Advanced: Economic valued added approach to divisional performance measurement The most recent published results for V pic are shown below:

An analyst working for a stockbroker has taken these published results, made the adjustments shown below, and has reported his conclusion that ‘the management ofV pic is destroying value’.

The Chairman of V pic has obtained a copy of the analyst’s report.
Requirement:

(a) Explain, as management accountant of V pic, in a report to your Chairman, the principles of the approach taken by the analyst. Comment on the treatment of the specific adjustments to R&D, Advertising, Interest and Borrowings and Goodwill. (12 marks)

(b) Having read your report, the Chairman wishes to know which division or divisions are ‘destroying value’, when the current internal statements show satisfactory returns on invest¬ ment (ROIs). The following summary state¬ ment is available:

Some of the adjustments made by the analyst can be related to specific divisions:
• Advertising relates entirely to Division A (Retail)
• R&D relates entirely to Division B (Manufac¬
turing)
• Goodwill write-offs relate to Division B (Manufacturing) £10.3m Division C (Services) £30.4m • The deferred tax relates to Division B (Manufacturing) £1.4m Division C (Services) £6.2m • Borrowings and interest, per divisional accounts, are:

Requirement:
Explain, with appropriate comment, in a report to the Chairman, where ‘value is being destroyed’. Your report should include • a statement of divisional performance, • an explanation of any adjustments you make, • a statement and explanation of the assump¬ tions made, and • comment on the limitations of the answers reached. (20 marks)

(c) The use of ROI has often been criticised as emphasising short-term profit, but many companies continue to use the measure. Explain the role of ROI in managing business performance, and how the potential problems of short-termism may be overcome.
(8 marks) (Total 40 marks) CIMA State 4 Management Accounting Control Systems

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Profit before tax for year ending 31 December Summary consolidated balance Published (m) 13.6 sheet at 31 December Fixed assets 35.9 Current assets 137.2 Less: Current liabilities (95.7) Net current assets 41.5 Total assets less current liabilities 77.4 Borrowings (15.0) Deferred tax provisions (7.6) Net assets 54.8 Capital and reserves 54.8