Chapter 4 - Other Contents and Features of Published Financial Statements Flashcards
What are the main contents of a company’s Annual Report & Accounts?
- Corporate Governance Statement
- Directors’ remuneration report
- Strategic Report
- Directors’ report
- Auditor’s report
- The 5 financial statements
- Statement of profit or loss & OCI
- Statement of financial position
- Statement of cash flows
- Statement of changes in equity
- Notes to the accounts
How are the published financial statements used by investors? (4)
- Examine profitability
- Look at revenue and profit trends
- Assess strength of the entity’s financial position
- Identify any potential risks
Objectives of the strategic report
- Detailed, written in non-financial language -
‘clear and coherant’ re company activities/performance/position/strategic position and probable risks attached with the business. - Its info should be accessible to a wide range of users (basic language)
- Helps members assess how directors have performed duties/functions
- Must contain: ‘Fair Review’ / Risks & Uncertainties / ‘Going Concern’ changes if any / References to the AR/FS
- Quoted companies must also include information on social, environmental and employee matters as well as that regarding the company’s strategy/business model
What information must be included in the strategic report?
-
Fair review: analysis to understand performance/development in the year including use of KPIs / position of business at end of the year
- Larger companies (>500 employees) should include non-financial KPIs as well - Principle risks & uncertainties
- Going concern (any events that made have had an effect on the ‘going concern’ basis)
- References to the financial statements: explanations/references where of ‘strategic importance’ (as appropriate) -
- Signing / approval of the report: approved by board and signed by 1 director or the CoSec on its behalf
-
ADDITIONAL INFO FOR QUOTED COMPANIES
- Description of strategy
- Description of business model
- Info on environmental/social/employee issues - including human rights/gender diversity/disclosure of GHG emissions - Some may include a statement about the company’s financial performance from the CEO
What law governs the preparation of the directors report?
Companies Act 2006 - s.415 (certain exemptions for small companies)
What must be included in the directors’ report?
- Names of all directors in the financial year
- Summary of trading activities
- Future prospects summary
- Principle activities (and of subsidiaries if relevant)
- Amount of dividend if any, as recommended by directors in the year
- Any financial events post date of ‘statement of financial position’ if could affect finances
- Any significant changes in non-current assets
- Statement: all relevant audit information has been provided to the auditor
- Directors responsibilities
- Promote success of company s.172
- Prepare AR/FS/Rem Rep in accordance with law, regulation & specific IFRS requirement
- Not approve accounts unless satifised ‘true and fair’ view of position/profit or loss for period
- Proper selection/application of accounting policies for relevant/reliable/comparable/understandable information
- Accounting estimates reasonable/prudent judgement
- Recognises need to establish sound system of ICs which are monitored/reviewed regularly
- Appointment of Chair/board/terms of appointment and remun in line with country best practice
- Keep proper accounting records/safeguard assets: reasonable steps to prevent fraud/irregularities - Signing / approval of the report: approved by board and signed by 1 director or the CoSec on its behalf
Purpose(s) of the directors’ report
The directors’ report helps shareholders make informed decisions when casting their votes at the annual general meeting or other members’ meetings.
It provides information on:
* whether the company has good finances
* whether the business has the structural capacity to expand and grow
* how well it is performing within its market and market in general
* whether the company is complying with financial regulations, financial reporting and accounting standards (IFRS) and social responsibility requirements
What does IAS1 require to be included in the notes to the accounts?
- Basis for preparation of the FS including any accounting policies chosen/applied to significant events/transactions
- Information required by IFRS not presented elsewhere
- Any additional info relevant to understanding not shown elsewhere
IASB suggesed order/presentation of notes to the financial statements
- Statement of compliance with IFRS.
- Statement of the measurement bases and a summary of the significant accounting policies applied in preparing the financial statements. The information on measurement bases (e.g. historical cost, current cost, net realisable value, fair value or recoverable amount) used in the preparation of financial statements significantly affects users’ analysis. Where more than one basis is used, such as when particular classes of assets are revalued, it should be stated to which assets each basis has been applied.
- Supporting information for items presented in the statement of financial position, the statement of profit or loss and OCI, the separate statement of profit or loss (if presented) and the statements of changes in equity and of cash flows. This should be presented in the same order as each statement and each line item.
- Other disclosures, including:
– contingent liabilities (IAS 37) and unrecognised contractual commitments;
– non-financial disclosures that enables users of financial statements to evaluate the entity’s financial risk management objectives and policies. International Financial Reporting Standard 7 (Financial Instruments: Disclosures) requires entities to provide disclosures that enable users to evaluate the significance of financial instruments, the nature and extent of risks arising from them and how those risks are managed. This includes a confirmation of whether capital requirements are met (for example, for financial institutions such as banks);
– dividends proposed or declared before the financial statements were authorised but not recognised and the related amount per share together with the amount of any cumulative preference dividends not recognised; and
– capital disclosures about an entity’s objectives, policies and processes for managing its capital. For example, the description of the capital an entity manages and whether it has complied with external capital requirements (if any).
If not cited elsewhere in the financial statements – such as in the opening pages of the annual report and financial statements (or accounts) – the reporting entity should also include the following: - the domicile and legal form of the business, its country of incorporation and its registered office address or, if different, principal place of business;
- a description of the nature of the entity’s operations and principal activities;
- the name of its parent and the ultimate parent of the group;
- if it is a limited-life entity, information regarding the length of its life; and
- related parties disclosures (IAS 24) that require disclosures about transactions and outstanding balances with an entity’s related parties.
What (apart from IAS1 requiremens) is generally also included in the notes to the financial statements of a published Annual Report
- More detailed analysis of figures in the statements FS
- Narrative information explaining figures in the FS
- Additional info, such as contingent liabilities and unrecognised commitments
What 5 elements can users of the FS better asess where segmented reporting is used?
Where supplementary to the statement of profit or loss and OCI, segment reporting helps users assess:
* past performance
* profit characteristics
* risks and returns
* potential for future growth
* more information about the entity as a whole
WHAT IS SEGMENTED REPORTING
Segment reporting provides information regarding the financial performance and positionof the identifiable operating segments of a company to users of its financial statements.
It can be particularly useful when dealing with large entities that produce a diversified range of products and services and/or have a number of business lines and operations – often in different geographical areas or countries.
IFRS 8 defines operating segments and requirement for listed companies to disclose such info that will allow users of the financial statements to evaluate the nature and effects of its operating activities and environments.
IFRS 8 defines an operating segment of an entity as a business component:
* from which it may earn revenue and incur expenses;
* whose operating results are regularly reviewed by the entity’s chief operating decision maker (CODM) to make decisions about resources to be allocated to the segment and assess its performance; and
* for which discrete financial information is available.
Thresholds for segment reporting
- Operating segments must be presented and reported separately, if they exceed any one of the following quantitative thresholds:
- reported revenue (both external and inter-segment sales or transfers) is more than 10% of overall gross revenue of all operating segments;
- the absolute amount of the segment’s reported profit or loss is 10% or more of the greater, in absolute amount, of:
- the combined reported profit of all operating segments that did not report a loss; and
- the combined reported loss of all operating segments that reported a loss;
- the segment’s assets are 10% or more of the combined assets of all operating segments.
- Any operating segment representing over 10% of gross revenue, profits or assets of the entity must always be presented separately.
- After determining the reportable segments, the entity should ensure that the total external revenue attributable to those reportable segments is at least 75% of the entity’s total revenue. If they constitute less than 75% of the total revenue, additional reportable segments should be identified (even if they do not meet the 10% threshold), until at least 75% of the entity’s revenue is included in reportable segments.
What ARE THE 4 DISCLOSURES FOR OPERATING SEGMENTS? ***
Disclosures must include:
* how the entity has identified operating segments and their general nature;
* information on operating segment assets and liabilities and profits and losses, if presented regularly to the CODM and measured in a different way to the primary or main statements;
* reconciliations of amounts disclosed by segments to the totals within the financial statements; and
* any change in the internal structure of the entity with the new and old segment information.
What is meant by ‘the substance of transactions’?
The ‘substance of transactions’ refers to the economic benefits or economic losses of any kind and the economic implications related to a transaction.
