Content of the Annual Report & Financial Statements
The annual report usually contains the following:
Chairman’s Statement • Review of Operations •
Directors’ Report • Statement of Directors’
Responsibilities • Auditors’ Report • Financial
Statements • Notes to the Accounts
The directors are required by law to prepare a report to shareholders
to show how they are managing the business and its assets. The content
and presentation of the report is governed by the Companies Act
which sets out standard formats for the content and presentation
of accounts. The content is also governed by accounting standards
whose role is to ‘narrow the difference and variety of accounting
practice by publishing authoritative statements on best accounting
practice which will, whenever possible, be definitive’. In
the UK the standards are issued by the Accounting Standards Board
and are known as the Statements of Standard Accounting Practice
(SSAPs) and Financial Reporting Standards (FRSs).
We shall briefly look at each item contained in the annual report.
This usually contains useful information about the company’
progress and its prospects for the future. This statement is not subject
to a formal audit and remember that it is always likely to be written
in an upbeat tone.
Review of Operations
This is a more detailed review of the company and often covers both
an operating and financial review of the business.
The Directors’ Report
The Companies Act sets out what must be included in this section.
It contains an assortment of information including a fair review of
the business, significant changes in fixed assets and any charitable
donations. The company must also show the names of the directors and
Statement of Directors’ Responsibilities
The directors manage the company on a daily basis on behalf of the
shareholders and their responsibilities are set out in the section.
Directors are responsible for selecting suitable accounting policies
(see below) and stating whether applicable accounting policies have
been followed. It is instructive to compare this statement with the
It is a requirement of company law that auditors are appointed to
help protect the interests of shareholders. This statement seeks to
clarify their exact role and responsibilities. The auditors express
an opinion as to whether the accounts represent a ‘true and
fair view’. ‘True and fair’ is fundamental to financial
reporting in the UK but the Companies Acts themselves do not in fact
provide a precise legal definition. This can be taken to imply that
judgement will always play a big role in the preparation of accounts.
Accounts can never be 100% accurate in every detail. ‘True and
fair’ can be taken to mean that they are free of bias, disclose
all material facts and comply with the appropriate accounting standards.
These are the profit and loss, balance sheet and cash flow statements.
Many businesses consist of a number of different companies which trade
as a group. These companies therefore prepare a group balance sheet,
a group profit and loss and a group cash flow statement.
A group of companies is made up of a holding, or parent, company and
one or more subsidiary companies. A subsidiary may be wholly-owned
by the parent (100% of the shares are owned) or partially-owned (less
than 100% but greater than 50%).
Most annual reports will present two balance sheets – one for
the group and one for the ‘company’ (i.e. the holding
company). This is a company law requirement.
The group balance sheet includes all the assets and liabilities of
the holding company and the assets and liabilities of the subsidiaries.
Similarly, the group profit and loss shows the results of the subsidiaries
and the holding company combined. If a subsidiary is partially-owned,
an adjustment is made for the portion that belongs to the outside
shareholders. This is shown as ‘Minority Interests’.
Notes to the Accounts
The notes to the accounts provide more information on a particular
item in the balance sheet, profit and loss and cash flow. In each
of the financial statements there is a column headed ‘Notes’.
This tells you where to look in the notes for more information. There
is, for example, usually a note relating to the company’s turnover
which gives details of the geographic breakdown of sales.
The notes form part of the accounts and are subject to audit in the
same way as the main body of the accounts. The first note usually
discloses the accounting policies adopted in the financial statements.
This is a company law requirement and sets out the practices employed
in the preparation of accounts with regard to wide range of items
such as stock valuation, research and development and the effects
of foreign currency movements.
The Companies Act also recognises four fundamental accounting concepts
which are more general than the detailed accounting policies. These
concepts - applicable to all companies - are going concern, consistency,
accruals (matching) and prudence.