Ian McIsaac

Financial Training and Consultancy
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


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2

Content of the Annual Report & Financial Statements
     
 

2.1

Introduction
    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.
     
 
2.1.1
Chairman’s Statement
    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.
     
 
2.1.2
Review of Operations
    This is a more detailed review of the company and often covers both an operating and financial review of the business.
     
 
2.1.3
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 their shareholdings.
     
 
2.1.4
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 auditors’ report.
     
 
2.1.5
Auditors’ Report
    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.
     
 
2.1.6
Financial Statements
    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’.

     
 
2.1.7
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.
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