BUACC2614: Management Accounting - Sustainable Business Practices - Assessment Answers

December 21, 2017
Author : Charles Hill

Solution Code: 1ACHC

Question: Management Accounting

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Management Accounting Assignment Writing

Task

According to your text (2012 edition), “there are many opportunities for management accountants to apply their skills and knowledge in

supporting managers as they respond to the business challenges associated with climate change”.

According to a popular accounting text, “sustainable business practices present numerous issues for management and managerial

accountants”. According to the CPA President, Alex Malley, "I think that our profession is going to be a key player in determining the way companies will report (on their environmental impact) from now on”.

According to Bazerman et al., (2002), “Given the vast scale of recent accounting scandals and their devastating effects on workers and

investors, it’s not surprising that the government and the public assume that the underlying problems are corruption and criminality—

unethical accountants falsifying numbers to protect equally unethical clients”.

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Solution:

Synopsis

The essay elaborates on the role of management accountants regarding the reporting of value creation/diminution in relation to the “six capitals”. The discussion elaborates on the challenges faced by them in this regard and the techniques adopted by them to combat these challenges.

The role of the management accountant pervades the accounting, information and reporting systems of the Organization and is often compared to the light emitted by the door of an open refrigerator door; clearly communicating the shareholders on the value created or diminished in respect of the capitals. He is also responsible for the perfect integration of the financial capital with the other five forms of capital such that the valuation and contribution of the intangible assets in the value creation process is also identified.

The challenges faced by the Accountants include among others the need to continuously keep update with recent developments and put in their experience, skills, knowledge and effort in the right direction towards the integrated reporting while getting support from the top management. Decision on the selection and implementation of an apt capital methodology are also challenging decisions in this regard.

Introduction

Integrated reporting is easily regarded as an improvisation from the traditional and sustainability reporting forms. The Management accountant plays an important role in reporting the value creation and diminution in relation to the “six capitals” in this regard.

The essay elaborates on this role as well as the challenges faced by the Accountant in this regard including the combat techniques for these.  An Integrated Report of Waco Ltd., a company operating in many markets including Australia and New Zealand is critically evaluated in this regard before reaching a conclusion on their role. Management Accountants are undoubtedly important to the integrated reporting process right from its evolution to its development.

Role of the Accountant in reporting value creation or diminution in relation to “six capitals”

The Management Accountant analyses and communicates the value created by the six identified capitals in the integrated reporting process. This aids the Organization to generate as well as sustain value of the capital input – output process. His role also extends to the designing, implementation and reporting of the business model duly incorporating the external environment in the whole scenario so as to make room in the model for adaptation crucial to survival.

The six identified capitals broadly include financial capital, manufactured capital, intellectual capital, human capital, social and relationship capital and natural capital. Each organization has a unique combination of these capitals. The Management accountant’s role is to communicate on the value created; this communication forms the core of the strategic decision making of the Organization. His role extends to making the data understandable to the internal and external users within the time available. (Guthrie, 2001)

His role is especially crucial from the point of view of reporting the metrics presented so that value created by each capital type is highlighted. This helps him as well as the users to understand what drives value especially for the intangible capital forms. (Goretzki, Strauss, & Weber, 2013)

His role also encompasses the provision of data, presentation and reporting and control and monitoring of the key performance indicators (KPIs) for each capital type. By analysing and integrating the past, present, and future performance as linked to each capital type (based on the data collected in this behalf); it becomes possible to demonstrate the value creation or diminution through the integration of production process, information system and capital methodology. For example, a mobile service provider company discusses the value created on social and relationship capital due to the availability of its services in the secluded island regions. (Ramin & Lew, 2015)

The Accountants role also extend to Strategy and Resource Allocation, where in liaison with the top management, the accountant strives to integrate management and corporate goals with value creation process for each capital. His responsibilities pervade the communication of strategic initiatives including their impact in terms of risk effect on each capital. For example, a mobile service provider ought to communicate the impact on natural capital of its new production process. Thus, his role extends to reporting on value created as well as depleted on behalf of each capital type by the firm. (Coulson, Adams, Nugent, & Haynes, 2015) This makes the integration of the financial capital with the other capital types possible so that the integrated report clearly reflects the contribution of the intangible capital types in the value creation process. He is expected to highlight the links between the capital types from the sustainability point of view to justify the management decisions. His role also extends to highlight the advantages of integrated reporting to other stakeholders and link various dimensions like Compensation schemes to the Value creation process. (2016)

Competency, confidence and experience of financial management is important for this role so that the accountant is capable to filter relevant information for the analysis of the impact on the value created and discharge his role of Stewardship in an effective way so as to foster insight by the users in timely manner. (Fontinelle, 2013)

Challenges and Combat Techniques in this regard.

The major challenge confronting the Accountant is to always be on the vigil so as to be keep update with developments and regulations for moving the integrated reporting process with wisdom, tact and knowledge. (Clayton & Vilene, 1990) The measurement of each capital type is important in this process so as to exhibit the integrated performance in a single report.

The challenge of triggering the integrated reporting process and defining its structure suited to the industry type is complex, lengthy and is prone to information overload. He may be able to combat this challenge by fostering the top management support so that each step of the process is well planned and executed with complete involvement and commitment of the top management as well as executives as a multidimensional team. The management may be uncomfortable with the transparency of the reporting process due to the fear of competitors taking advantage of important data, uncertainty and similar concerns.  The executives may also not be comfortable with the requirements of the new system. The profit motive will always override other management motives and it will be a challenge to draw management attention to integrated reporting requirements in this scenario. (Kolk, 2007) (Seyed Alireza Mosavi, 2012)

The challenge of bringing a major change to the Financial Accounting information system so as to bring it in sync with the integrated reporting format on the six capital types is also a major hurdle to be crossed. Here, communication of the process and its advantages may help to foster employee cooperation which may even extend to other stakeholders of the company. (Mishra, n.d.) (Young, Tsai, & Lee, 2007)

The next challenge of ensuring a completely controlled and error free process is ensured through continuous feedback on operational and tactical changes which may even trigger the identification of improvement areas. ("Corporate planning and the role of the management accountant", 1974)

The Accountant is an important hinge on which the value creation process rests by contributing to planning, execution, management and control of the value creation process in respect of each type. Where required, analysis of the impact of the integration between the capital input and capital output may be done through special simulation software available in this regard. (Younkins, 1993)

The next series of challenges in the implementation of integrated reporting are with regard to the selection of the suitable capital methodologies like Environmental profit and loss, Biodiversity and Climate change among others. This is combatted through the review of the currently used sustainability performance measures currently in use; voluntarily or mandatorily. Thereafter in liaison with the stakeholders, a corporate program is designed. Consistency between the selections of methodologies for different capital types has to be ensured at the minimum or it may present a problem while integrating the performance reports.

The scope of valuation and any constraints ought to be clearly identified and communicated. Most companies resort to the Greenhouse Gas Protocol. This also comes within the purview of the Management Accountant. He discharges this role effectively by reviewing the existing calculation tools used and zeroing out the ideal candidate among the given choices. The challenges in the process are further exhilarated when audit procedures and documentation also fall with the gamut of his role so as to obtain a clean chit from these regulatory authorities as well as internal auditors.

As mentioned in the onset of this section, he ought to update himself with up to date developments relating to financial accounting, sustainability accounting and ensure conformity to the applicable accounting standards. As regards the absence of standards for nonfinancial reporting; he may resort to the principles suggested in the “Natural and Social Capital Accounting,” format for implementation of the integrated reporting of the capitals. These mainly include clear definition of the scope of measurement on the criteria of accountability and positive and negative impact in respect of each capital, identification of the significant material issues and an attempt to consider the impact of each decision, major or minor on the company and community so as to ensure transparency and reduce the fear of risk and uncertainty regarding the integrated reports. The combat techniques used for these challenges are all unique and will depend on the scenario. (Raman & Lew, 2015)

Critical evaluation of the Integrated Report produced by Waco Ltd.

The Integrated report of the company very clearly discloses the outcomes achieved by the company in the reporting period in terms of the outcomes of the six aforementioned capitals. The company is basically a diversified equipment rental and industrial services company operating in Africa, Australia, New Zealand, United Kingdom and Chile. A very clear linkage between the input and the outcome for the financial, human, intellectual, natural, social and relationship and manufacturing capital is demonstrated in bullets with highlighted performance within each section.

Next, a clear identification of the business with a definition of the materiality levels for the risks and Opportunities have been communicated with the impact of each strategy on the affected capital type.

The Governance section highlights the value system and culture pervading the Organization thus meeting the standards of adequate transparency. Another highlight of the report is the link shown between the capital and the corporate goals in a subtle manner so as to aid the identification of risks for each capital type. The report also highlights important information revenues, expenses, profits, operations, risks of operating in different countries together with an analysis of the impact of the external environment.

The report integrates value added activities with the non-value added ones. The report has been prepared in conformity with the IIRC International framework and the king code of governance applicable to South Africa and attempts to integrate sustainability with the financial aspect of value creation aptly. The company is still pending listing on the JSE (Johannesburg Stock exchange) ("About Us - Waco International", 2016)

Conclusion

The role of the management accountant pervades the accounting, information and reporting systems of the Organization and is often compared to the light emitted by the door of an open refrigerator door; clearly communicating the shareholders on the value created or diminished in respect of the capitals. He is also responsible for the perfect integration of the financial capital with the other five forms of capital such that the valuation and contribution of the intangible assets in the value creation process is also identified.

The challenges faced by the Accountants include among others the need to continuously keep update with recent developments and put in their experience, skills, knowledge and effort in the right direction towards the integrated reporting while getting support from the top management. Decision on the selection and implementation of an apt capital methodology are also challenging decisions in this regard.

Management Accountants are undoubtedly important to the integrated reporting process right from its evolution to its development. The Management Accountant analyses and communicates the value created by the six identified capitals in the integrated reporting process. This aids the Organization to generate as well as sustain value of the capital input – output process. The Accountant is an important hinge on which the value creation process rests by contributing to planning, execution, management and control of the value creation process in respect of each type. The combat techniques used for these challenges are all unique and will depend on the scenario.

The report review of Waco International integrates value added activities with the non-value added ones. The report has been prepared in conformity with the IIRC International framework and the king code of governance applicable to South Africa.

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