ACCA Article 20 June, 2010

8/8/2019 ACCA Article 20 June, 2010

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When a southern Icelandicvolcano began spewingabrasive ash high into the

sky in April 2010, nobodycould have imagined the chaos andcosts it was about to bring with it.

The initial eruption lasted five daysand forced much of the Europeanairspace to close. Over 100,000 flightswere cancelled, causing airlines directlosses of more than an estimated$1.3bn and leaving thousands ofstranded passengers around the world.

Airlines cancelled hundreds of flightsacross Europe and added hours totrans-Atlantic journeys as planes werediverted around the large plume of ash,which initially stretched from Greenlandto Portugal and Canada to Russia.

Jittery European air traffic authoritiesdecided to close down much of thecontinents airspace because theyfeared the volcanos harsh ash could

harm jet engines.But despite the initial ash clouddispersing, it is impossible to tellwhen the end will be in sightfor the airlines

because nobody knows how the volcanowill behave in the future. Forecastsare unclear, while meteorologists say

that until Eyjafjallajokul (pronounceday-yah-FYAH-lah-yer-kuhl) actually stopserupting, the future course of Europesash cloud will depend heavily on theprevailing winds.

The glacier-capped volcano hasshown little signs of stopping so far anderuptions have continued to disrupttravel intermittently. The last time thisvolcano erupted was almost 200 years

ago it began in 1821 and didnt stopuntil 1823.So where does this situation leave

airline companies, ferry companies andbusinesses in general?

What risk assessment would theyhave had in place before the initialeruption and what will they need toconsider going forward?

Business riskBusiness risk itself is the risk ofinternal and external factors havingan impact on the companys businessobjectives. The most common impactsare on a companys finances and

also its reputation.

The IeandI voano erupTIon has presenTed aIrIneompanIes wITh fInanIa and ogIsTIa nIghTmares, wITh

fIghTs grounded and revenues severey affeTed. BuT howwoud aIrInes and BusInesses have assessed suh rIss andwhaT pans an They puT In pae for The fuTure?

Ashes to Ashes

Business risk is often seen as along-term strategic risk, so we canassume that the airline companies at

least weighed up the pros and consof any volcano-related decision andreacted accordingly.

Of course, there is a link to ethicshere, too.

Is it ethical for the ferry companies,for example, to use this situation toboost their profits by putting up theirprices as they did? Well, this issue isone that goes to the heart of Paper P1.

Corporate social responsibilityThe volcanic eruption has undoubtedlyprovided us with a classic scenario,but of course the issue is aboutmuch more than ethics, it is alsoabout corporate social responsibility.

Should ferry companies have beenthinking about acting in the interests ofsociety at large, or acting in the public

interest or simply for themselves?As they hiked up their ticket priceswith flights grounded, the answerseems that they took the decision to

18 rIs assessmenT


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20 rIs assessmenT

the four-point risk

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look out for themselves. The questionthen emerges, for whose benefit docompanies exist, the customers, theshareholders or the world at large?

Unfortunately, the answer is quiteclear in the vast majority of businessesas we saw with the ferry companies.

The business of business is business!If there is an opportunity to makeadditional profits, then the directorswill often see it as their duty to make

as much as they can.First Intuition partner Paul Moore,says: It would have been veryinteresting to have seen at least oneferry company say how they wouldcome to the rescue of their strandedpotential future customers, to give thema cup of tea and a biscuit and a 10 offvoucher for their next ferry crossing.

He adds: I might be old fashioned,

but I bet this would have impressedenough people in the UK to make themthink I like this company, I trustthem and I want to reward them fordoing the right thing.

Who knows, these ferry companiesmay even have achieved more long-termgrowth than they did over those fewdays when the volcano initiallycaused mayhem!

Going forward, it will be interesting tosee what impact the volcano has had onthese companies and their decision tomake a quick buck an undoubtedly

clever short-term bid to boost profits,but at what risk to their reputation?

Alternatively, one could take theopposite view.

It could be viewed that with risk anduncertainty can come good things aswell. Ferry companies could be saidto have seen the upside of the riskand that they were thinking quickly by

charging higher prices. Some wouldsay they have displayed good businesssense exploiting an opportunity thatunexpectedly dropped in front of them.

Further volcanic disruptionBut businesses at large may nowbe looking at potential businessrisks and identifying how to managethese risks in the event of further

volcanic disruption.One would expect any businesswhich has already suffered, to now begoing through a post-event risk reviewprocess and making decisions on whatthey are going to do about such a riskin the future and what lessons canbe learned.

They may wish to consider theirintentions with the four-point risk

treatment model (TARA) used toimplement company decision-makingstrategy (see panel).

Sarah Condon, Paper P1 contentspecialist at Kaplan Financial, says:In this instance, I doubt any businesseshad volcanic eruptions written downor considered as a risk. It was anunforeseen event.

British Airways for example, mayhave fantastic internal controls, butthey like everyone else seemed numband unable to make any decisionsfor the first few days after the initial

eruption started.It is likely though that somebusinesses may have included plansfor when the travel plans ofsenior staff are affected and theramifications this can bring if businessdecisions are not being made dueto enforced absences. For example,there were cases when flightswere being grounded, where senior

executives paid thousands of poundsto take long-distance taxi rides in orderto get their business decisions made.

Necessary extra controlsThe bottom line is that airlinecompanies, ferry companies andbusiness at large will have toincreasingly identify the risksassociated with the volcanic eruptions.

They will then need to think morecarefully about the impacts theeruptions can cause and make surethey put in place the necessaryextra controls.

Alex Miller is a freelance journalist

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TARA: THE FOUR-pOiT Rik TREATmET mOdEl

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find

your way

financial reporting is alanguage, just like Germanor English. It is the languagethat companies use to talk

to investors. It is the language that

investors use to ascertain value. It iswhat people use everyday to decidewhere to invest their hard earneddollars for financial security andfuture opportunity. These decisionscan be hard enough. But try it ina language you dont understand,and it becomes all but impossible.Even worse, misleading.

The world has changed a lot

since the (then) chairman ofthe United States Securities andExchange Commission (SEC) ArthurLevitt, uttered these words during

a speech in 1999, but they areno less true today than theywere then. Like any profession,accountancy has its own collection

of abbreviations, acronyms, andspecialist words and phrases,which can confuse outsiders andnewcomers, and the area of financialreporting is no exception.

Financial reporting is widelyregarded as one of the mostcomplex and challenging areas ofthe ACCA syllabus, and if you wantto master it you will need to get to

grips with a lexicon of concepts,principles, rules, words andexpressions. These will range fromaccounting standards and regulatoryframeworks to abbreviations andacronyms, via a collection ofspecialist terms of reference; someparts will seem easy to comprehendand remember, while others willseem mind-bogglingly complex

and confusing.Unfortunately, even the term ofreference financial reporting is notwithout challenges. In the broadest

sense, this expression describesthe process of preparing anddistributing financial information, tousers of that information; the devilis (as always) in the detail.

less convenient n oe consinIn a perfect world, the phrasefinancial reporting would alwaysmean the same thing, no matterwho is using it, and no matter whatcontext it is being used in. But thisis a deeply imperfect world, andthe reality is less convenient andmore confusing.

To some extent, this is due tothe fact that financial reporting isinherently complex (as any studentwho has completed Paper F7 will

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appreciate). But it does not helpthat you will find the term financialreporting used interchangeably(sometimes correctly and sometimesincorrectly) with managementreporting and statutory reporting(see The high profile of high finance,on page 24), that all three can beused generically to describe a type ofreport (that may encompass variousindividual reports), as well as specificand individual reports, that they canall contain financial information,and that some of this can overlap.

Invaluable context and clarificationAs your professional studiesprogress and you acquire morepractical experience of accountancy,the broader and deeper perspectiveyou gain will help you to judgethe most likely meanings of theseterms of reference, no matter who

is using them, and no matter whichenvironment or scenario they arebeing used in. Many of the ACCAFundamentals level papers helpto provide invaluable context andclarification. But in the workplace,it is well to remember that mostpeople outside the finance functiondo not have your advantages.

Arthur Levitt may have displayed

an impressive understanding ofwhat financial reporting is about(particularly for publicly listedcompanies), but most of the

non-accountants you encounter willnot. For somebody in marketingor manufacturing, for example,any report involving numbers maybe a financial report, all sorts ofdocuments will be managementreports, and the differencesbetween the two will be regardedas insignificant. So when youare discussing a finance-related

report with somebody who is not afinance professional, make surethat you are both talking about thesame thing.

Even accountants sometimes needto clarify what they mean by financialreporting. In a professional context,the term may most often be used torefer to the financial reports that are

required on dates and with contentsthat are determined by statute, orlegally defined rules (see Reports,reports, reports on page 24). Butthis does not eradicate the scopefor confusion, because financialreports are also (equally validly)referred to as financial statements,or accounts, and a variety ofnon-English language variations

such as cuentas in Spanish thoughXBRL is helping to solve this problem(see XBRL the language offinancial reporting on page 24).

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These financial reports areusually prepared using guidelinesprovided in an approved set ofaccounting rules. Some countriesmandate the use of national

Generally Accepted AccountingPrinciples (GAAP), others requirethe use of International FinancialReporting Standards (IFRS),

some countries allow the use ofeither (or apply IFRS to listedand national GAAP to unlistedcompanies), and there are manycountries where national GAAP isgradually moving towards IFRS,in what may eventually be aglobal transition to internationalstandards (see From IAS to IFRS).

If you were not studying tobecome an accountant, mediacoverage of financial reporting couldmislead you into supposing thatfinancial reporting standards applyonly to entities with a public listing.But financial reporting rules alsoapply to small businesses, and somecountry jurisdictions have differentfinancial reporting rules for them.In the UK for instance, there is aspecial Financial Reporting Standardfor Smaller Entities (FRSSE), and in2009, an IFRS for SMEs was issuedby the International AccountingStandards Board (IASB).

In addition to these variations, ineach country you will find a different

set of organisations responsible forissuing these approved accountingstandards (whether they are basedon IFRS or national GAAP).

For example, in Argentina thisis the Federacin Argentina deConsejos Profesionales de CienciasEconmicas (FACPCE), in Franceits the Conseil National de laComptabilit (CNC), in Norway itis Norsk RegnskapsStiftelse (NRS),in the UK, it is the AccountingStandards Board (ASB), in theUS its the Financial AccountingStandards Board (FASB), and so on.

Variations also exist from country tocountry in the area of regulation. TheUK, for example, has an independentregulator responsible for promotingconfidence in corporate reporting andgovernance: the Financial ReportingCouncil (www.frc.org.uk). The FRCincludes the Accounting StandardsBoard (mentioned above) plusvarious other standard-setting bodies,and also includes the ProfessionalOversight Board (POB) which (amongother things) oversees the regulationof the accountancy profession byprofessional bodies such as the ACCA.

The frameworks for standardsetting and regulation can bealmost as complex as the standardsand regulations themselves. Everycountry approaches this area in adifferent way, and the structuresand powers of the regulatorynational frameworks and bodiesinvolved in standard setting andgovernance vary widely. So althoughdevelopments such as IFRS andXBRL promise to simplify someaspects of financial reporting,learning the language of financialreporting is unlikley to become

any less challenging and complex,any time soon whether you arethe ex-chairman of the SEC or atrainee accountant.


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stttoy eotin n innci eotin bot insien otsie te innce oession.

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o n entity o entities, witin ewo o innciccontin concets n stns. Te estinocent set tyicy inces bnce seet,stteents o cs ows, incoe stteent (so nowns oit n oss stteent), stteent o etineenins, on wit seenty notes, n y soince neent coents sc s iectoseot, n (wee oite) n itos eot.

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ntention accontin tns (as) nti 2001,wen it ws estcte to cete te ntentionaccontin tns Bo (aB). ince ten, te aBs been esonsibe o issin te stns, wic itce ntention finnci reotin tns (fr).

To en oe bot a, fr, n te wo o te aBt www.isb.o. Te deoitte site www.iss.co so

oes se ete esoces incin ee e-eninteis n te ie frs in yo pocket wic cnbe ownoe in vios nes incin zec,nis, n rssin n ins to oe tn 200 otefr ete websites.

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xBL h LANA F FINANCIAL INTe eXtensibe Bsiness reotin lne (XBrl)s becoe inte to innci eotin, by init esie to nyse, bis, se, e-se n excne

innce-ete inotion, n to ovie steoes(insie n otsie onistions) wit ccess to oetnsent n sbe inotion.

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vios stttoy eotin oses in te uk.

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h hIh FIL F hIh FINANCTee ws tie, in te not so i n istnt st,wen ccontncy ws wiey ee s te oession. accontnts wys new bette, o cose,

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tt innci eots eve soe itbe ttbot conys oetions n innci et,n wiese inceity wen tey ont. Teestin cs o oe city n tnsency,n ess coexity n obsction, ve e toeveoents nin o te bnesxey act,to n incese ocs on i ve in fr n einnci eotin one o te ost ynic es o

te oession.

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