Study notes 47

l Goals and objectives – eg, what kind of image does the organisation want to portray?l Targets and achievements. l Performance and compliance.

The examiner will not ask you to draw up a report, but a general understanding of its usual content will help you to consider the important features.

What makes a good report?The answer to this question depends to some extent on who is looking at the report. But from the user’s point of view, a good one will be:l Timely, conveying up-to-date information.l Unbiased, giving a balanced view of the good, the bad and the ugly.l Trustworthy, perhaps with some sort of verifica-tion from an independent reviewer.l Easy to understand, providing a narrative as well as numerical information.

Are such disclosures mandatory?No, but many businesses still feel the need to pub-lish environmental reports in order to: l Communicate to stakeholders their general approach to environmental responsibility.l Increase their competitive advantage.l Enhance levels of recognition – “the public are becoming increasingly aware of environmental issues, so let’s tell them how wonderful we are”.l Set targets – “if we tell the public what we want to achieve, that puts pressure on us to hit our targets”.l Ensure that they are well prepared in the event that environmental reports become mandatory. The UK government has hinted that they will if it becomes dissatisfied with the quality and quantity of voluntary disclosures.l Improve access to lists of preferred suppliers.l Manage corporate risk. If the company is demon-strably aware of the environmental risks it faces, it is more likely to have effective procedures in place to prevent disasters, thereby reducing the likelihood that it will require emergency loans. This could reduce its finance costs and perhaps give it access to more investors.l Increase profitability if revenues grow as a result of an improvement in consumer perceptions.

Some people believe that employees are much more likely to want to work for an environmentally friendly organisation, which means that making such disclosures will help a company to recruit

Paper F2

ManagementFinancial

By Jayne HowsonFreelance lecturer specialising in financial management, reporting and tax, and a marker for F2

Until environmental reporting becomes a legal requirement, questions on the topic will continue to focus on the pros and cons of disclosure, but it’s still crucial to make a careful note of their requirements

S ection D of the Financial Management syllabus relates to developments in exter-nal reporting. Constituting ten per cent of the syllabus, it includes a range of topics concerning non-financial envi-ronmental and social reporting, as well

as international financial reporting standards. A quick review of past F2 papers will show you

that section A of the exam has included a ten-mark question about this subject area at each sitting. Previous articles in Financial Management and Velocity have covered human asset accounting (www.fm-magazine.com/pdfs/April_Paper_F2.pdf) and the convergence of IFRS and US Gaap (bit.ly/velocityIFRSGaap), so I will focus here on environmental reporting.

This topic is so vast that I could fill the whole magazine covering the ins and outs of the subject, but the most important thing is to address why students fail to achieve a pass mark when answer-ing questions on it. There are two main reasons:l A failure to understand what environmental reporting is.l A failure to answer the question that’s set. If someone asked you the way to London and you didn’t know it, would you give them directions to Sheffield, hoping that they wouldn’t notice the dif-ference? I doubt it. So why do so many students waste time giving irrelevant answers in the exam?

What is environmental reporting?It is the public disclosure of information concern-ing an entity’s environmental performance. Envi-ronmental reporting makes organisations appear more accountable for the economic, environmental and social consequences of their activities.

The reports may include information such as:l The company’s profile – eg, its size, its industry, the markets in which it operates.

Further reading CIMA Official Study Text – Financial Management (2011-12 edition), CIMA Publishing, 2011.

‘If someone asked you the way to London and you didn’t know it, would you give them directions to Sheffield, hoping that they wouldn’t notice the difference?’

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Paper F2Financial Management

Study notes

the best workforce. I don’t know of anyone who has applied for a job at a company as a result of having read its environmental report. In the cur-rent climate of high unemployment, I think that most people are even more unlikely to do that.

Does reporting have any drawbacks?The main disadvantage of making such disclo-sures is that the associated labour hours and print-ing costs are likely to be substantial.

You may think that a company could be giving away its trade secrets, but because the reports are voluntary, it can include whatever material it wants to. Since such disclosures are not audited, either, the lack of regulation allows each company to provide the information in the format it chooses. This makes it more difficult for users to compare how different companies are performing.

What could the examiner ask?Because the companies making the environmen-tal disclosures get to decide what information is published, exam questions have tended to focus on the advantages and disadvantages of provid-ing such information. This in itself is not a difficult topic, but candidates in recent sittings have failed to read the requirements properly and identify whether to comment on the pros and cons from a user’s point of view or from that of the business.

Take question 5 from May 2011’s P2 paper, for example. It offered candidates six marks to discuss the potential advantages that could be gained by BNM (the company in question) if it included voluntary disclosures in its annual report. The part highlighted here in italics is just as it was shown on the exam paper, but many students still failed to notice this and their answers listed general advan-tages – eg, how investors would have a better view of the company – which earned them no marks.

A good answer would have perhaps come up with some or all of the following (note the emphasis on the benefits to the company):l The reports may be biased. The firm can concen-trate on positive aspects and ignore the negative ones. (Note that this would be a disadvantage if we were looking at this from a user’s point of view.)l If enough positive aspects are highlighted, the company’s share price may improve.l Investors may be attracted to the business, thereby increasing its share price.

l Revenues could increase if more customers are drawn to the firm. l The company may appear on preferred-supplier lists, as some customers would rather deal with firms that disclose such information.l The reports may contain information about aspects that are not included in the financial state-ments – eg, human asset accounting. This will give potential investors more information and may encourage them to buy shares.

The second part of question 5 asked for a discus-sion of the potential drawbacks, allowing candi-dates to make far more general comments. But one-word answers such as “biased”, “cost” and “time” scored very few marks, because the verb in the requirement wanted some explanation and not just a statement.

So if you want to score highly on such questions, you would do well to heed the following advice:l Use the reading time to understand the require-ment. Note the angle that you are coming from.l Note the mark allocation. One good-quality point explained equals one mark.l Plan your answer briefly before you start writing it, or you will risk striking off on a tangent and stat-ing everything you know about the subject.

‘Candidates in recent sittings have failed to read the requirements properly’

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