Comparing different profit figures for the benefit of stakeholders
In prior research accounting profit and taxable income is compared. This study was adopted to incorporate the main differences between accounting profit, taxable income and economic profit as well as the standards each method needs to comply to. The aim of this research study was to compare the different sets of profit figures in order to establish the impact it may have on stakeholders’ decision making as different stakeholders require different financial information. Financial information can be obtained in either the statement of financial position (balance statement), statement of profit and loss and other comprehensive income (income statement), statement of changes in equity, the cash flow statement and the notes to the statement of financial position. The International Accounting Standards Board (IASB) provides guidelines to correctly report useful financial information in order for stakeholders to make informed business decisions. The study therefore strived to investigate how accounting profit, taxable income and economic profit can be compared and the influence the three different sets of profit figures will have on the Return on Equity (ROE). The primary objective has been achieved by mainly focusing on the three sets of profit figures and the profitability ratios of companies trading on the Johannesburg Stock Exchange (JSE) according to market capitalisation of each JSE sector, using a sample period from 2001 until 2015. The literature indicated that stakeholders require different financial information in order to make informed business decisions either for investment activities, day-to-day management or for tax purposes. Furthermore, that in order to correctly determine each set of profit figure, a framework or calculation method was used according to accounting standards, the Income Tax Act or by way of a reconciliation of the accounting profit. During the empirical research the framework and calculation method was applied in determining accounting profit, taxable income and economic profit. The three different profit figures where used in order to determine the effect it will have on the ROE. The profitability ratios recorded in some instances indicated that overall accounting profit and taxable income will provide stakeholders with more accurate information whereas, economic profit takes future considerations into account. Overall economic profit recorded a negative profitability ratio, which according to the literature study conducted indicates a poor performance and will affect investors’ confidence. Based on the literature study and the empirical research performed and the results obtained, it can be concluded that this study complied with its theoretical and empirical objectives.