FINANCIAL MANAGEMENT & IFRIC 12

Financial Management & IFRIC 12

Financial Management Techniques & IFRIC 12

Introduction

Financial planning plays an important role in the management of finances. It is in the planning of any business entity comprehensively assesses the state of their finances; identify opportunities to increase financial resources, the direction of their most effective use. Management decisions are taken in the planning process based on the analysis of financial information, which in this context should be sufficiently complete and accurate.

This paper will focus on the financial management techniques that have been adapted to control on Public Private Partnerships and Public Financial Initiatives in England.

Discussion

There are various methods or models of assessment or evaluation of investments. It is basically divided between static methods and dynamic methods. Static methods are:

Payback Period

Net Cash Flow (Cash-Flow News)

The Accounting Rate of Return

All these methods suffer from the same flaw which is avoiding the time i.e. the time is output or input of money and, therefore, their different values (Danielson M., Scott J., 2006, pp. 7).

Accounting Rate of Return

The Accounting Rate of Return provides a quick estimate of the value of a project during its lifetime. In order words, it is a rate used for capital budgeting. The basis for decision rule with the accounting rate of return is that if ARR is greater than or equal to the hurdle rate which is minimum rate on the project or investment required by a manager or investor, the project is accepted otherwise the project is rejected This is bench mark set by the company's management. For instance, if ARR is 8%, t his indicates that the project expects to generate 8% out of the dollar invested in the project. Here, the manager/ investor will accept the project. If the ARR is less than the hurdle rate then the project is rejected. When there are two more projects then that investment which has higher ARR will be accepted, as it will be more attractive. It is derived by finding profits before taxes and interest. The profit generated by an investment alone has no explanatory power. The ratio of profit to capital is crucial here. The smaller the capital employed in the same revenue, the more profitable is the purchase of capital goods for the company (Davis C., Davis E., 2011, pp. 268).

The Accounting Rate of Return is an accounting method used for comparison purposes. The main disadvantages are that it uses as a benchmark of the profits, instead of the cash flow, and does not take into account the time value of money.

Discounted Cash Flow

Discounted cash flow is the assessment methodology used to analyze the attractiveness of a particular investment opportunity. The analysis of discounted cash flow (DCF) uses the estimated future free cash flows and discounts them (most often using the weighted average cost of capital , WACC), to get their real value , which is used to evaluate the potential investment . If the value obtained from discounted cash flow analysis is higher than ...