Advanced Concepts in Accounting Dr Ashish Varma
Corporate Reporting Framework Contents Introduction CRF Model Evaluation Summary
Corporate Reporting Framework Introduction: Need for CRF Mandatory disclosure of financial and non financial information
Enhanced Corporate Transparency Major Drivers: • Building trust management and other stakeholders. • Need for information. • Better and transparent communication.
REPORTING FRAMEWORKS UNCTAD (United Nations Conference on Trade and Development) HKSAs (Hongkong Society of Accountants) PwC (PricewaterhouseCoopers)
FEATURES OF FRAMEWORKS • UNCTADs Financial Non financial General meetings Timing and means of disclosure Good practices for compliance
FEATURES OF FRAMEWORKS 2. HKSAs Capital structure. Board structure and functioning. Managements discussion and analysis. Remuneration.
FEATURES OF FRAMEWORKS 2. …HKSAs continued Audit committee. Related party transactions. Other mandatory disclosure. Other voluntary disclosure.
FEATURES OF FRAMEWORKS 3. PwCs: PowerWaterhouse Cooper Market overview. Strategy and structure. Managing for value. Performance.
Proposed CRF Defining Corporate Reporting • Qualitative or Quantitative • Financial or Non Financial • Forward Going or Historical
1. CGR Practices • CGR directly impacts EVA (Economic Value Added) • the Sincerity, Honesty, Truthfulness & Exhaustiveness of Info • Ensures optimum use of human, physical & financial resources • CGR Models can involve the Stakeholders for gaining confidence.
…CGR Practices continued • Formation of Board of Directors • Freedom given to the Board • Audit Committee – Internal & External namely First Line & Second line: to keep an eye on the working of the Board.
Various CGR Models Anglo-American Model: Empowering the Investors German Model: • More emphasis on the Employees. • Information Supply Chain starts at Employee Level. • So, it is more transparent than other CRF models. Japanese Model: is more regulator-driven
2. Company Objectives • Disclosure of objectives of the enterprise Objectives Business/Economical: stating operational & business targets. Social & Ethical……….: Relationship with community & ethical practices (moral values). Environmental………..: Outlook towards Pollution Control
3. Value Management … refers to Brand Value, Knowledge Base, Networked Relationships – the intangible assets which help the firm stand out from the billions of other firms.
Parameters of Value Management • Employees • Customers • Innovation • Brands & Intellectual Assets • Supply Chain • Awards & Achievements • Competitors
4. Technology Driven Initiatives Improving Information Technology through: • Communication & Network • Knowledge Management • Integration with Stake Holders • Core Areas
5. Risk Management How does a Firm tackle risk owing to: • Operational: Supply Chain/Distribution Channels risks • Market-related: New Competition/Varying Economic Scenarios/Government Regulations
…tackling Risks • Technological: Transaction Processing faults/Telecommunication Security/Data Privacy/Hardware or Software malfunctioning/Network Malfunctioning • Financial: Extent of Liquidity/Interest Rate/Foreign Exchange/Different Financial Instruments/Derivatives Usage
6. Non GAAP Financial disclosure • Other than GAAP info • pro-forma reporting • helps excluding special or one time expenses/incomes • Cash Flows
Few Non GAAP Financial Info • EBITDA – Earnings before interest, tax, depreciation & amortization – Highlights the Performance of Assets • Improved pro-forma by detailed level description like disclosure of Interest & Dividend, Taxation breakup, Reporting of Unrealized Gains/Losses from foreign currency Translation.
…..Few Non GAAP Financial Info • Margin (Total Revenue generated – Cost of Purchases without inter-subsidiary businesses ) measurement for Upstream Segment performance. • Operating profit (minus the effect of acquisitions)
XBRL- Extensive Business Reporting Language • XML based language • Enables electronic publication, exchange & analysis of info • Common Reporting Framework • Eliminates rumors, duplications, guesswork. • Basic requirement for XBRL – Internet • An integrator – because of platform neutrality.
Evaluation • Ford Motor Company • Maruti Suzuki India Limited • Comparison
Summary Finally on comparing the annual reports of the two companies we conclude that the Ford annual report is more presentable and more readable. The quality of analysis in Ford is also better with respect to Maruti.
Conclusion • Potential advantage of CRF • Stakeholders Interests • Investors : Lower cost of equity and debt. • Employees :Recruitment and retention • Customers :Reputation and advocacy • Press and NGO:Reputation • Government :Enhanced license to operate • Competitor : Striving for excellence, motivation for innovation.
Overview Presented By • Corporate Sustainibility Development • Example from Indian Scenario : TATA POWER • Sustainibility : DJSI & SAM • Aim of the Paper • Methodology : Determinants of CSP • Hypothesis • Conclusion
Sustainable Development • Environmentally conscious business practice. • Socially conscious business practice. • Triple bottom line • Social and Environmental Corporate Impact • Financial Reports Development which meets the needs of the present world without compromising the ability of future generations to meet their own needs • Corporate Social Responsibility • Corporate Citizenship
Sustainibility : DJSI & SAM Dow Jones Sustainability Indexes are the first global indexes tracking the financial performance of the leading sustainability-driven companies worldwide Sustainable Asset Management (SAM) Group, involved in sustainability research the opportunities and risks associated with each firm’s economic, environmental and social development.
Examples : DJSI Firms The extent of the oil-spill catastrophe in the Gulf of Mexico and its foreseeable long-term effects on the environment and the local population – in addition to the economic effects and the longterm damage to the reputation of the company The oil company BP plc. was removed from the Dow Jones Sustainability Indexes (DJSI) w.e.f May 31st 2010
Aim of the Paper • To investigate the factors that drive high levels of corporate sustainability performance • To examine the incentives of US firms to invest in sustainability principles and develop a number of hypothesis that relate CSP to firm specific characteristics
Methods & Materials • Stakeholder theory • Hypothesis testing _t-test & Wilcoxon-signed ranks • Dependent Variable – CSP • Sample taken from DJSI & S&P listed firms
Methodology : Determinants of CSP • Usage of Stakeholder Framework • Comparison between Group of High Ranking CSP DJSI Firms Non DJSI Firms • Hypothesis testing _t-test & Wilcoxon-signed ranks • Dependent Variable – CSP • Sample taken from DJSI & S&P listed firms
Sustainability : Stakeholder Theory Any group or individual who can affect or is affected by the achievement of the firm’s objectives- (Freeman, 1984, on defining Stakeholder) Firms must manage their relationship with key stakeholders to ensure that such access to resources is maintained(Stakeholder theory, Roberts, 1992)
Hypothesis 1 SIZE Firm size and corporate sustainability performance are positively related. • Pollution ≈ f (Size of Operations) • High Political Visibility • Size ≈ f (Larger Social Problem) • Faster realization of Economics of Scale
Hypothesis 2 LEVERAGE Leverage and corporate sustainability performance are negatively related. • Level of debt in the firm’s capital structure • Power is more with Debtholders etc Stakeholders • Power is less with communities etc Stakeholders
Hypothesis 3 FREE CASH FLOW & PROFITABILITY Free Cash Flow along with Profitability and corporate sustainability performance are positively related. • Low profitability, Focus -> Economic Demands • High profitability , Invest -> Sustainibility programmes without affecting economic demands
Hypothesis 4 GROWTH OPTIONS Growth Options and corporate sustainability performance are positively related. • Higher Level Product Mix -> Better integration Sustainibility priciples into Corporate Strategy • Investment in R & D -> Innovation & product differentiation