Reporting Business Performance and Value: What if Money Was Meaningless - Research Paper Example

Reporting business performance and value: What if money was meaningless? Contents Contents 2 Executive Summary 3 Introduction 3 Discussion 3 Part a 3Part b 6 Part c 8 Conclusion 9 References 10 Executive Summary The financial reporting of companies according to the International Accounting Standards Board (IASB) is majorly reliant on the monetary and quantitative elements. The case report aims at discussing how the financial reporting processes are based on the value of money and what alternative ways of financial reporting can be used by the reporting entities across the globe. Tesco Plc. is chosen as the case company and an analysis is made on how the qualitative terms of measurement can be better focused on in the financial reporting of the company. Introduction The main discussion is divided into three sections. The first section includes an analysis of the process in which the Conceptual Framework for Financial Reporting under the International Accounting Standards Board (IASB) makes it obligatory for the reporting entities to report their financial information in monetary terms. The second section encompasses the consideration of the financial information available for an IASB compliant company, Tesco Plc. in order to devise a qualitative section that can be integrated into the annual report of the company to depict the performances and value creation for the company on the basis of non-monetary measurement scales. This section also lists the five biggest achievements of Tesco Plc. in the latest reporting period. The third section includes the recommendations as to how Tesco Plc. can prepare and represent more meaningful and informative reports to its stakeholders. Discussion Part a The conceptual framework defines the concepts that form the underlying basis for the formulation and presentation of the financial reporting of different IASB compliant companies. The use of updated and complete set of concepts makes it possible for the reporting entities to improve the standards of their financial reporting. The IASB conceptual framework encompasses the following aspects: The main goals of financial reporting. The qualitative aspects of financial information. The measure, identification, definition and recognition of the components through the use of which the financial statements are constructed. The aspects of capital and capital maintenance. The main objectives of the general financial reporting are to prepare and publish financial information of the reporting entity which is useful for the existing as well as the potential lenders, investors and other creditor groups of the company. This financial information is helpful in making decisions related to the provision of resources to the company. These decisions may involve settling loans, providing loans, selling, buying and holding equity and other types of equities. Since, the potential investors, creditors and lenders rely extensively on the financial reports for extracting the much needed financial information, therefore, the financial information are mostly presented on the basis of monetary terms. The financial statements which are prepared according to the IASB Conceptual Framework involve information that have to mandatorily consider the modifications in the purchasing power of the currency in which the reports are being made. The financial statements including the balance sheet, income and expense statements and the cash flow statements are prepared on the basis of a current cost approach or a historical cost approach. The IASB Conceptual Framework also involves a consideration of the level of price index as on the date of the preparation of the balance sheet and a consideration of the price index movements during the previous as well as the current reporting periods (Smith, 2012). One of the primary financial disclosures made in the financial reporting done according to the IASB Conceptual Framework is the reporting of gains and losses in monetary terms. Money is taken as the scale of measurement while evaluating the value of the assets, liabilities, incomes, and gains of a company. The conceptual framework focuses on the quantitative characteristics of the financial information. The elements that are considered in the financial reporting for the measurement of the financial position of a company include equity, assets and liabilities all of which are measured and valued on monetary terms (Ball, 2006). An asset is defined as a resource of the company which is controlled by the company and from which the company can ensure the future inflow of economic benefits into the business. A liability represents an obligation on the part of the company that has arisen from past events. The settlement of the liabilities is expected to create an outflow of the resources which lead to economic benefits. Equity is defined as the residual interest gained on assets after meeting the liabilities and similar to assets and liabilities, are also measured in terms of economic or monetary gains. All these three core elements of financial reporting are valued and measured in terms of monetary values like income and expenses which indicate at the fact that the IASB conceptual Framework influences the reporting entities to provide the financial information that can be measured in monetary terms. According to the IASB Conceptual Framework, the elements of expense and income are defined as per the economic benefits and losses of the reporting entity. Income is defined as the increase in the inflow of economic benefits resulting from an increase in assets or decrees in liabilities in the entity within the specified accounting period. Similarly, expenses are defined as the decrease in economic benefits in the form of depletion of assets or increase in liabilities that result in outflows of economic benefits. Measurement of the financial element is done by determining the monetary value at which these elements are to be recognized in the financial statements like the balance sheet and the income statement. This process involves the identification of a particular basis for measurement which is usually the economic or monetary value. The concept of capital and capital maintenance, as defined in the IASB Conceptual Framework involves the way in which the company defines the capital that is maintained by it. This creates a linkage between the concepts of profit and that of capital (International Accounting Standards Board, 2007). Part b This section of the study will include different non-monetary achievements, resources and value creations which can be potentially incorporated into the annual report of the Tesco. Over the years the organization has given significant importance towards the value creation. Currently the organization is arranging 75 million shopping trips around the world in a week. With the help of this trip the organization is trying to create significant values for its stakeholders and it is an obvious choice to be incorporated into the annual report of the company. The organization currently has almost 6,500 stores across the world. Increased number of stores helps the customers to get more easy access to the location of stores. This value creation can easily secure its place in the annual report of the company. Over the years the organization has able to increase its loyal customer base significantly. The organization enjoys almost 40 million loyal customers across the world. It is one of the biggest non-financial achievements of the company that can be easily secured its place to the annual report. The organization has suppliers almost 70 countries which is a significant non-financial value creation from the side of the organization. It demonstrates the strength of the organization as far as the resources are concerned. The organization has taken serious initiatives for the employment generations. The organization is trying to break the cycle of “no job: no experience; no experience: no job.” According to a report, 54% customers of UK want significant helps from the Supermarkets regarding healthy products. This trend has been well identified by the Tesco (Nicholls and Opal, 2005). The organization is reformulating its products and levels. The organization is trying to create a healthier store environment. All these are significant non-financial value creations which can be incorporated into the annual report of the company. The organization is introducing more customized approaches for solving several individual needs. This information can be introduced into the annual report as well. The organization has given significant importance towards managing the food waste. At present 1.3 billion tons of foods are wasted each year. The organization is conducting an extensive research to reduce the global food waste. The organization has maintained continuous dialogues with the national and international agencies, NGOs and charitable organizations to reduce the food waste. It is non-financial information related with the resources can easily be incorporated within the annual report of the company. The organization is rolling out its business operations across the world to reduce the food waste (Tesco, 2013). One of the biggest achievements of the organization is fund raising for the charity. Since 2000 the company has raised almost £70 million for the charity purposes. Employees of the organization and customers have contributed their money for this effort. This achievement can be easily placed within the annual report of the organization. The organization has shown significant achievements towards the environmental stewardship. Since 2006, it has able to reduce 32.5% carbon intensity in their operations. Information related with this achievement will be able to attract the investors. So there is no shadow of doubt that this information can make its place into the annual report (Macdonald, 2013). The organization believes in the gender equality and manages its diverse workforce significantly. In Tesco 31% senior management posts are held by the women. It is a remarkable achievement and can be easily placed into the annual report of the company. Part c Tesco should add more of the non-financial achievements to its annual report which will help the company to attract the attentions of the shareholders. At this present moment of global warming and climate changes stakeholders of the company are significantly focused towards the different non-financial activities of the company. Investors of the organization are always scrutinizing what are the steps the company is taking towards the environmental stewardship. In order to showcase these kinds of achievements the organization has to be much more proactive in their reporting systems. The organization can come up with a separate report showcasing their several activities related with the climate change and environmental stewardship. With the changing world, scarcities of the resources are increasing day by day. It is important for the company to report their usage of resources in a transparent fashion. The organization can provide every minute detail related with the usages of the resources. Value creation is also an important part for the organization to inspire the stakeholders of the company. Stake holders of the company adjust their investments according to the value creation of the organization. It is important for the organization to show case its value creation in more detailed manner. Financial performance indicators are important for the stakeholders but recently one new trend has been emerged. Stakeholders of the company are giving significant priorities to the non-financial information. Management of the organization must identify the necessity of the non-financial information and should act according to that. Currently the organization gives significant importance to the financial information but in course of that non-financial information are somewhat neglected. To draw the attention of sensitive stakeholders of the company, Tesco needs to showcase its non-financial achievements also. The organization can highlight their efforts related with the environmental sustainability. The organization can highlight their safety and security norms for the employees of the organization in more elaborate way. The organization can give a clear picture about the supplier relationships. All these non-financial statements will be helpful for the company to grow the attraction of investors. There are several non-financial activities which add into the financial outcomes. Those non-financial activities should be taken care of within the report of the organization. The current global society is significantly concerned with climate change and the scarcity of the resources. Stakeholders of Tesco being a part of the global society are also concerned with this fact. It is a straight forward responsibility for the company to make them aware about their non-financial activities. Conclusion The IASB Conceptual Framework for Financial reporting deals with the quantitative as well as the qualitative aspects of general reporting and the objectives of financial reporting. The conceptual framework aims to set out the concepts that form the basis for the preparation and publishing of the financial statements for the external stakeholder groups of a company. It can be identified that the reporting by companies and other entities are more focused on the quantifiable monetary values. However, it can be concluded from the above discussion that the qualitative measures of reporting should also be given equal importance in the process of reporting because that would help to provide a more functional and consistent view of the position of the reporting entity. References Ball, R. 2006. International Financial Reporting Standards (IFRS): pros and cons for investors. Accounting and Business Research, 14(2), pp. 956-960. International Accounting Standards Board. 2007. International Financial Reporting Standards. Georgia: LexisNexis. Macdonald, R. 2013. Global Corporate Social Responsibility of Tesco (Grocery Retailer, UK): Critical Evaluation. London: GRIN Verlag. Nicholls, A. and Opal, C. 2005. Fair Trade: Market-Driven Ethical Consumption. London: SAGE. Smith, N. J. 2012. Constant item purchasing power accounting per IFRS: Three Concepts of Capital Maintenance. London: Kogan Page. Tesco. 2013. What matters now: using our scale for good. Available at: http://www.tescoplc.com/files/pdf/reports/tesco_and_society_2013_ipad.pdf. Accessed on 30th September 2014. Read More