i. The content of any accompanying commentary on the accounts and other statements.
ii. The age and nature of the company’s assets.
iii. Current and future developments of the company’s business interests.
iv. Any other noticeable features of the report and accounts, such as post balance sheet events, contingent liabilities, a qualified auditor’s report, the company’s taxation position, etc.

1. Inconsistent definitions of ratios
2. Financial statements may have been deliberately manipulated (creative accounting)
3. Different companies may adopt different accounting policies (e.g. use of historical costs compared to current values)
4. Different managerial policies (e.g. different companies offer customers different payment terms)
5. Statement of financial position figures may not be representative of average values throughout the year (this can be caused by seasonal trading or a large acquisition of non-current assets near the year-end)
6. The impact of price changes over time/distortion caused by inflation.

• Profitability:
  Both gross profit margin and net profit margin have fallen below the industry average. This may be the result of uncontrolled overhead cost on the presence of large obsolete equipment. Unless steps are taken quickly to improve the income account investors may shift their interest into more profitable companies in the industry.
• Liquidity:
  Both quick and current ratios fall far below those of the industry as confirmed by the fact that it takes longer to collect its debt than the industry. The problem may have been worsened by the fact that inventory stay longer at Agrimore Ltd than in the industry which is not the best use to which resources should be put.
• Efficiency:
  Even though Agrimore Ltd takes longer to collect its debts (5 days), this is compensated by an even longer time to settle the debts (20 days). This means that creditors provide free finance for its operations. However, the holding on to inventory for a long time (10 days) cannot be justified. This should be turned over in like manner as that assets turnover far exceeds that of the market.
• Shareholders’ Investment:
  Both dividend cover and dividend yield fall below that of the industry. Such a situation is not likely to excite investors especially income – oriented investors who are seeking to recoup their investment in the shortest time possible. This poor performance may be due to the fact that high gearing ratio of Agrimore Ltd has effectively put its future in the hands of debenture holders who are reaping the bulk profits in the form of interest charges.

Current Cost Accounting (CCA) also called replacement cost accounting method is a method of accounting in which assets and liabilities are valued on the basis of their current replacement cost, and increases in their value as a result of inflation are excluded from calculation of profits. CCA approach recognizes the changes in the prices of individual specific assets and liabilities due to the changes in technology, taste or other factors. CCA method revalues the assets and liabilities on current cost or replacement cost basis. It does not consider the RPI.

Profit measurement by historical cost:

Profit measured by replacement cost:

Note: The application of replacement cost values attempts to reflect economic reality by maintaining the value of asset balances in line with changes in the value of money and changes in the specific value of the assets concerned.

Monetary items are those items whose amounts are fixed by contract or otherwise in terms of numbers of currency units (e.g. cedis), regardless of changes in general price levels whiles non-monetary items are those items whose amounts changes with respect to changes in general price level. Examples of monetary items are cash, receivables, payables and loan capital. Examples of non-monetary items are PPE and inventories.

Arguments for:
• Profit is measured in real terms excluding inflationary value increments. This enables better forecasts of future prospects to be made.
• It provides a stable monetary unit with which profit and capital can be valued. It therefore measures the impact on the company in terms of shareholders purchasing power.
• By applying a single price index to all non-monetary assets, subjective valuation of current value accounting is avoided.
• The restatement of asset values in terms of a stable money value provides a more meaningful basis of comparison with other companies.
• CPP accounting is based on historical cost data which is readily verifiable and hence free from subjectivity.

Arguments against:
• The use of indices inevitably involves approximations in the measurement of value.
• CPP does not show the current values of assets and liabilities. Retail price index is not necessarily appropriate for all assets in the business. In addition, the physical capital of the business is not maintained.
• An objection of CPP accounting is raised by some authorities who believe that there is no such thing as generalised purchasing power.
• CPP deals with changes in the general price level and not with changes in prices of individual items.

Social and environmental reporting is the measurement and reporting of information concerning the impact of a business and its activities on society. It is the disclosure of information in the published annual report or in separate report, of the effect that the operations of the business have on the natural environment. In other words, it is the collation and communication of data – financial, quantitative and/or qualitative – about an organisation’s interactions with society.

The backbone of social reporting is the explicit recognition that every organisation has a wide range of stakeholders – those who are influenced by and/or, in turn, influence the organisation. In addition to shareholders and other financial participants, the most important of the other stakeholders are usually taken to be the employees, the local community (ies), customers, suppliers, the environment and government(s).

From society’s point of view, each of these stakeholders have rights to, amongst other things, information about the activities of the organisation – whether or not the organisation chooses to recognise those rights. From the organisation’s point of view, it has a range of stakeholders that it must manage and whose interests it must balance if it is to remain a successful enterprise.

Costs to Preparers:
i) the cost of developing and disseminating information,
ii) the cost of possible litigation attributable to information disclosure,
iii) the cost of competitive disadvantage attributable to disclosure.

i) The costs of developing and disseminating the information include those of gathering, creating and auditing the information. Additional costs to the preparers include training costs, changes to systems (for example on moving to IFRS), and the more complex and the greater the information provided, the more it will cost the company.

ii) Although litigation costs are known to arise from information disclosure, it does not follow that all information disclosure leads to litigation costs. Cases can arise from insufficient disclosure and misleading disclosure. Only the latter is normally prompted by the presentation of information disclosure. Fuller disclosure could lead to lower costs of litigation as the stock market would have more realistic expectations of the company’s prospects and the discrepancy between the valuation implicit in the market price and the valuation based on a company’s financial statements would be lower. However, litigation costs do not necessarily increase with the extent of the disclosure. Increased disclosure could reduce litigation costs.

iii) Disclosure could weaken a company’s ability to generate future cash flows by aiding its competitors. The effect of disclosure on competitiveness involves benefits as well as costs. Competitive disadvantage could be created if disclosure is made relating to strategies, plans, (for example, planned product development, new market targeting) or information about operations (for example, production-cost figures). There is a significant difference between the purpose of disclosure to users and competitors. The purpose of disclosure to users is to help them to estimate the amount, timing, and certainty of future cash flows. Competitors are not trying to predict a company’s future cash flows, and information of use in that context is not necessarily of use in obtaining competitive advantage. Overlap between information designed to meet users’ needs and information designed to further the purposes of a competitor is often coincidental. Every company that could suffer competitive disadvantage from disclosure could gain competitive advantage from comparable disclosure by competitors. Published figures are often aggregated with little use to competitors.

Companies bargain with suppliers and with customers, and information disclosure could give those parties an advantage in negotiations. In such cases, the advantage would be a cost for the disclosing entity. However, the cost would be offset whenever information disclosure was presented by both parties, each would receive an advantage and a disadvantage.

Benefits to users:

Increased information disclosure benefits users by reducing the likelihood that they will misallocate their capital. This is obviously a direct benefit to individual users of corporate reports. The disclosure reduces the risk of misallocation of capital by enabling users to improve their assessments of a company’s prospects. This creates three important results.

(i) Users use information disclosed to increase their investment returns and by definition support the most profitable companies which are likely to be those that contribute most to economic growth. Thus, an important benefit of information disclosure is that it improves the effectiveness of the investment process.

(ii) The second result lies in the effect on the liquidity of the capital markets. A more liquid market assists the effective allocation of capital by allowing users to reallocate their capital quickly. The degree of information asymmetry between the buyer and seller and the degree of uncertainty of the buyer and the seller will affect the liquidity of the market as lower asymmetry and less uncertainty will increase the number of transactions and make the market more liquid.

(iii) Information disclosure helps users understand the risk of a prospective investment. Without any information, the user has no way of assessing a company’s prospects. Information disclosure helps investors predict a company’s prospects. Getting a better understanding of the true risk could lower the price of capital for the company. It is difficult to prove however that the average cost of capital is lowered by information disclosure, even though it is logically and practically impossible to assess a company’s risk without relevant information. Lower capital costs promote investment, which can stimulate productivity and economic growth.

According to the International Integrated Reporting Committee (IIRC) integrated reporting is a process that results in communicating the value creation of an entity over time through an Integrated Report.

The IIRC defines an Integrated Report as ‘a concise communication about how an organization’s strategy, governance, performance and prospects lead to the creation of value over the short, medium and long term’
Integrated reporting provides information not only on the financials of an entity, but also information on strategy, governance, performance and prospects.

The following issues are often the subject matter for integrated reports:

• Overview of the organisation
• The strategic direction of the entity
• Analysis of stakeholder relationships
• Overview of the external environment
• Overview of governance structures
• An explanation of the entity’s business model
• Strengths, Weaknesses , Opportunities and Threats (SWOT) analysis
• Basis of resource allocation
• Analysis of financial performance and financial position
• Sustainability projection.
  

The primary benefit of integrated reporting is that it allows a company to better understand, manage and report on multiple dimensions of value.

A properly designed set of performance measures often included in integrated reports will give management the incentive and urge to improve performance.

For other stakeholders, the report is intended to provide more and better information to increase stakeholder understanding of the company- its management, strategy and operations, and its perils and prospects.

It has been suggested that the integrated report will become an organisation’s primary report, which links in with various supporting, more detailed, reports.

Note: The finance cost in the income statement for 2012, for instance, is computed as GHC4, 402,000 x 24% = GHC1, 056,480. Meanwhile, the interest to be paid is GHC5, 000,000 x 18% = GHC900, 000. This requires an accrual of GHC156, 480 (that is, GHC1, 056,480 – 900,000). This accrual should be added to the carrying value of the debt to arrive at the amortised cost at the end of year 2012.

Dr Financial liability    5,000,000
Cr Equity                                            5,000,000

Dr Financial liability    5,000,000
Cr Cash                                             5,000,000

An intangible asset is an identifiable non-monetary asset without physical substance. Intangible assets comprise expenditure on computer software, research and development, advertising, brands, etc. It also includes rights under licensing agreements for items such as motion picture films, video recordings, plays, manuscripts, patents and copyrights.

Recognition criteria for intangible asset:

1) The asset needs to be ‘identifiable’
An asset is identifiable either if it is separable (can be sold without disposing of the business as a whole) or if it arises from contractual or other legal rights, irrespective of separability.

2) Control over the economic benefits derivable from the asset
Control involves the power to obtain the future economic benefits flowing from the asset and to restrict the access of others to those benefits. The capacity of an entity to control the future economic benefits would normally, but not necessarily, stem from legal rights that are enforceable in a court of law.

3) Future economic benefits flowing to the entity
These benefits may include revenue from the sale of products or services, but could also include cost savings or other benefits arising from the use of the asset by the entity.

4) Cost can be measured reliably
‘Cost’ will often be the cost of purchasing or developing the asset. In the case of an asset acquired in a business combination, ‘cost’ will be the fair value of the asset at the date of acquisition, assuming this fair value can be reliably measured.

Relevance of the Conceptual Framework for Financial Reporting:

1) The Conceptual Framework is intended to assist the IASB in the development of future International Financial Reporting Standards (IFRS) and in its review of existing IFRS. The situation is avoided whereby standards are developed on patchwork basis, where a particular accounting problem is recognised as having emerged and resources are then channelled into standardising accounting practice in that area, without regard to whether that particular issue was necessarily the most important issue pertaining at that time without standardisation. Moreover, through the Conceptual Framework, those who are interested in the work of the IASB get more information about the IASB’s approach to the formulation of IFRSs.

2) Although, the Conceptual Framework assists national standard-setting bodies in developing national standards, it is primarily intended to assist the Board in promoting harmonisation of regulations, accounting standards and procedures relating to the presentation of financial statements by providing a basis for reducing the number of alternative accounting treatments permitted by IFRSs.

3) In the preparation and presentation of financial statements, the Conceptual Framework provides guidance to preparers of financial statements in applying IFRS. Some standards may concentrate on the income statement whereas some may concentrate on the valuation of net assets (statement of financial position) but a conceptual framework caters for every aspect of the financial statements. And for auditors who have to assert the true and fair view of those financial statements prepared and presented, the Conceptual Framework assists auditors in forming an opinion on whether the financial statements comply with IFRS.

4) It enables users of financial statements to interpret the information contained in financial statements prepared in compliance with IFRS. Where there is a conflict of interest between user groups on which policies to choose, policies deriving from a conceptual framework will be less open to criticism that the standard-setter gave in to external pressure.

Limitations of the Conceptual Framework for Financial Reporting:

1) Financial statements are intended for a variety of users and it is not certain that a single conceptual framework can be devised which will suit all users.

2) Given the diversity of user requirements, there may be a need for a variety of accounting standards, each produced for a different purpose (and with different concepts as a basis).
3) It is not clear that a conceptual framework makes the task of preparing and then implementing standards any easier than without a framework.