ACCG224 2014 S2 ReportPresentation Topic Essay

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ACCG224

Intermediate Financial Accounting

S2, 2014

Report and Presentation:
Reporting business performance and value: What if money was meaningless? Recently graduated from Macquarie University, you have just joined the financial reporting unit of a company* which applies the national equivalents of IFRS/IAS. On your first day, you are introduced to the Chief Financial Officer (CFO) who looks somewhat depressed. "You know", she says, "I have just reviewed our latest financial report. All those $ amounts! What do they really mean?" You are a bit shocked hearing such doubts from the CFO. Shouldn't she know what they mean? "But isn't money the most objective and therefore best measure for business performance? At least, that is what we learned at University" you reply a bit shyly. "That's what I used to believe, too.
But I give you just three reasons of many which made me question the meaning of money." "Firstly, did you know that money is not backed by any real value? In October 1976, the
United States government officially changed the definition of the dollar; any references to gold were removed. From this point, the international monetary system was made of pure fiat money that has no intrinsic value at all. Fiat money only works as a means of exchange and a store of value as long as people who are offered money in exchange for their labour or goods believe that they can easily find other people who also believe in money and therefore will accept it in exchange for their goods and services. Those other people will only believe in money if they in turn can easily find again other people who also believe in money and so forth. What if this belief-chain breaks and people realise that money has no value on its own?"
“So what you are really saying is that by creating a system based on fiat money any reference to real values has been removed? Rather, our whole monetary system is now built on trust?” you reply.
"Exactly. Further, did you know that out of every $100 of foreign exchange transactions in A$ roughly only A$1 is traded for real goods and services? In other words, the volume of purely financial transactions is 100 times the volume of transactions in A$ for imported or exported real goods and services.”
At this point you begin to really question - “So, how can the value of A$ be connected to any real value in a meaningful way?"
"This is what I have been asking myself of late. Did you also know, and that is my third reason, that the central banks in the so-called ‘developed’ western countries have, since the Global Financial Crisis in 2008, pumped trillions of $ into the monetary system to avoid the collapse of financial institutions (so-called quantitative easing)? A great deal of this money ended up in the share markets around the world with new record highs of share prices leaving far behind the real growth of listed companies, another disconnect between money and real values."
"So, how about writing a research report for me as your first task to search for any alternative ways of reporting our performance and value creation?" she ends our conversation and turns back to her numbers.

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ACCG224

Intermediate Financial Accounting

S2, 2014

Required:
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