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Write an essay that shows that you understand “sustainability accounting and reporting” – what it is and suggestions / theories as to why it is done by companies. You need to include examples of actual companies and their sustainability reporting and relevant key performance indicators and disclosures on economic, social and environmental matters. At least one of the examples needs to be from a non-profit organisation. You should conclude on the usefulness of sustainability accounting and reporting based on the evidence that you have found in actual company practices and in the literature.

Provide a detailed analysis about the performance of the non-profit organisation mentioned in your analysis above.

Meaning of Sustainability accounting and Reporting

Sustainability accounting and reporting is wide known concept and there has been huge debate over this topic due to its relevance in the outside world. Sustainability accounting is now becomes a generic term and there are many definition to this term as it is very wide concept. Sustainability accounting means accounting of financial as well as non financial matters that represents the performance of the company.  Sustainability accounting involves accounting of matters related to social, economic and environment issues that company is involved with. Triple bottom line is famous accounting method used to report all these activities in annual report in the standard format (Houston and Brigham, 2009).

This report aims to discover the key performance indicators of SLH Group, a non profit making organization which is situation in South Liverpool, United Kingdom. KPIs are related to financial as well as non-financial data reported in the annual report of year 2016. SLH Group is group of associations that provides homes at affordable cost to the people of South Liverpool. This report also explains the meaning of sustainability accounting and reporting in detail along with its importance (Annual Report, 2016). Apart of sustainability reporting, this report will provide detailed overview financial performance of the selected company through use of financial tool such as ratio analysis.

Sustainability accounting is the well known concept in the field of accounting and it has emerged from the constant development of the accounting over the years. Sustainability accounting can be termed as group of terms that has huge significance in the accounting such as social accounting, environment accounting, corporate social responsibility reporting, corporate social reporting and non-financial reporting. Sustainability accounting can be defined as sub category of the financial accounting that focuses on disclosing all the matters that are non-financial in nature to the stakeholders in order to have complete access over the financial as well as non-financial performance of the company. Non-financial matters relates to such activities that have direct or indirect impact on the environment, economic performance and society at large. It can be said that sustainability accounting is the tool mostly used by the companies to become more sustainable and to be more reliable in the eyes of the public (Mumba, 2013).

During the past few years accounting has transformed from conventional accounting system to the most modern accounting. Conventional accounting system is the oldest concept that includes financial accounting that includes gathering of financial data from the day to day transactions and present them in the form of financial reports to management and external parties. Conventional accounting also includes cost accounting that helps in providing management information about the inventory assets values and other information that is required to be present in the annual report. Modern or today’s accounting is far more related to non-financial matters as it relates to financial matters as it is presumes that financial matters are most impacted through the activities performed in the company. Sustainability accounting is designed to promote the new from accounting that includes strategy of sustainability and it is an extension to the financial accounting and management accounting.

Reasons why the sustainability accounting is followed by the companies

Conventional accounting has already transformed and it has taken place of the environmental accounting that incorporates the reporting of external environment matters that can be expressed in the form of physical, qualitative and even in financial values. Triple bottom lines accounting is used formerly to separate the economic, social and environmental accounting. Sustainability accounting is widely used is non-profit organizations as these organsiastions are reportable to the external stakeholders about the impact it creates through its activities (Mumba, 2013). Non-profit organization are public organizations that works for the welfare of the public and it is important that these organization must be true and fair while carrying out its activities as large number of people are involved in such organizations.

Sustainability accounting as discussed above is important for both profit making and non-profit making organizations. In this context this part lays emphasis on the importance of sustainability accounting and reporting by the organizations. There can be many reasons for implementing the sustainability accounting and reporting while presenting reports and presentations regarding the activities performed in the organizations through out the year (Buckle, Buckle and Thompson, 2004). On research various reasons have been located for and among them most important 6 reasons are described below:

  • Greenwashing: It is an indication to the organizations or concerns, that accounting serves as the weapon or tool that helps the cost efficient communicative activities to promote the sustainability or feel or reliability.
  • Industry pressure: It has been seen that there were extreme pressures from the companies in industry to make sure that all the legal and non-legal matters have disclosures in the annual reports so that stakeholders can have access on the workings of the company and helps them to take wise decision.
  • Legislative pressure: Apart from the industry pressure there has been pressure of stakeholders demanding disclosures of non-financial maters such as environmental accounting social accounting etc in the annual reports and it is main reason that give license to operate in the market.
  • Self Control: In order to present more reliable and efficient organizations lays emphasis on the sustainability accounting that helps to sustain with the mandatory requirements imposed by the regulatory bodies and also provides benefits through maintaining the social acceptance and reputation. It also helps in promoting the companies and also reduces the competition among companies (Ujwary-Gil, 2011).
  • Social responsibility and ethical reasons: Sustainability accounting is the way for the ethical motivation and legitimate accounting that address the sustainability issues and helps managers to produce the accounting information that can be guide for all the decisions makers.
  • Manages the business activities: Ongoing disclosures regarding the economic, social and environmental matters help the organization to manage business activities successfully and to promote the level of satisfaction among the shareholders.

Apart from these reasons there are some more reasons that allow company management to make disclosures regarding the non financial matters such as sustainability accounting helps in increasing the profit under the given regulatory corporate framework.

The selected non-profit organization is well known company is United Kingdom and it is named as SLH Group. SLH Group is collective group of South Liverpool Homes, SLH projects, and SLH regenerations (About Us. SLH Group, 2017). This company mainly works in Speke and Garston areas of the South Liverpool. This organization is well known in South Liverpool and it is the housing association and in present time it manages around 3700 homes (Company Profile: SLH Group. 2017).

Key performance indicators refer to elements of annual report that shows the financial and non financial performance of the company to the stakeholders. Therefore, key performance indicators can be any information that can be helpful for the investors or owners to judge the performance of the organization in one go. For example, items like net revenue, net profit or loss from the statement for profit and loss can be key performance indicators to any company that is interested in knowing the net profit earned by the company during the period.

To be more precise, this segment helps in understanding the meaning of key performance indicators and their role in the sustainability reporting. As disclosed in the annual report by the SLH Group in year 2016, the financial and non financial key performance indicators are as under:

For the year ended 31 March

2016

2015

2014

2013

2012

Restated

Restated

Under old UK Gaap

Under old UK Gaap

Under old UK Gaap

Group Income and Expenditure account (£’000s)

Total turnover – continuing activities

 $    19,469.00

 $  18,293.00

 $    16,944.00

 $  16,374.00

 $  16,588.00

Income from lettings

 $    18,651.00

 $  17,817.00

 $    15,555.00

 $  14,990.00

 $  14,084.00

Operating Surplus

 $      4,843.00

 $    4,745.00

 $      4,333.00

 $    4,863.00

 $    4,120.00

Total Comprehensive income for the year

 $      3,408.00

 $    3,096.00

 $      3,324.00

 $    3,680.00

 $    2,786.00

Group Balance Sheet (£’000s)

Housing tangible fixed assets at cost

 $  105,372.00

 $  99,557.00

 $  100,879.00

 $  93,723.00

 $  91,696.00

Housing tangible fixed assets, net of depreciation

 $    76,024.00

 $  72,624.00

 $    85,257.00

 $  79,917.00

 $  79,871.00

Net current assets

 $          908.00

 $    5,509.00

 $      6,095.00

 $    6,689.00

 $    2,894.00

Interest Bearing Loans (due over one year)

 $    24,000.00

 $  25,180.00

 $    25,700.00

 $  25,700.00

 $  25,700.00

Revenue Reserves

 $    34,502.00

 $  31,304.00

 $    29,458.00

 $  25,623.00

 $  22,450.00

Accommodation figures

Social housing

 $      3,742.00

 $    3,666.00

 $      3,626.00

 $    3,608.00

 $    3,619.00

Performance

Debt per unit

 $      6,413.00

 $    6,868.00

 $               7.09

 $    7,123.00

 $    7,101.00

Interest Cover

 $               4.60

 $             5.41

 $               4.59

 $             4.75

 $             4.22

Gearing

 $               0.23

 $             0.25

 $               0.25

 $             0.27

 $             0.28

Void Loss

 $            83.00

 $          94.00

 $          117.00

 $        109.00

 $        104.00

Bad debts

 $          (20.00)

 $        (50.00)

 $               3.00

 $          45.00

 $          94.00

Rent arrears

 $      1,173.00

 $    1,025.00

 $      1,102.00

 $    1,170.00

 $    1,338.00

Above table shows the key statistics of the performance of SLH group during 2012 to 2016. Looking at the above table it can be said that there has been gradually increase in income over the period of time despite of major decrease in net current assets in year 2016 (Annual Report, 2016). Company maintains good interest cover to pay the debt taken for building the homes.

Conclusion

Sustainability accounting is also known as social and environmental accounting that emphasizes on disclosing non-financial information relating to the performance of a business organization. The disclosure of information relating to society, environment and economic performance of a business entity is required for maintaining the trust of stakeholders. This enhances the trust and credibility of an organization in stakeholder’s mind by providing proper information relating to measures adopted for promoting social, economic and environmental performance. The sustainability accounting reporting is used as tool by business worldwide in order to promote their long-term growth and development.  This is achieved by gaining customer trust through providing adequate information related to the societal, environmental and economic benefits that a business entity provides to the community in which it operates. This develops a good brand image of a business entity in the customer’s mind thus helping it to attain customer satisfaction. This in turn increases the profitability of a business entity and thus leading to its sustainable growth and development. The sustainable accounting reporting is also known as triple bottom line reporting as a business entity reports it performance on the three parameters of social, economic and environmental. The Global Reporting Initiative (GRI) was established in order to provide standard guidelines to business worldwide regarding development of their reports based on sustainability (Confino, 2013).

Ratio analysis is frequently used financial tool used to measure the financial performance of the company. This report will analyze the liquidity, profitability, and capital structure of the SLH Group for year 2015 and 2016.

 Financial Data Used to make ratio calculations

Years

Particulars

2015

2016

Data in $'000

Current Assets

 $    9,041.00

 $    4,587.00

Current Liabilities

 $    3,532.00

 $    3,679.00

Inventory

129

165

Prepaid Expenses

0

0

Quick assets

 $    8,912.00

 $    4,422.00

Operating Profit

 $    4,745.00

 $    4,843.00

Net Profit

 $    3,096.00

 $    3,408.00

Net sales

 $  18,293.00

 $  19,469.00

EBIT

 $    3,763.00

 $    3,142.00

Total Assets

 $  82,258.00

 $  83,974.00

Shareholders Equity

 $  31,346.00

 $  34,601.00

Debt

 $  43,766.00

 $  42,096.00

(Annual Report, 2016)

Liquidity performance means company financial ability to pay or write off the short term liabilities in the one year time period. Current ratio and quick ratio are the two main ratios used to evaluate the liquidity performance (Bull, 2007).

Liquidity Ratios

Ratios

Formula

2015

2016

Current Ratio

Current Assets/Current Liabilities

2.56

1.25

Quick Ratio

Quick Assets/Current Liabilities

2.52

1.20

  • Current ratio: Current ratio is calculated as current assets divided by the current liabilities. Current assets refer to the assets that can be converted into cash into short period of time. Current liabilities refer to the balance sheet items that are to be paid within one year time period. Current ratio shows the times the current assets company maintains to pay the current liabilities. Current ratio of SLH Group was 2.56 in year 2015 and it was reduced to 1.25 in year 2016. It reflects poor performance in year 2016 as compare to year 2015.
  • Quick ratio: Quick ratio was similar to current assets and it is calculated as quick assets divided by current liabilities (Bull, 2007). The difference between quick ratio and current is that quick assets do not consider inventory and prepaid expenses as they are not converted into cash and cash equivalent frequently. Quick ratio of the SLH Group was 2.52 in year 2015 and it got reduced to 1.20 in year 2016 that purely indicates decrease in current assets in year 2016. So it can be said that liquidity performance was poor in year 2016 as compare to 2015 (Annual Report, 2016).

Profitability analysis means profit earning capability of the organization using its assets. Profitability can be measured in many forms such as operating profit ratio, net profit ratio, return on assets and return in equity (Bull, 2007).

Profitability Ratios

Ratios

Formula

2015

2016

Operating profit Ratio

Operating Profit/Net sales

25.94%

24.88%

Net profit ratio

Net Profit/Net sales

16.92%

17.50%

Return on Assets

EBIT/Total Assets

4.57%

3.74%

Return on Equity

EBIT/Shareholders Fund

12.00%

9.08%

  • Operating Profit: Operating profit means operating profit earned on the total revenue earned by the company. It is calculated as operating profit divided by the net sales. In year 2015, company earns the operating profit margin of 25.94% and it got slightly reduced to 24.88% in year 2016.
  • Net profit margin: It is the ratio of net profit divided by the net revenue that shows net profit margin earned by the organsiastions after meeting all the expenses of the year. Net profit margin of SLH Group was 16.92% in year 2015 and 17.50 % in year 2016. Overall profitability position of the SLH Group was strong in both the years. There was very slow growth in the profit margin of the company(Annual Report, 2016).
  • Return on Assets: Return on assets means profit earned by the organization using their assets. It is calculated as EBIT divided by the total assets. SLH Group has earned 4.57% return on their assets in year 2015 and it got reduced to 3.74 % in year 2016.
  • Return on Equity: Return on equity is defined as profit earned by the organization on the shareholder equity. It is calculated as EBIT divided by the shareholders equity. Return on equity of the SLH Group was 12 % in year 2015 and 9.08% in year 2016. Overall profitability of the SLH Group was better in year 2015 as compare to year 2016.

Capital structure analysis aims to analyze the capital formation of the organization i.e. debt and equity position (Bull, 2007).

Capital Structure Ratios

Ratios

Formula

2015

2016

Debt Equity Ratio

Debt/Equity

1.40

1.22

Debt Ratio

Debt to Total Assets

0.53

0.50

  • Debt Equity ratio: This ratio calculates times the debt present in the total invested capital as compare to shareholder equity. In year 2015 the debt equity ratio was 1.40 that indicates that debt was 1.4 times the equity capital. In year 2016 the debt equity ratio was 1.22 that shows that debt got reduced in year 2016.
  • Debt ratio: It tells total to total assets of the company. It is calculated as debt divided by the total assets. Company maintains 53 % debt to total assets in year 2015 and it reduced to 50 % in year 2016.Overall capital structure of the company was highly leverage due to presence of more debt compare to equity (Annual Report, 2016).

References

About Us. SLH Group.(2017). [Online]. Available at: https://www.slhgroup.co.uk/about-us/ [Accessed on: 25 April, 2017].

Annual Report (2016). SLH Group. [Online]. Available at: www.slhgroup.co.uk/media/1707/slh-stat-2015-16-final.pdf [Accessed on: 25 April, 2017].

Bull, R. (2007). Financial Ratios: How to use financial ratios to maximise value and success for your business'. UK: Elsevier.

Company Profile: SLH Group.(2017). [Online]. Available at: https://www.b.co.uk/company-profile/?slh-group-48388 [Accessed on: 25 April, 2017].

Confino, J. 2013. What's the purpose of sustainability reporting? [Online]. Available at: https://www.theguardian.com/sustainable-business/blog/what-is-purpose-of-sustainability-reporting [Accessed on: 26 April 2017].

Houston, J.F. and Brigham, E.F. (2009). Fundamentals of Financial Management. Cengage Learning.

Mumba, C. (2013). Understanding Accounting and Finance: Theory and Practice. USA: Trafford Publishing.
Buckle, M.J., Buckle, M. and Thompson, J.( 2004) . The UK Financial System. 4th ed. New York: Manchester University Press.

Ujwary-Gil, A. (2011). Business and non-profit organization facing increased competition and growing customers' demands. WSB-NLU.

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