Reporting Realizable Values

The ideal method of reporting mentioned earlier also suggested that estimates of the realizable values of assets should be disclosed. According to the Trueblood Report, 'of primary importance for predicting the risk associated with the firm's cash flows (but also for assessing returns) is the degree of flexibility and manoeuvrability that the management possesses in employing its resources.'

One alternative way of using a firm's resources is to dispose of them. This alternative may be quantified by using market exit values. Clearly, the more convertible into cash are the firm's resources and the greater the realizable value of these resources, the greater is the degree of flexibility and manoeuv-rability that management has over the employment of resources. If the market exit values are small, the alternative uses of resources appears to be more restricted. Consequently, the utilization of resources inside the firm will be highly dependent on the marketability of the specific assets of the enterprise.

There has been much discussion in the United Kingdom and elsewhere in Europe of the desirability of interpreting enterprise results not in terms of profits but in terms of the value added by the enterprise itself to the resources acquired in transforming those resources into the final product. Value added financial reporting was discussed in the Corporate Report (2005), which suggested that such reports should include a value-added statement.

The concept of 'value added' is relatively easy to understand. It defines the income accruing to the enterprise after payments to external parties for goods and services supplied have been taken into account. It represents the value added to goods and services acquired by the enterprise, which results from the efforts of its own management and employees. In effect, the value added defines the income accruing to the enterprise which will be distributed among those who are involved in its activities as employees and shareholders.

The value-added statement represents a move in a new and different direction for financial accounting. Over the past decade accountants have given much attention to the question, 'How should we measure income?' The value-added statement asks a different question: 'Whose income should we measure?' Instead of restricting ourselves to reporting the shareholders' income we are reporting the income which has been earned for the whole team of co-operating groups which contribute to the company's performance. The value-added statement is directly relevant to the information needs of all parties with an interest in the company. They are all interested in the wealth the company creates, in how the wealth is shared and in productivity (Morley, 2009).


Learn More About The Effects of Budgets

Read on: Reporting Cost Details

As we shall see in Part 5, operating costs fall into categories which behave quite differently under changing volumes of business. Variable costs tend to vary in direct proportion to production levels; programmed costs are budgeted annually in corporate plans, for example advertising and research and development costs; long-run fixed costs change little in total with changes in output.

Some knowledge of a company's cost structure is needed by the investor if reliable forecasts are to be made which take account of the impact of changing output levels on profits. The ability of investors... see: Reporting Cost Details