Investor focus - Miscellaneous

Question 1

Investor focus

Answer 1

Investors are primary users, providers of capital.
There is a stewardship and accountability to them.

what information do SHAREHOLDER need
1. profit
2. value of the business
3. dividends

what decisions do investors make
1. Buy sell or hold - Vote at AGM

what information do Debtholders need
1. Interest payments
2. Value of collateral asset
3. Going concern

what decisions do investors make
Lend or call in loans

Question 2

Alternative performance measures - EBITDA, underlying profitability, Adjusted Net Debt, KPI’S

Answer 2

APM’s are measures of performance not mandatory or required by IFRS.
This helps to close the reporting gap

There is a question whether they should be mandatory or optional?

1. EBITDA - Add back depreciation, amortisation, interest to profit.
2. Underlying profitability - Profit excluding non recurrent, one off items.
3. Adjusted Net debt - Gearing ratio excluding certain financial instruments.
4. KPI’s - different companies come up with KPI relevant to their business or industry

Advantages
1. Enhances the stakeholder understanding of business
2. It allows to see business from the eyes of directors
3. It is entity specific

Disadvantages
1. It Is not defined Or required by IFRS
2. It lacks comparability
3. It may not be understandable by investors
4. There is risk of over information and could distract users from main F.S
5.

Question 3

Integrated reporting - Definition, Benefits, capitals

Answer 3

An integrated report is a concise communication about how an organisation’s strategy, governance performance and prospects in the context of its external environment lead to creation of value in short, medium and long term.

Benefits
1. It improves communication with stakeholders
2. Improved stewardship
3. Improved understanding of business for investor
4. Increased share price
5. Lower cost of capital

Financial, manufactured, intellectual, human, social and relationship and natural capital.

Question 4

IFRS for SME

Answer 4

The reason for having a separate IFRS for small businesses is because all other IFRS are complex and aimed at large businesses that need regulatory oversight.

SME are mostly owner managed and less red tape is needed. This reduces comparability as SME are producing F.S with less detail.

Simpler treatments
1. Goodwill is amortised over 10 years.
2. NCI at acquisition cannot be measured at fair value
3. Revenue expenditure on development is also expensed
4. Borrowing costs always expensed
5. Depreciation and amortisation methods do not need to reviewed annually.

Question 5

Materiality

Answer 5

An item is material if misstatement or omission would lead influence the economic decision of F.S users.

It becomes more important when it relates to key line items - revenue, profit, assets, cashflows

If it also relates to related party transactions, unusual transactions, geography and wider economic uncertainty.

Question 6

Management commentary

Answer 6

comments are used to provide context and understanding of performance.

Contents
1. Business model
- qualitative and quantitative info on operational developments and
how this affects future developments.
- This should cover senior leadership strategy on how they intend to take the company forward and any risks they may face most relevant to shareholder value.
- It needs to contain how business generates value and factors affecting value generation long term.

2.Financial analysis
- Explanation of current year position and performance.
- Wide variety of KPI measures by industry.

3. Non - financial information
   - Resources and relationships key to creating value in a business
   - historical info relating to understanding of future financial performance and position in the short, medium and long term
4. Forward looking statements
   - Explanation of future prospects including factors expected to drive those prospects. e.g. forecast such as sales growth percentage or target market share