Award criteria and nomination report - Essay Example

Running head: Award criteria and nomination report Award criteria and nomination report s Financial reporting and financial statements play an important role in projecting the position of a company in the market. Share holders and all the related groups find financial reporting as an important tool, which help them in making decisions regarding business. Financial reporting covers a wide range of Information as compared to the financial statements only. In broader perspective financial statements are the part of financial reporting but financial reporting is much more than financial statement. With the changing global business environment the reporting needs of the business has also transformed. The information required in to be reported is much more than the cash activities. Now days the requirement of information disclosure from both internal and external sides has been increased. The advancement and the volatile nature of business are replacing the old methodologies. The users of the information are become much more aware. This has given rise to the accountability. The Companies are required to disclose information related to more aspects than in past. Transparency of the information has also become a necessity. The Financial information disclosed by a company to its stakeholders are required to posses some important characteristics so that it can serve the purpose of the users in successful manner. A brief discussion of these qualities is given as under. Financial Reporting: An authentic tool of decision making: Financial information has remained an important tool for the shareholders and outsiders who take their portfolio decision by taking into consideration the present situation of the Company. It is an effective means, which a company can use to attract shareholders by effectively translating the information in user friendly and effective manner. Financial Statements as a part of Financial Reporting: Financial statements are important tools for all the stakeholders who take their decisions regarding their business by taking into consideration the information revealed in the financial statements, which are available to them yearly. Coverage of historical performance: The reporting and comparison of the past performance with present performance can play an important role in the decision making process of all the internal and external groups. Both the sides can plan for their future steps in the light of the past experiences. Inexact and Approximate Measures: Most of the financial information reported externally is not exact in nature it is based on estimates through using the past events. This is the major shortcoming of the externally reported information that it lacks accuracy. Should serve the general-purpose of all related groups: All the related groups find it important that they should be provided with their required information separately by the Company. But this task is quiet difficult and complex. It is not possible for a company to prepare and provide separate information according to the need of each and every group. On the other hand the purpose can be served by providing the information in general manner which can serve the purpose of all the internal and external groups. Usefulness Enhanced via Explanation: Inside Out: Reporting on Shareholder Value (1999) it is important for the financial information to be understood by the common people easily. Mostly the common people are not very much aware of the technical terms and figures therefore it is important to eke the financial information with qualitative description so that the meaning of the information can be understood by the users in an effective manner. Tomorrow’s Company, (1998) explains that the financial techniques are not enough in order to undertake effective business reporting all other related aspects should also be taken into consideration. Decision Making by internal Parties: “Management accounting is the design and use of accounting information systems to achieve the organisation’s objectives by supporting decision-makers inside the enterprise. Internal decision-makers are employed by the enterprise. These internal decision-makers create and use internal accounting information not only for exclusive use inside the organisation but also with the purpose of sharing some of it with external decision-makers.” (Meigs, Williams, Haka & Bettner, 1999) Information provision to external decision-maker: There is also some information, which should not be disclosed to the external parties. These include the competitive strategy, future plans, innovation and research etc. and all other business secrets which provide a cutting edge to the business in market. It can be also defined as all the information, which can harm the position of the company in the business. On the other hand “Value Dynamics argues that companies should be more transparent and user-driven in their disclosures; in particular, they should disclose the current values of all their assets, including intangibles not currently recognised in financial reporting. Cracking the Value Code: How Successful Businesses are Creating Wealth in the New Economy of Arthur Andersen was published in the United States in 2000. As its title suggests, it is primarily about businesses creating wealth, but it pays significant attention to reporting issues. Its central concept is ‘Value Dynamics’. “ (ICAEW, 2005) Internal Users of Accounting Information: The information provided by the Company for the stakeholders is also useful for its employees from the board of directors to different level managers and supervisors all can find these information helpful in planning and implementing different plans related to their departments and field. Through these information the management and the stakeholders can successfully judge the position of the Company. “For the last two hundred years, neo-classical economics has recognised only two factors of production: labour and capital. This is now changing. Information and knowledge are replacing capital and energy as the primary wealth-creating assets, just as the latter two replaced land and labour 200 years ago. In addition, technological developments in the 20th century have transformed the majority of wealth-creating work from physically based to "knowledge-based.” Technology and knowledge are now the key factors of production. With increased mobility of information and the global work force, knowledge and expertise can be transported instantaneously around the world, and any advantage gained by one company can be eliminated by competitive improvements overnight. The only comparative advantage a company will enjoy will be its process of innovation--combining market and technology know-how with the creative talents of knowledge workers to solve a constant stream of competitive problems--and its ability to derive value from information.” (Enterweb, 2005) With the technological advancement, the businesses have now started investing in intangible assets such as knowledge and technology. But this has given rise to difficulty. People believe in what they see. The process of interaction of ideas and assets has been revolutionised. Developing trust and understanding with stakeholders is very important in order to turn knowledge in value. In Intangibles: Management, Measurement, and Reporting, “Professor Lev proposes a two stage solution to help move financial reporting in the direction indicated by the Task Force. The first stage is ‘a satellite information system’ to financial reports. This would focus on the concept of a ‘value chain scoreboard’ (for which the author was in the process of applying for a trademark). The scoreboard would give quantitative, standardised and relevant measures for each of the three stages of the value chain. These are: 1. ‘The discovery of new products or services or processes’, 2. ‘The development phase of these discoveries and the establishment of technological feasibility’, 3. ‘The commercialisation of the new products or services’. Companies may also disclose qualitative information, but in an annex to the scoreboard. The information would be standardised to ensure that it is comparable across businesses. The standards would not mandate disclosures but be ‘standards’ in the sense of providing a common approach. Professor Lev argues that once such standards are in place, disclosures will follow voluntarily. ‘Enterprises with good news … will start disclosing –in effect motivating others to join ranks. No news is bad news in capital markets; silence is penalised.’ “Relevant disclosures here mean disclosures that are relevant to users. Indeed, the measures on the scoreboard ‘should be confirmed by empirical evidence as relevant to users (generally by establishing a significant statistical association between the measures and indicators of corporate value such as stock return and productivity improvement).’ The second stage of Professor Lev’s plan is changes to mandatory accounting standards. He proposes ‘the recognition as assets of all intangible investments with attributable benefits that have passed certain prescribed technological feasibility tests… Once asset recognition commences … all the project-related previously expensed R&D should also be recognised as assets… A strict periodic impairment test … should be applied as a safeguard against overvaluation.’ The object of these changes would be to match income and expenditure better in company accounts.” (ICAEW, 2005) With the increase in the corporate scandals a surge is felt in the last few decades to improve the financial reporting. With the growing awareness due to technological progress people are becoming more defensive towards their decisions for undertaking investments. This has made companies long term investment capabilities and customer relationships critical for success. In order to cope up with the situation new models are presented. The ValueReporting (2001) is one of them. The model emphasises the need of building the trust of public in corporations through business reporting. But still the problem remains as these models also have their strengths and shortcomings. With all the pros and cons these models are designed by keeping in view the changing business environment and stakeholders needs. By combining all or few of them one can find a model which will have a high degree of perfection in order to fill all the gaps, which are found in the financial reporting. The companies should follow these models instead of the old financial reporting which cannot put up with today’s knowledge based business environment. In this report we have designed a criteria using the 11 proposed models. Outlined in new reporting models for business by ICAEW in 2003. The financial report of three companies Smith Group Plc, Smith and Nephew Plc and Johnson Matthey Plc, will be analysed according to the criteria and the award will be given to the company which would have covered all the six important purposed of financial reports and will comply the standards described in the criteria framework described below. Six important purposed of financial reporting: Serving the needs of multiple stakeholders. Useful for decision making process. Fulfil all the requirements of legislators, securities regulators and according standard- setters. It should cater the changing needs of new business environment. It should take into account all the tangibles and intangibles. There is a required degree of transparency, which is necessary for all the users of the financial report. The financial report aiming to serve the purposes above can be considered as successful. Today, the companies are required to report the performances not only on financial basis but also should under cover the issues such as vision, strategy, risks, value drivers, KPIs etc. The Jenkins report (1994); Tomorrow’s company (1998) and Inside out (1999) emphasises on these areas or reporting. Technology should be used in order to provide easy link and layered information required by the users, which can fulfil the needs of today’s users. The process of information should be double looped, which allows the users to give their comments, discuss the strengths and weaknesses of the company’s management. Technology has been emphasised by 21st century annual report, the inevitable change. Value dynamics and value reporting. Sir Brian Jenkins emphasises changes in IT. “ With technology, a whole new vista of opportunities is… opening up and we are in the world of á la carte with potentially infinite alternative menus of information able to be given to users of financial data…Whilst technology is an enabler, if its potential is to be realised, many businesses will need to change their approach to providing information, moving away from primarily seeking statutory compliance and towards meeting market needs. And there is a variety of different markets including, for instance, financially sophisticated investors who may have large or small holdings, those more interested in non-financial performance information and users primarily interested in social accountability issues… In this new world, the notions of what information should be included on performance measures will also be subject to substantial change with more sought on non-financial performance indicators and on, for example, the value of a company’s intangible assets, including its human resources and satisfaction ratings, the key drivers of wealth in many companies.” (ICAEW, 2005) The financial & performance report should cater both internal and external needs of KPI to be reported. Division and grasp formation of KPIs according to the business process and objectives of the company. Should describe frameworks of modern business. Businesses today mostly rely on relationship and knowledge assets. The intangible assets should also be included in the financial statements as assets. The emphasis of inclusion of knowledge as asset is given in value dynamics, and the balance scorecard model. The models also give importance to analyse social and environmental aspects of business with economic aspects. Consistent and regular reporting of information is also an important factor on effective financial reporting. The consistency in the delivery of information is very important. Although with the increasing requirement of information disclosure the firms are disclosing more information than in past but the consistent provision of the information is important. Higher degree of practical approach and cost effectiveness of database is also an important factor to be considered. The indication of future business performance and value through KPIs. All the areas covered should not have any conflict with the rules and regulations. Use of measurement and conceptual framework as per requirement. Presenting information in a meaningful hierarchy so that, users whether they are presented with the most significant information first and are not misled if they fail to drill down deeper. Understanding of internal and external users of the knowledge provided by the financial report. “The gain in the worth of a companys Knowledge Capital is arguably the most important indicator of its success in the Information Age. It should be instrumental in changing the attitudes of accounting-minded executives about the value of information To keep score the company needs to develop a measurement system using measures, such as those just listed, appropriate to each business unit. The last few years has seen a growth in the use of various measurement systems, such as: The balanced scorecard: developed by Kaplan and Norton. Designed to focus managers attention to those factors that help the business strategy, it adds alongside financial measures, measures for customers, internal processes and innovation. Economic Value Added (EVATM) developed by Stern Stewart this is related to the return on capital employed. An associated measure is MVA (Market Value Added). While playing an important part, critics of such measures argue that they are static measures and do not help managers identify the underlying cause and effect. The last few years have seen the development of new kinds of scorecard that are more directly helpful to understanding your intellectual capital.” (David Skyrme Associates, 2005) After considering the annual plan and reports of the three Companies it is decided that the award goes to the Johnson Matthey for best financial reporting. The company has stated and explained its strategy and objectives in a very understandable manner. Johnson Matthey’s strategic intent is defined as “consistent growth in earnings by concentrating on the development of high added value products and services in areas where our expertise provides a competitive edge, particularly in catalysis, precious metals, fine chemicals and materials technology.” (Johnson Matthey, 2005) The group’s financial objectives are also specified in the report with a review of board’s strategies to achieve these financial objectives. The functional objectives of the Company are also defined with the funding policy. This part of the report fulfils the requirements settled by the Balanced Scorecard strategy (1996), which requires a company to translate strategy into Action. The Company puts forward an inclusive approach to business and business reporting, in which there would be a broader focus on stakeholder relationships and less emphasis on financial measures as described by the Tomorrow’s Company. This provides the company with the ability to compete internationally, and convey its information to the stakeholders in a very useful manner. As argued by Tomorrow’s Company that British companies are damaged by, among other things, not only a ‘national adversarial culture’ but also their ‘over-reliance on financial measures. The company doesn’t rely only on the financial measures. It under takes all the aspects of the business in order to gauge the overall health of the business. The company has the clear understanding of the fact that only financial measures are not enough in today’s era of global business. All the other aspects such as stakeholder trust environment and technological issues should be taken into consideration with the economic performance’. “It neither defines competitive performance, nor measures the broader value created through product quality, speed of response and service.’ The report also argues that although ‘good financial performance is the UK’s traditional definition of success for a business… Historic financial measures are lagging indicators: they are unsatisfactory guides to future performance.’ The report notes the growing importance of intangibles: ‘The centre of gravity in business success is … shifting from the exploitation of a company’s physical assets to the realisation of the creativity and learning potential of all the people with whom it has contact – not just its employees.” (ICAEW, 2005) The annual report of Johnson Matthey Plc is well versed by all the information regarding the customer interest in relatively simple manner including goodwill amortisation, Earnings per share, growth in operating profit, Cash generation, organic growth, returns on under performing assets. Total sales at constant exchange rates sales growth, operating profit before exceptional items and goodwill amortisation, Interest. The return on retirement benefits assets and liabilities increased funding surplus, Profit before tax, exceptional items and goodwill amortisation Earnings per share before exceptional items and goodwill amortisation, Total exceptional items. The board’s recommending to shareholders of final dividend, with the growth in earnings per share. Provision of comparison data: In order to provide the users information in an effective manner it is important that it should be compared to the past information. The comparison with the past trend can make the meaning of the information more clearer and understandable for a user. In order to understand the meaning of the available information it is better to mention the prior trend. A Company should provide its users with handy information, which will not only improve the reputation of the Company in the market but also, will help the company in its smooth operation. Mostly the information disclosed by the companies does not have such comparisons available. But Johnson Matthey provides several comparisons with reasons. For instance “the group’s profits were higher in the first half of 2004/05 than in the second half, partly as a result of exchange translation. In 2005/06 we expect this trend to be reversed, with most of the growth coming in the second half of the year.” (Johnson Matthey, 2005) Forward-looking report: Smith Group Plc, Smith and Nephew Plc both of the companies have drive down the road looking in their rear view mirror; this is known as historical cost accounting. Too infrequently companies drive down the road looking through their windshield; this is known as making projections. Johnson Matthey has also undertaken this task very carefully. It has stated the projection of future car production in the report. It is stated that the “much-publicised problems in the US car industry are likely to have some impact on Johnson Matthey’s results in the first half of 2005/06. We expect car production to be down in the US in our first half which will reduce demand for autocatalysts in that region. However, both Europe and Asia are now bigger car producing regions than the US and Johnson Matthey’s businesses in those regions are continuing to see good demand which should more than offset the shortfall in the US. In the first half of 2005/06 we expect profits in our Pharmaceutical Materials.” (Johnson Matthey, 2005) The annual report of Johnson Matthey also undertaken the analysis of The Hermes Principles “What Shareholders Expect of Public Companies and What Companies Should Expect of Their Investors (2002) expressing that The group’s defined benefit pension funds are well funded with the main UK and US funds showing a net surplus at 31st March 2005 of £24.9 million after tax. However, this position is exposed to the risk of changes in interest rates and the market values of investments as well as inflation and increasing longevity of the members. These risks are mitigated by paying appropriate contributions into the funds and through an investment asset allocation policy which has a high level of probability of avoiding a material deficit based on the results of an asset / liability matching study. Like all the models of reporting the Johnson Matthey annual report has its shortcomings but still it is the nearest to recent perfect models of reporting.” (Johnson Matthey, 2005) Works cited Centre for Tomorrow’s Company, Sooner, Sharper, Simpler: A Lean Vision of an Inclusive Annual Report (Centre for Tomorrow’s Company, London, 1998) David Skyrme Associates, (2005). Measuring Knowledge: A Plethora of methods, retrieved 15/01/05 from Enterweb, (2005). Knowledge Economy, retrieved 12/01/06 from Eccles, Robert G., Robert H. Herz, E. Mary Keegan and David M. H. Phillips, The ValueReporting™ Revolution: Moving Beyond the Earnings Game (John Wiley & Sons, New York, 2001) ICAEW, (2005). New Reporting Models for Business: Information for Better Markets, An initiative from the Institute of Chartered Accountants in England and Wales. Institute of Chartered Accountants in England & Wales, Inside Out: Reporting on Shareholder Value (ICAEW, London, 1999) Johnson Matthey, (2005). Operating and Financial Review, retrieved 12/01/06 from http://www.matthey.com/AR05/oprev.html Kaplan, Robert S., and David P. Norton, ‘The Balanced Scorecard – Measures that Drive Performance’, Harvard Business Review (January-February 1992) Lev, Baruch, Intangibles: Management, Measurement, and Reporting (Brookings Institution Press, Washington DC, 2001) Meigs, F.R., Williams, J. R., Haka, S. F. & Bettner, M. S., (2001). Accounting, Eleventh edition, Irwin McGraw-Hill, United States of America, ISBN0-07-289709, pp. 12 PricewaterhouseCoopers Trends in Corporate Reporting 2004: Towards ValueReporting™, (PricewaterhouseCoopers, London, 2003). Watson, Tony, and David Pitt-Watson, The Hermes Principles: What Shareholders Expect of Public Companies – and What Companies Should Expect of Their Investors (Hermes Pensions Management Limited, London, 2002) Read More