Other Revision Points Flashcards
Critical success factor
An activity that organisation must excel out in order to succeed. Will be a shortlist of approximately less than six items that are not time bound. 
Definition of corporate governance
The way in which businesses are directed and controlled
Ethical investors
Investors that will look for businesses/investments that have high ethical standards. Businesses that have clear CRM policies and include sustainability within their integrated reporting.
Debt versus equity
Debt is usually cheaper than equity due to the tax relief received on interest payments
IRR suitability
Suitable for evaluating projects/investments in the existing line of business and taking account of risks in that area
Only suitable for evaluating projects that stand alone and can be considered in isolation.
If a project is mutually exclusive, it would be preferable to evaluate using the net present value This is an absolute value and reflects the impact of an investment on shareholder wealth.
It is possible alternative investments can have a lower IRR, but a higher NPV, and so would be superior to a business.
IRR can be inflated if existing resources have been used in a project
Currency changes
Any loss or gain in foreign investments due to the translation on the reporting date will be taken to a currency reserve in the statement of financial position (there will be no direct impact on reported profit).
This could impact key ratios such as return on equity, return on capital employed and gearing.
Revenue expenditure, such as ongoing maintenance, will be written off at cost throughout the year and translated out the average rate for the year in the consolidated financial statements. This would mean it is less likely to be affected by large swings in the currency rates.
The impact of capital investments in foreign subsidiaries will reduce overtime due to the fact that appreciation will decrease the value of the capital investment.
If a business has multiple foreign subsidiaries , this would help to mitigate and reduce the overall effect of currency changes.
Cost centre
The manager has responsible only over managing costs. Often service departments will be set up as cost centres
Cost variances and possibly benchmarking against external providers used to assess performance.
An attributable cost is any cost that can be specifically identified as belonging to that particular responsibility centre. Most of the time these costs will be controllable by the manager
Revenue centre
The manager purely has responsibility for the sales/revenue generating activities
Performance assessed by sales variances, revenue growth, market share
Profit centre
The manager is responsible for managing both the revenues and operating costs
Performance assessed by variances for sales and costs, profit margins, and profit growth.
Investment centre
The manager is responsible for managing both the revenues (internal and external) and operating costs plus the level of capital investment within the investment centre
Performance can be measured by linking profit to capital employed. E.g. return on investment, residual income and economic value added
Presentation similar to that the profit centre except depreciation would now be classified as controllable.
Structure of organisations and responsibility, accounting
Important to determine if the current structure is appropriate
Basis of divisionalisation will usually be product or service driven.
Responsibility accounting is used to asses the performance of business divisions in a decentralised business
Managers of the division will tend to have responsibility for all the functions within that division.
In effect, they are often running a complete business within a larger organisation.
This can have motivational benefits but care is needed to ensure non-goal, congruent behaviour does not develop
Return on investment
Can be calculated using the income statement and statement of financial position
Calculated as divisional profit divided by divisional investment
Divisional profit should be before head office allocations, usually before interest tax if you are assessing the managers performance. If you are looking at the divisions performance, it may be better includes centrally allocated cost as well.
Divisional investment may use capital employed (TA L, C,L) or net assets.
Can cause dysfunctional behaviour or non-goal congruent behaviour
Residual income
Identify the net profit of a division after ducting, a notional charge for interest, based in the amount of investment tied up in the division.
National charges estimated reference to the companies, overall cost of raising finance cost of capital or weighted average cost of capital).
It compares the profit actually made with the minimum acceptable profit to the investors.
If RI is positive, it suggested the division has generated a profit that is over and above that which would be required by the capital providers.
ROI and R I. Comparison
Technically residual income is a better method because it’s linked to the cost of capital and should result in fewer dysfunctional decisions.
ROI is so widely preferred because:
-It gives a percentage answer and people understand percentage returns
- Division comparisons are easier to do since ROI is a relative measure, not an absolute one like RI
- It is not felt that dysfunctional decision making happens often enough to be a real problem.
R I needs an estimate of the cost of capital to be made
Economic value added
A specific type of residual income calculation
Based on the same principles, but aims to make adjustments to both the profit figure I used and the asset figure used in order to better reflect the economic reality of the performance and decision-making.
EVA is net operating profit after tax minus an appropriate charge for the opportunity cost of all capital invested in an enterprise
Adjustments include
Any interest charges
Training costs, R&D and advertising
Depreciation
Provisions
Non-cash expenses
Operating leases
Tax charges (needs to reflect the cash tax charge)
Pros and cons of EVA
Benefits
Linked to the cost of capital so consistent with improving shareholder wealth.
NoPat is closer reflection of cash flow than accounting profit due to adjustments.
Adjustments reflect economic reality of cost/revenue
Limitations
Short term view might be taken by some managers.
Lots of adjustments, some of which could be argued to be arbitrary.
Difficult to compare divisions of different sizes
Integrated reports
A report to stakeholders on the strategy, performance and activities of an organisation to create and sustain value over the short, medium and long-term
Limitations of traditional financial statements.
– they normally based on historical information.
– they do not recognise all of an entities, assets and resources
– they did not include information about non-financial factors that affect an entities performance
The six capitals of integrated reporting
Fishman
Financial capital
Intellectual capital
Social and relationship capital
Human capital
Manufactured, capital
Natural capital
Objectives of integrated reporting
To improve the quality of information available to providers of financial capital to enable a more efficient and productive allocation of capital
To provide a more cohesive and efficient approach to corporate reporting the draws on different reporting strands and communicates the full range of factors that materially affect the ability of an organisation to create value of time
Accountability and stewardship for the board, broad base of capitals
To support integrated thinking, decision-making, actions of focus on the creation of value of the short, medium long-term
Benefits and limitations of integrated reporting
Benefits
Increase the level of forward-looking information provided enabling more informed user decisions
Disclosure previously undisclosed information increases understanding of the users
Stakeholder reputation due to the increased transparency.
Integrated thinking may lead to improve efficiencies within the organisation.
Limitations
Potential for bias, as reports are not required to be audited.
Reluctant to disclose information for fear of losing competitive advantage
May provide too much information for uses digest
Stages of negotiation
Preparation/Opening stage/Bargaining/Closing
Prep. Obtain info and identify leverage
Opening. Establish co-operating atmosphere and present opening position
Bargaining. Areas of leverage and areas of compromise. Include senior staff with authority. Be willing to work together
Closing. Formalise conclusions, don’t leave anything to doubt. Emphasis win:win
Contingent liability in a subsidiary
Becomes a provision in consolidated accounts
Consolidated accounts
Fair value asset increases
Will increase net asset and the value of the business but will decrease future profits due to higher depreciation charges.
Deferred tax
Estimated future tax consequences of transactions and events recognised in the financial statements of the current and previous periods.
It is an application of the accruals concepts and aims to eliminate a mismatch between accounting profit and taxable profit
Deferred tax adjustments are an application of the matching concept. The accounting of the tax implications are being matched to the accounting treatment of the transaction, causing the tax.
Accounting for deferred tax
One - established the temporary difference at the year end – compares carrying amount of net assets against the tax base
Two – calculate the year end third tax balance showing on the SFP. Take the temporary difference from step one, and multiply by the tax rate.
Three – record a journal entry, showing the increase/decrease in the deferred tax balance during the year. The cumulative deferred tax balance at the state of financial position would be presented as a noncurrent item.
Deferred tax impact on other comprehensive income
Any deferred tax charge/credit that relates to an item that has been recognising in other Comprehensive income should also be recognised in other comprehensive income.
The most common example to this relates to the revaluation of nonconcurrent assets.
When an asset is revalued upwards, increasing the carrying amount of the assset it does not affect the tax base (revaluations are ignored for tax purposes).
Debt versus equity
Debt is generally cheaper than equity, because lenders generally bear less risk than shareholders
Debt is cheaper, but the company must pay it back.
Equity does not need to be repaid, but generally cost more due to the tax advantages of interest payments.
Since the cost of equity is higher than debt, generally provides a higher rate of return.
Risky investments, in the working average cost of capital
Rescue investments imply an increase in the cost of equity.
If the cost of equity increases and share prices will decrease.
Herzberg definition
Identification of the motivational needs of individuals.
Hygiene factors – based on a need to avoid unpleasantness. They do not provide any long-term motivating power. A lack of satisfaction of hygiene factors can demotivate staff.
Motivational factors – satisfy and need for personal growth. Satisfaction
of motivator factors can encourage staff to work harder.
You can’t motivate dissatisfied people. Satisfiers or motivators only generate job satisfaction, if the hygiene factors are present.
Herzberg
Hygiene factors
Policies and procedures for staff treatment
Suitable level and quality of supervision
Pleasant, physical and working conditions
Appropriate level of salary and status for the job.
Team working
Herzberg
Motivational factors
Sense of accomplishment through setting targets.
Recognition of good work
Increasing levels of responsibility
Career advancement
Attraction of the Job
Burns and stalker
Mechanistic
Task specification
Responsibilities and authority clearly defined
Coordination and communication – a responsibility of each management level
Selective release of information to subordinates
Emphasis on the organisational hierarchies ability to develop loyalty and obedience.
Employees are often locally recruited
Seem to be appropriate in very stable conditions with management of change was not seem to be an important factor
