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Recently graduated from Macquarie University, you have just joined the financial
reporting unit of a company* which applies the national equivalents of IFRS/IAS. On
your first day, you are introduced to the Chief Financial Officer (CFO) who looks
somewhat depressed. “You know”, she says, “I have just reviewed our latest financial
report. All those $ amounts! What do they really mean?” You are a bit shocked hearing
such doubts from the CFO. Shouldn’t she know what they mean? “But isn’t money the
most objective and therefore best measure for business performance? At least, that is
what we learned at University” you reply a bit shyly. “That’s what I used to believe, too.
But I give you just three reasons of many which made me question the meaning of
money.”
“Firstly, did you know that money is not backed by any real value? In October 1976, the
United States government officially changed the definition of the dollar; any references
to gold were removed. From this point, the international monetary system was made of
pure fiat money that has no intrinsic value at all. Fiat money only works as a means of
exchange and a store of value as long as people who are offered money in exchange
for their labour or goods believe that they can easily find other people who also believe
in money and therefore will accept it in exchange for their goods and services. Those
other people will only believe in money if they in turn can easily find again other people
who also believe in money and so forth. What if this belief-chain breaks and people
realise that money has no value on its own?”
“So what you are really saying is that by creating a system based on fiat money any
reference to real values has been removed? Rather, our whole monetary system is
now built on trust?” you reply.
“Exactly. Further, did you know that out of every $100 of foreign exchange transactions
in A$ roughly only A$1 is traded for real goods and services? In other words, the
volume of purely financial transactions is 100 times the volume of transactions in A$ for
imported or exported real goods and services.”
At this point you begin to really question – “So, how can the value of A$ be connected
to any real value in a meaningful way?”
“This is what I have been asking myself of late. Did you also know, and that is my third
reason, that the central banks in the so-called ‘developed’ western countries have,
since the Global Financial Crisis in 2008, pumped trillions of $ into the monetary
system to avoid the collapse of financial institutions (so-called quantitative easing)? A
great deal of this money ended up in the share markets around the world with new
record highs of share prices leaving far behind the real growth of listed companies,
another disconnect between money and real values.”
“So, how about writing a research report for me as your first task to search for any
alternative ways of reporting our performance and value creation?” she ends our
conversation and turns back to her numbers.
ACCG224 Intermediate Financial Accounting S2, 2014
please turn over →
Required:
Based on your conversation, the CFO asks you later in an email to prepare a business
research report addressed to her and a brief presentation of your findings (5 minutes +
2 minutes for questions) to her and your colleagues on the following:
a. Critically discuss how the current IASB Conceptual Framework for Financial
Reporting (CF) forces entities to report in monetary terms. In your discussion, you
need to refer to the objective of general purpose financial reporting (OB1-OB21)
and the concepts of measurement, capital and capital maintenance (4.54 – 4.65)
as outlined in the CF. (15 marks)
b. Based on any information made publicly available by your company for the most
recent reporting period, draft a qualitative section to be potentially incorporated into
the annual report depicting your company’s performance and value creation in
non-monetary terms. This section should include the five, in your opinion, biggest
achievements in the last reporting period, describing the resources used and the
value created in non-monetary terms. (15 marks)
c. In the form of a conclusion, make concrete recommendations on how your
company could provide more meaningful reports to stakeholders who require
increasingly more non-financial information on a company’s performance and
value creation in a world of climate change, natural resource scarcity and
overpopulation. (10 marks)
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