Business Risk Governance

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Components of effective risk reporting The required content of effective risk reports can be stated using the following five components that would be expected in an effective risk management system:

 risk agenda;

 risk assessment;

 risk response;

 risk communication; and

 risk governance. Risk agenda This explains the reasons for undertaking risk management activities and expected benefits from doing so. Good risk reports would include the following:

 a clear statement of the drivers for the company when planning and undertaking risk management activities;

 a description of the benefits from the risk management processes established; and  information on resources allocated to risk management activities

Risk assessment Good risk reports would include the following:

 a clear description of the procedures in place and information used to identify risks;  an explanation of how risk is evaluated;

 a list of significant risk. Risk response Good risk reports would include the following:

 description of appropriate responses for each risk;

 information on how the efficiency and effectiveness of existing controls is assessed;

 description of disaster response and business continuity plans.

Risk communication Good risk reports would include the following:

 a description of how risk management processes and responsibilities are communicated throughout the company;  information on risk management recordkeeping and on risk reporting and whistleblowing arrangements in the company.

 

[Yakub02]

Trends Many companies include tables or diagrams in the annual reports to indicate performance in key areas over time.

Such information might include revenue, operating profit, profit after tax, eps and share price, typically over a five or ten year period. Some companies also include non-financial information, for example, the number of employees.

Historically, companies have considered themselves responsible to their shareholders by generating dividends and capital growth on their investment.

More recently, companies have been criticised for striving to maximise profits at the expense of social and environmental concerns,

for example, by such means as underpaying their workforce or by abusing their power over their smaller suppliers to negotiate prices and terms.

 

[Yakub02]

Disclosure of a change in accounting policy When a change in accounting policy has an effect on the current period or any prior period (or would have an affected that period except that it is impracticable to determine the amount of the adjustment) or might have an effect on future periods the following must be disclosed:

Disclosure: Change due to IFRS Voluntary change The title of the Standard or Interpretation  The nature of the change in accounting policy   A description of any transitional provisions

 The reason why the new accounting policy provides reliable and more relevant information

 For the current and previous period(s), to the extent practicable, the amount of the adjustment   to each item in the financial statements. To the extent practicable, the adjustment relating to accounting periods before those 

 presented in the financial statements If retrospective application is impracticable, an explanation of how the accounting policy change   has been applied

 

[Yakub02]

An accounting estimate is made for an item in the financial statements when the item cannot be measured with precision, and there is some uncertainty about it.

An estimate is therefore based, to some extent, on management’s judgement.

Management estimates might be required, for example, for the following items:  bad debts;  inventory obsolescence;  the fair value of financial assets or liabilities;  the useful lives of non-current assets;

 the most appropriate depreciation pattern (depreciation method, for example straight line or reducing balance) for a category of non-current assets; and  measurement of warranty provisions.

The use of reasonable estimates is an essential part of the preparation of financial statements and does not undermine their reliability.

 

[Yakub02]

It is important to distinguish between an accounting policy and an accounting estimate. Sometimes it can be difficult to distinguish between changes in accounting policy from changes in accounting estimate. In such cases any change is treated as a change in accounting estimate.

Accounting policy: Depreciating plant and equipment over its useful life Accounting estimate: How to apply the policy - for example, whether to use the straight line method of depreciation or the reducing balance method is a choice of accounting estimate.

A change in the measurement basis applied is a change in an accounting policy, and is not a change in an accounting estimate