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practice of financial accounting

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Introduction

Practice of financial accounting The table below shows the rate of return on shareholders equity and gearing ratio Bonnie ltd Clyde ltd Rate of return on shareholders equity 14% 14% Gearing(debt equity) ratio 200% 20% Rate of return on shareholders equity (50 increase on operating profit before interest) 35% 22.4% Rate of return on shareholders equity(50 decrease on operating profit before interest) -7% 5.6% *formula in appendix The return on share holder's equity compares the amount of profit for the period available to the shareholders with the shareholders stake in the company. The two companies have the same rate of return on shareholders equity at 14%, however when operating profit before deducting interest charges is increased by 50%, both companies figures increase. However Bonnie ltd has a better rate of return on shareholders equity at 35% compared to Clyde ltd at 22.4%. However when the operating profit is decreased by 50% Bonnie ltd does not have a favorable rate of return as its figure actually drops to -7% compared to Clyde ltd with a 5.6%. This gearing ratio measures the contribution of long-term lenders to the long-term capital structure of a business. Bonnie ltd has a gearing ratio of 200% compared to Clyde ltd which has only 20%, there is a difference of 180% between the two companies. Bonnie ltd is a highly geared company because it has a substantial proportion of its capital in form of debentures while on the other hand Clyde ltd is a low gearing company because only a small proportion of its capital is in the form of debentures. ...read more.

Middle

It was formulated in 1998 and revised in 2003 following the publication of the Higgs report. The Code is divided into two sections. The first outlines principles of best practice and their supporting provisions for companies, while the second does the same for shareholders. While compliance with the Code is not mandatory, the Code was appended to the listing rules and listing rule 12:43A requires a statement by companies to provide shareholders with sufficient information to be able to assess the extent of compliance with section one of the Code. Instances of non-compliance should be justified to shareholders.16 November, 2004 Milestones in UK Corporate Governance Section 1 of the Code is comprehensive covering topics such as the composition and operations of the Board, directors' remuneration, relationships with shareholders, the supply of information, and accountability and audit. The fact that the Code has provided both principles and provisions has resulted in a Code that is powerful enough to effect specific recommendations and flexible enough to be applicable to most companies. Section 2 of the Code is much shorter, covering shareholder voting, dialogue with companies and the evaluation of governance disclosures. As institutional investors invest on behalf of the shareholders they represent they have a responsibility to hold the companies in which they invest to account. In particular, the Code recognized that the responsibility for maintaining good dialogue and mutual understanding belongs to both companies and its institutional investors. Finally when evaluating the quality of governance disclosure by companies, institutional investors are to give due weight to all relevant factors. This is rather vague and the area has been recognized as a shortcoming of the Code, leading to membership associations of institutional investors having to produce guidance to its members on this area. ...read more.

Conclusion

Ultra plc does have a nomination committee which reviews all main board and sub committee appointments, according to higgs report 2003 this committee should be chaired by an independent non executive director, however at Ultra its chaired by the chairman of the board. This clearly only meets half of the recommendation of the higgs report 2003. The corporate governance report indicates that Ultra has an audit committee, which was one of the recommendations set out in the Cadbury report. According to the governance report the board suggested that Mr. Macfarlane continues as a committee member of the audit group though he is chairman of it, (Ultra corporate governance) this does not comply with the revised combined code 2003. Ultra directors do conduct a review of the effectiveness of their internal control systems and report the information to share holders. Ultra's internal controls are designed to meet the group's particular needs and the risk to which it is exposed. In this context the controls can provide only reasonable, not absolute, assurance against material errors, losses or fraud (ultra corporate governance report, internal controls). It clearly sets out the internal controls systems they operate. This meets recommendations made by the Turnbull report 1999 and the combined code 2003. Two way communication is encouraged with shareholders, with the website providing financial and non financial information this was one of the recommendation of the Hampel report 1998, and later the combined code. Looking at the corporate governance report I conclude that Ultra' board has been successful with implementing corporate governance in their business, reporting to financial information to stakeholders. However there are still changes that need to be implemented in order to comply with the codes fully though they are voluntary. ...read more.

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