CHAPTER 11 The annual report

Contents  Introduction – Small and medium-sized companies versus large, listed companies  The corporate report  Publicity document  Analysis

SME versus MNC  Different financial reporting objectives  SME: narrow reporting needs, closely linked to taxation  MNC: annual report as a major publicity tool (inform and reassure) with a wide audience  Differences in scale and scope of activities (business segments and geographical dispersion)  Individual versus group financial statements

Group financial statements  Each individual company in a group prepares its statutory accounts (also used for tax purposes)  At group level, group financial statements are prepared as an aggregation (“consolidation”) of individual financial statements  Consolidated financial statements present an economic picture of the consolidated group  Accounting constraints imposed by tax rules should be eliminated  These group financial statements are usually the core of an annual report

The corporate report - Contents 1. Corporate publicity material (not statutory, not audited) 2. Management report 3. Income statement 4. Balance sheet 5. Statement of changes in equity 6. Cash flow statement 7. Summary of significant accounting policies 8. Notes to the accounts 9. Auditor’s report

Management report  Currently not covered by IFRS  Different national regulations may apply  US: Management’s Discussion and Analysis (MD&A)  UK: Operating and Financial Review (OFR)  EU: Directors’ report  Consistency check by auditors is often required

Statement of changes in equity  IAS 1 Presentation of Financial Statements specifies that an analysis should be provided of changes in equity during the year  A Statement of Changes in Equity includes details of all classes of equity and changes in these, payment of dividends, the net profit or loss for the period and any charges or revenues taken directly to equity without passing through the income statement

Publicity document  The annual report of an MNC is a major publicity document and has a significant representational function  Increased transparency has economic value as it tends to lower the cost of capital (taking away investor uncertainty will decrease risk premium)  Parts of the annual report are usually integrated in the company’s website (including links to officially filed reports)

Analysis routine 1. Read publicity material to get idea of company activities 2. Check the auditor’s report to see if there are any warnings 3. Read the summary of the significant accounting policies to see whether there is anything special 4. Look at the main statements (income statement, balance sheet and cash flow statement) to get the overall accounting picture 5. Look at the statement of changes in equity and the notes to the accounts to get more detail