BAO5522 Managerial Accounting ____________

BAO5522 Managerial AccountingExamination of the Quality of the Akzo Nobel N.V.’s Performance Information in Its 2016 Annual Report

A Critical Examination of the 2016 Akzo Nobel N.V.’s Annual Report per the PwC Value Framework

Table of Contents

Executive Summary

Ideally, based on the PWC Value Framework, companies share four classes of information with the outside world, including their industries and other companies. The classes of information are performance, relationships along with resources, strategy as well as external drivers. Each of the classes is ideally backed by the pertinent measures of performance. It encompasses particular elements that the managements of given companies and investors in given companies informed PWC that they are critical in appraising corporate performance. When developing companies’ annual reports, the framework helps in the execution of industry-focused analyses and researches. Companies can customize the framework by emphasizing any elements that optimize their performances in specified industries.

The PWC Value Framework is aimed at helping companies to generate connected and complete sets of information that they use in not only external reporting but also in internal reporting. Such information helps the companies respond well to the expectations of own stakeholders, evolving market conditions, ebbing certainty and confidence levels, and decision-making dynamics. Companies exploit the connected and logical structure provided by the framework in determining and presenting their information needs and the significant connections flowing across the classes of information as seen in the present analysis of the 2016 annual report of AkzoNobel based on the framework. The analysis zeroes in on the quality of the reporting on the company’s performance and the reporting’s nature. The reporting focuses on the company’s organizational performance as well as health.

AkzoNobel is the trading name for Akzo Nobel N.V., which is an international Dutch firm. It produces varied daily essential such as performance coatings, specialty chemicals, paints, essential manufacturing ingredients, essential color, and essential protection agents. It sells the products to consumers and industries globally. Its head office is located in Amsterdam. In the analysis of the 2016 annual report presented by the company, the main objective was to determine the way each of the pillars, or principal, elements of the PWC Value Framework was measured, the comprehensiveness of each of the classes of information, and the accessibility of the information that the company was expected to provide under each of the four pillars of the framework.

The outcomes of the appraisal of the AkzoNobel’s 2016 annual report in the light of the PWC Value Framework showed that the framework and the breath of the company’s disclosure along with the related depth were consistent. Especially, there were remarkable disclosures of performance regarding the company’s strategic, performance, resources along with relationships, and external driver elements as tabulated below:

Strategic

Performance

Resources and Relationships

External Drivers

Objectives and strategy

Economic

Supply chain

Macroenvironment

Risk

Principal performance indicators

Intellectual assets and brands

Regulatory environment

Governance

Innovation

Competitive environment

Remuneration

Corporate responsibility

People

Operating

Customers

Physical assets

Financial assets

Information on each of the elements tabulated above was accessed easily from the AkzoNobel’s 2016 annual report either in the report’s table of contents section or within the body of the report. The disclosure extent and information comprehensiveness in the report was by and large consistent with the framework’s elements related to organizational health as well as performance. When the report was viewed against the framework, it was clear that anyone reading the report was sure to amply appreciate the performance of the company in 2016.

The outcomes of the analysis should be used with a consideration of the limitations of the analysis in mind. The analysis had varied limitations. First, the annual report may have been prepared by the company to respond with an unstated aim of using it as a marketing tool, somewhat losing objectivity. Second, the report remains publicly available and may be used by the company’s competition, affording them information that they use in rolling back the company’s competitive advantages. Third, the outcomes of the analysis cannot be extrapolated to give ideas on the performances of other companies in 2016. Fourth, the analysis was relied excessively on how the analyst interpreted the report. Lastly, the analysis’ scope was limited to the performance of the company in 2016 thus being of no use in examining the historical trends in the company’s performance reporting.

Elements of the PwC Value Framework

Value Framework Element: Objectives and Strategy

Report Extract

Purpose

(Page 8, AkzoNobel’s Annual Report 2016).

Strategic Review by the Chief Executive

Our commitment to delivering essential ingredients, essential protection and essential color ensured we made progress towards our vision of leading market positions delivering leading performance. Our track record of performance improvement continued – 2016 was again a record year for us in terms of return on investment and return on sales – driven by our focus on growth, operational excellence and continuous improvement (Page 8, AkzoNobel’s Annual Report 2016).

Reporting Critique:

Reporting Characteristics Driving the “Strategy and Objectives” Element of the PwC Value Framework

In the CEO’s statement on the company’s strategy and related goals, the CEO spells out the AkzoNobel’s strategic objectives clearly. In the CEO’s statement, the CEO spells out the AkzoNobel’s strategic goals clearly. From the statement, one can pick out the company’s long-term, medium-term, as well as short-term, targets easily.

Extensiveness and Accessibility

The AkzoNobel’s strategy, strategic objectives along with strategic goals are easy to pick out from the CEO’s statement. The statement communicates the strategy, strategic objectives along with strategic goals in ample details. There are numerous other sections in the report in which the strategy, strategic objectives along with strategic goals are communicated not only quantitatively but also qualitatively. On page 24 of the report, the company indicates that the elements of its business strategy include sustainability and safety, and linking of the activities of its employees to its overall strategic plan.

The company has various strategies tailored to its varied functional areas, including operational control cycle, innovation, procurement, talent management. In the report’s “Management Processes” section, there is a comprehensive piece of information indicating that those charged by the company with the management of particular business, or functional, areas have made out sustainability priorities based on the company’s market drivers and strategy. They have already put together dashboards with targets as well as KPIs for appraising progress.

Comprehensiveness

The statement by the CEO draws insightful parallels between the company’s management, customer focus, and growth strategy by reporting comprehensively on the:

company’s community-centric “Human Cities” program

link between and evaluation of the company’s performance and strategy

company’s organizational evolution

company’s innovativeness

company’s leadership dynamics

Notably, the statement paints a picture of the direction the company is keen on taking regarding its strategic growth and management. The company is keen on growing in a sustainable manner in all areas, viewing sustainability as being business and vice versa. As it continues to identify opportunities for growth, it is keen on matching the growth with sustainability. The CEO views the company’s management as a critical element of its overall performance and transformation at present and in the days ahead as is clear from his strategy statement.

Conclusion and Strength

The business strategy and the related objectives of AkzoNobel are covered in ample details in the report. The ways through which they are appraised are also communicated comprehensively in the report. The information in the report and the related reporting regarding the business strategy and the related objectives of AkzoNobel are “outstanding”.

Value Framework Element: Business Model

Report ExtractApplied Business Model

(Page 199, AkzoNobel’s Annual Report 2016)

Reporting Critique

Reporting Characteristics Driving the Company’s ‘Business Model’ Element of the PwC Value Framework

The annual report provides clear descriptions of how AkzoNobel generates and adds value to own products in the light of the linked elements of performance. From the report, one learns that the company’s clients fully appreciate that in addition to selling products, it supports product performance. For instance, it provides anti-fouling, heat refection, as well as insulation, services. It delivers extra services to own products. In the report, the example of the company’s engagement with Vehicle Refinishes is provided to illustrate that the company’s clients fully appreciate that in addition to selling products, it supports product performance.

Extensiveness and Accessibility

The applied business model provided on page 199 of the AkzoNobel’s Annual Report give readers a picture of the core business model of the company. The applied business model is presented in a clearly illustrated diagram. The model is easily accessible within the report, particularly in the section titled “New Business Models Driving Fresh Approaches To Sustainability”.

Comprehensiveness

The presented applied business model distinctly communicates how the company’s goes about generating value and growing own revenue by engaging its customers in all its business processes and undertakings. The model makes it clear that the company’s clients fully appreciate that in addition to selling products, it supports product performance. The model communicates comprehensively that the company is keen on making its business environment increasingly sustainable going forward.

Conclusion and Strength

The business model AkzoNobel is explained ample details in the report. The applied business model on page 199 is prominent, drawing marked attention to how the company executes business. The model communicates that the company’s is keen on not only selling products but also supporting product performance in sustainable ways. The information in the report and the related reporting regarding the business model and the related sustainability considerations are “remarkable”.

Value Framework Element: GovernanceReport Extract

Board

(Page 107, AkzoNobel’s Annual Report 2016)

Reporting Critique:

Reporting Features Driving the ‘Governance’ Element of the PwC Value Framework

There are various features that drive the ‘governance’ element of the PwC value framework. They are the comprehensiveness of the reporting on governance, the transparency in the reporting, the rigor with which operating processes and structures are explained, and the rigor with which a company’s administration structures are explained. The structures include: the board of directors, company rules, and code of conduct. In the report, all these features are covered clearly in four subsections of the “governance and compliance” section. The subsections are:

Corporate governance statement

Compliance and integrity management

Remuneration report

AkzoNobel on the capital markets

Extensiveness and Accessibility

The AkzoNobel’s reporting on governance is covered in the report’s “governance and compliance” section in four subsections:

Corporate governance statement

Compliance and integrity management

Remuneration report

AkzoNobel on the capital markets

The subsections run from page 106 of the report to page 129. That means that the reporting is extensive. The reporting can be accessed without difficulties from the report’s table of contents and body. The marked length of the reporting shows that the company is keen on being transparent and accountable to its audiences and stakeholders.

Comprehensiveness

There is ample information in the reporting on the structure of the company’s governing board. The information covers not only the structure of the board but also how it operates and the committees that work under its general direction. The reporting on the four subsections is in depth and insightful. In the “corporate governance statement” subsection there is ample information on the structure. In the “compliance and integrity management” subsection one gets lots of insight into how the company ensures that its officials comply with the set regulations and maintain integrity in the execution of own mandates. The remuneration of the board’s members is comprehensively communicated on in the “remuneration report” running from page 122 of the report.

Conclusion and Strength

The reporting on not only the structure of the board but also how it operates and the committees that work under its general direction demonstrates that the company is keen on ensuring that those in its governance positions work in ways that are transparent, as well as accountable, especially in relation to those with an interest in its affairs. The reporting on the four subsections is in depth and insightful. The reporting’s quality regarding the governance of the company is “commendable”.

Value Framework Element: Risk Management

Report Extract: Framework for Risk Management

(Page 47, AkzoNobel’s Annual Report 2016)

Approach to Risk Management

We continuously strive to foster a high awareness of business risks and internal control, geared towards preserving our risk appetite and providing transparency in our operations. The Executive Committee is responsible for managing the risks associated with our activities and, in turn, for the establishment and adequate functioning of appropriate risk management and control systems (Page 47, AkzoNobel’s Annual Report 2016).

Reporting Critique:

Reporting Features Driving the ‘Risk Management’ Element of the PwC Value Framework

The features largely refer to reporting on how the structures, operations, and processes which companies put in place to measure, mitigate, and manage particular risks.

Extensiveness and Accessibility

The “risk management” section of the report is easily accessible from the report’s table of contents. The section contains many explanations, tables, charts, and process flows that help readers in appreciating the reporting done in the section. From the section, one can easily follow how the different risks facing the company are measured, mitigated, and managed. The risks include:

external strategic risks

internal strategic risks

external operational risks

internal operational risks

external financial risks

external compliance risks

Comprehensiveness

In the report, AkzoNobel communicates expansively on how it measures, mitigates, and manages possible external strategic risks, internal strategic risks, external operational risks, internal operational risks, external financial risks, and external compliance risks. Under each of these classes of risks, there are specific risks that the company reports on in ample details. For instance, the internal operational risks it reports on in significant details include change management.

Conclusion and Strength

The reporting on risk management demonstrates that the company is keen on ensuring that the probable risks are measured, mitigated, and managed appropriately if they happen. The reporting on risk management is in depth and insightful. The report’s quality regarding risk management is “good”.

Value Framework Element: Remuneration

Report Extract

CEO’s Pay Mix

(Page 123, AkzoNobel’s Annual Report 2016)

The ratio between fixed and performance-based compensation (pay mix) for the CEO and CFO, under various levels of performance, is illustrated below. The fixed pay component only refers to base salary, excluding bulkpostcontract benefits and other benefits. The variable component includes the aforementioned short-term incentive, longterm incentive and share-matching feature. Share price developments are not taken into account (Page 123, AkzoNobel’s Annual Report 2016).Members of the Board of Management receive a contribution towards pension and similar retirement benefits, as determined by the Supervisory Board (Page 123, AkzoNobel’s Annual Report 2016).

Reporting Critique:

Reporting Features Driving the ‘Remuneration’ Element of the PwC Value Framework

The report communicates how the board members of the company are remunerated under the “governance and compliance” section, especially in the “remuneration report” subsection. The other subsections under the “governance and compliance” are:

corporate governance statement

compliance and integrity management

AkzoNobel on the capital markets

The report communicates the value of the remuneration packages given to the members and communicates why the company feels that the packages are reasonable and defensible.

Extensiveness and Accessibility

The remuneration packages given to the AkzoNobel’s board of directors members are reported generously in the report. They are easily accessible in the report under the “governance and compliance” section and from the report’s table of contents. The report breaks down how the performance-based remuneration and fixed remuneration of the members are arrived, especially with respect to the CEO and the company’s chief financial officer at specific performance levels. The elements of the remuneration packages covered in the report include:

base salaries

bulkpost-contract benefits

incentives

share-matching features

other benefits

Comprehensiveness

The reporting on how the senior management of the company is remunerated is consistent with the reporting features driving the ‘remuneration’ element of the PwC value framework especially regarding comprehensiveness. As noted earlier, the reporting on the remuneration is presented in a detailed way that allows readers to examine the specific elements of the remuneration packages. The elements include base salaries, bulkpost-contract benefits, incentives, share-matching features, and other benefits.

Conclusion and Strength

The remuneration dynamics at AkzoNobel are explained in ample details in the report. The charts and tables related to the remuneration dynamics are prominent, drawing marked attention to how the company remunerates its senior officers. The information in the report and the related reporting regarding remuneration are “remarkable”.

Value Framework Element: Financial Assets

Report Extract

Financial Instruments

Regular purchases and sales of financial assets and

liabilities are recognized on trade date. The initial measurement of all financial instruments is at fair value. Except for derivatives, the initial measurement of financial instruments is adjusted for directly attributable transaction costs (Page 141, AkzoNobel’s Annual Report 2016).

Derivative Financial Instruments (Note 23) Derivative financial instruments are recognized at fair value on the balance sheet. Fair values are derived frommarket prices and quotes from dealers and brokers, orare estimated using observable market inputs. Whendetermining fair values, credit risk for our contract party, as well as for AkzoNobel, is taken into account. Changes in the fair value are recognized in the statement of income, unless cash flow hedge accounting or net investment hedge accounting is applied. In those cases, the effective part of the fair value changes is deferred inOther comprehensive income and released to the relatedspecific lines in the statement of income or balance sheetat the same time as the hedged item (Page 141, AkzoNobel’s Annual Report 2016).

Reporting Critique:

Reporting Characteristics Driving ‘Financial Assets’ Element of the PwC Value Framework

There are various reporting features that are deemed to be driving the element. They include reports on financial asset values, financial asset ownership, and the general financial wellbeing of companies.

Extensiveness and Accessibility

In the report, information on the financial assets of the company is easily accessible from and expansively presented as part of the notes accompanying the company’s consolidated financial statements. The notes run from page 137 of the report and are easy to locate in the report’s table of contents. The report has extensive information on the company’s policies relating to its financial assets, debt terms, and related financial instruments, including the derivative financial instruments.

Comprehensiveness

The detailed information provided as notes accompanying the company’s consolidated financial statements communicates that the company is keen on decimating the financial risks facing it and making certain that it maintains adequate liquidity levels to ensure that its strategic aims are realized. The notes communicate the company’s financial asset performance over time and the related benchmarks. As noted earlier, the report has extensive information on the company’s policies relating to its financial assets, debt terms, and related financial instruments, including the derivative financial instruments.

Conclusion and Strength

The reporting on the company’s financial assets is strong. It is done by way of notes accompanying the company’s consolidated financial statements. The reporting’s quality is “good”.

Value Framework Element: Physical Assets

Report Extract

Inventories (Note 12)

Inventories are measured at the lower of cost and net realizable value. Costs of inventories comprise all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to the present location and condition. The costs of inventories are determined using weighted average cost (Page 140, AkzoNobel’s Annual Report 2016).

Reporting Critique:

Reporting Features Driving the ‘Physical Assets” Element of the PwC Value Framework

According to the framework, ideally, reporting on the physical assets elements should cover a disclosure of a company’s current book values for its physical assets. According to the framework, ideally, reporting on the physical assets elements should cover a disclosure of a company’s prospective book values for its physical assets. As well, the reporting should bring to light the effectiveness, as well as efficiency, of the physical assets.

Extensiveness and Accessibility

One can easily locate descriptions of how the values of the company’s physical asset are measured in the report. That can be done from the table contents for “financial information”. The descriptions are extensive, covering how the company measures own inventories at varied values, inventory cost computations, and determination of inventory costs.

Comprehensiveness

The reporting on the company’s physical assets is comprehensive, covering many different aspects such as how the company measures own inventories at varied values, inventory cost computations, and determination of inventory costs. The reporting has marked depth regarding these areas of physical assets.

Conclusion and Strength

The reporting on the company’s physical assets is strong. The reporting’s quality is “good”.

Value Framework Element: Customers

Report Extract

Customer Need

End–users and customers regularly ask for products andsolutions that will make their business more sustainable.In many cases, we work closely with them so we candeliver breakthrough solutions that provide downstreamsustainability benefits while delivering economic value toall parties in the value chain. These collaborations canrange from smart product choices and logistics solutions, to complete long-term innovation programs involvingacademic partners and government institutes (Page 210, AkzoNobel’s Annual Report 2016).

Reporting Critique

Reporting Features Driving the ‘Customers’ Element of the PwC Value Framework

Ideally, corporate reporting should describe the size of the base of a company’s customers. The reporting should speak to customer loyalty and revenue. As well, it should speak to how the company relates with its customers and how it heightens their satisfaction levels.

Extensiveness and Accessibility

There are various sections in the report that communicate varied aspects related to the company’s customers. Even then, the principal section dealing with customer matters is titled “customer engagement”. The section is extensive and pronounced, making it easily accessible within the report. It covers aspects such as how the company heightens its customers’ satisfaction levels via the:

services it provides

handling of complaints

independent surveys

customer loyalty evaluations

Comprehensiveness

The reporting on how the company’s engages its clients is rather comprehensive. It provides detailed information on how the company’s customers:

are keen on products that the sustainability of their businesses

collaborate with the company closely to benefit from the breakthrough solutions delivered by the company

get the value delivered by the company

Conclusion and Strength

The reporting on the company’s customers is strong. The reporting’s quality is “good”.

Value Framework Element: People and Culture

Report Extract

Inclusivity

(Page 24, AkzoNobel’s Annual Report 2016)

Opportunities

We aim to clearly link our employees’ daily activities to our strategy and purpose and provide continuous learning and development opportunities. Since 2013, we have followed a clear roadmap towards building a high performance culture. With all the foundational elements now in place, we will turn our focus to building the capability we need to further deliveron our strategic goals (Page 24, AkzoNobel’s Annual Report 2016).

Employee Engagement Survey

Our annual employee engagement survey provides avaluable measure of our progress. The 2016 results show an improvement in the number of employees agreeing they had the chance to learn and grow over the past year. Our overall engagement score improved for the sixth year in a row (Page 24, AkzoNobel’s Annual Report 2016).

Reporting Critique

Reporting Features Driving the ‘People and Culture’ Element of the PwC Value Framework

According to the framework, ideally, reporting should entail the gradation of staff competency in a company. According to the framework, ideally, reporting should cover the gradation of staff motivation besides engagement in a company. According to the framework, ideally, reporting should speak to the available advancement opportunities. As well, it should explain the cultures of the employees, how they think, perform, connect, and co-operate.

Extensiveness and Accessibility

The detailed “diverse and inclusive talent development” section is easily accessible in the report. It is rather expansive. It communicates the extent of the staff competency in the company, the staff motivation besides engagement in the company, the available advancement opportunities, and the cultural sensitivities of the company’s employees, including how they think, perform, connect, and co-operate. The company is presented as being quite keen on having a diverse and culturally inclusive working environment. It is committed to affording its entire people equal opportunities for advancement devoid of considering their cultural differences.

Comprehensiveness

The report covers the question of the company’s people on one hand and cultural considerations on the other in ample details. The details are largely qualitative and related to performance as well as policy. As noted earlier, it communicates the extent of the staff competency in the company, the staff motivation besides engagement in the company, the available advancement opportunities, and the cultural sensitivities of the company’s employees, including how they think, perform, connect, and co-operate.

Conclusion and Strength

By and large, the company’s reporting on the “people and culture” element is “good”. Even then, it would have been better had the company ensured that that the details were not only largely qualitative and related to performance as well as policy but also quantitative.

Value Framework Element: Innovation

Report Extract

Innovation

Customer focused product and process innovation is at the heart of our four-stage innovation process (ideation; selection and prioritization; execution; implementation and support). To further improve the quality of input, we are deploying a front-end ideation process, as well as building a strong innovation and growth culture. We have systems in place to manage the innovation portfolio and assess resourcing and prioritization on a dynamic basis, while tracking the success of individual launches. Longer term planning of the portfolio ensures that resources are placed close to the markets, particularly in key locations in growth regions (Page 25, AkzoNobel’s Annual Report 2016).

Reporting Critique

Reporting Features Driving the ‘Innovation’ Element of the PwC Value Framework

newness of goods

innovation process

prioritization

growth culture

quality of input

Exten