A question for Tom

property prices decline, then annual profits will be lower. Measuring investing properties at fair value means that profitability becomes less predictable.

Cash flow

Investors can also want information regarding dividends. Dividends are paid in cash. Investors may want to know why profit and cash are two very different figures. In which case we would have to explain that.

Capital value

Investors are also naturally interested in the value of the business. It may be necessary to explain to an investor why the carrying value of the net assets as reported on the statement of financial position is not the same as the market capitalisation. In some cases, this can be partly explained as monies spent on creating valuable brands have to expensed. IAS 38 Intangible Assets prohibits the recognition of a business’s own brand.

Key performance indicators

Tom Clendon tackles a concept that’s particularly important for Strategic Business Reporting sitters

Question

What is meant by investor focus?

Answer

How relevant to SBR! This is because, going forward, the ACCA SBR examining team will be continuing to ask exam questions with an ‘investor focus’ rather than on current issues. This means that in the exam (and maybe in our jobs) we have to put ourselves in the shoes of investors and explain the impact of various accounting issues. Investor focus is not about calculating ratios but is a more rounded and applied form of interpretation with an explanation at its heart.

Introduction

The existing shareholders are the investors and owners of the business. They have a natural right to know what has happened – stewardship. The directors of the business are accountable to the investors as how they have managed the resources and what return has been made. Investors will also be interested in the future profitability of the business.

Investors, however, should not be pigeonholed as just greedy capitalists only interested in short term profit. As a group they will have diverse information needs. For example, some will be more interested in sustainability reporting than others.

Profitability

This is the natural place to start. It may be necessary to explain to an investor how choosing a particular accounting policy will impact on the reported profits. For example, IAS 40 Investment Properties allows such assets to either be accounted for at historical cost or the fair value model. Companies that use the fair value model report changes in value directly in the statement of profit or loss. This means if property values are rising, reported profits will be higher. Though, if in subsequent years

Many companies publish additional bespoke information to help users better understand the business. Key performance indicators. For example, a measure of underlying profitability such as EBITDA. It may be necessary to explain to an investor whether the particular key performance indicator is credible.

Decision making

Remember that investors have decisions to make. Do they sell their shareholding? Do they buy more shares e.g., by subscribing to a rights issue? They will also have to decide how to vote at general meetings, for example who is appointed as directors of the company.

Conclusion

The information needs of investors are complex and diverse. They will want to know about the future and yet are presented with information that is basically historic. Companies that publish integrated reports help address this reporting gap.

• Tom Clendon is an online ACCA SBR lecturer – see www.tomclendon.co.uk. He loves using WhatsApp (07725 350793) to communicate directly with his students