Financial Statements for Decision Making

Discuss about the case study Financial Accounting for Corporate Social Responsibility.

Financial statements are made to provide efficiency to users in making economic decisions in business. The objectives of financial statements are to provide details about the financial performance, financial position, cash flow statements, and changes in financial position of a business or enterprise, profitability and growth prospects etc. This information is used by a variety of users like stakeholders, investors, managers, employees, government etc in making economic decisions for enhancing the effectiveness of the management.

Financial statements help in assessing the operational efficiency of the company’s management. This information can be provided by the profit and loss account or an income statement of an enterprise. The actual financial performance can be obtained through the financial statements and can also be compared with standards set earlier to ascertain the management’s efficiency (Brealey et.al, 2011). Information about the financial position can be obtained by the Balance Sheet that aims in depicting the current position of an enterprise in terms of types of assets owned and various liabilities due. Hence, the financial position where the business stands on a particular date can be ascertained by financial statements. Moreover, it assists in providing information about how the cash moves in and out of the business and allocation of cash throughout the business (Horngren, 2013).

When it comes to prediction of growth prospects and profitability financial statements aim to predict the growth prospects in earnings that can further be used by investors while comparing investment alternatives. This prediction can be done by the preparation and forecasting of budgets (Brealey et.al, 2011). Financial statements also aim to provide details about the changes in financial position of a business during a period through a separate statement. Financial statements accommodate several supplementary schedules and notes like the uncertainties and risks affecting the business, resources that cannot be identified through Balance Sheet etc. All these additional information can be obtained through financial statements and can prove to be very beneficial in decision-making (Kruger, 2015). When it comes to comparative analysis and adoption of appropriate policy financial statements of one enterprise can be compared with other enterprises to determine which enterprise is functioning more effectively. This can be done by making a comparative study of the profitability of both enterprises and with the help of this intra firm comparison, financial statements aims to help the management in adopting a sound business policy (Brealey et.al, 2011). Other objectives of financial statements include the evaluation of efficiency of various department or parts of business, evaluation of the long-term liquidity of the business fund, evaluation of outcomes of stewardship of management or management’s accountability for resources that are entrusted to it and evaluation of the exact meaning and outcome of financial information (Choi & Meek, 2011).

Objectives of Financial Statements

Prospective investors need these financial statements because it helps them in assessing the viability of investing funds in a company or business. They may also need financial statements in predicting future dividends on the basis of profits that are disclosed in them. Furthermore, there are various risks and uncertainties associated with an investment and investors can gauge those risks and uncertainties with the help of financial statements (Kruger, 2015). For example, it is a well-known fact that fluctuating profits point out higher uncertainties and risk. Hence, financial statements can be used as a basis for the investment decisions of these prospective investors. Investors and shareholders are generally the first group of external users of financial statements whose main motive is to assess the value of a business so as to decide whether it is worth selling or buying or holding their stock (Nzuve, 2011).

In UK, there exists a functioning of Director of fair trading who is responsible to oversee the behavior of companies. Investigation can be initiated against those companies who have deviated from their goals and objectives. The maximum amount of market shares that a company in UK can hold is not more than 25% of the total market. If these limits get surpassed, then the Director of fair trading takes necessary steps to bring the limit to a normal range by informing the Competition Commission of UK. The Competition Commission is bound to initiate an investigation on those companies who have not followed the prescribed norms or against whom Director of fair trading has made comments (Ballot et.al, 2006). Furthermore, firms of UK are prohibited to collude because in this way competition can be restricted by setting the prices. As there are several companies operating all around UK and worldwide, other organizations have to be made that can keep a check on the strategies of these companies. The regulatory system of UK made three (tripartite) authorities – The financial Services Authority (FSA), Bank of England and Treasury. These were collectively bound to maintain the financial stability of UK but these failed because of the accommodation of several weak spots and hence these were reformed. A new Financial Policy Committee was formed in the Bank of England with a sole motive of maintaining financial stability. This was a necessary reform by the government of UK because macro-prudential action was required to be globally coordinated (Mulbert, 2010). Thus, FPC worked globally with authorities like European Systematic Risk Board etc to co-ordinate macro-prudential action. For macro-prudential regulation of firms, government transferred operational responsibility from FSA to a newly formed subsidiary of Bank of England that is PRA (Prudential Regulation Authority). PRA is responsible for the supervision and regulation of individual firms and it represents UK on the new supervisory authorities of Europe for insurance and banking so that UK’s voice can be promoted. For regulation of markets and protection of consumers, the UK government created CPMA (Consumer Protection and Markets Authority) which was entrusted with a responsibility of promoting confidence in the financial markets and services. By this regulation system, two objectives can be satisfied that is protection of consumers by a powerful consumer division and promotion of confidence in the financial markets of UK for better efficiency and integrity (Ballou et. al, 2006). The introduction of these regimes has been very effective taking into consideration the potential for intense implications for the financial institutions of UK. Gaps in regulatory details have been closed by this regulatory system of UK that has also enhanced expectations from political areas (Bence & Nadine, 2012). There are several areas that are policed by other bodies of UK like the Environmental Agency, CQC, Information Commissioner’s Office and Scottish Environment Protection Agency etc. Compliance issues for every small and large organization consist of Data Protection Act 1998 and Freedom of Information Act 2000 for the public sector. The corporate governance code of UK issued by FRC (Financial Reporting Council) sets out standards associated with remuneration, board effectiveness and leadership, relationships with shareholders etc. Companies of UK that possess a premium listing of equity shares are bound to report under the Listing Rules on the process they have adopted in their annual reports or accounts.

Financial Statements for External Users

Global financial reporting requirements are that effective structures which involves third parties to have an access to the environmental impact of an entity. These guidelines face a lot of speculation but still it is followed by several countries like United Kingdom etc because with the assistance of this reporting, several ethical features of a company can be informed to the public, investors etc. With the help of GRI guidelines, an organization can achieve better business operations that will in turn contribute towards its growth (Mark, 2010). Adoption of GRI have also assisted in decentralization and gaining target audience that proves that it is a successful attribute for the future. Inspite of several effectiveness, GRI or global financial reporting requirements has a lack of integrity in its aggregate structure but there exists various options that can be obtained through sustainability reports (Ballot et.al, 2006). For the purpose of this assignment, the two companies of UK that are selected are BP Plc and Volkswagen UK. BP Plc adopts international reporting guidelines from IPIECA and GRI so that it can report its sustainability performance and remains a signatory to UN’s Global Impact. BP adopts Global Reporting Initiative G3.1 guidelines in its reporting together with a comprehensive pair of indicators that covers the entire dimensions of sustainable development. GRI helps in providing a framework against which every organization can report and track their environmental, social and economic performance. With this standardized method, greater accountability and transparency can be achieved together with benchmarking against the previous year’s performance. These guidelines also assist in recognition of stakeholders and the dominance of such reporting in various areas. With the help of global financial reporting requirements, BP Plc has managed to obtain an A plus in its reporting and it can be proved from the fact that every disclosure that are important are being disclosed and reasons are provided for the ones which are unimportant and not disclosed (BP Plc, 2014). For example, in the year 2015, when BP faced a huge quarterly loss of around 403 billion dollars, share price was decreased but the voluntary disclosure regarding the negative outcomes of BP’s activity and greenhouse gas emission with a further disclosure of solutions to reduce the outcomes and comparative analysis of prior years with minimizing tendency, will surely pay off. Due to this voluntary disclosure, stock of BP improved from 417.55 GBP to 451 GBP. Even according to the legitimacy theory, disclosure regarding the oil spill surely made people realizes the outcome of any negligence towards any safety standards on environment (BP Plc, 2014). The impact of this global financial reporting requirement is that BP has become more efficient in collecting the data method and presenting the data in a more enhanced way so that the principles of UN Global Compact can be achieved. Furthermore, this guidance assures that BP Plc identifies every issue that is significant to oil and gas companies and replies to industry problems through this reporting (Albuquerque et. al, 2013). Hence, on a whole, global financial reporting requirements prove to be very effective in case of BP Plc as the company effectively reports its material issues and by observing the value provided by various reporting elements, companies can tailor their reporting to their own situations. When it comes to Volkswagen (UK), Global reporting financial requirements are much better placed here than in BP Plc. It follows the G4 reporting index and fulfills various requirements that are essential in achieving the stage of completion and perfection. Thus, the functioning of Volkswagen is in such a manner so that it can socially meet every requirements and needs for the benefit of the society and the environment (Volkswagen, 2014). The Board of Managing Directors of Volkswagen is liable for accurately preparing the sustainability report based on the criteria’s set in the Sustainability Reporting Guidelines of the (GRI) Global Reporting Initiative. This includes the application and selection of proper procedures to prepare the Sustainability Report and the adoption of estimates and assumptions for sustainability disclosures of an individual that are very reasonable in the circumstances. The reason for preparing the Sustainable reports by the company is pretty obvious and that is the active participation of businesses that in turn provides support to the companies, business and the society (Fernando, 2009). These reforms are expected to bridge the gap between government and businesses so that the level of transparency can be increased (Sustainability reporting, 2012). There are several companies which are reporting GRI indicators at the end of their annual report and Volkswagen being one of them, communicates which GRI information have been disclosed and the reasons for not communicating specific disclosures. A statement of the GRI Application Level Check is present in the sustainability report of Volkswagen Group which states that all the material disclosures have been communicated and it can be proved by the fact that Volkswagen received an A plus in its application in the Sustainability Report (Bertel, 2013). An example of voluntary disclosure of Volkswagen is that under International Financial Reporting Standards, the disclosure of expenses related to R & D is not specified but big companies like Volkswagen are revealing more than specified details voluntarily so as to ensure maximum transparency among the investors, public etc. Volkswagen presents a breakdown of the R & D expenses which is identified in its income statement portraying the amortization of development expenses separately from non-capitalized development expenses and research (Bertel, 2013). Even according to the legitimacy theory, Volkswagen discloses the emission tests where the level of nitrous oxide gets enhanced when vehicles run on the road. Although these emissions are unauthorized, Volkswagen takes steps to inform the public about this so that trust in the company cannot be lost.

UK Regulatory System and Corporate Governance Standards

It can be concluded from the above details that financial statements play a very major role in enhancing the trust and goodwill of the organization. Therefore, the financial statements must adhere to the regulation to have a strong level of transparency. This helps in better presentation and enhances the level of goodwill. Moreover, it leads to compliance that projects a better scenario for the company. The regulatory system of UK have proven to be very effective for the public as it mainly aims in promoting the UK financial markets that will in turn provide benefit to several others (Nzuve, 2011). The scope of global reporting have further accelerated the system a provided a major opportunities to the firms. Especially the GRI guidelines have been the prime highlight in portraying the scope of companies. Even though these guidelines faces a lack of integrity, it is still followed everywhere in the world by most of the companies. In businesses, the most precise information can be provided by the Sustainability reports of a company that can collectively serve as rightful actions for future with the Global Financial Reporting Requirements. There are several experts who consider that Global Financial Reporting Requirements and sustainability reports were important in the past and not in the present but it must be noted that markets are diminishing internationally and taking into consideration the future prospects if such reporting systems are not aligned with the market conditions, then severe difficulties can arise (Goergen, 2012).

It can also be observed from this study that companies like Volkswagen do not hesitate in disclosing the unspecified information in their reports and the reason is that these companies want to maximize their transparency with the investors, public etc so that during uncertain circumstances, it does  not suffer more (Volkswagen, 2014). From their annual report, we can get a clear picture of the level of disclosure and their functioning. For instance in the case of BP Plc, whose stock improved after voluntary disclosing the negative activities and outcomes of the company. The difference between the regulatory system of UK and the impact of global financial reporting requirements is critically evaluated taking into account these two companies. Moreover, it has been ascertained that the level of disclosures provides a strong balance to the company because the stakeholders are always in search of information. Concealing of information leads to unfair practice and is contradictory to the ethical practice (Lubatkin, 2009). Hence, viewing this it can be commented that companies must adhere to the global reporting and should disclose the matter on a voluntary basis that leads to better practice and raising the level of standard.

References

Albuquerque, R., Durnev, A., Koskinen, Y 2013, Corporate social responsibility and firm risk: theory and empirical evidence, Boston University.

Ballot, B., Heitger, D. L. & Landes, C. E. 2006, ‘The future of corporate sustainability reporting: A rapidly growing assurance opportunity’, Journal of Accountancy, vol. 20, pp. 65-74

Ballou, B., Heitger, D. L. & Landes, C. E. 2006, ‘The future of corporate sustainability reporting: A rapidly growing assurance opportunity’, Journal of Accountancy, vol. 20, pp. 65-74

Bence, D & Nadine, F 2012, The International Accounting Standards Board’s Search for a General Purpose Accounting Model, viewed 4 July 2016, <https://business.curtin.edu.au/files/bence-fry.pdf>.

Bertel, S, 2013, Volkswagen Can Be World’s Largest Automaker In 2013 – As Unlikely As It May Be. GM In Danger Of Dropping To Third., viewed 4 July 2016, <https://www.thetruthaboutcars.com/>. 

BP Plc 2014, BP Plc: Annual report and accounts 2014, viewed 3 July 2016, https://www.bp.com/content/dam/bpcountry/de_de/PDFs/brochures/BP_Annual_Report_and_Form_20F_2014.pdf

Brealey, R., Myers, S. and Allen, F 2011, Principles of corporate finance, New York: McGraw-Hill/Irwin.

Choi, R.D. & Meek, G.K 2011, International accounting, Pearson.

Fernando, A C 2009, Corporate Governance Policies and Principles, Oxford University Press

Goergen , M 2012,  International Corporate Governance, Prentice Hall.

Horngren, C 2013,  Financial accounting, Frenchs Forest, N.S.W: Pearson Australia Group.

Kruger, P 2015, ‘Corporate goodness and shareholder wealth’, Journal of Financial economics, pp. 304-329

Lubatkin, M.H 2009, ‘One more time: What is a realistic theory of corporate governance?’, Journal of Organizational Behaviour, vol.28, pp. 59-67

Mark, J.R 2010, Political Determinants of Corporate Governance – Political Context, Corporate Impact, Oxford University Press.

Mulbert P.O 2010, ‘Corporate Governance of Banks after the Financial Crisis Theory’, Evidence and Reforms, European Corporate Governance Institute (ECGI), pp. 1-40

Nzuve. S, 2011, Some Thoughts of How to Allocate Indirect Costs in a Corporate Environment, School of Business, University of Nairobi.

Sustainability reporting 2012, Using sustainability to drive business innovation and growth 2012, viewed 4 July 2016, <https://www.deloitte.com/view/en_IN/in/index.htm>.

Volkswagen 2014, Volkswagen: Annual report and accounts 2014, viewed 4 July 2016, <https://www.volkswagenag.com/content/vwcorp/content/en/misc/pdf dummies.bin.html/downloadfilelist/downloadfile/downloadfile_30/file/Y_2014_e.pdf>.