Topic 1 | The Accounting Landscape
↪ The Six Capitals
> apply six capitals into business activities to CREATE VALUE, using outside resources
a. Financial capital
- The FUNDS + FINANCIAL RESOURCES used by organizations to support its activities, to make
investments and achieve objectives
> Monetary Funds reported in financial statements
b. Manufactured capital
- The PHYSICAL + TANGIBLE ASSETS used by organizations in their operations
E.g. building, machinery & infrastructure
c. Intellectual capital
- This involves the KNOWLEDGE , SKILLS + INTELLECTUAL PROPERTY that contribute to a
companies competitive advantage
E.g. patents, trade marks, copyrights & expertise
d. Human capital
- This involves the intellectual capital of the organization's WORKFORCE
> people are valuable assets & critical contributors to the company
e. Social + Relationship capital
- This recognizes the importance of RELATIONSHIPS + SOCIAL NETWORKS that contribute to a
businesses success
E.g. customer, supplier, employee, community & stakeholder relationships
f. Natural capital
- This involves the RESOURCES + ECOSYSTEM services provided by the environment
E.g. air, land, water, biodiversity & other free goods
↪ Financial Indicators
What is responsible reporting?
- The MEASUREMENT, PROCESSING and COMMUNICATION of financial information about economic
entities / activities performances
> law is to justice, as medicine is to health, as business is to economic growth / sustainability, as corporate
reporting is to ethical influencing / accounting
↪ Non-Financial Components
- Frameworks that guide efforts towards sustainability, differing in approaches + scopes
a. ESG : environmental, social + government
- Focuses on companies ENVIRONMENTAL IMPACTS
- Evaluates companies SOCIAL RESPONSIBILITY
- Focuses on corporate governance & ETHICAL BUSINESS practices
> businesses & investors
b. SDG : sustainable development goals
- Consists of 17 goals to address global challenges ( issued by the UN )
> addresses a broad set of global challenges
c. SASB : Sustainable Accounting Standards Board
- Measures each capital with factors to make sure sustainability is at play
> factors include the 17 global challenges
E.g. ‘extreme weather risks’ may use the following measures;
Climate action ( 13 ) , Life on land ( 15 ) , Life below water ( 14 ) , etc
↪ What is our role?
- To take part in reporting, reflecting the organizations impact on the ECONOMY,
ENVIRONMENT and the PEOPLE
> ensure compliance with accuracy + completeness
Chapter 1 | What is Accounting?
↪ What does ‘Accounting’ mean?
- The process of COLLECTING, SUMMARISING, ANALYZING and COMMUNICATING information to
make informed decisions
> information is the aspects of the PERFORMANCE of an organization
> stakeholders are ALL shareholders
> HOWEVER, all shareholders are NOT stakeholders
a. What are informed decisions?
- Information dependent upon;
> decisions held
> expectations held
- Must be;
> reliable
> relevant
b. What is performance?
- Has 3 categories;
1. financial performance
- A measure or assessment of an organization’s performance measured in FINANCIAL
TERMS, perhaps through the use of financial accounting standards
E.g. total sales revenue, total cost of goods sold, total expenses + profits
2. social performance
- The impacts – both positive and negative – that an organization’s ACTIVITIES have on its
stakeholders, including employees, customers and the wider community
E.g. training, staff satisfaction, customer satisfaction, number of workplace accidents +
inclusive practices
3. environmental performance.
- The impacts – positive and negative – that an organization has on the PHYSICAL and
NATURAL environments in which it operates
E.g. amount + type of waste generated, water consumption, greenhouse gas emissions +
use of natural resources used
↪ What is a stakeholder?
- Any group or individual who can affect, or is affected by, the achievement of an organization’s
OBJECTIVES.
E.g. the physical environment, owners, investors, employees, customers, suppliers, the government
+ local communities
> environment bares the effects of the actions taken by businesses, people etc
- Can be INTERNAL or EXTERNAL
a. Deals with management + operational stakeholders within the business
> you cannot manage what you cannot measure
b. Deals with the laws + regulations
> you have the right to know
↪ The role of accounting
- To GUIDE decisions
- Information is influenced by management beliefs;
> what aspects of performance needs to be monitored, controlled and/or improved
> what aspects of performance needs to be disclosed to EXTERNAL STAKEHOLDERS
- Reporting provides a vehicle for an organization to be accountable to various STAKEHOLDERS,
and the ACCOUNTS (detailed record) being reported do not all have to be prepared in financial
terms.
> to be ethically influenced, transparent + responsabile
Accounting vs Accountability
a. Accounting = The communication of information that was collected and reported to relevant
stakeholders
b. Accountability = The duty to provide reckoning / give account to stakeholders for what you are
responsible for ( it is subjective )
> obtains key responsibilities
- to undertake certain actions (or to refrain from taking actions) in accordance with the
EXPECTATIONS of a group of stakeholders
- to provide a reckoning, or account, of those actions to the stakeholders.
↪ Qualitative Characteristics of Information
- Increased quality of information → increased quality of decision making
- Comparability, understandability, timeliness + verifiability ENHANCE relevance and reliability
1. Relevance ( pillar )
- Changing the decisions of those receiving information ( greater understanding of STAKEHOLDERS,
will bring a greater understanding of RELEVANT INFORMATION )
> determined by professional judgment ( accountants )
> affected by TIME + LOCATION
E.g. poisoness chemicals are emitted ( not made aware that it is dumped innto soil by a natural
fountain feeding locals ) - but should be as its relevant
- Predictive value ( deals with FUTURE decisions, your strategy )
- Confirmatory value ( deals with HISTORICAL facts, info can be backed by research )
2. Faithful Representation ( pillar )
- Informations NEEDS to be trusted
- It is free from error + bias
> get it as close to correct as possible
3. Comparability
- Information should be selected, measured, compiled and reported in the SAME way from period
to period
> can be benchmarked ( external comparability )
- must be in same industry → otherwise will be an IRRELEVANT comparison
4. Understandability
- Understand what information means
- Understand basis of measurement
- Consider knowledge and expertise of users
> if not understood, it is useless
5. Timeliness
- Give users access in time
- Older information is LESS useful
E.g. when making ethical decisions, dont waste so much time on reliability that it becomes irrelevant
6. Verifiability
- Give others the same data, then they should come to the same conclusion/ results
E.g. checking with co-workers STATEMENTS whether your work is free from errors and bias
↪ The Accountability Model
- The process of DECISION MAKERS responsibility
Influenced by;
a. Why?
- Perceived responsibility for QUALITY information
> legal requirements
> mandatory reporting requirements
> perceived responsibility
> powerful stakeholder demands
- Those with the LOUDEST voice
> the most influential
> responding to a crisis
- typically WITHIN & OUTSIDE the business
e.g. outside crisis is COVID
e.g. corruption within business want to report who supplier is
> increased profits
- Sole objective ( providing info to shareholders to keep profits increasing
b. To Whom?
- Motivation is PROFITS
> managerial reasoning + strategizing
( directed might be those who hold + exercise the greatest economic power over the organization )
E.g. shareholders, POTENTIAL shareholders
- Motivation is ETHICAL/MORAL reasoning
> who has a right to know?
( will seek to address the information needs of a broader range of stakeholders)
( direct the reports towards those stakeholders most affected by the operations of the organization )
( It would focus on issues such as various stakeholders’ ‘right to know’ )
c. What?
- What information is NEEDED, DEMANDED & WANTED
> encourages ethical reasoning ( greenhouse gas emissions etc )
d. How?
- Determine if an appropriate reporting framework exists, and where the related information should be
disclosed ( an organization's OBJECTIVE )
> objectives influence HOW it does accounting
1. Maximize profits
2. Reduce greenhouse gas emissions
- want to know HOW - will resort to a framework - to ensure accurate comparability to set a
STANDARD
↪ The Changing Role of Accountants
- Before → supposed to comply with tax regulations
> just account for things that already happened
- Now ;
> Analytical and strategic business partner
> Expert in regulatory frameworks
> Specialists in complex fields, i.e. forensic accounting, environmental accounting and IT auditing
> Strategic decision-making through business intelligence and data analysis
> Ethical influencers
a. Technical practices
- The COLLECTING + REPORTING ( to make financial decisions )
> this refers to the rules & regulations / reporting standards
( important for presenting framework - or will have NO value )
b. Social practices
- The USE of accounting records
> how accounting affects people
( job security )
( reporting unethical decisions )
E.g. reporting unethical decision, may force more ethical responsibilities, generating social impacts
of greater health, less risks etc
Chapter 2 | The Governance Landscape