Article Reviews
The newly developed SASB allowed companies to take into consideration external events (Eccles, 2016) that cannot be controlled such as the effects of climate change. The reason for the accounting standard addition is that governments cannot ignore the effects on industrial markets and their investors (Eccles, 2016). The value of accounting standards is that it allows individuals, companies, and governments to generate wealth since it allows financial performance comparisons (Eccles, 2016). The problem is that there was no previous standard developed for nonfinancial performances (Eccles, 2016) especially on environmental and social activities.
Areas of Agreement
The advantage of the article is that it details the value of nonfinancial performance to company investors specifically with regards to climate change. The reason is that climate change risk is perceived by Eccles (2016) to affect 93% of the U.S. market and related industries. This is because climate change can limit resources (Eccles, 2016) resulting to an eventual outcome of a decrease in production. An additional effect of the resource scarcity is the increased need for product innovations due to required production alignments or process changes.
Determining the standards required to quantify nonfinancial performance factors (Gilman and Schulschenk, 2015, p.2) are the main goal of the SASB. The purpose is to develop a way to measure and report nonfinancial information as a benchmark (Gilman and Schulschenk, 2015, p.2) due to operating variances in the industries. A material factor can be considered as a minimal factor from one industry to the next resulting in the 10-sector classification system (Eccles, 2016), which needs to be applied to different industries. One example is the computation of the carbon emissions generated by a chemical company, which cannot be applied to banks.
The threat of resource scarcity (Eccles, 2016) also increased the focus of corporations to ensure that their supply chains must remain sustainable. Supply chain sustainability, which was previously ignored by retailers and investors are increasing in importance since it decreases downstream supply risks while creating upstream opportunities (Eccles, 2016). The value of the nonfinancial performance factors (Eccles, 2016) is that it increases to the same level as the financial performance factors.
Areas of Disagreement
The determination of what nonfinancial performance factors will be included and the amount to be recorded is the next task (Gilman and Schulschenk, 2015, p.3). The reason for which is that financial performance factors are difficult to determine especially with regards to inventories. Nonfinancial factors and their values are going to be more difficult to determine since good or reliable information is not always available from the supply chains (Eccles, 2016).
The use of the 10-sector classification system is considered to be a general application of material ESG issues (Eccles, 2016). The reason is that only the most likely material issues determined by the SASB have Key Performance Indicators (KPI) or appropriate metrics (Gilman and Schulschenk, 2015, p.3). The provisional standards have only recently become available at April 2016 (Eccles, 2016) since the standards for the health care sector was scheduled to be finished by the SASB on 2012 (Gilman and Schulschenk, 2015, p.4). The provisional standards are considered to be temporary since the SASB requires the feedback from companies in various industries and their investors. This is because the principles included may be considered as ineffective (Gilman and Schulschenk, 2015, p.3) with regards to its usefulness and applicability.
Essay Question
How many sectors did the SASB develop to classify the nonfinancial performance issues?
Area of Agreement
The IPSASB adopts stricter pension accounting rules (Biggs, 2016), which is perceived to be contrary to the accounting rules developed by the GASB despite the modifications in 2012 (GASB, 2012). The reason for the value differences is that each country has their own accounting rules but a higher number are implementing the IPSASB accounting rules (Biggs, 2016). The IPSASB uses a more conservative accounting rule and results in a higher valued pension plan (Biggs, 2016). The OECD believes that despite the 2012 modifications (Biggs, 2016) the U.S. government pension plan still does not faithfully represent the impact of the public employee pension liability (GASB, 2012).
The public employee pension liabilities must be based on the amount of money that the government owes to its retirees (Biggs, 2016) since it is also affected by the amount of pension contributions paid by the state and local government employees. The resulting accumulated liability is the amount of money set aside by the government to pay off its employee pensions (Biggs, 2016). Unfortunately the OCED believes that using the current accounting policies under the GASB encourages the state and local government to partial payments (Biggs, 2016) instead of the true amount.
The use of the discounted rate of return to the pension liabilities is perceived by the IPSASB to be an effect of the time value of money (Biggs, 2016) rather than the investment risk implied by the GASB. Based on IPSAS 25, the interest payment must be considered as a reward for high risk investments (Biggs, 2016). IPSAS 25 further revealed that the discount rate must be complimentary to the period of the pension plan estimated to be at 2% based on an average yield of 10-20 year government bonds (Biggs, 2016).
Area of Disagreement
The current GASB is considered to be significantly lacking (Biggs, 2016) due to its understated values, which is worsened by the fact that the standards are also applied to the public pension industry. The GASB is therefore seen to manipulate the accounting rules to benefit them since financial logic is ignored (Biggs, 2016). The reason given by the GASB (Biggs, 2016) is that the state and local governments cannot pay the full pension payment required under the IPSASB and has therefore resorted to faulty accounting practices.
The problem with the public employee pension liabilities is that its value is discounted by a forecasted rate of return based on an investment portfolio at 7.7% (Biggs, 2016). The rate of return is based on the assumption that the investment portfolio is invested in risky assets such as stocks, private equity, real estate and hedge funds (Biggs, 2016). The effect is that the pension plan liability is better funded when the pension contributions decreases and investment risk increases. The IPSASB unfortunately believes that the true discount rate is at 2% (Biggs, 2016).
Essay Question
What is the estimated discount rate used by the IPSASB? The GASB?
Xerox: Business Separations
Xerox is competing in two business markets (Lauchlan, 2016), which are the business process services and document technology. The revenue from the business process service is estimated to be at $7 billion while the document technology business generated $11 billion in revenues (Lauchlan, 2016). Xerox CEO Ursula Burns revealed that it plans to separate the business segments into two publicly traded companies in 2016 (Lauchlan, 2016). The resulting split will increase the restructuring costs to a total of $550 million with $126 million already spent by January 2016 (Lauchlan, 2016). The objective is to improve cost savings to $2.4b for the next 3 years but the positive effect is perceived to be higher than expected (Lauchlan, 2016).
Area of Agreement
The value of the business separation is that it enhances corporate operations by considering external parties such as customers. The goal of the business separation is to increase the customer focus (Lachlan, 2016) by analyzing what operating processes will require modifications in order to become more efficient or competitive (Rivero, 2013, p.3). The resulting effect is perceived to be better cost efficiencies (Lachlan, 2016), which is considered to be unrealistic from Rivero’s (2013, p.3) point of view. Xerox’s CEO (Lachlan, 2016) believes that it gives management a chance to analyze its operations in order to become more efficient.
The positive effect is that each separate company will make use of the same fundamental strategies of the original company (Lachlan, 2016). This means that corporate strengths are enhanced while weaknesses can be changed to potential strengths resulting in a better corporate operation. The use of the same fundamental strategies is perceived by its employees, customers, and partners as mutually beneficial (Lachlan, 2016). The effect is that each employee is more focused on the needs of its customers (Lacklan, 2016) resulting to better flexibility with regards to the market change adaptations (Rivero, 2013, p.3).
A more flexible market adaptation (Rivero, 2013, p.3) results to better opportunities for Xerox especially in the Health Outcome segment (Lachlan, 2016). The reason is that the government requires 50% of all Medicare and Medicaid service payments to be value-based by 2018 (Lachlan, 2016). The ability for faster adaptation is seen to be a future corporate opportunity especially since competing healthcare providers and payers also needs to adapt to the standard (Lachlan, 2016).
Area of Disagreement
The business separation decision is considered to be impractical since it will total to $550 million (Lachlan, 2016) especially in an uncertain economic environment. But the defense for the separation is cost efficiencies, which will save $2.4 billion for the next three years (Lachlan, 2016). But the decision had already declined the corporate profits by 84% or at $34 million, which was due to the 4% decline in corporate revenues (Lachlan, 2016).
The business separation also resulted to increased customer concerns (Rivero, 2013, p.3) with regards to service disruptions in the two business segments (Lachlan, 2016). The reason for this is that the business reorganization had only initially focused on the business process services (Lachlan, 2016) and may have ignored concerns in the document technology business, which Rivero (2013, p.3) may result to failure. The primary reason for the concern is that the human approach was ignored (Rivero, 2013, p.3) when focusing on the business restructuring strategies especially when the CEO does not have potential executives in place to run the two new businesses (Lachlan, 2016).
Essay Question: What business opportunity is targeted by Xerox after the business separation?
References
Biggs, A. (2016). U.S. state and local pensions couldn't survive under tougher international accounting standards. Forbes. Retrieved from http://www.forbes.com/sites/andrewbiggs/2016/06/01/u-s-state-and-local-pensions-couldnt-survive-under-tougher-international-accounting-standards/#1ed1d9954fb1
Eccles, B. (2016). What the world needs now: Sustainability accounting standards. Forbes. Retrieved from http://www.forbes.com/sites/bobeccles/2016/05/03/what-the-world-needs-now-sustainability-accounting-standards/#290f019d66dc
GASB. (2012). News Release 06/25/12: GASB improves pension accounting and financial reporting standards. GASB. Retrieved from http://www.gasb.org/cs/ContentServer?pagename=GASB/GASBContent_C/GASBNewsPage&cid=1176160126951
Gilman, K., and Schulschenk, J. (2015). Sustainability Accounting Standards Board. Ey. Retrieved from http://www.ey.com/Publication/vwLUAssets/Sustainability_accounting_standards_board/$FILE/130304%20Inform%20Vol%203%2014-17.pdf
Lauchlan, S. (2016). Xerox’s “refreshing” pain sparks 84% profit collapse. Diginomica. Retrieved from http://diginomica.com/2016/04/26/xeroxs-refreshing-pain-sparks-84-profit-collapse/
Rivero, O. (2013). A humanistic approach to streamline organizational change initiatives. Digital Commons. Retrieved from http://digitalcommons.apus.edu/cgi/viewcontent.cgi?article=1004&context=facultySBus
