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assess the benefits and limitations of financial reporting
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analyse financial statements
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critically review the role of auditors
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explain the corporate investor relations function
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assess the emergence and relevance of impact reporting and integrated reporting
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illustrate the characteristics of an integrated report
17.1 Financial Reporting and Analysis
17.1.1 Why Report?
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measurement, reporting, and auditing standards;
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effective enforcement mechanisms, including courts of law for redress of fraud in the financial statements;
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sophisticated internal control and measurement systems; and
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information technologies that enable rapid capture and aggregation of data.
17.1.2 Financial Statements & Financial Statement Analysis
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the balance sheet;
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the income statement, also called the profit & loss (P&L) account;
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the cash flow statement.
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Cash from operating activities;
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Cash from investment activities;
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Cash from financing activities.
17.2 Audits and Investor Relations
17.2.1 Audits
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Reasonable assurance is a high level of assurance, but is not a guarantee that an audit will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements.
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Limited assurance is a lower level of assurance, whereby the auditor collects less, but sufficient, evidence for a negative form of its conclusion: ‘Based on the procedures performed, nothing came to our attention to indicate that the management assertion on XYZ is materially misstated’. The auditor achieves this by performing fewer tests or using smaller sample sizes for the tests performed than those for reasonable assurance.
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Deloitte;
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EY;
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KPMG;
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PwC.
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An unmodified opinion is expressed when the auditor is able to conclude that the financial statements give a ‘true and fair’ view of the company’s financial position and comply in all material respects with the applicable financial reporting framework;
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A modified opinion can be given in two ways:
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A qualified opinion is given when misstatements are material but not pervasive to the financial statements;
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An adverse opinion is given when the auditor concludes that misstatements, individually or in the aggregate, are both material and pervasive to the financial statements.
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17.2.2 Investor Relations
17.3 Sustainability-Related Financial Reporting
17.3.1 IFRS Sustainability Standards
Industry (77 in total, 3 given here) | Material topics identified per industry |
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Apparel, accessories, & footwear | • Management of chemicals in products • Environmental impacts in the supply chain • Labour conditions in the supply chain • Raw materials sourcing |
Hotels and lodging | • Energy management • Water management • Ecological impacts • Labour practices (including average hourly wage) • Climate change adaptation |
Materials & mining | • GHG emissions • Air quality • Energy management • Water management • Waste & hazardous materials management • Biodiversity impacts • Human rights (including those of indigenous people) • Community relations • Labour relations • Workforce health & safety • Business ethics • Tailings storage facilities management |
17.3.2 Sustainability Reporting Company Case Study
17.4 Impact Reporting
17.4.1 Convergence in Reporting
Cross-cutting standards
| |
ESRS 1 | General requirements |
ESRS 2 | General disclosures (governance, strategy, risk management, and metrics and targets) |
Topical standards—environment
| |
ESRS E1 | Climate change |
ESRS E2 | Pollution |
ESRS E3 | Water and marine resources |
ESRS E4 | Biodiversity and ecosystems |
ESRS E5 | Resource use and circular economy |
Topical standards—Social
| |
ESRS S1 | Own workforce |
ESRS S2 | Workers in the value chain |
ESRS S3 | Affected communities |
ESRS S4 | Consumers and end-users |
Topical standards—Governance
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ESRS G1 | Business conduct |
17.4.2 Impact Reporting Frameworks
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Integrated Capitals Assessments written by the Capitals Coalition, formed by uniting the Natural Capital Coalition and the Social and Human Capitals Coalition;
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Impact-Weighted Accounts Framework (IWAF) written by the Impact Economy Foundation with experts from Harvard Business School, Singapore Management University, Rotterdam School of Management and Impact Institute;
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Value Balancing Alliance (VBA) written by an association consisting of more than 25 international companies and the big four audit firms.
17.4.3 Impact Reporting Company Case Study
17.5 Integrated Reporting, Analysis, and Investor Relations
17.5.1 Integrated Statements
Companies that are able to articulate the relevance of sustainability issues to their long-term business success are likely to be those that are best equipped to address these issues internally. We therefore consider integrated reporting to be a useful proxy for the overall quality of management, which increasingly involves managing intangible assets while also taking account of any negative effects (or “externalities”) on the environment and society.Integrated thinking also implies an ability to find an optimal balance between managing short-term business imperatives and on-going value creation.
17.5.2 Integrated Audits and Investor Relations
BU1 | BU2 | BU3 | Overall | |
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F Size by • Sales • Invested capital Return on invested capital EBIT margin Sales growth | ||||
S Annual health benefits in additional life years Well-being of employment Damages in human rights violations Etc. | ||||
E GHG emissions GHG emissions avoided Contribution to biodiversity losses Contribution to biodiversity restoration Waste generation Etc. |
17.6 Conclusions
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Accounting is the process of keeping financial accounts
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Aggregation refers to combining data to provide an overview
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Assurance (or audit) is the independent review of company accounts by a certified auditor
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Attribution of impact distributes shares of an impact to each of the stakeholders in the value chain
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Auditor is a chartered accountant that is qualified to audit financial statements
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Balance sheet is a statement of the assets, liabilities, and equity capital of an organisation
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Book value of equity is an accounting measure of equity. It is measured as the difference between a company’s assets and liabilities.
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Efficiency ratios evaluate a company’s ability to generate income with its resources
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Financial reporting is the process of producing reports that disclose an organisation’s financial status
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Financial statement analysis is the process of reviewing and analysing a company's financial statements by external stakeholders, in which they calculate financial ratios to gain insights in the company’s ability to generate value
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Going concern principle assumes that during and beyond the next reporting period a company will complete its current plans, use its existing assets, and continue to meet its financial obligations
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Impact reflects changes that affect the welfare of a company’s stakeholders; companies create or destroy value for society through their impact
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Intangibles are assets or resources that are not physical in nature; examples are human capital, goodwill, brand recognition, and intellectual property, such as patents, trademarks, and copyrights
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Integrated reporting integrates financial, social, and environmental metrics and refers to concise communication about how an organisation’s strategy, governance, performance, and prospects, in the context of its external environment, lead to the creation of value over the short, medium, and long term
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Integrated thinking refers to taking into account the connectivity and interdependencies between the factors that affect an organisation’s ability to create value over time; it combines the financial, social, and environmental dimensions
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Investor relations informs current and prospective investors about the company’s financials, strategy, and operations
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Leverage ratios show how the business operations are financed and provide an indication of the company’s solvency
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Limited assurance is a lower level of audit assurance than reasonable assurance (see below), whereby the auditor collects less evidence but sufficient for a negative form of its conclusion: ‘nothing came to our attention to indicate that the management assertion on XYZ is materially misstated’
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Liquidity ratios reflect the ability to meet the company’s short-term debt obligations
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Market value of equity reflects a company’s market capitalisation. It depends on what investors expect a company’s assets to produce (or earn) in the future
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Market Value ratios can be used to determine how valuable a company is
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Materiality indicates relevant and significant information and refers to the degree to which certain information is important for a company
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Net working capital is the capital available in the short term to run the business. It is calculated as the difference between a company’s current assets and current liabilities.
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Profitability ratios are meant to reflect a company’s ability to generate profits
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Reasonable assurance is a high level of audit assurance, but is not a guarantee that an audit will always detect a material misstatement (due to fraud or error) when it exists
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Six capitals are the types of capital distinguished by the International Integrated Reporting Council, namely financial, manufactured, intellectual, social (and relationship), human and natural capital
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Valuation ratios are based on a company’s market value and show how valuable a company is