Introduction
The UK corporate governance code spells out the role of the chairman. According to the code, the Chairman is a non-executive director (NED) who serves as the head of the board of directors. He/she is responsible for the leadership of the board and must ensure that the board is running effectively in all material respects (FRC, 2012).
It is the responsibility of the chairman to set the agenda of the board and ensure that there is enough time for discussing all the items in the agenda with specific emphasis placed on strategic issues that affect the company. The chairman should facilitate the effective contribution of NEDs in particular and ensure that constructive relations exist between executive directors and NEDs. This ensures that a culture of openness is prevalent in the board. In addition, the chairman should ensure that directors receive accurate, timely and clear information. In addition, the chairman should promote effective communication with shareholders.
. The chairman’s statement of Reckitt Benkiser Plc contains some important information. It contains information regarding the performance of the company during the year ended 2011. It provides details of the difficult environment in which the company operated and the strategies that the company implemented. For example, the Chairman begins by stating that the company performed well in a turbulent business environment. The chairman also notes that a new CEO was appointed during the year. This was a significant event for the company because the CEO is very important in implementing the company’s strategy.
The chairman further notes that the company witnessed an improvement in its cash flows during the year which enabled it to pay down part of its debt. The strong cash position also enabled the company to increase its dividend by 9% from the year 2010 figure to 125 pence per share.
The chairman’s statement also focused on the company’s strategy. The chairman notes that considering the changing business environment, the company has redefined its vision and purpose to align itself with the opportunities and challenges of the environment in which it operates. The chairman believes that the new vision and purpose are fundamentally sound and will result in the creation and growth in shareholder value.
The chairman concludes by making a statement on corporate governance. Accordingly the chairman notes that the Board conducted its regular reviews of the performance and results of the business including reviews with management on strategy, brands, geographic area and functional performance as well as detailed reviews of human resources, corporate responsibility and reputation, controls and business risks (Reckitt Benkiser Plc, 2011).
Critical Assessment of the IFRS Foundation’s convergence Agenda
The IFRS foundation is working through its subsidiary body, The International Accounting Standards Board (IASB) to develop a global set of accounting standards that can be used across different. The foundation is making efforts to promote the convergence of national standards with International Financial Reporting Standards. For example, the IASB has been working on a Joint Conceptual Framework project with the US Financial Accounting Standards Board to ensure the convergence of US GAAP standards with IFRSs. In addition, the IASB has made significant progress in achieving convergence of national accounting standards of different countries with IFRS. For example, in 2002, the European Union (EU) issued Regulation EC No. 1606/2002 of the European Parliament and of the Council requiring all EU listed firms to adopt International Financial Reporting Standards on or before 1st January 2005 (European Union, 2002; Jermakowicz and Gornik-Tomaszewski, 2006; Epstein and Jermacowicz, 2007). This meant that more than 7000 firms were required to prepare financial statements that complied with IFRS standards during the year ending 31st December 2005. Moroever, in 2007, the United States (U.S) Securities and Exchange Commission (SEC) which regulates the trading of securities in the U.S decided to waive the requirement that foreign firms listed in the U.S should reconcile their financial statements with U.S Generally Accepted Accounting Principles (GAAP) (SEC 2007; Street and Linthicum, 2007). Moreover, the SEC has considered proposals to allow U.S firms to prepare financial statements that are in compliance with IFRS (GAAP) (SEC 2007; Street and Linthicum, 2007). IFRS is increasingly gaining recognition as a global set of accounting standards. Zalm (2008) observes that the number of countries that had replaced their national GAAP with IFRS was approximately 100 in 2008. The International Accounting Standards Board (IASB) and the Financial Accounting Standards Board have been working on a joint project to harmonise IFRS with U.S GAAP. The objective is to enhance the comparability of financial statements prepared under both standards and to improve the understandability, relevance and reliability of financial reports prepared using either U.S GAAP or IFRS. In order to evaluate the convergence project, this paper benefits and costs of convergence.
Benefits of Convergences
Improvement in FDI flows
One of the benefits of convergence is that it will result in an increase in cross-border capital flows such as foreign direct investment (FDI) (Chen et al., 2010). Convergence will result in a reduction in the degree of information asymmetry between home country and foreign users of the information reported in financial statements (Chen et al., 2010). Users of financial statements will be able to compare financial statements prepared across different countries and thus make better investment decisions.
It has also been argued that widespread adoption of IFRS will reduce or eliminate differences in accounting standards across the globe. This will result in a reduction in information processing costs and to an increase in cross-border economic transactions (Chen et al., 2010). According to the European Commissioner, McCreavy for example, adopting IFRS standards as a global set of accounting standards will result in more efficient allocation of resources and greater cross-board investment which will enhance economic growth in the EU (McCreavy, 2005).
Enhancement of the quality of Financial Reports
A potential benefit of the adoption of IFRS standards is that it will result in high quality and more corporate reporting practices. This will in turn improve market liquidity, lower costs of capital and enhance resource allocation. Greater market liquidity is consistent with a more efficient capital market. Improving market liquidity will result to a decline in transaction costs and increase the number of people participating in the market. An increase in the number of market participants will result in more efficient markets because more people will ensure that securities are always trading at their equilibrium prices (Bodie et al., 2007).
Costs of Convergence
Despite the potential benefits cited for convergence some investor groups believe that it is still very early to determine whether IFRS can effectively serve as a global set of accounting standards (SEC, 2010). The main argument offered is that IFRS is yet to be sufficiently developed or applied in practice to the extent that one can judge its ability to serve as a global set of accounting standards. According to the SEC (2010) IFRS lacks guidance in certain significant areas. In areas where there is guidance, such guidance tends to require much latitude before it can be comparable with US GAAP. There are jurisdictional variants in the application of IFRS which pose significant challenges to the adoption of IFRS. In order for IFRS to be applied globally, countries will need to converge in many other areas such as auditing, taxation, legal systems, etc.
According to commentators, existing US GAAP standards are already universally accepted as high quality financial reporting standards. In addition, not all firms in the US require capital from global capital markets or market securities internationally. Therefore, the convergence agenda is likely going to result in increased costs for US companies.
Investors and large firms in the US also felt that there were significant challenges and risks associated with having an international institution as the ultimate body that would issue accounting standards for issuers of securities in the US. Significant concerns were raised over whether this was likely going to be a wise policy taking into account the long standing role of the SEC as the oversight body over the financial reporting process in the US.
Another concern raised is that incorporating IFRS standards into the financial reporting system in the US will have a negative impact on the compliance with corporate governance requirements in the US. For example, the Sarbanes Oxley Act prescribes a number of corporate governance rules that US companies with comply with such as ensuring that the audit committee has at least one independent non-executive director with financial expertise. Investor groups in the US feel that the IFRS agenda may affect the ability of US companies to comply with these rules and as such the convergence agenda of the IFRS foundation is likely not going to be feasible in so many countries.
In addition, Hail et al. (2009) argue that accounting standards play a limited role in improving the quality of financial reports. There are other institutional factors that contribute to the enhancement of financial reporting quality. For example, the reporting incentives of firms and the enforcement of standards have been cited as important factors that determine the quality of financial reports.
Hail et al. (2009) further contend that comparability of financial reports cannot be guaranteed by the adoption of a single set of accounting standards across different countries. Comparability can only be fully achieved if the reporting incentives of firms are similar. Therefore, the argument that comparability of financial statements will improve as a result of the adoption of IFRS remains questionable.
Furthermore, it is not correct to view accounting standards in isolation from other important factors of a country’s institutional framework. There must be a match between the institutional framework and accounting standards. This means that if a country adopts accounting standards that do not properly match with the elements of its institutional framework can result in undesirable consequences for the economy as a whole irrespective of whether the new accounting standard unambiguously improves the element itself.
SECTION B
Environmental Reporting By Reckitt Benkiser Plc.
According to the Sustainability report of the Reckitt Benckiser Plc, the company’s strategy incorporates a commitment to run the business in a manner that is responsible, environmentally sound and sustainable. With respect to the environment, the company is committed to ensuring that the workplace environment is safe and healthy. It is also committed to ensuring that the employment environment attracts, developed and retains the right talent of people to manage the business.
The company has a life cycle carbon management program and a sustainable operational excellence program. With respect to the life cycle carbon management program, the company is committed to reducing its carbon dioxide emission. The life cycle management approach is used to reduce CO2 emission right across the product life cycle. This approach is used because the largest emissions occur when consumers use products.
For example, Air Wick launched a ground-breaking air fresher product which replaced the traditional propellant gases with compressed air. The natural propellant delivers a cleaner fragrance experience in a safer way than butane or nitrogen. The propellant is non-flammable and non-hazardous. Using compressed air in place of butane saves 5,000 tonnes of butane per year which in turn saves 20,000 tonnes of CO2 emissions (Reckitt Benckiser Plc, 2011b).
It should be noted that there is no specific legislation that governs environmental reporting in the UK. The only legislation that governs the reporting of CO2 emissions in the UK is the Climate Change Act of 2008 and the Energy Act of 2010. The Climate Change Act aims at reducing CO2 emissions. The Climate Change Act and the Energy Act led to the implementation of the Carbon Reduction Commitment, which represents a mandatory climate change and energy saving scheme. The scheme aims at enhancing energy efficiency and CO2 emissions. The sustainability report of Reckitt Benckiser Plc is to some extent in compliance with the Climate Change Act and the Energy Act 2010 (Gray et al., 2010).
Despite the absence of legislation on environmental reporting in the UK, a significant number of attempts have been made to encourage businesses to provide sustainability and environmental reports on a voluntary basis. Businesses are often encouraged through codes of practice and environmental reporting guidelines. Reckitt Benkiser Plc might have been influenced by these encouragements to disclose information relating to its environmental and social performance. Despite the absence of legislation, it has been argued that voluntary disclosure of environmental and social performance helps in enhancing firm value. For example, McGuire et al. (1988); Davis (1960); and Roberts (1992) provide evidence suggesting that there is a positive link between corporate social responsibility (CSR) disclosure levels and firm performance. The evidence also suggests disclosure of environmental performance is positively related to firm value. This explains why Reckitt Benkiser Plc has made an effort to disclose information about its environmental performance.
Advanatges a Company may gain by adopting and disclosing voluntary environmental Accounting Practices
Adopting voluntary environmental accounting can help a company improve its reputation (ICAEW and EA, 2010). Voluntary environmental accounting can be viewed by users of financial statements as a positive signal that the company is using efficient and low cost manufacturing techniques which results in efficient use of resources. As such the company’s share price can increase if it discloses positive information.
In addition, customers and can view the company as having concern over its environment. customers are not interested in buying from companies that do not have regard for their external environment. Consequently voluntary disclosure of environmental information can result in an improvement in the company’s sales and financial performance (Gray et al., 2010).
How Future Environmental Accounting will continue to support accrual accounting and going concern.
Accrual accounting is essential because not all transactions are settled in cash. It enables organisations to record transactions that have not been settled in cash as credit transactions. The going concern assumption assumes that the business will continue to exist for the foreseeable future. Environmental accounting will support accrual accounting in that it will enable businesses to continue recording all transactions irrespective of whether they are settled in cash or not. With respect to going concern, environmental accounting will enable users of financial statements to assess the impact of the company on its environment and determine whether the company will be able to continue as a going concern.
Section C.
Classification of the Convertible Bond
The convertible bond in question is a compound financial instrument because it has both debt and equity characteristics. According to IAS 32, Financial Instruments, Presentation, the instrument’s component parts should be accounted for separately. The accounting should be done according to their substance based on the definitions of liability and equity. The entity is required to make the division between equity and debt at issuance and is not allowed to make any amendments in response to changes in market conditions such as a change in the market interest rate, share prices, or other event (Deloitte, 2012). Therefore, the instrument will be classified as a compound instrument including debt and equity components. The debt component is the contractual obligation of the company to pay cash and the equity component is the option of the holder to convert the bond into common shares of the issuer (Epstein and Jermakowicz, 2007; Deiloitte, 2012).
Calculation of the Equity Component
The present value of the bond is calculated as follows:
YearDiscount Factor (9%)Interest/PrincipalPresent Value
10.91740.080.073392
20.84170.080.067336
30.77220.080.061776
40.70840.080.056672
50.64994.082.651592
Debt Element2.910768
Equity Element1.089232
The bond pays a coupon of $.08million (2% x $4million) per annum. At the end of the year, the bond is expected to repay the coupon plus principal of $4.08million. The cash flows need to be discounted at the market interest rate of 9% on similar non-convertible bonds. The present values are based on the discount factors for the 9% interest rate. It can be observed that the present value of the bond is $2.91million. This represents the debt component of the financial instrument. The equity component is calculated by subtracting the debt component from the amount raised from the issue of the security. Therefore, the equity instrument is equal to $4million less $2.91million. This gives $1.19million.
Closing Figure in the Statement of Financial Position
The closing figure in the statement of Financial Position is based on the following amortisation Schedule:
YearCash PaidInterest
ExpenseDiscount
AmortisedLiability
($millions)
02.91
10.080.360.283.19
20.080.290.213.40
30.080.310.233.62
40.080.330.253.87
50.080.350.274.14
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