ACCA APPROVED CONTENT PROVIDER ACCA Passcards Paper P5 Advanced Performance Management Passcards for exams from September 2015 – 31 August 2016 ACP5PC15.indd 23/03/2015 11:29 (000)ACP5PC14_FP_Ricoh UK.qxp 3/27/2015 2:26 PM Page i Professional Paper P5 Advanced Performance Management (000)ACP5PC14_FP_Ricoh UK.qxp 3/27/2015 First edition 2007, Ninth edition Apr il 2015 ISBN 9781 4727 2709 e ISBN 9781 4727 2774 British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library Published by BPP Learning Media Ltd BPP House, Aldine Place 142-144 Uxbridge Road London W12 8AA www.bpp.com/learningmedia Printed in the UK by RICOH UK Limited Unit Wells Place Merstham RH1 3LG Your learning materials, published by BPP Learning Media Ltd, are printed on paper obtained from traceable sustainable sources 2:26 PM Page ii All rights reserved No part of this publication may be reproduced, stored in a retrieval system or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior written permission of BPP Learning Media © BPP Learning Media Ltd 2015 (000)ACP5PC14_FP_Ricoh UK.qxp 3/27/2015 2:26 PM Page iii Preface Contents Welcome to BPP Learning Media's ACCA Passcards for Professional Paper P5 Advanced Performance Management They focus on your exam and save you time They incorporate diagrams to kick start your memory They follow the overall structure of the BPP Learning Media's Study Texts, but BPP Learning Media's ACCA Passcards are not just a condensed book Each card has been separately designed for clear presentation Topics are self contained and can be g rasped visually ACCA Passcards are still just the right size for pockets, briefcases and bags Run through the Passcards as often as you can during your final revision period The day before the exam, try to go through the Passcards again! You will then be well on your way to passing your exams Good luck! Page iii (000)ACP5PC14_FP_Ricoh UK.qxp 3/27/2015 2:26 PM Page iv Preface Introduction to strategic management accounting Performance management and control of the organisation Business structure, IT developments and other environmental and ethical issues Changing business environment and external factors Performance management information systems Management information, recording and processing and management reports Performance hierarchy Scope of strategic performance measures in the private sector Divisional performance and transfer pricing issues Page 17 10a 10b 11 25 41 51 63 71 81 91 12 13 14 15 16 Contents Strategic performance measures in not-for-profit organisations Non-financial performance indicators The role of quality in management information and performance measurement systems Performance measurement: strategy, reward and behaviour Alternative views of performance measurement and management Strategic performance issues in complex business structures Predicting and preventing corporate failure Current developments, issues and trends Page 101 107 111 127 141 151 155 163 (001)ACP5PC14_CH01.qxp 3/27/2015 2:27 PM Page 1: Introduction to strategic management accounting Topic List This chapter introduces strategic management accounting and how it fits into the planning and control process of an organisation Planning, control, decision-making and management information The chapter also explains how organisations set strategic plans and control their outcomes Corporate planning Planning and control: strategic and operational Multinational aspects SWOT analysis Benchmarking However, it is important to remember that P5 is not pr imarily a business strategy paper – its main focus is how organisations can evaluate and improve their performance Benchmarking could provide a useful way of comparing processes or performance between business units or organisations, with a view to improving them in line with best practice (001)ACP5PC14_CH01.qxp 3/27/2015 Planning, control, decision-making and management information 2:27 PM Corporate planning Page Planning and control: strategic and operational Strategic planning The process of deciding on the objectives of the organisation, on changes to these objectives, on the resources used to attain them, and on the policies that are to govern the acquisition, use and disposal of those resources Strategic decisions Strategic decisions are long-term decisions, characterised by wide scope, wide impact, relative uncertainty and complexity Most strategic decisions are unique, so the information needed to support them is likely to be ad-hoc and specially tailored to the decision Multinational aspects SWOT analysis Benchmarking Characteristics of strategic information Long term and wide scope Generally formulated in writing Widely circulated Doesn't trigger direct action, but a series of more detailed (tactical, operational) plans Includes selection of products, purchase of noncurrent assets, required levels of company profit (001)ACP5PC14_CH01.qxp 3/27/2015 2:27 PM Management control The process by which managers ensure that resources are obtained and used effectively and efficiently in the accomplishment of the organisation's objectives It is sometimes called tactics or tactical planning Management accounting information for strategic planning and decision making Incorporates forecasts/estimates/risk and uncertainty analysis Has an external orientation Forward looking and outward looking Helps to ensure goal congruence Page Page Characteristics of management accounting information Short-term and non-strategic Management control planning activities include preparing annual sales budget Management control activities include ensuring budget targets are achieved Carried out in a series of routine and regular planning and comparison procedures Management control information covers the whole organisation, is routinely collected/disseminated, is often quantitative and commonly expressed in money terms: – Cash flow forecasts – Variance analysis reports – Staffing levels Source of information likely to be endogenous (from within the organisation) 1: Introduction to strategic management accounting (001)ACP5PC14_CH01.qxp 3/27/2015 Planning, control, decision-making and management information 2:27 PM Corporate planning Page Planning and control: strategic and operational Multinational aspects SWOT analysis Benchmarking Strategic planning and management control compared Example The decision to launch a new brand of frozen foods is a strategic plan, but the choice of ingredients for the meals is a management control decision Long-term strategic plans can conflict with the shor ter-term objectives of management control Performance measures/control measures not take strategic direction into account Strategic imperatives might not be properly communicated to middle management Strategic planning information might be difficult to measure (001)ACP5PC14_CH01.qxp 3/27/2015 2:27 PM Page Performance management Performance management systems Activity designed to improve an organisation's performance and ensure that its goals are being met Plans, with set guidelines and targets, to help organisations measure how efficiently goals are being met, and to identify areas where performance can be improved Organisation has to establish its goals and objectives before it can assess whether they are being met Once performance targets have been set, an organisation can measure whether its goals and targets are being achieved Page Often linked to employee reward programmes so employees are rewarded for helping an organisation reach its goals Performance measurement is an important control in an organisation 1: Introduction to strategic management accounting (015)ACP5PC14_CH15.qxp 3/27/2015 2:31 PM Page 158 Business failure Performance improvement strategies Organisation lifecycle and survival Declining companies Slatter identifies four stages in the crisis: Crisis denial Managers are complacent They ignore warning signs or not understand them Hidden crisis Crisis signs are explained away by managers to protect their positions Disintegration Action is taken too late and too little Management becomes more autocratic Collapse Effective action becomes impossible There are power struggles and able managers leave The Icarus paradox (Miller) Strategic drift can follow success if the organisation becomes over-confident The business model comes to revolve around what worked in the past, hampering innovation and reducing flexibility Strategy rests on unchallenged assumptions and drifts away from environmental fit It can be difficult to distinguish core competences from obsolete assumptions (015)ACP5PC14_CH15.qxp 3/27/2015 2:31 PM Slatter: 10 symptoms of corporate decline: Decrease in company's profitability Decrease in sales volume Increase in gearing Decrease in liquidity Restrictions on dividend policy Financial engineering Top management fear Frequent changes in senior management Falling market share 10 Evidence of lack of planning Page 159 Page 159 Other signs Difficulties indicated in chairman's report Adverse press coverage New legislation Increased competition Worsening economic situation Note: Failure can be caused by internal factors (eg lack of innovation; inappropriate marketing strategy) or external factors (eg recession; industry lifecycle) or a combination of both 15: Predicting and preventing corporate failure (015)ACP5PC14_CH15.qxp 3/27/2015 2:31 PM Page 160 Performance improvement strategies Business failure Organisation lifecycle and survival Ross and Kami: 10 commandments for avoiding business failure You must have a strategy Keep informed of, and react to, change You must have controls Customer is king The Board must participate Do not misuse IT Avoid one-man rule Do not manipulate accounts Management in depth 10 Organise to meet employee's needs Three stages in turning a company round Contraction to cut the cost base while maintaining re venue Reinvestment in capability and efficiency Rebuilding with an emphasis on innovation (015)ACP5PC14_CH15.qxp 3/27/2015 2:31 PM Page 161 Business failure Performance improvement strategies Organisation lifecycle and survival The life cycle and long-term survival Although not all products inevitably go into decline, organisations need to be aware of life cycle issues, so that their products generate enough cash to allow for investment in new products Stages of lifecycle: Introduction → Growth → Maturity → Decline Ideally organisations should have a number of different products at different stages in the life cycle New products at introduction/ growth stages, which will mature and generate cash (Question marks in BCG matrix) Mature products already generating cash for new investment (Cash cows) Products in decline to be harvested (Dogs) Importantly though, critical success factors, KPIs and information needs also vary through the life cycle Page 161 15: Predicting and preventing corporate failure (015)ACP5PC14_CH15.qxp 3/27/2015 2:31 PM Page 162 Notes (016)ACP5PC14_CH16.qxp 3/27/2015 2:31 PM Page 163 16: Current developments, issues and trends Topic List Environmental management accounting Public sector performance Changing role of management accountant Contemporary issues Integrated reporting This final chapter covers current developments and emerging issues in performance management (section F of the syllabus.) We look at a range of discrete topics here but they could all easily be examined in your P5 exams One of the key capabilities P5 candidates are expected to demonstrate is their ability to identify and assess the impact of current developments in management accounting and performance measurement on measuring, evaluating and improving organisational performance (016)ACP5PC14_CH16.qxp Environmental management accounting 3/27/2015 2:31 PM Page 164 Changing role of management accountant Public sector performance Contemporary issues Integrated reporting Environmental management accounting 'The generation and analysis of both financial and non-financial inf ormation in order to suppor t internal environmental management processes' Traditional management accounting Underestimates cost of poor environmental behaviour Underestimates benefits of improvements Distorts and misrepresents environmental issues Classifies environmental costs as general overheads EMA attempts to make all relevant, significant costs visible so that they can be considered in business decision making using: Input/output analysis Flow cost accounting Environmental ABC Life cycle costing for the purposes of Poor management decision making Managers are unaware of these costs, have no information with which to manage them and no incentive to reduce them Product pricing Budgeting Investment appraisal Setting performance targets (016)ACP5PC14_CH16.qxp 3/27/2015 Environmental management accounting Public sector performance 2:31 PM Page 165 Changing role of management accountant Contemporary issues Integrated reporting Issues to consider Benchmarking and league tables Can motivate organisations to improve performance But how reliable are league tables, what measures to use? Could lead to concentration on achieving specific benchmarks whilst neglecting others Level of comparison Are league tables looking at organisation as a whole (str ategic view) or looking at individual operational issues? Potential conflict between strategic and operational focus? Private sector comparators Who to compare against, validity of comparisons Targets VFM, efficiency and effectiveness, qualitative measures But which areas of performance are selected for measurement? Wide range of stakeholders, each with different (possibly conflicting) objectives Page 165 16: Current developments, issues and trends (016)ACP5PC14_CH16.qxp 3/27/2015 Environmental management accounting Public sector performance 2:31 PM Page 166 Changing role of management accountant Contemporary issues Integrated reporting Traditional view of the management accountant Separation from operational aspects of the organisation to allow independence and objective judgement Trigger for change Technology Access to IT and MIS across the organisation Management structure Shift in responsibility for budgeting to operational management who prepare and monitor their own budgets Competition Competitive economic situation has led to strategic focus and commercial orientation Modern view of the management accountant Hybrid accountant with accounting knowledge and in-depth awareness of operational/commercial processes of the organisation Increasingly integrated into the operations of the organisation (016)ACP5PC14_CH16.qxp Environmental management accounting 3/27/2015 2:31 PM Public sector performance Page 167 Changing role of management accountant Four main performance issues requiring management attention Linking performance to strategy Setting performance standards and targets Linking rewards and performance Considering benefits and problems of performance measures Source: The pyramids and pitfalls of performance measurement, ACCA P5 Technical Article Contemporary issues Integrated reporting Performance measures chosen should: Measure effectiveness of all processes Measure efficiency of resource utilisation Include mix of qualitative and quantitative methods Look at both long-term and shortterm performance Be flexible and adaptable to changing business environment Page 167 16: Current developments, issues and trends (016)ACP5PC14_CH16.qxp Environmental management accounting Integrated Report 'A concise communication about how an organisation's strategy, governance, performance and prospects, in the context of its commercial, social and environmental context, leads to the creation and enchancement of value over the short, medium and long term.' (IIRC) 3/27/2015 Public sector performance 2:31 PM Page 168 Changing role of management accountant Contemporary issues Integrated reporting Six categories of capital Category Characteristics Financial Funds available for use in the production of goods or the provision of services Manufactured Buildings, equipment or infrastructure used in the production of goods or the provision of services Human Skills, experience and motivation to innovate Intellectual Intangible assets providing competitive advantage (eg patents, copyrights, brand and reputation) Natural Inputs to goods and services, and natural environment on which organisation's activities have an impact (eg water, land, minerals, eco-systems) Social Institutions and relationships between stakeholders groups to enchance individual and collective well-being Includes an organisation's social licence to operate (016)ACP5PC14_CH16.qxp 3/27/2015 2:31 PM IIRC: Seven guiding principles of IR Strategic focus and future orientation – insight into strategy and how it relates to the use of the six capitals Connectivity – holistic picture of relationships and dependencies Stakeholder relationships – provide insight into the nature and quality of relationships, and how an organisation recognises and responds to stakeholders' interests Materiality – only focus on matters which substantively affect organisation's ability to creat value Reliability and completeness – present information in a balanced way, including negative matters as well as positive ones Conciseness – report should be concise Consistency and comparability – to enable comparison with other organisations Page 169 Page 169 Key questions to address in an Integrated Report Purpose of organisation and context in which it operates Governance structure and how it supports organisation's ability to create value Opportunities and risks facing the organisation and how it is responding to them Strategy and resource allocation Business model – and how resilient it is to threats from the external environment Performance – how well has the organisation achieved its strategic objectives, and what effect has this had on the six capitals? Future outlook – what challenges and uncer tainties is the organisation likely to face and what are the potential implications for these on its future performance? 16: Current developments, issues and trends (016)ACP5PC14_CH16.qxp Environmental management accounting 3/27/2015 Public sector performance 2:31 PM Page 170 Changing role of management accountant Contemporary issues Integrated reporting Implications of IR for the management accountant Requirement for forward-looking information as well as historical – Insights into an organisation's prospects and future perf ormance – But how much future information can/should an organisation provide? Long-term performance and business sustainability – Evaluate performance on a long-term basis as well as in the shor t-term – Performance measures need to promote a balance betw een long-term and short-term performance – Use of non-financial performance indicators Value generation – Focus on value generation (rather then narrow financial goals) – Increased use of non-financial data to gain a better understanding of perf ormance Insight into strategy – Need to highlight the significance of figures, rather than simply reporting figures Focus on key aspects of performance – Guiding principle of conciseness: focus on aspects of performance which are truly key to the organisation's future success (critical success factors) (016)ACP5PC14_CH16.qxp 3/27/2015 2:31 PM Page 171 Impact of IR on management account information Stategic – information needs to be more strategic; not just about historical, internal, financial performance External information – need information on external environment to highlight opportunities and threats Requirement for non-financial information – Can organisation's information systems supply the range of information stakeholders want to see? – Will systems need to be improved in order to enable the non-financial information to be collected? – Can the accountant ensure that non-financial information is reliable? – What assurance is there over non-financial information in a report? Page 171 16: Current developments, issues and trends (016)ACP5PC14_CH16.qxp 3/27/2015 2:31 PM Page 172 Notes ... written permission of BPP Learning Media © BPP Learning Media Ltd 2015 (000)ACP5PC14_FP_Ricoh UK.qxp 3/27/2015 2:26 PM Page iii Preface Contents Welcome to BPP Learning Media's ACCA Passcards for Professional... but BPP Learning Media's ACCA Passcards are not just a condensed book Each card has been separately designed for clear presentation Topics are self contained and can be g rasped visually ACCA Passcards...(000)ACP5PC14_FP_Ricoh UK.qxp 3/27/2015 2:26 PM Page i Professional Paper P5 Advanced Performance Management (000)ACP5PC14_FP_Ricoh UK.qxp 3/27/2015 First edition