A Company Prepares Financial Statements And Annual Reports Solely For Their Benefit Accounting Essay
In this essay I have identified four key users of BskyB’s financial statements. I have discussed the information these users are provided with, and have evaluated if it aids them in their decision making process. Within this evaluation, I have considered how the users are affected by the qualitative characteristics of financial information, and how the format and wording of the report aids these users in the decision making process.
Financial Reporting Statements Essay- BSkyB
One could be mistaken for thinking that a company prepares financial statements and annual reports solely for their benefit, but in fact, depending on the organisation and some of its characteristics; it often aids many other groups of people, known as stakeholders. A stakeholder is “those individuals, groups or other organisations who have an interest in the activities of the organisation producing the accounting information and/or are in some way affected by these activities” (Upchurch, 2002 p10). In my opinion, Sky have produced their annual reports structure which best enables all interested parties to easily view the information of importance to them whilst maintaining accounting standards. These parties require access to the accounts for slightly different reasons, be it to make an informed decision, or merely to see how the business is developing.
The conceptual accounting framework identifies four principal characteristics that make the information provided in financial statements useful to users. The first is understandability: apart from merely setting the information out in a clear format, the company should also take into account that the users of its financial statements will have different levels of knowledge and ability therefore they must be written in consideration of this (An employee is less likely to be experienced at understanding financial statements compared with a shareholder). The second principal is relevance: information that doesn’t have the ability to influence decisions is generally considered irrelevant. Materiality is a fundamental accounting concept which is used to decide which information should be included in financial statements and whether or not it should be grouped with other similar items: For example, the amount spent on air travel by Sky is not likely to be a material amount, and is of no real relevance to any of their users. The third is reliability: if the information provided isn’t accurate, faithful, free from bias and complete then it is of limited use to the user. If Sky provided an unfaithful representation of its accounts, the shareholders are one user which could be greatly affected (they could, for example, choose to invest more in the company, when if they knew the correct figures, they wouldn’t). The final characteristic is comparability/consistency: i.e. being able to evaluate changes in figures from one year to the next.
Identification and description of users
The first user of BskyB plc’s financial statements I am going to discuss is the management sector of the business itself. “It is management’s responsibility to employ the resources of the business in an efficient way” (Weetman, 1999 p12). Without accounting information, it would be far harder for management to achieve a high level of efficiency, as they would struggle to distinguish where the business is using its resources efficiently, and where wastage is occurring (especially in large businesses such as BskyB plc). With the use of accounts, the decision-makers within the company are able to make accurate informed decisions based on reliable figures. Such a large company will also have statements created at regular intervals just for management, but a yearly report will still have use in that it allows for easy comparison between past and present years.
A second group which will frequently use BskyB plc’s financial statements are its investors, both current and prospective. There are several reasons why investors need access to a company’s financial statements, the first is that upon seeing the annual report, both current and potential future investors are able to “evaluate the performance of the entity and its management, and assess the effectiveness of the entity in achieving its objectives” (Thomas and Ward, 2009 p38). Another reason is to let the current or potential investor try and understand or calculate the company’s distant prospects – so they can predict the size of future dividend payments, and forecast their ability to maintain them. The aim for the investor is to deduce from the financial statements whether the businesses good performance is likely to continue or whether it’s temporary (cyclical variation as a result of a trend is a fairly common feature in the general entertainment sector). A third reason is so that investors can assess the “economic stability and vulnerability of the reporting entity including its liquidity, its present or future requirements for additional capital, and its ability to raise long- and short-term finance” (Thomas and Ward, 2009 p38). An investor wouldn’t inject money into a company if it is evident he/she is unlikely to see return, for reasons such as the business declaring insolvency - hence why it is important he/she can assess the stability of the entity before making any financial decisions.
A third user group of BskyB plc’s financial statements is the employees (including potential future employees, and employee representatives such as unions) of the company. The conceptual framework of accounting states that “employees and their representative groups are interested in information about the stability and profitability of their employers. They are also interested in information which enables them to assess the ability of the entity to provide remuneration, retirement benefits and employment opportunities”. This doesn’t apply solely to current employees, but also employees who might have an interest in joining the firm in near future. Potential employees might be reluctant to apply if it is clear that employment opportunities would be limited, or if it is evident there might be remuneration issues. Current employees will be interested in the performance of the company, due to reasons such as the possibility of increased pay and maybe even a new position in the firm if it is for example experiencing growth at levels which might force expansion. The economic stability of the firm is also of obvious importance to the current employees as if the business is heading for liquidation; employees will want to start searching for a new job. “Employee representatives (trade unions) will be interested in information for the purpose of wage bargaining” (Thomas and Ward, 2009 p39). This isn’t a direct interest from the employee’s, however it is still concerning them and is still an active interest in the company on their behalf.
A fourth key user of Sky’s financial statements will be their competitors. There will be several factors of interest to their competitors. Amongst others, there is growth in terms of profit, the speed of this growth, the number of new subscribers and any indicators of customer satisfaction. Using BskyB’s financial statements will also allow them to benchmark their own results, enabling them to make comparisons of performance over the past couple of years. Drury (2006, p15) stated the following: “Benchmarking is a technique that is increasingly being adopted as a mechanism for achieving continuous improvement. It is a continuous process of measuring a firm’s products, services or activities against the other best-performing organizations” and that it “therefore represents the ideal way of moving forward and achieving high competitive standards”. BskyB plc is the market leader, and by quite a way, so for them, benchmarking might be of less use than for their competitors who are trying to penetrate the market, it could be invaluable. Potential competitors would also have an interest in Sky’s annual report because it could aid them in establishing how profitable it might be to enter that industry. It would be seen as a bold move for most businesses to try and make itself space in the same markets Sky operates in, as they have huge budgets for many pay-to-air programs, such as sports matches. Many of Sky’s competitors have complained in recent years of simply not having the same level of funds to make it worthwhile entering into a bidding war. As a result of their dominance, the media regulator, Ofcom, interfered on several occasions, instructing Sky to make changes such as forcing them to offer their HD channels to competitors, and to sell its sports channels at reduced prices to its competitors.
Discussion of information provided
With regard to the first user discussed in this essay (Management), the conceptual accounting framework actually takes the view that the report/statements “should not be prepared with management’s information needs in mind”. Regardless of this, there are still many ways in which this information can be of use to them. The layout of the figures in the statements, with present and past years being side by side, allows for quick and efficient comparison. There is also the question of decisions they may make based on their findings whilst creating the annual report, for example they might choose to increase dividend pay-out per share in view of augmented profits (it is clear from a well-designed chart that they have been increasing pay-out in line with increased profit in recent years). Another example is that Sky might find increased investment into one product has led to a possible increase in profits, meaning that they might choose to boost spending in that sector in the upcoming year. Finally, in light of their end of year profit, they might decide to try and find more funds to invest in the business, whether it’s by raising shareholder capital or more unlikely, through other external sources of finance.
Secondly, the company has addressed the needs of its shareholder’s in more than one way - To begin with, they have clearly laid out key performance indicators, with descriptions and analysis’ next to each graph. There are diagrams showing dividend pay-out per share changes, each basic enough for users of all abilities to understand. After reading the encouraging information on show by the company (Dividend pay-out per share is up to 19.40p per share, an increase of 1.80p from last year and £855m adjusted profit for 2010) current shareholders might very choose to increase their investment in the firm, and potential shareholders might be motivated to take the next step towards investing. There has been some scepticism recently about a possible change in full ownership of Sky to News Corporation, which understandably would have been of much interest to shareholders. Realising this, Sky included the following statement in their annual report, aimed at reassuring its shareholders: (pg7) “While this process continues, the Company’s Independent Directors have put in place structures to uphold the interests of all shareholders”.
The third user group earlier discussed is the employees (and their representative groups) of the firm. The annual report does a good job of reassuring its employees of their job security (another constant rise in profit, 750m to £855m), and states the benefits its employees receive (free Sky TV etc). There is a section dedicated to their employees, in which they heavily complement them, using phrases such as “Our people are critical to our success. Together they make Sky what it is today and what it will be tomorrow” (Sky Annual Report 2010, p27). Their substantial growth in recent years will have led to many employee promotions which will give current staff hope that they might be one of the ‘lucky ones’ in future years, and will entice new workers to the company. Their representative groups will have looked at the change in profit over recent years (which has visibly risen), and will be expecting to see an increase in employee salaries as a result. If there hasn’t been an increase, and there is no listed reason, it is likely the union will take action on behalf of the employees (i.e. Collective/wage bargaining).
The fourth and final user earlier discussed is the company’s competitors. Understandably Sky won’t have set out to create a report tailored for the needs of its competitors; however, there are still many facts and figures that are of value to them. Two of Sky’s main competitors (BT and Virgin Media), both offer packages which include phone and broadband. Sky now also provides these and therefore they have included a graph showing the additional paid-for products per customer over the last few years. It has increased from just over 0 in 2004, to nearly 1.5 in 2010. This is a key figure for their competitors, which can only be seen as a negative for them as Sky is effectively shrinking their customer base. They also give exact figures for 2010, such as adding 421,000 broadband customers, 517,000 telephony customers and 769,000 line rental customers. Exact figures like these will allow the competitors to directly benchmark their own performance, and will greatly support them in making decisions about issues such as what to offer in future packages, and whether it’s worth maybe expanding their product portfolio.
In conclusion, after studying and analysing BskyB plc’s annual report, I feel that Sky have displayed the information in an easily understandable yet detailed format, allowing all users (inevitable varying ability has clearly been acknowledged) to efficiently extract the pieces of data they need to aid them in decision making. There are also no issues regarding the four qualitative characteristics of financial information. As for how the statements have been prepared, and the legal requirements, Sky themselves stated in their annual report (2010, p54): “The summary financial statement has been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted for use in the European Union, the Companies Act 2006 and Article 4 of the IAS Regulations”. Sky’s performance has been somewhat exceptional over recent years, and with many more customers joining each year, and a lack of any fierce competition, there is no sign of this changing in years to come.
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