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The International Accounting Standards Board (IASB) is a governing organization that is a part of the International Financial Reporting Standards Foundation (IFRS Foundation), which is in responsibility of creating and approving the International Financial Reporting Standards (IFRS) and related documents. These financial reporting standards offer organizations instructions on how to do financial reporting. To meet the needs of diverse users of financial information, they offer the components that make up the various financial statements. The majority of organizations in the UK utilize these standards for financial reporting. This in itself delivers a sense of harmony by providing a concrete set of standards which organizations will use to prepare their financial statements. It also enhances the level of comparability between the financial statements of one company and the other as a result of the application of similar financial reporting standards. (Kaplan 2010).
The users of financial information can be either internal or external to the organization. Internal users who are the primary users of information are the owners, the management and employees of the company.
History of BP
BP Plc. formerly known as British petroleum is an oil and gas multinational corporation well known over the years as one of the largest oil and gas companies as well as one of the largest companies measured by their revenue streams (Yeomans 2016). The history of BP is traced back to 1901 where the founder, William D’Arcy, obtained a concession to search and explore oil in Persia. Amidst the challenges that William and his team encountered, they were able to drill out their first oil in May 1908 after drilling to 1180 feet. Upon discovery of the oil, an Anglo-Persian complex was built to attempt to refine the oil into a product that would be used by the people. Due to technological challenges, this took significant amount of time to even be able to establish a pipeline that would be carrying the oil. The pipeline carried its first crude oil in April 1912 headed for Royal Dutch Shell. The Anglo-Persian company was able to settle for a deal with the British Government to supply approximately 40 million oil barrels to its navy in exchange of significant funding. In 1918, the company was able to establish its first subsidiary known as the British Tanker Company. The year 1954 saw the company renamed to what is known as British Petroleum after Williams’ efforts to acquire oil operations in Iran. After this period of time, the company attempted to acquire contracts to excavate oil in various countries including Russia with the aim of increasing market share. By the 20th Century, the company’s main focus was on providing safe working conditions for employees and reducing pollution (BP Global, 2017). The company is currently managed by Bob Dudley as its Chief Executive Officer.
Users of Financial Information
As mentioned above, there are different users of financial information usually presented in a company’s financial statements. These users are mainly classified into external users and internal users. Internal users are the people who work for the company or have a direct influence to the operations and the going concern status of the organization. These people include the owners of the organization, the management team and the employees. On the other hand, the external users can also influence the operations of the company, however, indirectly. They mainly include the investors (both current and potential investors), the creditors, the Government, the general public, consumers, financial institutions and regulatory bodies. These users have different information needs when presented with a company’s financial statements.
Qualitative Characteristics of Financial Statements
For financial information to be useful to these users of information, the IASB Framework established qualitative characteristics of financial statements. These characteristics are divided into fundamental qualitative characteristics and enhancing qualitative characteristics (IFRS 2008).
The fundamental qualitative characteristics are relevance and faithful representation. Relevance of financial information means that the information should be able to guide users in the prediction of future events and obtain feedback from previous performance. The relevance of information therefore is therefore measured by its predicative value and its confirmatory value. Faithful representation means that financial information should give a true reflection of real-time economic events occurring in the world. This means that the financial statements should be an accurate reflection of the condition of the business.
The enhancing qualitative characteristics are used to distinguish the information that is useful from that which is not useful. The four enhancing qualitative characteristics are comparability, timeliness, verifiability and understandability.
Comparability means that the external users of financial information will be able to deduce similarities and differences between two or more items, and between current and previous performance. Information should therefore be presented in such a manner that external users can compare similar information across different financial reporting periods and also across competitors within the same industry.
Verifiability means that independent parties are able a consensus about the measurement methods used for an activity, and produce similar results to the ones given. Timeliness means that information should be available to the different users and be able to suit their information needs before it loses its ability to influence decision making. Information should therefore be readily available to enable users to make decisions.
Understandability means that the users of financial statements should, with reasonable accounting and business knowledge together with the willingness to apply reasonable efforts in studying such information, be able to easily comprehend the message being portrayed within the financial statements (Britton and Waterston 2013). In this report, we will look at the five non-management external users of financial information who are investors, creditors, the Government, regulatory bodies and the general public.
Investors are made up of both current investors and potential investors. Current investors in an organization are the shareholders who have a stake in the company. This is usually acquired by purchasing company shares; with significant shareholding enabling investors to influence decision making within an organization. Investors can also be grouped into institutional and individual investors, where institutional investors are the companies that have shares in BP.
Financial information meets the needs of the shareholders by shedding light on the current financial position, financial health and performance of the organization. The company’s income statement will enable them to know the company’s profits where they can be able to estimate future profitability by comparing with past performance. From the income statement, they will also be able to use the earnings per share figure to determine the company’s profitability in relation to each share. Investors can be able to establish the amount of earning available in the company to pay its shareholders. In the case of BP, which reported a loss in the group income statement for the year ending 2015, the shareholders can be able to deduce the costs that contributed significantly to this loss. They can also be able to compare the performance with that of previous years and understand why the company’s financial performance in relation to profitability has been deteriorating. In this way, they can be able to decide whether to retain their stake at BP or sell the same.
The company’s statement of financial position can also be used to obtain the total value of their retained earnings. Shareholders are able to establish whether the company is in a position to pay them dividends from these retained earnings. From the statement of financial position, they will be in a position to determine whether it is feasible to increase their investment within the organization.
The company’s statement of equity can also enable both current and potential investors at BP to compare the dividends paid in 2015 and compare it with that of 2014. This will also guide them in decision making relating to investing at BP Plc.
BP creditors are the individuals who generally provide credit to the organization. They essentially comprise of banks who provide financial aid to the organization and suppliers who mainly provide goods on credit to the organization. Generally, creditors are concerned with the credit-worthiness of the organization to establish if the organization can repay back what they owe on time. Banks and other financial institutions can use the financial statements to establish the current amount of debt that BP has. For example, from BP’s financial statements, the company’s finance debt as at the year ending 2015 was $5,942 million in comparison to $6,343 million from the year ended 2014. The statements also indicate that the company will repay its current borrowings within the oncoming twelve months (BP Annual Report 2015, p. 146).
This means that from this financial information banks can be able to deduce that the company has been repaying back their debt from the reducing level of borrowings from that of the previous periods. The financial statements will also provide a break-down of the projects and investments acquired by the organization from the borrowed funds and their futuristic value. In this way, banks can be able to determine how BP uses their borrowings.
Suppliers, on the other hand, are keen on identifying if BP is keen at repaying what they owe on time. This information can be obtained by looking at the liquidity position of the company that is, comparing its current assets and current liabilities (current ratio). The current ratio as at 2015 stands at 1.28 which means that the company has more current assets than their current liabilities (BP Annual Report 2015, p. 146). BP ‘s trade payables as at 2015 stands at 31949 which is lower than that of the previous year, additionally their trade payable days for the same year was 70 days. The above financial information shows that BP pays their creditors on time and this position has been improving from the previous year. Creditors will therefore use the above information to remain confident that the company will pay them back when the value of their goods is due.
The Government will use the financial statements of a company to determine the amount of tax to be charged on the company’s taxable profits. Additionally, the financial statements will provide indicators as to the economic performance of the oil industry. These indicators will guide the government in establishing suitable economic and fiscal policies. The financial statements will also alert the government as to whether the organization is concerned about the well-being of the employees and that of the society in general. This will be evidenced by the availability of information relating to safe working conditions as well as the company’s efforts when it comes to corporate social responsibility. The government will want to ensure that the company is complying to set rules and regulations with regards to conducting business, for example compliance with environmental laws relating to oil spillage, labor laws for employees and other policies safeguarding climatic change.
The Government is also keen on financial information provided by an organization for effective allocation of resources to different industries. Information obtained from financial statements will guide the government in the provision of data used in the national statistics (BPP Learning Media 2010, p. 8).
Regulatory bodies will use a company’s financial information to evaluate whether an organization is complying with the set rules and regulations. The IASB in itself is a regulatory body and it will use the company’s financial statements to verify if they comply with the International Financial Reporting Standards. Regulatory bodies at the end of the day aim to ensure the company’s operations are in line with the set policies that safeguard the interests of various stakeholders. Regulatory bodies will also use financial information to identify the effect of various policies on financial information and the potential with which the various policies can be improved.
These institutions will use financial information to measure the success of the policies in place. Regulatory bodies will also use financial information to measure adherence of an organization to complying with set regulations including compensation policies. For example, compensations in the form of damages paid to affected individuals after the Deepwater Horizon Oil Spill in 2010. The company has a Gulf of Mexico Committee which has provided a report in the company’s financial statements focusing on how the Deepwater Horizon Oil Spill Trust will compensate affected people (BP Annual report 2015, p. 73).
The general public is mainly made up of consumers. These are the individuals who acquire the company’s products and services. They can use the financial information availed by BP to ascertain whether the company will continue providing them with goods and services in the near future. Consumers will also be keen on the strategies adopted by the company to provide safe and clean products to them with an aim of reducing the amount of pollution contributed by BP. For example, in the annual report for the year ended 2015, the company’s strategy focused on safe and reliable operations that would deliver value to the end consumer through the use of advance technology. Consumers will also use financial information to obtain information about the company’s plans to reduce both oil and gas prices (BP Annual report 2015, p. 14). Such futuristic information however is not fully accurate as it does not take into account future economic events for example, the exit of Britain from the European Union which shook the British economy. The general public is also able to know the long term viability of the company from the financial statements. The management team has provided an assessment of three years within which they are sure the organization will be able to continue running its operations while meeting its obligations as they fall due (BP Annual report 2015, p. 94).
The general public is also made up of the local community members who can use financial information to see the corporate social activities undertaken by the company in that fiscal year. People will therefore use the financial statements to get to know about the company structure and if this is a suitable place to work in. This, however, has a limitation in that a company may be doing well financially however the employees may not be happy working there. Additionally, a company may have positive financial performance but poor pay packages for their employees which may not be available from financial statements. The company has also been firing people after recording losses in 2015 with more than 7,000 people losing their jobs (Macalister, 2016). Such information limits the use of financial information available to consumers.
Conclusion and Recommendations
Two key examples of financial information which most users look out for are the company’s revenue margins as well as its profitability. In the year 2015, BP recorded its worst ever loss margins. This is mainly due to the reason that the company’s financial performance remains haunted by the Deepwater Horizon Oil Spill. The company is still uncertain about the outcome of current and futuristic litigations relating to the oil spill. It means that more funds will be required to fully settle the settlements, claims, fines, penalties among other expenses that likely to be occurred.
The unavailability of the exact amount of money they will need to cover this incident limits the decision making process for financial information users as they are not able to conclude whether BP is still a worthy investment. Even though it is currently one of the largest oil companies on a global scale, its decline in both profitability and revenue margins is a worrying trend. Its poor financial performance has also led to decline in their share price making it an unattractive investment to potential investors. The share price has also been affected by shareholders who quickly sold their investments after the company was said to record the worst loss ever since inception. The company’s management team is however confident that their losses will reduce in future periods as they have a strong cash flow position which will be able to cater for their losses (Macalister 2016).
I would therefore recommend that potential investors to avoid investing in BP Plc. since its financial performance is significantly affected by the effects of the oil spill which may take several years to be fully settled. Current investors should also consider selling their stake in the company considering the declining share price coupled with the loss reported for the year ending 2015. Additionally, the company faces stiff competition from the likes of Exxon Mobil and Royal Dutch Shell which are performing much better and may be better investment opportunities.
BP. 2015. BP Annual report 2015. Retrieved February 22, 2017, from http://www.bp.com/en/global/corporate/investors/results-and-reporting/annual-report.html
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Britton, A., & Waterston, C. 2013. Financial accounting. Harlow: Financial Times Prentice Hall.
IFRS. 2008, May. Objectives and Qualitative Characteristics [Phase A] [May 2008]. Retrieved February 22, 2017, from http://www.ifrs.org/Current-Projects/IASB-Projects/Conceptual-Framework/EDMay08/Pages/Frequently-Asked-Questions.aspx
Kaplan Publishing. 2010. ACCA paper F3 (UK): Financial accounting Complete Text. Wokingham: Kaplan Publishing UK.
Macalister, T. (2016, February 02). BP makes record loss and axes 7,000 jobs. Retrieved February 23, 2017, from https://www.theguardian.com/business/2016/feb/02/bp-annual-loss-biggest-for-20-years-axes-thousands-of-jobs-deepwater
Yeomans, J. 2016, July 20. Revealed: the biggest companies in the world in 2016. Retrieved February 22, 2017, from http://www.telegraph.co.uk/business/2016/07/20/revealed-the-biggest-companies-in-the-world-in-2016/
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