ANNUAL REPORTS Flashcards
Name the 6 stakeholder groups that make use of information contained in annual reports.
- Managers and employees
- Investment analysts and information intermediaries
- Shareholders and directors
- Customers and strategic partners
- Regulators and tax agencies
- Governments and the public
What constrains the supply of information in an annual report?
Supply constrained by cost/benefit assessment
- Cost: collation, dissemination, business risk
- Benefit: shareholders needs
Who ensures a minimum supply of information in annual reports?
Regulatory agencies
Limitations and constraints of accounting information?
- Materiality thresholds
- Cannot be considered absolute
- Historical
- Quantifiable information
- Only one source of information
What are the 3 components of the regulatory framework?
- Legislation
- Accounting standards
- Governance (stock exchange)
Name the 5 elements of financial reporting legislation (per the Companies Act 2014 and EU directives) adopted in Ireland.
- Accounting standards
- Accounting records
- Audit (small company exemptions)
- Income statement and balance sheet (annual)
- True and fair view
What are accounting standards?
Principles, rules and guidance governing the accounting treatment of transactions and other items presented in the financial statements.
Why do we use accounting standards?
Increase transparency (faithful representation) and comparability of financial information by reducing variations in accounting practice and introducing a degree of uniformity in reporting.
Describe the steps in the standard-setting due process?
- Research programme
- Developing a proposal for publication
- Redeliberations and finalisation
- Post-implementation reviews
What are the two natures of standards and their corresponding strengths and weaknesses?
- Rules-based
- Principles-based
- Strengths: Unambiguous Minimise loopholes; Weaknesses: Potential for manipulation
- Strengths: Non-prescriptive, Reflect established concepts, Professional judgement; Weaknesses: Reliability? Integrity?
What are the two reporting frameworks in Ireland?
- Company law based financial statements - company law and local Irish GAAP (FRS 102)
- IAS/IFRS based financial statements – IAS and company law (as appropriate)
How does governance (via stock exchange bodies) shape the nature of annual reports in Ireland?
- Listing requirements
- Regulations apply only to listed companies
- Generally as required by company law & accounting frameworks
- Not legal regulations but can sanction noncompliance
- Equitable access to information
Why was the conceptual framework for financial reporting rewritten in 2018 (implementation 2020)?
Balance information demand with cost of information supply.
What is the objective of a general purpose financial statement?
Provide financial information about the reporting entity that is useful to primary users in making decisions about providing resources to the entity.
What are the two primary qualitative characteristics, and related sub-groups, of financial information?
- Fundamental:
- Relevance
- Faithful Representation
- Enhancing
- Comparable
- Verifiable
- Timely
- Understandable
What are the 4 elements that make up the framework for financial reporting?
RUME
- Recognition: future inflow/outflow economic benefit, reliable cost measurement
- Underlying assumption: Going Concern
- Measurement: monetary value, and a measurement base
- Elements: financial position and financial performance
What does IAS1 set out to provide?
To provide information about the financial position, financial performance, and cash flows of a business that is useful to a wide range of users in making economic decisions.
What are the 6 principles of financial reporting?
- Comparative information & consistency of presentation
- Fair presentation & compliance with international standards
- Frequency of reporting
- Going concern & accruals basis
- Materiality and aggregation
- Offsetting
Seven items that must be included in the structure and content of financial statements?
- Clearly identify the financial statement
- Name of reporting entity
- Single entity or group?
- Reporting period, changes?
- Presentation currency
- Level of rounding
- Formats not prescribed but minimum line disclosures
What are the items that must be included in the Statement of profit or loss & other comprehensive income (SoPLOCI)?
Must show:
- Revenue
- Finance costs
- Tax expense
- ~Profit or loss from discontinued operations~
- Profit or loss for the year
- Each class of other comprehensive income
- Total comprehensive income for the year
- Separate disclosure of material items
How do we divide expenses in the SoPLOCI?
- Cost of sales: All costs related to purchase or manufacture of goods for resale or provision of services including materials purchasing & transport, production salaries & overheads…
- Selling & distribution expenses: All costs related to sales distribution of good/services including delivery costs, distribution salaries & overheads, marketing activities including advertising, promotion, publicity……
- Administrative expenses: All costs related to administrative service including administration salaries & overheads, directors fees, professional fees…
- Research & development
- Impairment losses trade receivables…
What is the Statement of Changes in Equity?
Shows how each component of equity has changed
during an accounting period, reconciling between
opening & closing balances.
What items are presented in the Statement of Changes in Equity?
- Total comprehensive income for the year;
- Effects of any changes in accounting policies;
- Share issues;
- Dividends paid.
What are the three elements of the Statement of Financial Position?
- Assets
- An asset is a current asset if it satisfies any of the following criteria:
- Expected to be realised within normal operating cycle;
- Held for purpose of being traded;
- Expected to be realised within 12 months after reporting period;
- Cash or a cash equivalent
- All other assets are non-current assets.
- An asset is a current asset if it satisfies any of the following criteria:
- Liabilities
- A liability is a current liability if it satisfies any of the following criteria:
- Expected to be settled within normal operating cycle;
- Held for the purpose of being traded;
- Due to be settled within 12 months after reporting period;
- No right to defer settlement for at least
- 12 months after reporting period.
- All other liabilities are non-current liabilities.
- Equity
- Values as per closing values on statement of changes in equity
What are the requirements (and suggestions) for inclusion in the Notes to the Financial Statements?
- Must
- Present basis of preparation and specific accounting policies used
- Disclose information required by IFRSs not presented elsewhere
- Provide additional information not presented elsewhere but relevant to understanding
- Should
- Include narrative descriptions & detailed analysis of items on face of financial statements
- Be presented in a systematic manner
- Be cross-referenced
- Be presented in the following order:
- Statement of compliance with IFRSs
- Summary significant accounting policies and measurement bases applied
- Supporting information in order of presentation in financial statements
What are the 5 required disclosures?
- Dividends proposed or declared
- Domicile, legal form, country of incorporation and address of registered office or principal place of business
- Judgements and key sources of estimation
- Name of parent and ultimate parent of group
- Operations and principal activities
What is the audit process (Before audit - 3 steps; During audit - 5 steps; Post-Audit - 2 steps)?
What are the 5 duties of an auditor (broader than their client alone)?
- Audit report to shareholders
- Evidence of approval & report resignation
- Professional integrity
- Report failure to keep adequate accounting records
- Report indictable offences
What are the two rights of auditors?
- Access to accounting records
- Notice of/attendance at AGM
What are the 4 things an audit must identify at the start of the report?
- Auditing standards adopted in conducting audit
- Financial reporting framework adopted by company
- Financial statements subject to audit
- Scope of audit
What are the 3 things that an auditor must confirm as done by the end of the audit?
- Obtained all information and explanations considered necessary
- Underlying accounting records properly permit financial statements to be audited
- Directors report consistent with financial statements
What is the basis of opinion on financial statements?
- Give true and fair view of the financial position at end of the year and profit or loss during the year
- Properly prepared in accordance with relevant financial reporting framework & requirements of Companies Act 2014
What is International Financial Reporting Standard (IFRS) Practice Statement Management Commentary?
A broad, non-binding framework for the presentation of narrative reporting to accompany financial statements prepared in accordance with IFRS (est. in December 2010).
What is management commentary?
Management commentary is a narrative report that provides a context within which to interpret the financial position, financial performance and cash flows of an entity.
What is Narrative Reporting?
“Information that accompanies financial statements as part of a company’s financial reporting.
- It explains the main trends and factors underlying the development, performance and position of the company’s business during the period covered by the financial statements. CONFIRMATIVE
- It also explains the main trends and factors that are likely to affect the company’s future development, performance and position”. PREDICTIVE
What are the qualities of effective management commentary?
- Clearly identifies compliance
- Provides context
- Forward looking
- Provides understanding of nature of business
- Style
