National Grid Case Study

BAE 7 2. Fundamental Characteristics 7 2. Enhancing Characteristics 7 2. National Grid 8 2. Fundamental Characteristics 8 2. Annual Report 2016 28 7. Corporate Responsibility Summary 2016 28 7. Corporate Social Responsibility (CSR) Assurance 28 7. National Grid Group 29 7. Preamble 29 7. IFRS developed by IASB sets the regulatory framework for the three companies and shows how each item in the financial statements is recorded. Disclosure of accurate, relevant and timely information requires a comprehensive conceptual framework for critical analysis and decision making. There is need to determine how the three companies meet the IASB conditions while enhancing the required fundamental IASB standards. Timeliness, comparability, relevance and understandability are the common frameworks for efficient capital market reporting. Chairman’s letter or the CEO comments help identify useful concepts to a financial statement user. Regulatory framework Regulatory framework for National Grid National Grid primary activities include electricity and gas transmission and distribution in Great Britain and North-eastern US.

The company is a public limited company Incorporated in England. The company consolidated financial statements have been prepared in accordance with IAS (International Accounting Standards) as well as IFRS. IAS as a regulatory agency relates financial statement interpretations of the company with the standards policies issued by International Accounting Standards Board (IASB) and IFRS as adopted by the EU. Income statement items, balance sheet items and the statement of cash flows are all prepared on the basis of the accounting standards and interpretations provided on the basis of IFRS. The prices are projected based on the available data and trends in the market. Regulatory framework for Smurfit Kappa The consolidated financial statements of Smurfit Kappa have been prepared in accordance with IFRS issued by International Accounting Standards Board (IASB) and adopted by European Union.

The adoption is under those parts of Companies Act 2014 which are applicable to companies reporting its financial statements under IFRS and the IAS Regulation stated in article 4. Thereafter, the financial statements of Smurfit Kappa are presented in Euro that needs to be rounded off to the nearest million. All the items therein are required to be prepared under the historical cost convention except derivative instruments, available –for-sale assets, pension plans/schemes, biological assets and share-based payments which are prepared under the fair value convention as required by IFRS. Revenue and profit recognition The recognition of revenue and profit on long-term contracts of Bae Systems are regulated under IAS 11. The accounting policy requires that revenue on long-term contracts to be recognized when the performance of the company milestones have been completed.

Profits under the same policy are recognized and estimated based on the estimated costs and revenue. The valuation of acquired intangible assets Acquired intangible assets are valued in line with internationally used models (IFRS and IAS). However, goodwill valuation is excluded in valuation of the acquired intangible assets. Fundamental Characteristics 2. Faithful Representation BAE’s financial statements provide a faithful representation of the financial position of the group, by providing the qualities of being neutral, free from error and complete. Assurance of being neutral and free from error are provided by an unmodified audit opinion in the Auditor’s Report by external statutory auditors, KPMG. The quality of completeness is provided by the provision of a full set of financial statements, together with a set of Notes describing the basis for computing various figures.

Relevance The quality of relevance is provided by a full set of financial statements, together with figures for the previous year. This would be a standard amount of time for a public-limited company, and compares to a month and a half after financial year end for National Grid below. Verifiability Assurance on the verifiability of the financial information is provided by an unmodified report from BAE’s external statutory auditor, KPMG, that the financial statements provide a true and fair view of the financial position at year end. National Grid The way in which National Grid Group’s Financial Statements meet the fundamental and enhancing characteristics of the IASB’s Conceptual Framework are as below. Fundamental Characteristics 2. Relevance Relevant information is provided in the form of the five standard financial statements: The Income Statement, Statement of Comprehensive Income, Statement of Changes in Equity, Statement of Financial Position and Cash Flow Statement.

This is considered sufficiently timely, as it was approximately a month and a half between the financial year end and the annual report being released. This is broadly in-line with the average amount of time for a public-limited company. Verifiability This is provided by the notes to the financial statements disclosing accounting polices used, particularly inventories (disclosed on page 125). Reasonable assurance that the figures are verifiable are provided by the Independent External Auditor’s giving an un-modified opinion that the financial statements provide a true and fair of the financial position of the entity (pages 75 and 83). Smurfit Kappa Group (SKG) – Conceptual Framework The way in which the Smurfit Kappa Group’s Financial Statements meet the fundamental and enhancing characteristics of the IASB’s Conceptual Framework are as below.

This includes a Consolidated Income Statement, Consolidated Statement of Comprehensive Income, Consolidated Balance Sheet, Company Balance Sheet, Consolidated Statement of Changes in Equity, Company Statement of Changes in Equity, Consolidated Statement of Cash Flows, Company Statement of Cash Flows, Notes. This assists comparability with the financial performance of similar entities for the same period, for example International Paper, which recently mounted a take-over bid for the Smurfit Kappa Group. In addition, the inclusion of figures for 2015, and a breakdown into pre-exceptional and exceptional items, helps to compare the performance of the Smurfit Kappa Group year-on-year. Timeliness SKG’s 2016 Annual Report was released on the 28th March 2017. Although somewhat long after the financial year end of the 31st of December 2016, this would still be broadly in line with what would be expected for a public-limited company, and would be sufficiently timely for users of the information.

his statement about the Board announcing that Charles Woodburn, Chief Operating Officer, will succeed Ian as Chief Executive with effect from 1 July 2017. Finally, the letter is useful to a user since it states the way forward that the company recommends to achieve certain objectives. For example Bae chairman recommended successful execution of the orders, increase in dividends and increase in the coming year revenues and profitability. On this, it gives a sense of direction to be undertaken to reach greater heights in the company. It necessary for Bae to get to know the key reasons why they exist, state their objectives and pursue them to achieve a better financial performance than today. There is need to address the benefits and setbacks associated with new developments in the industry.

Address any changes in accounting standards and practices recent decades is associated with certain benefits and cons. CEO/Chairman’s letter for Smurfit Kappa Chairman’s letter: “Smurfit Kappa Year in Review” by Liam O’Mahony, Chairman The letter is useful to a user since it narrates the state of governance the role of board of directors in the company. Liam explains that the board is committed to support the standards of governance and the ethical conduct required. He also explains specific roles of the board like setting strategies, leading and managing effectively, and mitigating appropriate controls. This information is not legally expected to be disclosed but more and more it is being demanded by investors in the yearly reports. • BAE systems has had a lot of success with its F35 lightning II program.

BAE systems prides itself on its technological edge over its competitors and with its future projects to be under contract for lot 11 delivery of similar models. The company believes it has franchise position regarding the delivery of F35 Lightning II advanced fighter jet and hopes to continue its longstanding relationship with its customers. • The company’s pensions deficit has increased form 1. With total net assets od euro 91 million in the country. The risk analysis conducted by the company was forward looking and employed a number of metrics provided by the Venezuelan government, considered the impact of exchange rates. Due to unavailability of official inflation rates the company used independent experts to calculate an inflation rate. Analysis of Forward Looking Items for National Grid PLC.

• National Grid PLC provides their services in parts of Northwestern United States including the state of Rhode Island. IAS/IFRS application IAS/IFRS application for Bae Systems IAS 16 - Property, Plant and Equipment The values of Property, Plant and Equipment of BAE Systems are stated at cost less accumulated depreciation and impairment losses. When a customer reimburses the cost of an item of Property, Plant and Equipment, it is recognised as a deferred income in the income statement and is valued on the basis of depreciation of the asset over its calculated useful life. Assets leased out under operating leases are also included with the Property, Plant and Equipment at cost less accumulated depreciation and impairment losses. Depreciation used is normally on straight-line basis; however for some items which are used in the group’s US businesses are depreciated on the basis of cost reimbursement profiles of US government contracts.

Also, freehold land and assets in the course of construction are not depreciated. Goodwill is the fair value of consideration in the date of acquisition, less the net acquisition-date fair value of assets gained and liabilities incurred. Except goodwill, all of these assets are amortized and is based straight-line method over their estimated useful lives. Goodwill is tested annually for impairment and valued at cost less acquired impairment. Impairment is estimated basis on the future profitability and projected cash flow of the acquired businesses which are based on the company’s 5 year business plan and pre-tax discount rate. IAS 19 — Employee Benefits (2011) Under IAS 19 which was amended in 2011, the company accounts for short-term benefits such as salaries & wages, post-employment benefits like pension, other long-term benefits and termination benefits.

An impairment loss is not reversed for goodwill, but it can be reversed for other intangible assets when there is a change in the estimate used to determine the recoverable amount and when the increase in the recoverable amount can directly be linked to an event occurring after the impairment loss was recognised. IAS 12 — Income Taxes Income tax consist of current and deferred tax and they are recognised in profit and loss accounts except in the cases in which it relates to a business combination or items identified directly in equity or other comprehensive income. Deferred tax is identified in respect of temporary differences between the values used for taxation purposes and the carrying amounts of assets and liabilities for financial reporting purposes.

The deficits on BAE System group’s pension/retirement schemes contribute to the most significant recognised deferred tax assets. A deferred tax asset is identified for unutilised tax losses, deductible temporary differences and tax credits to the extent that it is likely that future taxable gains will be available against which they can be utilised. The group’s tax charge calculation is based on several estimations & judgements and management establishes provisions where applicable. Balance sheet liability method is used for deferred tax and is accounted on temporary differences between the corresponding base of tax used in calculating taxable profit and carrying value of liabilities and assets in the financial statements. Deferred tax assets are recognised to the limit that it is possible that taxable profits will be available against which deductible non-permanent differences can be utilised.

Reviews are conducted on the carrying value of deferred tax assets periodically and are reduced to the extent that it is no longer possible that enough taxable profits will be available to allow part or the entire asset to be recovered. IAS 38 — Intangible Assets Goodwill is considered as an asset and is not amortised, but impairment testing is done periodically. IAS 19 — Employee Benefits All of the employees of the group are members of either DB (defined benefit) or DC (defined contribution) pension plans. Projected unit method is used to calculate the cost of providing DB plan. A qualified actuary carries out actuarial valuations at each reporting date. The group’s obligation in respect to DB plan is valued separately for each plan by projecting the calculated amount of future benefit payments that the staff have earned for the pensionable service in the prior and current periods.

The future payments are discounted to calculate the present value of the liabilities and fair value of plan assets. In hyperinflationary economies, if the functional currency of the group is the currency of that economy, the financial statements of those entities are altered so that they are shown in terms of measuring unit current at the reporting period end. IAS 16 - Property, Plant and Equipment They are valued at cost less impairment charges and accumulated depreciation. Cost is the expenditure which is directly related to the acquisition of assets. Software that is unavoidable in the functionality of equipment is capitalised as part of that equipment. Other related costs are included in the asset’s carrying value or accounted as a separate asset, as required, only when there is a chance that future economic benefits linked with the item will flow to the group and the cost of the item can be measured efficiently.

The carrying values are reviewed at each reporting date for indications of impairment. IAS 2 — Inventories Inventories are valued at the lower of net realisable value (NRV) and cost. The inventory cost is estimated on the first-in, first-out basis and includes expenses incurred in acquiring the inventory and bringing them to their current location and condition. The value of raw materials is calculated on the basis of purchase cost on a first-in, first-out basis. For work-in-progress and finished goods, cost excluded borrowing costs and includes direct labour, direct material and attributable overheads based on normal operating capacity. The deferred income tax is provided using the liability method, on temporary variances between the carrying amounts of liabilities and assets in their tax bases and in the consolidated financial statements.

Under-reported event/fact Under reported events for BAE Systems. Accounting reports are statements on the financial position of the firm, which for large multinationals are usually reported every year. For my analysis of certain items which might be under reported I have chosen to compare our company with a proxy firm within the similar industry. In order to do that I have chosen BAE systems main competitor the American multinational Raytheon as of 2017 it is the fourth largest defense contractor in the world. The resulting realized gains and losses in the cash flow are used to offset foreign currency exchange gains and losses on its underlying assets. BAE systems has now the opportunity to apply some of these ideas of hedging foreign currency exchange risk and make their reporting of a higher standard.

Statement on Under reported events of National Grid PLC National Grid PLC is a British multinational company operating as one of the largest energy suppliers in Britain and Wales as well as delivering natural gas and electricity to areas in Massachusetts, the State of New York and Rhode Island. In the financial statements of the company the independent auditors report mentions that there were certain areas of focus which were identified by the auditors as being the greatest risk to material misstatement including accounting for disposals, Accuracy and valuation of treasury derivative transaction, accounting for pension obligations, valuation of environmental provisions. I want to discuss the valuation of the environmental provisions. Under IAS 10 it is a requirement that a comparative statement be provided.

The company does not provide a comparative statement or a detailed analysis of the auditor’s sensitivity analysis which is against the IAS 10 requirement. Statement on Under reported events of Smurfit Kappa Group PLC The Smurfit Kappa group PLC is one of the world’s leading paper packaging companies. It is listed on the London Stock Exchange. Smurfit Kappa is true multinational organization with offices in 33 countries with a very large presence in the USA. In principle, this represents best practice, as an assurance engagement provided by an external party provides limited assurance as to the faithfulness of the representations made by the reporting entity regarding its Corporate Social Responsibility reporting. In addition, it’s noteworthy that the CSR reporting has been provided by a separate firm (Deloitte LLP) to that of the financial statements (KPMG LLP).

This represents best practice, as their might be a potential conflict of interest of the audit of the financial statements and CSR reporting were carried out by the same firm. If this was the case, the firm might be at risk of turning a blind eye to deficiencies in CSR reporting to avoid the risk of losing the audit work for the financial statements. However, given that assurance of CSR reporting does not have the same corpus of standards behind it as financial reporting, this raises questions as to the credibility and usefulness of assurance engagements for CSR reporting, as compared to that for financial statements. In addition, SKG produces a separate Sustainable Development Report, last published in May 2016. The SKG Annual Report 2016 stated a further Sustainable Development Report would be issued in May 2017.

At the time of writing, however, this was not available via the website. Annual Report 2016 SKG’s Annual Report 2016 discusses CSR reporting in the Sustainability section, starting on page 48. This covers four key themes: Social Citizenship, Modern Slavery Act, Health and Safety and the Environment. Targeted reduction is 30% per tonne of paper in 2020 compared to 2013. • People – Lost-Time Accident (LTA) frequency rate reduced by 10% in 2016. CSR Reporting Assurance KPMG was engaged by SKG to provide an external overview and provide limited assurance on the report contents. This is contained in the Assurance Report at the back of SKG’s Sustainable Development Report 2016 (p104). This states nothing has come to the auditor’s attention to suggest the report has not been prepared, in any material respect, in accordance with the GRI Sustainability Reporting Guidelines version G4.

The message was useful to the employees, the public and other stakeholders of the company. CSR of the three companies show how the companies are trying to develop the communities around them in order to have a good reputation. The CSR also makes an assurance of the various activities to be undertaken to enhance development of projects within the environment of each individual company. Secondly, there was need to determine how the three companies meet the IASB conditions while enhancing the required fundamental IASB standards. This was achieved by an in-depth conceptual framework done on the three companies with each company displaying unique IASB frameworks. Smurfit_Kappa_Annual_Report_2016. pdf National Grid Plc Annual Report and Accounts 2016 investors. nationalgrid. com/. National-Grid.