1. Annual Report: Narrative
Chapter 5
Annual Report: Narrative

2. Annual Report (AR) Focus of text: ARs of EU-listed companies
Principal means of communication
Produced annually by companies
Increasing in size and importance
Aimed primarily at shareholders
Needs of other stakeholders being recognized
Contains quantitative and qualitative information
Chapter 5
© Philip O’Regan 2016

3. Annual Report ctd. Content controlled by statute, regulation, IFRS
Narrative and financial elements, e.g.:
financial statements and notes
Chairman’s, Directors’, Auditor’s Reports
Strategic Report
Financial elements central
Narrative elements increasing in range
Supplemented by graphs, photos, etc.
Chapter 5
© Philip O’Regan 2016

4. Narrative content Should supplement financial statements
Required by statute:
Directors’ Report
Auditor’s Report
Strategic Report (CA06)
Not required by statute:
Chairman’s Statement
Chief Executive’s Report
Other, e.g. historical summaries
Chapter 5
© Philip O’Regan 2016

5. Chairman’s Statement Not required by statute Personal perspective
Comments on macro contexts
Usually refers to:
significant events
overall results, performance
future prospects
Danger of management “spin”
Chapter 5
© Philip O’Regan 2016

6. Directors’ Report Required by statute
Impact of Combined Code extensive
Includes sections on:
trading activity
developments during period
directors (especially remuneration)
employees
corporate governance
directors’ responsibilities for financial statements
Chapter 5
© Philip O’Regan 2016

7. Strategic Report This type of report recommended by Cadbury
Equivalent of US Management’s Discussion & Analysis
Replaces Operating & Financial Review (OFR)
Commentary by directors on strategy/plans/risks
Historical assessment, but with future perspective
FRC: Guidance on the Strategic Report:
Insight into business model
Describe risks and future prospects
Analysis of past performance
Chapter 5
© Philip O’Regan 2016

8. Auditor’s Report Auditor conducts “independent review”
Report (ISA 700):
Opinion on “true and fair” [or “fair presentation”]
Report may be unqualified or modified (ISA 705)
Modified opinion significant for any company
Must also comment on:
internal controls
compliance with Cadbury
any other area of AR showing inconsistencies
Audit report content changing significantly
Chapter 5
© Philip O’Regan 2016

9. Auditor’s Report ctd.
New style audit reports a response to audit failures
ISA Governance Code now require:
greater insight into conduct of audit
focus on risks, materiality and audit scope
Companies must also report on how audit committee interacted with auditors
Reflects growing role of audit committee
Chapter 5
© Philip O’Regan 2016

10. Other elements Some ARs now include report by CEO Historical summaries
allows CEO to communicate with users
supplements other elements
Historical summaries
not required by statute
usually summarize 5-year performance
often tabular/graphical presentation
Visual (graphs/photos) commonly used
Chapter 5
© Philip O’Regan 2016

11. Summary AR a principal means of communication Narrative element:
substantial
evolving in type and range
partly controlled by statute
open to abuse/manipulation
Critical to any informed analysis
Chapter 5
© Philip O’Regan 2016