QUESTION NO:1 (10 marks)
Advise the directors whether the above APMs would achieve fair presentation in the
financial statements.
APMs are the additional performances measures not defined by any IFRS or IAS.
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They are used for internal management to assess a company’s financial performance but
often used by external to see the management strategies through the eyes of management.
Proper calculations of APMs should be disclosed for the ease of financial statement users.
The calculations of APMs should be same for every year. Companies should not
manipulate them to make the financial performance of the company better.
They are not normally comparable because every company has its own APMs.
Sometimes companies report APMs on the face of income statement which is wrong as it
reduces the importance of official IFRS and IAS.
They can be misleading due to inconsistencies in calculations and lack of transparency.
Sometimes companies give little information about the APMs, and they don’t give proper
reconciliations with profits.
1. Operating profit before extraordinary items:
They are based on operating profit before the impact of extraordinary items. Toobasco has
included restructuring costs and impairment losses in extraordinary items. Both items had
appeared at similar amounts in the financial statements of the two previous years and were likely
to occur in future years. restructuring costs and impairment losses are not one-off events because
they are happening from last two years and are expected to happen in the future also, so they
should not be excluded from operating profit before extraordinary items. Management should
include these costs to give a fair representation of financial statements.
2. Operating free cash flow:
It is calculated as cash generated from operations less purchase of property, plant and equipment,
purchase of own shares, and the purchase of intangible assets. Directors have not given any
detail of these calculations but have emphasized its importance. If they think that they are
important for the business so they should disclose all the details of these calculations for the
financial statements users to make the information transparent and relevant.
Also, they have also shown free cash flow per share in bold next to earnings per share to
emphasize the entity’s ability to turn its earnings into cash. They should not report APMs in the
face of income statement which is wrong as it reduces the importance of official IFRS and IAS.
3. EBITDAR:
EBITDAR uses operating profit as the underlying earnings. Directors did not disclose any
comparable IFRS information and there was no reconciliation to any IFRS measure. They have
done wrong financial statements. They should give more information about the APMs, and they
give proper reconciliations with profits to make the financial statements fair and transparent.
Operating profit would not be considered the best starting point as EBITDAR adjusts for items
which are not included in operating profit such as income and tax.
In previous years, this company chose to treat rent differently. If any company chooses to change
the APM, then it should disclose the change and reasons of changes.
4. Tax effects:
An entity should provide income tax effects on APMs and should not exclude them. They should
include current and deferred tax expense to make the APMs more realistic and fairer. Income tax
should be shown as a separate adjustment and explained.
QUESTION NO: 2 (4 marks)
Discuss why sustainability has become an important aspect of the investors’ analysis of the
companies.
Sustainability has become an important aspect of the investors’ analysis of the companies due to
several financial and ethical considerations. It helps investors to assess a company’s exposure to
different risks including environmental liabilities and reputational damage. Companies with poor
ESG may face lawsuits, or decline in consumers’ trust, which may have negative impact on stock
prices and financial stability.
Companies that adopt sustainable practices often gain a competitive edge by innovating in areas
like renewable energy and ethical supply chains. Investors look for businesses that embrace
sustainability for long-term success.
Governments worldwide are implementing strict restrictions related to carbon emissions and
waste management. Investors look for those companies to invest who comply with these
regulations to avoid potential fines and lawsuits.
Many institutional investors like pension funds and asset managers, are now integrating ESG
criteria into their management strategies. Companies with strong sustainability initiative attract
more investors, leading to a better access of capital and lower cost of borrowing.