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Critical Thinking Exercise on Topic of Non-Statutory Profit

Financial Accounting

You work for the Sydney office of an international firm of public accountants. You have been asked to prepare a report for the partners on the topic of non-statutory (underlying) profit, as reported by many of the firm's corporate clients. The partners are concerned that these profit figures depart from those disclosed in the financial statements, which are prepared under AASB standards. The partners want to know relevant background information, current practice in the area and the reasons for the proliferation of the practice, and its implications. The partners require that the report is presented in simple language and in an interesting, easy-to-read format.

The report will consist of a cover page, which shows the title of the report and the authors, a table of contents, an executive summary, the report itself, a page of references and any appendices. It is required to be prepared in 1.5 line spacing, using a Times New Roman 12 point font, with 2 cm margins on all sides. You are required to cite at least ten (10) current sources which may include academic literature, media, and websites. Since the firm wants to maintain its high reputation, it is vital that sources are reliable, reputable and relevant, cited in an accurate manner and properly referenced using the Harvard method.

This is based on Australian accounting standards, not US GAAP.

Here are some helpful resources

o Websites of accounting firms, e.g. Deloitte, Ernst & Young, KPMG, PWC.
o Financial Media, e.g. Business Review Weekly, The Financial Review รข?"
o Media Releases by Australian corporations, e.g. corporate websites.
o Regulators, e.g. ASIC, ASX, AASB, AICD, CPA Australia, FINSIA.

Solution Preview

Executive Summary

The statutory profit is the foundation for reporting financial standing of an organization. The International Financial Reporting Standards (IFRS) is mandated for listed companies but financial agencies like AICD and Finsia believe that organizations should provide supplemental information to aid shareholders and other investment community members in understanding of the organization. The users of financial information are mostly analysts who make recommendations about companies based on their financial history. They value companies on the basis of past earnings and expected future cash flows. However, analysts do not use this approach in deriving actual profit figures. Instead they make adjustments to derive an underlying profit. This underlying profit is then projected into future using various techniques and is capitalized to determine current valuation of the company. Also, underlying profits are used to derive future cash flows which are then discounted to arrive at a present valuation.

The disclosure of non-statutory profits can prove to be valuable information for users of financial information. In this regard, the Australian Institute of Company Directors (AICD) and Financial Services Institute of Australia (FINSIA) have issued guidance which seeks to encourage companies to disclose any non-statutory measure of profit in a responsible and consistent manner.


In November 2006 a survey of analysts was conducted by Finsia on the quality of financial reporting in which analysts were satisfied with the quality of financial reporting in Australia. However, one area where they felt more consistency was required was normalizing of profits and propagated for a separate and consistent disclosure of normalized profit. This does not question the financial ...

Solution Summary

Critical thinking exercise on topics of a non-statutory profit is examined in the solution.