs. The governments of various countries have issued fiats and laws as to the method of accounting for tax purposes. Thus most nations practice the ‘double entry ‘system. Some Middle East countries follow the local systems. In order to bring uniformity to accounting globally, the Government set up the International accounting Standards Board (IASB), which started up in April, 2001. The board was constituted with the aim of: Defining accounting concepts, in such a manner that uniform standards are applied globally, or at least within UK, and identifying the best practice. The results came in the form of the Dearing report in November 1988 stating how the standard setting process needed to be changed. Pursuant to that the ASB was formed in 1990.They issued a ‘Statement of Principles’ that comprised of several key objectives. That created diverse principles, and now there are 30 FRS’ and SSAP’s that form the current accounting standards.2 There is also the GAAP, Generally Accepted Accounting Principles.3 This is a combination of: Company law, FRS’s and SSAP’s, Stock Exchange requirements The most important theory is EMH. The system of corporate governance that exists in the UK has profound implications for financial reporting. The Cadbury Report is hugely important and was the first committee to review governance practice. Since then the Combined Code on Corporate Governance was published in July 2003 and is the definitive document on this area. GAAP Implementation The GAAP was taken seriously in many nations and the US brought out the Conditions for Use of Non-GAAP Financial Measures, by the Securities and Exchange Commission US. Below is quoted the stricture: “As directed by the Sarbanes-Oxley Act of 2002, we are adopting new rules and amendments to address public companies' disclosure or release of certain financial information that is calculated and presented on the basis of methodologies other than in accordance with generally accepted accounting principles (GAAP). We are adopting a new disclosure regulation, Regulation G, which will require public companies that disclose or release such non-GAAP financial measures to include, in that disclosure or release, a presentation of the most directly comparable GAAP financial measure and a reconciliation of the disclosed non-GAAP financial measure to the most directly comparable GAAP financial measure. We also are adopting amendments to Item 10 of Regulation S-K and Item 10 of Regulation S-B to provide additional guidance to those registrants that include non-GAAP financial measures in Commission filings. Additionally, we are adopting amendments to Form 20-F to incorporate into that form the amendments to Item 10 of Regulation S-K. Finally, we are adopting amendments that require registrants to furnish to the Commission, on Form 8-K, earnings releases or similar announcements.”4 The Importance of Corporate accounting to shareholders According to Bala G. Dharan,J. Howard Creekmore Professor of Accounting, Jesse H. Jones Graduate School of Management, Rice University, Houston, the importance of corporate accounting cannot be understated. He says: " While the typical corporate structure of separation of powers among competing units obviously provides for several built-in conflicts among the units, the potential conflicts between accounting and non-accounting functional areas are especially important for our purpose, since it is accounting’s historical role as neutral and objective recorders and transmitters of information that was most likely compromised in Enron and all other recent scandal-ridden companies. At the core of these conflicts is a failure by managers to grasp the critical role of accounting disclosures in building and maintaining investor trust, and the equally critical role of investor trust in a company’s ability to raise capital and survive as a corporation.Public companies and public capital markets exist only because investors believe that financial disclosures produced by a company’s management are trustworthy. These alternative sources of information can and do coexist with accounting disclosures, but investors and regulators have come to regard financial accounting reports produced by company management as the primary source of verifiable and reliable information about a company. Thus in modern capital markets, investor trust is entirely determined by the ability of corporate financial statements being perceived as neutral and objective while providing useful and timely information. Once accounting information is suspected of not having these fundamental characteristics, public capital market participants have no choice but flee to the exit doors..."5 Tools of analysis The performance indicators The appraisal of a company’s performance ought to be measured in very precise terms so as to make future decisions effective. This is done using comparative performance against previous years, and comparison with market figures, competitors, and based on accounting principles. All these indicators help frame policies as well as gauge economic performance. RCE : Return on Capital Employed. This is one of the powerful indicators of how a company has used its capital and if the business decisions have been sound. A less return for greater investment denotes an industry that is uncertain or having flaws in the system of production, delivery or credit. It also shows if the industry is inconsistent like the movie industry. In that industry, return on capital employed is dependent on various factors not dependent on the performance of the units of the company. Methodology The aim of this paper is to show the critical nature of the Return on Capital and how it affects all other indicators. We have therefore taken the case of Ruby Ltd which is performing as per expectations, but has great disadvantage owing to its tight credit policy and Return on Capital being very low. Our analysis will cover the company’s performance, and comparison with the three other companies in similar position. Case study The scenario The Managing Director of Ruby Ltd has requested that we interpret the following information obtained from a trade association, of which Ruby Ltd is a member. Ruby Company Company Company Ltd A B C RATIOS: Profit to capital employed (%) 17.7 25.2 31.5 25.3 Sales to capital employed (x) 0.9 1.0 1.1 0.9 Capital employed per £000 sales 1074.1 1045.5 939.1 1105.0 Profit to sales (%) 19.0 26.4 29.6 28.0 Production costs to sales (%) 50.5 43.6 41.7 48.0 Distribution costs to sales (%) 16.7 16.4 15.7 14.0 Admin expenses to sales (%) 9.3 9.1 7.8 7.0 Interest payable to sales (%) 4.5 4.5 5.2 3.0 Material cost to sales (%) 25.0 20.0 19.1 22.0 Direct labour cost to sales (%) 13.5 13.6 13.0 15.0 Factory overheads to sales (%) 12.0 10.0 9.6 11.0 Fixed assets per £000 sales 907.4 909.1 869.6 990.0 NCA per £000 sales 166.7 136.4 69.6 115.0 Stocks per £000 sales 138.9 118.2 104.3 100.0 Debtors per £000 sales 111.1 145.5 130.4 160.0 Bank and cash per £000 sales 55.6 36.4 8.7 20.0 Short-term creditors per £000 sales 138.9 163.6 173.9 165.0 The analysis and presentation Let us first take the capital employed and surplus capital lying with Ruby. NCA per £000 sales 166.7 Bank and cash per £000 sales 55.6 Short-term creditors per £000 sales 138.9 Let us now consider what this says as to the utilization of capital. We can at a glance say that much of the capital is under-utilised and is at the bank. > 50%. We can say that short term creditors are very less, which is good if the credit- sale ratio is balanced. For the same figures, let us compare with the other companies: Ruby A B C NCA per £000 sales 166.7 136.4 69.6 115.0 Stocks per £000 sales 138.9 118.2 104.3 100.0 Debtors per £000 sales 111.1 145.5 130.4 160.0 Bank and cash per £000 sales 55.6 36.4 8.7 20.0 Short-term creditors per £000 sales 138.9 163.6 173.9 165.0 We see that NCA for Ruby is very high. We also see that they hold more stocks. The debtors are least bank cash the highest. Looking at that we can say that Ruby ought to stock less if there is no need for overstocking, and must increase credit so that the sales ratio increases. They must also invest some of the surplus capital into expanding production, or eliminating production cost by bringing it down. Their production cost and selling cost is the highest, although they score well with labour costs. They must therefore increase credit sales, invest in expanding and controlling production costs and utilize for the above, the surplus capital reserve as reflected I n the figures to achieve competitive edge over the competitors. Recommendations: In order to be competitive, the company must bring down Production costs, from 50.5 to 41. and bring down fixed assets and stop gaining fixed assets further. They must reduce stocks to equal 104.3, and expand credit to bring in more sales and change the sales-profit ratio. It is recommended therefore that the company invest more in reducing production cost by upgrading or expanding, create more sales by extending more credit to purchasers, and hold lesser stocks and inventories, By doing so the company will have the best competitive edge, it having a better labour cost ratio. References: 1. THE UK APPROACH TO CORPORATE GOVERNANCE Nov 2006 www.frc.org.uk 2. The Corporate Library, http://www.thecorporatelibrary.com/default.asp, Retrieved May 02 2007 3. URL, Unlimited Learning Resources, http://www.4ulr.com/products/finance/gaapninterna.html, Retrieved May 02 2007 4. Securities and Exchange Commission17 CFR PARTS 228, 229, 244 and 249[Release No. 33-8176; 34-47226; FR-65; FILE NO. S7-43-02]RIN 3235-A169 5. Business Education and Corporate Accounting Scandals: Lessons on Accounting Information and Investor Trust by Bala G. Dharan (Pdf) page 2 Read More