1. Limitations of traditional corporate reporting.
Traditional reporting is about financial reporting. Hence it is criticised for ignoring social and environmental externalities caused by the corporations. Therefore its suitability is questioned. Craig Deegan, in his book “Financial Accounting Theory, chapter 9” lists the following as some of the limitations of traditional reporting:
1.1 The objective of traditional reporting
The objective is to provide useful financial information about the company. It identifies the purpose as providing of financial information to financial stakeholders. No consideration is given to the broader stakeholders in providing information of non-financial nature.
1.2 Materiality
“Materiality” precludes the reporting of social and environmental information, given the difficulty quantifying social and environmental costs. AASB 1031 says if something is not material, it does not need to be disclosed. This means if something cannot be quantified (social and environmental externalities) it is not material and therefore does not require disclosure.
1.3 Discounting liabilities to present value
Liabilities to be repaid in more than 12 months should be discounted to their present value. (Paragraph 45 of IAS).
It downplays the significance of the future clean up and thus encourages us to pass problems of an environmental nature to future generation.
1.4 The entity assumption
“Entity assumption” treats entity separate from its owners and other stakeholders. Transactions not directly impacting the entity will be ignored. This means ignoring the externalities caused by corporations.
1.5 Definitions of the elements
Expenses and assets are defined in a way as to exclude the recognition of any impacts on resources ...
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...g’ as a way of breaking down internal silos and minimizing duplication. It improves the quality of information to financial capital providers in order to enable a more productive and efficient allocation of capitals. Its concentration on value creation, and the ‘capitals’ used by the corporations to create value over time, paves the way towards a more financially stable world economy. will rectify the limitations by charting the levels of the various capitals held by a company at the beginning of a period, and how these capitals are accumulated or spent over the period. Meanwhile, the integrated report would tell a company's value proposition – why an investor should invest with them in the short, medium and long term.
It would also integrate the information in the financial and the sustainability reports to provide insights to company's broader performance.
At the end of the useful life of fixed assets the businesses will dispose, and any amount received from disposal will represent its residual value. This may be difficult to estimate in practice. How ever, an estimate has to be made. If it is unlikely to be significant amount, a residual value of zero will be assumed. The cost of fixed assets less its estimated residual value represents the total amount to be depreciated over its estimated useful life.
Accountants record costs that have been incurred internally but EMA suggests that there are costs incurred externally. GE used CFC in refrigeration and air conditioning. They were the market leaders back then. But as soon as they realized that CFC is a harmful gas, it had an adverse effect on the society. GE were unable to realize the long term cost to the society, the damage they were causing by polluting the air and water, impact on the health of the public, diseases incurred by its workers and the poor corporate image it had unknowingly created of itself.
It outlines the interconnection of a company’s financial and non-financial elements and aims to combine them and show value creation and maintenance. It identifies resources and their effective and responsible usage. It intends to create a dialogue between the shareholders and other stakeholders and provides them with detailed information.
A consolidated financial statement can be defined as the financial statements of a parent and its subsidiaries combined to form a single economic entity (AASB 10, 2011). The entity, which acquires the other entity, is known as the parent and the entity, which has been acquired, is known as the subsidiary. Consolidation financial reports arise when one entity purchases another entity, to then form a group.
According to the conceptual framework, the potential users of financial statements are investors, creditors, suppliers, employees, customers, governments and agencies, and the general public (Financial Accounting Standards Board, 2006). The primary users are investors, creditors, and those who advise them. It goes on to define the criteria that make up each potential user, as well as, the limitations of financial reporting. The FASB explicitly states that financial reporting is “but one source of information needed by those who make investment, credit, and similar resource allocation decisions. Users also need to consider pertinent information from other sources, and be aware of the characteristics and limitations of the information in them” (Financial Accounting Standards Board, 2006). With this in mind, it is still particularly difficult to determine whom the financials should be catered towards and what level of prudence is necessary for quality judgment.
Howells, Peter., Bain, Keith 2000, Financial Markets and Institutions, 3rd edn, Henry King Ltd., Great Britain.
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Financial reporting is an example of an ethical problem for an organization or business. Many busin...
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