Chapter 12
The annual report
‘It is a yearly struggle: the conflict between public relations experts determined to put a sunny face on somewhat drearier figures, and those determined to tell it like it is, no matter how many “warts” there are on the year's story. The annual report is a vital instrument designed – ideally – to tell the story of a company, its objectives, where the company succeeded or failed, and what the company intends to do next year.’
Kirsty Simpson, ‘Glossy, expensive and useless’, Australian Accountant, September 1997, pp. 16–18.
Learning Outcomes
After completing this chapter you should be able to:
- Explain the nature of the annual report.
- Outline the multiple, conflicting objectives of the annual report.
- Discuss the main contents of the annual report.
- Evaluate how the annual report is used for impression management.
Go online to discover the extra features for this chapter at www.wiley.com/college/jones
Chapter Summary
- The annual report is a key corporate financial communication document.
- It is an essential part of corporate governance.
- It serves multiple, and sometimes conflicting, roles of stewardship/accountability, decision making and public relations.
- It comprises key audited financial statements: income statement (i.e., profit and loss account), statement of financial position (i.e., balance sheet), and statement of cash flows (i.e., cash flow statement).
- It normally includes at least 22 identifiable sections.
- It includes important non-audited sections such as the chairman's statement.
- Most important companies provide group accounts.
- Goodwill is an important intangible asset in many group accounts.
- Managers use the annual report for impression management.
Introduction
The annual report is well-entrenched as a core feature of corporate life. This yearly-produced document is the main channel by which directors report corporate annual performance to their shareholders. All leading companies world-wide produce an annual report. In the UK, both listed and unlisted companies produce one. Many other organisations, such as the British Broadcasting Corporation, now also produce their own versions of the annual report. Indeed, the Labour Government produced the first governmental annual report in 1998. Traditionally, the annual report was a purely statutory document. The modern annual report, however, now has multiple functions, including a public relations role. Modern reports comprise a mixture of voluntary and statutory, audited and unaudited, narrative and non-narrative, financial and non-financial information. They are also governed by a regulatory framework which includes Companies Acts and accounting standards. The modern annual report has become a complex and sophisticated business document. In particular, European listed companies now follow International Financial Reporting Standards. As most publicly available annual reports are those of listed companies, the terminology laid down by the IASB will be used in this chapter.
Definition
In essence, an annual report is a document produced to fulfil the duty of the directors to report to shareholders. It is produced annually and is a mixture of financial and non-financial information. As Definition 12.1 shows, it is a report containing both audited financial information and unaudited, non-financial information.
DEFINITION 12.1Working definition
A report produced annually by companies comprising both financial and non-financial information.
Formal definition
‘A document produced annually by companies designed to portray a ‘true and fair’ view of the company's annual performance, with audited financial statements prepared in accordance with companies legislation and other regulatory requirements, and also containing other non-financial information.’
CIMA definition
‘Package of information including a management report, an auditor's report and a set of financial statements with supportive notes. In the case of companies these are drawn up for a period which is called the accounting reference period, the last day of which is known as the reporting date.’
Source: Chartered Institute of Management Accountants (2005), Official Terminology. Reproduced by Permission of Elsevier.
Context
The annual report has evolved over time into an important communications document, especially for large publicly listed companies. Surveys have consistently shown that it is one of the most important sources of financial information. It plays a critical confirmatory role. The earliest annual reports arose out of the need to make directors accountable to their shareholders. The main financial statement was the statement of financial position. In order to ensure that the financial statements fairly represented corporate performance, the annual report was audited. The annual report, therefore, has always played a key role in the control of the directors by the shareholders. The central role of the annual report in external reporting can be seen in Figure 12.1.
In essence, the directors are responsible for the preparation of the financial statements from the accounting records. The actual preparation is normally carried out by accounting staff. An annual report is then compiled, often with the help of a company's public relations department and graphic designers. These graphic designers are responsible for the layout and design of the annual report (providing, for example, colourful graphs and photographs). The annual report's financial content is then audited and disseminated to the main users, principally the shareholders. As discussed in Chapter 10, much of the annual report is mandated by a regulatory framework consisting principally of the requirements of the Companies Acts and accounting standards.
Multiple Roles
The annual report is a social as well as a financial document. Therefore, as society evolves, so does the annual report. The earliest annual reports were stewardship documents. Today's annual report is much more complex, being an amalgam of stewardship and accountability, decision making and public relations. These concepts are discussed below. The first two roles are those traditionally recognised by standard setters. Although it is important to realise that nowadays the IASB prefers decision making rather than stewardship. However, the public relations role is more driven by preparer self-interest.
(i) Stewardship and Accountability
Effectively, stewardship involves the directors reporting their actions to the shareholders. This reflects the origins of financial reporting. In the middle ages, the stewards who managed the estates used to render an annual account of the master's assets (for example, livestock and cereals) to the lord of the manor. The main aim of the accounts, or annual statement, was thus for the lord of the manor to keep a check on the steward's activities. In particular, there was a concern that the steward should not defraud the lord of the manor. An important aspect of stewardship is this accountability. Accountability is traditionally seen as referring to the control and safeguarding of the assets of a company.
Gradually, as the economy became more sophisticated so did the accountability mechanisms. At first, there was a rudimentary statement of assets and liabilities, showing how much the organisation owned and owed. This gradually evolved into the modern statement of financial position. However, the fundamental aim was still to account for the assets and liabilities of the organisation. Accountability tended to diminish in importance with the rise of decision making.
An important modern aspect of stewardship is corporate governance. Essentially, in both Europe and the US, several well-publicised corporate financial scandals (e.g., Polly Peck, Maxwell) led to a growing concern with monitoring the activities of directors. In addition, the privatisation of the utilities created considerable concern over the salaries of so-called ‘fat-cat directors’. Real-World Views 12.1 and 12.2 discuss this issue. As can be seen, this issue is apparently perennial and refuses to go away. The committees which looked at corporate governance in the 1990s all stressed the role that corporate financial communication could play in increasing directors' accountability to shareholders. The accounting scandals such as Enron and WorldCom in the US and Parmalat in Italy have reawakened interest in corporate governance. There has been increasing concern with auditor independence and the need for effective audit committees.
REAL-WORLD VIEW 12.1Directors' Pay: The Continuing Debate
Directors' pay has long been a problem for politicians in the UK. For example, Alex Brummer stated that Stephen Byers, a UK politician, had called for world-class salaries for world-class performance. However, as Brummer pointed out at the time:
‘The trouble is that it fits only a handful of the executives and companies in the Guardian's pay survey. Of the 35 or so directors in the million-pounds-plus pay club only a handful – such as those at the drugs companies SmithKline Beecham and Glaxo Wellcome – deliver a world class product.’
Brummer further pointed out that others, for example, Bob Mendelsohn of Royal and Sun Alliance took home £2.4million without being world class.
Since then directors' pay fuelled by generous remuneration schemes sanctioned by generous remuneration committees have continued to soar. A particular bone of contention has been bank bonuses where bankers, widely seen as failing society and causing the global financial crisis, are still walking away with huge salaries. This caused a rare shareholders revolt at Barclays in 2012.
Source: Alex Brummer, Time is Up for World Class Waffle, The Guardian, 20 July 1999.
Director's Pay:
Bob Diamond, the new boss of Barclays, has refused to bow to MPs' demands that he waives his 2010 bonus, which could be as much as £8m.
Speaking yesterday, Mr Diamond said he had forgone his bonus in 2008 and 2009 and would decide ‘with my family’ whether to do so again. He added: ‘There was a period of remorse and apology for banks and I think that period needs to be over.’
In a lengthy and sometimes irascible session before the Treasury Select Committee, Mr Diamond attacked the MPs for being ‘wrong and unfair’ about British banks.
‘I really resent the fact that you refer to this as blackjack or casino banking or rogue trading,’ he said. ‘It's wrong, it's unfair, it's a poor choice of words. We have some fantastically strong financial institutions in this country and frankly they deserve better.’
The banker had been called to appear before the committee to discuss bank competition, but was mostly grilled on pay, leading him to make an impassioned defence of the industry.
He warned that the government could not expect bonuses to be ‘isolated’ and targeted for regulation and ‘assume it won't have consequences'.
He told the MPs that shareholders had not asked for information about this year's bonus pool but were ‘very involved’ in the process.
Source: Louise Armistead and Harry Wilson, MPs try to shame Barclays boss on pay, Daily Telegraph, 12 January 2011, p. 23.
PAUSE FOR THOUGHT 12.1‘Fat Cat’ Directors
There has been a great furore about the salaries of ‘fat-cat’ directors. What justification do you think they tend to give for their salaries? What do their critics argue?
The directors' view
Conventionally, directors argue that they are doing a complex and difficult job. They are running world-class businesses and they, therefore, need to be paid world-class salaries. They also create and add shareholder value because of increased share prices and, therefore, they deserve to be well paid.
The critics' view
Yes, but if the directors are paid on the basis of performance, then we would expect them not to get big bonuses when their organisations are doing less well. However, generally this does not happen. Also, much of the increase in share prices that directors ascribe to themselves is often caused by a general rise in the stock market. This debate has intensified because of the financial crisis and credit crunch. Many believe it is unfair, for example, for bankers to pay themselves big salaries when they are widely perceived to be responsible for the current economic downturn.
(ii) Decision Making
In the twentieth century, decision making has increasingly replaced stewardship as the main role of accounting. This reflects wider developments in society, business and accounting. In particular, decision making is associated with the rise of the modern industrial company.
Industrialisation led to increasingly sophisticated businesses and to the creation of the limited liability company with its divorce of ownership and control. Shareholders were no longer involved in the day-to-day running of the business. They were primarily interested in increases in the value of their share price and in any dividends they received. These dividends were based on profits. Consequently, the income statement became more important relative to the statement of financial position. The primary interest of shareholders shifted from cash and assets to profit. Thus, performance measurement and decision making replaced asset management and stewardship as the prime objective of financial information.
Engines of Capitalism
Limited liability companies have been called the engines of capitalism. Why do you think this is so?
Effectively, limited liability companies are very good at allowing capital to be allocated throughout an economy. There are several advantages to investors. First, they can invest in many companies not just one. Second, they can sell their shares very easily, assuming a buyer can be found. Third, they stand to lose only the amount of capital they have originally invested. Their personal assets are thus safe.
These new shareholder concerns were officially recognised by two reports in the 1960s and 1970s in the US and the UK. Both reports, A Statement of Basic Accounting Theory (American Accounting Association, 1966) in the US and The Corporate Report (Accounting Standards Steering Committee, 1975) in the UK, proved turning points in the development of accounting. Before then stewardship had been the generally acknowledged role of accounting. After them, decision-usefulness was generally recognised as the prime criterion. In a sense, decision making and stewardship are linked, for shareholders need to make decisions about how well the directors have managed the company.
In a nutshell, the purpose of the annual report was recognised to be:
‘to communicate economic measurements of and information about the resources and performance of the reporting entity useful to those having reasonable rights to such information’. (The Corporate Report, 1975, para. 3.2)
The decision-making model had been born!
As Definition 12.2 shows, the modern objective of accounting is still recognised as providing users with information so that they can make decisions.
For the shareholder, these economic decisions might involve the purchase or sale of shares. Other users will have different concerns. For example, banks might be principally interested in whether or not to lend a company more money.
Decision Making Objective of Annual Report
Working definition
Providing users, especially shareholders, with financial information so that they can make decisions such as buying or selling their shares.
Formal definition
‘The objective of general purpose financial reporting is to provide financial information about the reporting entity that is useful to existing and potential investors, lenders and other creditors in making decisions about providing resources to the entity.’
Source: International Accounting Standards Board (2010), The Conceptual Framework for Financial Reporting. Copyright © 2012 IFRS Foundation. All rights reserved. No permission granted to reproduce or distribute.
(iii) Public Relations Role
The public relations role reflects the annual report's development over the last 20 years as a major marketing tool. Company management has come to realise that the annual report represents an unrivalled opportunity to ‘sell’ the corporate image. In part, this only reflects human nature. We all wish to look good. It is a rare person who never attempts to massage the truth, for example, at a job interview. The public relations role of annual reports does, however, provoke strong reactions by some commentators (see Real-World View 12.3).
Public Relations and the Annual Report
Queen Isabella was said to have washed only three times in her life, and only once voluntarily. That was when she was married. The other two times were at her birth and death. No wonder Columbus left to discover a new world. Why this olfactory analysis of history? Because this is the time of year when we are inundated with corporate annual reports, and in most of them the letter to the shareholders smells as wretched as Queen Isabella must have.
One of the sad truths about malodorous things is that people tend to get used to them in time. But I'll never become accustomed to the public-relations pap I read in most annual reports. Every year tens of thousands of stale, vapid, and uninspired letters to shareholders appear in elaborate annual reports. They are printed on expensive paper whose gloss and sheen are exceeded only by the glitzy words of the professional PR writer who ghosted the message. They will be read by shareholders who don't understand them – or believe them. Quite often they are hype. Sometimes they are dull. Some are boastful, others apologetic. And they are generally ambiguous.
Source: Sal Marino, Industry Week, 5 May 1997, p. 12.
Conflicting Objectives
The standard-setting organisations generally only recognise the first two objectives of financial statements (also by implication of annual reports): stewardship and decision making. Indeed, there is currently heated debate within the accounting community about the relative importance of stewardship vis-à-vis decision making. In effect, these two objectives clash with the public relations role. This is because the stewardship and decision-making roles rely upon the notion of providing a neutral and objective view of the company. However, the public relations view is where managers seek to present a favourable, not a neutral, view of a company's activities. This causes stress, particularly if a company did not perform as well as market analysts had predicted. In these cases, as we see in Chapter 13, there is great pressure for the company management to indulge in impression management.
Stewardship or Decision Making
There are broadly two schools of thought about the basic objectives of accounting. First, there are those who think that accounting is all about decision making. This is generally the line followed by the IASB. Others, however, are less convinced. For example, Professor David Myddelton (‘Yesterday’, Accountancy Magazine, March 2010, p. 22) disagrees with the modern-day assumption that the primary purpose of company accounts is decision-usefulness for investors, and presents three main reasons for doing so:
‘First, companies publish their accounts much later than nearly all of the many other sources of information for investors. Second, Modern Portfolio Theory of investment implies that a fully-diversified investor need not care much about the results of any specific company. Asset allocation and portfolio re-balancing are far more important.’
And his third reason concludes:
‘… the vast majority of entities producing accounts do not have investors who are even remotely considering buying or selling shares in them.’
Some commentators often think that more credence should be given to accountability. In particular, that directors should be accountable to their shareholders. The Accounting Community is thus divided.
So what do you think? Should accounting be primarily about decision making?
Main Contents of the Annual Report
Every annual report is unique. The average annual report ranges from about 40–80 pages with many having substantially more pages. Indeed, some annual reports, such as HSBC, run into hundreds of pages. Perhaps unsurprisingly, therefore, the modern annual report is often criticised for being too complex. A company's report presents a wide variety of corporate financial and non-financial information. The traditional financial statements (e.g., statement of financial position, statement of comprehensive income (or income statement and statement of comprehensive income), statement of cash flows) and accompanying financial information (such as notes to accounts) are normally audited. Other parts, such as the chairman's statement, are not. Nowadays, they also are normally positioned at the back of the annual report with the more contextual qualitative information such as the chairman's statement appearing at the front. However, auditors generally review this qualitative information to ensure it is consistent with the audited accounts. In addition, the report is a mixture of voluntary and mandatory (i.e., prescribed by regulation) information, and narrative and non-narrative information. In Figure 12.2, the main sections of a typical annual report are outlined. Although based on UK financial reporting practice, in the main these sections are also found in most European listed companies.
A growing trend is for companies to produce multiple reports. Some companies produce an annual report which contains only financial statements aimed at sophisticated investors and another report entitled ‘Annual Review’ which contains simplified financial information and discussion. Companies also may produce separate environmental, corporate responsibility or sustainability reports. This is particularly true of large listed companies both in the UK, Europe and the US. Indeed a recent development is the International Integrated Reporting Committee (IIRC), an influential group of business leaders, academics, accountants and regulators who aim to develop a global reporting framework that embraces environmental and financial issues. In addition, many companies produce web-based financial information. For simplicity, however, we assume for the rest of this chapter that a company produces only the traditional annual report.
The main sections of the annual report can be divided into audited and non-audited statements. These are shown in Figure 12.3 and discussed below. In the text various illustrative figures are included from the annual report of Tesco, a UK listed company, and from the annual report of the Finnish listed company, Nokia.
The Audited Statements
Nine audited financial sections are normally included by most UK companies in their annual reports. The first three (the statement of comprehensive income (see Chapter 4), the statement of financial position (see Chapter 5) and the statement of cash flows (see Chapter 8)) have already been covered in depth earlier. As Soundbite 12.1 shows, they are still very important despite the growth in non-audited material. They are, therefore, only lightly touched on here. The remaining audited statements are all comparatively recent. They can be divided into subsidiary statements and explanatory material. All the sections are presented in a relatively standard way, following guidance laid down in the Companies Acts and accounting standards.
Main Statements
1. Statement of Comprehensive Income (SOCI) or Income Statement and Statement of Comprehensive Income (also known as Profit and Loss Account). The statement of comprehensive income is widely recognised as one of the two primary financial statements. It focuses on the revenue earned and expenses incurred by the business during the accounting period as well as non-trading items. Importantly, this is not the same as cash received and cash paid. European listed companies follow guidelines for the SOCI as laid down by IAS 1 Presentation of Financial Statements. UK non-listed companies usually follow UK Financial Reporting Standard 3, Reporting Financial Performance although they may choose to follow IFRS. An illustration of the income statement for AstraZeneca is given in Company Snapshot 7.3 in Chapter 7.
The SOCI may be presented as one statement; alternatively it can be presented as two statements: first, the income statement dealing with trading items and arriving at profit for the year and second, the statement of comprehensive income dealing with other items. Practice varies between companies with some companies producing just one statement of comprehensive income whereas others present an income statement and then a statement of comprehensive income. In this book, we generally present the income statement as one statement. Other non-trading items are typically outside the scope of this book. As one statement, the statement of comprehensive income deals with profit from trading as well as dealing with non-trading gains and losses in a unified statement. The SOCI attempts to highlight all shareholder gains and losses (i.e., not just those from trading). These gains and losses might, for example, be surpluses on property revaluation. Alternatively, as in the case of Tesco in 2010 (see Company Snapshot 12.1), there may be a gain on foreign currency translations, losses on pensions or losses on hedging (insuring against) cash flows. Tesco's statement of comprehensive income just shows the non-trading gains and losses. Tesco also produced a separate income statement.
SOUNDBITE 12.1The Accounting Numbers
‘For all their flaws – and I accept that some can be rather colourful – the numbers in reports and accounts do give you a good solid picture of how the company has actually performed – the cashflow, the strength of the balance sheet, the level of debt.’
Source: Ian Fraser, More than Words, Accountancy Magazine, November 2009, p. 39.
COMPANY SNAPSHOT 12.1Statement of Comprehensive Income
Group statement of comprehensive income
Source: Tesco PLC, Annual Report and Financial Statements 2010, p. 71.
2. The Statement of Financial Position. It is much debated whether the statement of financial position or the income statement are the most important for decision making. The statement of financial position focuses on assets, liabilities and shareholders' funds (i.e., equity or capital employed) at a particular point in time (the reporting date). The statement of financial position, along with the income statement, is prepared from the trial balance. The statement of financial position is commonly used to assess the liquidity of a company, whereas the income statement focuses on profit. An illustration of the statement of financial position for AstraZeneca is given in Company Snapshot 7.4 in Chapter 7.
3. Statement of Cash Flows. Unlike the previous two statements, which use the matching basis and are prepared from the trial balance, the statement of cash flows is usually prepared by deduction from the income statement and statements of financial position. It is a relatively new statement, for example, introduced in the UK in 1991. The objective of the statement of cash flows is to report and categorise cash inflows and outflows during a particular period. In Company Snapshot 12.2, Tesco PLC's Statement of Cash Flows for 2010 is given (note that Tesco still prefer to use the old UK GAAP terminology, cash flow statement).
Tesco PLC's Statement of Cash Flows
Source: Tesco PLC, Annual Report and Financial Statements 2010, p. 74.
Subsidiary Statements
4. Statement of Changes in Equity. This statement highlights major changes to the ownership claims of shareholders. These include profit (or loss) for the year, annual dividends and new share capital. In Tesco's statement of changes in equity, Tesco has chosen to show all the changes in other comprehensive income (thus replicating the information shown in the statement of comprehensive income in Company Snapshot 12.1) and then show the share and dividend movements. It could have just begun with the total comprehensive income of £2249 m.
Tesco PLC's Statement of Changes in Equity
Source: Tesco PLC, Annual Report and Financial Statements 2010, p. 73.
Tesco PLC's Reconciliation of Net Cash Flow to Movement in Net Debt Note
NB. The reconciliation of net cash flow to movement in net debt note is not a primary statment and does not form part of the cash flow statement and forms part of the notes to the financial statments.
Source: Tesco PLC, Annual Report and Financial Statements 2010, p. 74.
5. Note on Reconciliation of Net Cash Flow to Movement in Net Debt. This statement seeks to reconcile the increase in cash flow calculated from the statement of cash flows to the net debt. As Tesco's 2010 statement (Company Snapshot 12.4) shows it specifies increases and decreases in debt and cash flow.
6. Note on Historical Cost Profits and Losses. If the accounts are prepared under the historical cost convention then the original cost of assets is recorded in the accounts. However, sometimes assets, particularly property, will be revalued. These assets are not then included in the accounts at their original purchase price. Depreciation on the revalued property will then be more than on the original cost. This note records any such differences caused by departures from the historical cost convention. Tesco records its property, plant and equipment at cost so there is no note on historical cost profits and losses.
Explanatory Material
7. Accounting Policies. Companies must describe the accounting policies they use to prepare the financial statements. The flexibility inherent within accounting means that companies have a choice of accounting policies in areas such as foreign currencies, goodwill, pensions, sales and inventories. Different accounting policies will result in different accounting figures. Nokia's policy on inventories is given as an illustration (see Company Snapshot 12.5).
Policy on Inventories
Inventories are stated at the lower of cost or net realisable value. Cost is determined using standard cost, which approximates actual cost, on a FIFO (first in first out) basis. Net realisable value is the amount that can be realised from the sale of the inventory in the normal course of business after allowing for the costs of realisation.
In addition to the cost of materials and direct labour, an appropriate proportion of production overhead is included in the inventory values.
An allowance is recorded for excess inventory and obsolescence based on the lower of cost or net realisable value.
Source: Nokia, Annual Report 2010, p. 24. Reproduced by permission.
8. Notes to the Accounts. These notes provide additional information about items in the accounts. They are often quite extensive. For example, in Tesco's 2004 annual report the main three financial statements take up three pages, but the 34 notes take up a further 24 pages. These notes flesh out the detail of the three main financial statements. They cover a variety of topics. For example, the first six Tesco notes cover prior year adjustment, segmental analysis, operating profit, employee profit-sharing, profit on ordinary activities before taxation, and employment costs. The notes to accounts can be crucial. ‘The numbers are just part of the story. The balance sheet is just a snapshot. It captures some of the picture but not all of it so that's why the notes to the accounts are important’ (Jill Treanor, The Guardian, 6 March 2000, p. 28).
9. Principal Subsidiaries. Most large companies consist of many individual companies arranged as the parent (or holding company) and its subsidiaries. Collectively, they are known as groups (see later in this chapter for a fuller explanation of groups). In the case of a group, there will be a listing of the parent (i.e., main) company's subsidiary companies (i.e., normally those companies where over 50% of the shares are owned by the parent company) and associate companies (normally where between 20% and 50% of shares are owned by the parent company).
The Non-Audited Sections
The amount of non-audited information in annual reports has mushroomed over the last 30 years. It has caught even experienced observers by surprise. Narrative information has grown in importance over the last generation until as Deloitte (2010) point out, almost half of the annual report is narrative (see Real-World View 12.4).
The non-audited information is extremely varied, but can be broadly divided into narrative and non-narrative information. The narrative information consists mainly of the chairman's statement, the directors' report, the business review and the auditors' report. As Soundbite 12.2 shows, some argue that narrative reporting is now the key driver in an annual report. By contrast, the non-narrative information mainly comprises the highlights and the historical summary. Although these sections are not audited, the auditor is required to review the non-narrative information to see if there are material misstatements or material inconsistencies with the financial statements. If there are, the auditors consider whether any information needs to be amended. Unfortunately, all this is very subjective and, in reality, little guidance is given to auditors.
The balance of narrative versus financial statements as a proportion of the total annual report has shifted slightly from the prior year. As shown in figure 2, below, financial statements now represent on average 2% more of the total report than last year at 48% (2008: 46%). The overall shift is to an increase in length of the financial statements. The larger companies continue to devote more of the report to narrative information than the middle and smaller companies, with total narrative of 56%, 50% and 45% respectively (2008: 59%, 51% and 47% respectively). The relative decline between 2008 and 2009 may be due to the factors referred to above regarding information being moved to company websites or separate reports.
Source: Deloitte (2010) A Telling Performance, Surveying Narrative Reporting in Annual Reports.
Narrative Reporting
‘Indeed, the financial statements are becoming a technical appendix, play a supporting role to a evolving narrative.’
Source: Michael Power, Accountancy Magazine, February 2011, Pantomime Accounting, p. 22.
Narrative Sections
10. Business Review. The operating and financial review (OFR) represented a major innovation in UK financial reporting. For the first time, regulators formally recognised the importance of qualitative, non-financial information. It enabled companies to provide a formalised, structured and narrative explanation of financial performance. The ASB introduced the OFR as a voluntary statement in 1993. It had two parts: first, the operating review which discusses items such as a company's operating results, profit and dividends; second, the financial review which covers items such as capital structure and treasury policy. The OFR aimed to provide investors with more relevant information. In an interesting example of government interference in UK accounting, the Government in November 2005 decided to abolish the proposed mandatory status of the OFR. It has been replaced with a European piece of legislation, the Business Review. This is discussed in Pause for Thought 12.4. However, with the change in political parties in the UK in 2010, the Coalition wanted to reinstate the OFR to ensure that the directors' social and environmental activities are covered.
The Operating and Financial Review (OFR)
The Operating and Financial Review is a document that was originally suggested by the UK's Accounting Standards Board. It was a document whereby companies could present an extended narrative on areas such as risks or social and environmental information. It was going to be made mandatory but then the Labour Government scrapped it. The Coalition Government in 2010, however, planned to reinstate it.
So what would you do? Scrap it or reinstate it?
11. Chairman's Statement. This is the longest-established accounting narrative. It is provided voluntarily by nearly all companies. The chairman's statement provides a personalised overview of the company's performance over the past year. Most chairman's statements cover strategy, the financial performance and future prospects. It is also traditional for the chairman to thank the employees and retiring directors.
12. Directors' Report. The directors' report is prescribed by law. Its principal objective is to supplement the financial information with information that is considered vital for a full appreciation of the company's activities. Items presented here (or elsewhere in the accounts – an increasingly common practice) might include any changes in the company's activities, proposed dividends, and charitable and political gifts.
Auditing the Accounting Narratives
What difficulties do you think an auditor might have if called upon to audit the narrative sections of the annual report, such as the chairman's statement?
The main difficulty is deciding how to audit the written word. Usually, auditors audit figures. They can thus objectively trace these back to originating documentation. The problem with accounting narratives is that they are very subjective. How do you audit phrases such as ‘We have had a good year’ or ‘Profit has increased substantially’?
13. Review of Operations. This section forms a natural complement to the chairman's statement. Whereas the chairman provides the overview, the chief executive reviews the individual business operations, often quite extensively. Normally, the chief executive discusses, in turn, each individual business or geographical segment.
14. Social and Environmental Accounting Statement. A growing number of companies are reporting social and environmental, social responsibility or sustainability information. For example, over 70% of the UK's top 350 listed companies report such information. This information is largely voluntary. Increasingly, companies are producing separate stand-alone environmental reports or sustainability reports. However, they may also include sections in their annual report. For example, J.D. Wetherspoon's in 2010 included a corporate social responsibility section in its 2010 annual report. This covered, inter alia, responsible drink retailing, the environment, community and charitable activities.
Sustainability Information
‘Accounting mechanisms have not, for the moment at least, kept pace with our requirements for sustainability information.’
Prince Charles
Source: Accountancy Age, 2 June 2005, p. 12.
15. Statement of Corporate Governance. This statement arises out of the drive to make directors more accountable to their share-holders. The corporate governance statement is governed by stock market requirements. The issues usually covered are risk management, treasury management, internal controls, going concern and auditors. A major objective is to present a full and frank discussion of the directors' remuneration. Contained within this section is often a Directors' Remuneration Report. However, growing numbers of companies record this separately.
16. Directors' Remuneration Report. This includes details of directors' pay. It may include details of the remuneration committee, the remuneration policy and the main components of the directors' pay (for example: basic salary, incentives, bonuses, share options and performance-related pay). There is also a graph showing the company's total shareholder return with an appropriate stock market index (see Company Snapshot 12.6 for Tesco PLC's 2010 performance graph). This is headed total shareholder return. It compares Tesco's share price against the FTSE 100 and Eurofirst Food and Drug Index over a ten-year period. Tesco is shown to out-perform these other indices. This graph helps shareholders to compare directors' remuneration to company performance.
Tesco PLC Performance Graph
Source: Tesco PLC, Annual Report and Financial Statements 2010, p. 3.
17. Auditors' Report. The audit is an independent examination of the financial statements. An example of an auditors' report for Nokia, a Finnish company, is given in Company Snapshot 12.7. An example of a UK company's audit report is given for Rentokil in Company Snapshot 10.1.
Companies are legally required to publish the auditors' report. In essence, the report states whether the financial statements present a ‘true and fair view’ of the company's activities over the previous financial year. It sets out the respective responsibilities of directors and auditors as well as spelling out the work carried out to arrive at the auditors' opinion.
The auditors' report thus outlines the respective responsibilities of directors and auditors, the basis of the audit opinion and how the auditors arrived at their opinion. Pricewaterhouse Coopers, the auditors of Nokia, are one of the world's leading auditing partnerships.
To the Annual General Meeting of Nokia Corporation
We have audited the accounting records, the financial statements, the review by the Board of Directors and the administration of Nokia Corporation for the year ended 31 December 2010. The financial statements comprise the consolidated statement of financial position, income statement, statement of comprehensive income, cash flow statement, statement of changes in shareholder's equity and notes to the consolidated financial statements, as well as the parent company's balance sheet, income statement, cash flow statement and notes to the financial statements.
Responsibility of the Board of Directors and the Managing Director
The Board of Directors and the Managing Director are responsible for the preparation of consolidated financial statements that give a true and fair view in accordance with International Financial Reporting Standards (IFRS) as adopted by the EU, as well as for the preparation of financial statements and the review by the Board of Directors that give a true and fair view in accordance with the laws and regulations governing the preparation of the financial statements and the review by the Board of Directors in Finland. The Board of Directors is responsible for the appropriate arrangement of the control of the company's accounts and finances, and the Managing Director shall see to it that the accounts of the company are in compliance with the law and that its financial affairs have been arranged in a reliable manner.
Auditor's responsibility
Our responsibility is to express an opinion on the financial statements, on the consolidated financial statements and on the review by the Board of Directors based on our audit. The Auditing Act requires that we comply with the requirements of professional ethics. We conducted our audit in accordance with good auditing practice in Finland. Good auditing practice requires that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and the review by the Board of Directors are free from material misstatement, and whether the members of the Board of Directors of the parent company and the Managing Director are guilty of an act or negligence which may result in liability in damages towards the company or have violated the Limited Liability Companies Act or the articles of association of the company.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements and the review by the Board of Directors. The procedures selected depend on the auditor's judgement, including the assessment of the risks of material misstatement, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation of the financial statements and the review by the Board of Directors that give a true and fair view in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company's internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements and the review by the Board of Directors.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion on the consolidated financial statements
In our opinion, the consolidated financial statements give a true and fair view of the financial position, financial performance, and cash flows of the group in accordance with International Financial Reporting Standards (IFRS) as adopted by the EU.
Opinion on the company's financial statements and the review by the Board of Directors
In our opinion, the financial statements and the review by the Board of Directors give a true and fair view of both the consolidated and the parent company's financial performance and financial position in accordance with the laws and regulations governing the preparation of the financial statements and the review by the Board of Directors in Finland. The information in the review by the Board of Directors is consistent with the information in the financial statements.
Other opinions
We support that the financial statements should be adopted. The proposal by the Board of Directors regarding the distribution of the profit shown in the balance sheet is in compliance with the Limited Liability Companies Act. We support that the Members of the Board of Directors and the Managing Director should be discharged from liability for the financial period audited by us.
Helsinki, March 11, 2011
PricewaterhouseCoopers Oy
Authorised Public Accountants
Merja Lindh
Authorised Public Account
Source: Nokia, Annual Report 2010, p. 82. Reproduced by permission.
18. Statement of Directors' Responsibilities for the Financial Statements. This statement (see Company Snapshot 12.8) was introduced because of a general misconception by the general public of the purpose of an audit compared with the actual nature of an audit as understood by auditors. The directors must spell out their responsibilities which include (i) keeping proper accounting records; (ii) preparing financial statements in accordance with the Companies Act 2006; (iii) selecting suitable accounting policies consistently; (iv) stating whether Group and Company financial statements are following appropriate standards, (v) preparing the financial statements under the going concern basis and (vi) making reasonable and prudent judgements and estimates.
In the case of Tesco, in 2010, it is noteworthy that the Group financial statements are prepared following IFRS, as endorsed by the EU while the parent company accounts are still prepared following UK GAAP.
Statement of Directors' Responsibilities
The Directors are required by the Companies Act 2006 to prepare financial statements for each financial year which give a true and fair view of the state of affairs of the company and the Group as at the end of the financial year and of the profit or loss for the financial year. Under that law the Directors are required to prepare the Group financial statements in accordance with International Financial Reporting Standards (IFRSs) as endorsed by the European Union (EU) and have elected to prepare the Company financial statements in accordance with UK Accounting Standards.
In preparing the Group and Company financial statements, the Directors are required to:
- select suitable accounting policies and then apply them consistently;
- make reasonable and prudent judgements and estimates;
- for the Group financial statements, state whether they have been prepared in accordance with IFRS, as endorsed by the EU.
- for the Company financial statements state whether applicable UK Accounting Standards have been followed; and
- prepare the financial statements on the going concern basis, unless it is inappropriate to presume that the Group and the Company will continue in business.
The Directors confirm that they have complied with the above requirements in preparing the financial statements.
The Directors are responsible for keeping proper accounting records which disclose with reasonable accuracy at any time, the financial position of the Company and the Group, and which enable them to ensure that the financial statements and the Directors' Remuneration Report comply with the Companies Act 2006, and as regards the Group financial statements, Article 4 of the IAS Regulation.
The Business Review includes a fair review of the business and important events impacting it, as well as a description of the principal risks and uncertainties of the business.
The Directors are responsible for the maintenance and integrity of the Annual Review and Summary Financial Statement and Annual Report and Financial Statements published on the Group's corporate website. Legislation in the UK concerning the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
The Directors have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Group and of the Company and to prevent and detect fraud and other irregularities.
Source: Tesco PLC, Annual Report and Financial Statement 2010, p. 68.
19. Shareholder Information. Companies increasingly include a variety of shareholder information. This might, for example, include a financial calendar, share price details, shareholder analysis (see item 22) or notice of the AGM. The information may be narrative or nonnarrative in nature.
Non-Narrative Sections
20. Highlights. This very popular feature normally occurs at the start of the annual report, often accompanied by graphs of selected figures. This section provides an at-a-glance summary of selected figures and ratios.
In Tesco's report (Company Snapshot 12.9), for example, group sales, group profit, profit before tax, earnings per share, dividends per share, group enterprise value (market capitalisation plus net debt) and return on capital employed are the financial ratios highlighted. The financial highlights may be seen as an abridged version of the historical summary.
21. Historical Summary. The historical summary is a voluntary recommendation of the stock exchange. Indeed, in the UK, it is one of the very few regulations set out by the stock exchange. Usually, companies choose to present five years of selected data from both the statement of financial position and the income statement.
22. Shareholder Analysis. In many ways this item supplements item 20, shareholder information. It provides detailed analysis of the shareholders, for example, by size of shareholding.
These 22 items are by no means exhaustive, for example, J.D. Wetherspoon's plc, the pub chain, provides a list of its Directors, officers and advisers.
Presentation
The style of the annual report is becoming much more important. Companies are increasingly presenting key financial information as graphs rather than as tables. This information is voluntary and generally often supplements the mandatory information. Many companies use graphs to provide oases of colour and interest in otherwise dry statutory documents. In many cases, the graphs are presented at the front along with the highlights. Tesco, for example, in 1999 provided five-year graphs of group sales, group operating profit, earnings per share, and operating cash flow and capital expenditure (see Company Snapshot 12.10).
Photographs are also common in annual reports. These may be of employees or products. However, often they act as ‘mood music’ with no obvious relationship to the actual content of the report.
The increased use of the Internet provides many opportunities for companies to present their annual reports on their websites. Many companies are now experimenting with this new presentational format, often using varied presentational methods. Figure 12.4 on page 362 gives some well-known company websites and students are encouraged to visit them.
Source: Tesco PLC, Annual Report and Financial Statements 2010, Inside Cover.
Group Accounts
Subsidiary and Associated Companies
An interesting feature of most of the world's largest companies is that they are structured as groups. It is the annual reports of these groups of companies such as Vodafone, Toyota or Wal-Mart that are most often publicly available. A group of companies is one where one or more companies is controlled by another. In many cases, these groups are extremely complex and complicated involving many hundreds of subsidiary and associated companies. At its simplest, subsidiaries are normally companies where the parent (i.e., top group company) owns more than 50% of shares and associates are companies where the parent owns 20–50% of shares. The formal definitions (see Definition 12.3 on the next page) provided by the Accounting Standards Board (ASB), the International Accounting Standards Board (IASB) and the Companies Act are expressed in considerably more complex language.
Group accounts are prepared using special accounting procedures, which are beyond the scope of this particular book (interested readers could try Elliot and Elliot, Advanced Financial Accounting and Reporting, or Alexander, Britton and Jorrisen, International Financial Reporting and Analysis). In essence, the group income statement and group statement of financial position attempt to portray the whole group's performance and financial position rather than that of individual companies.
Thus, in Figure 12.5 (see page 364), the group comprises seven companies. Company A is the parent company and owns over 50% of companies B and C, making them subsidiaries. Company B also owns more than 50% of the shares of companies B1 and B2. Companies B1 and B2 thus become sub-subsidiaries of Company A. These four companies (B, C, B1 and B2) are therefore consolidated as subsidiaries using normal accounting procedures. In addition, an appropriate proportion of companies D and E are taken into the group accounts since these two companies are associates as between 20% and 50% of the shares are held. Overall, therefore, we have the aggregate financial performance of the whole group. One group set of financial statements is prepared. It is these group accounts that are normally published in the annual report.
Working definition
A company where more than half the shares are owned by another company or which is effectively controlled by another company, or is a subsidiary of a subsidiary.
Formal definition
‘A subsidiary is an entity, including an incorporated entity such as a partnership, that is controlled by another entity (known as the parent). Control is presumed to exist when the parent owns, directly or indirectly through subsidiaries, more than one half of the voting power of an enterprise unless, in exceptional circumstances, it can be clearly demonstrated that such ownership does not constitute control. Control also exists even when the parent owns one half or less of the voting power of an enterprise when there is:
(a) power over more than one half of the voting rights by virtue of an agreement with other investors;
(b) power to govern the financial and operating policies of the enterprise under a statute or an agreement;
(c) power to appoint or remove the majority of the members of the board of directors or equivalent governing body; or
(d) power to cast the majority of votes at meetings of the board of directors or equivalent governing body.’
Source: International Accounting Standards Board, 2010, IAS 27, Consolidated and Separate Financial Statements, paras 2 and 12. Copyright © 2012 IFRS Foundation. All rights reserved. No permission granted to reproduce or distribute.
2. Associated Company
Working definition
A company in which 20–50% of the shares are owned by another company or one in which another company has a significant influence.
Formal definition
‘An associate is an entity, including an unincorporated entity such as a partnership, over which the investor has significant influence and that is neither a subsidiary nor an interest in a joint venture of the investor. If an investor holds, directly or indirectly (e.g., through subsidiaries), 20 per cent or more of the voting power of the investee, it is presumed that the investor does have significant influence, unless it can be clearly demonstrated that this is not the case. Conversely, if the investor holds, directly or indirectly (e.g., through subsidiaries), less than 20 per cent of the voting power of the investee, it is presumed that the investor does not have significant influence, unless such influence can be clearly demonstrated. A substantial or majority ownership by another investor does not necessarily preclude an investor from having significant influence.’
Source: International Accounting Standards Board, 2010, IAS 28, Accounting for Investments in Associates, paras 2 and 6. Copyright © 2012 IFRS Foundation. All rights reserved. No permission granted to reproduce or distribute.
Goodwill
Goodwill is a particular feature of group companies. Goodwill is known as an intangible asset (i.e., one that you cannot touch). Goodwill, in accounting terms, is only recognised when one company takes over another. It represents the value of the whole business over and above the value of its individual assets and liabilities. This can often be quite considerable. European listed companies follow International Financial Reporting Standard 3 which states that goodwill is shown as an asset on the statement of financial position. It is then reviewed every year to see if the goodwill has lost value. If it has lost value, this value will be written off to the income statement. That annual review is called an impairment test. For UK non-listed companies, the UK standard requires a different treatment. The preferred treatment is that companies should write off goodwill to the income statement annually over a period of up to 20 years. This process of writing off goodwill is called amortisation. It is similar to depreciation. Non-listed companies are also permitted, if they can make a case, to write off goodwill over a period of greater than 20 years or even not at all.
Group Accounts
Nowadays, most leading companies must prepare group accounts. Can you think of any problems they might encounter?
There are many! Many companies will have hundreds of subsidiaries. All the information must be supplied to head office. At head office, it must all be collected and collated. Different subsidiaries may have different year-end accounting dates, operate in different countries using different accounting policies and different currencies. Some of the subsidiaries will have been acquired or sold, or the shareholdings of the parent company will have changed, during the year. All these are potential problems.
Impression Management
Managers have significant incentives to try to influence the financial reporting process in their own favour. These incentives may be financial and non-financial. Financially, managers may be keen, for example, to maximise their own remuneration. If remuneration is based on profits, they may seek to adopt accounting policies that will increase rather than decrease profits. In non-financial terms, managers, like all human beings, will try to portray themselves in a good light. This may result, for example, in managers selectively disclosing only positive features of the annual performance.
In this section, three illustrative examples of impression management are discussed: creative accounting, narrative enhancement and use of graphs.
Impression Management
Can you think of any non-accounting situations where human beings indulge in impression management?
There are many, just to take two: interviews and dating. At an interview, normal, sane candidates try to give a good impression of themselves in order to get the job. This may involve trying to stress their good points and downplay their bad points. When dating, you try to look good to impress your partner. Once more, most normal people will try to present themselves in a favourable light. You want to impress your dates not repel them.
Creative Accounting
Creative accounting will be dealt with more fully in Chapter 13. Put simply, creative accounting is the name given to the process whereby managers use the flexibility inherent within the accounting process to manipulate the accounting numbers. Flexibility within the accounting system is abundant. By itself, flexibility allows managers to choose those accounting policies that will give a true and fair view of the company's activities. However, there are also opportunities for managers to choose policies which portray themselves in a good light. The worst excesses are covered by the regulatory framework. To see how the flexibility within accounting can alter profit, we take inventory and depreciation as examples.
Inventory
In accounting terms
In other words, if assets increase so will equity. As equity includes retained earnings, if we increase inventory we will increase retained earnings. Inventory is an easy asset to manipulate, if we wish to increase our profits. We could, for example, do an extremely thorough stocktake at the end of one year, recording and valuing items which normally would have been overlooked.
Inventory and Creative Accounting
A company has one asset, inventory. Its abridged statement of financial position is set out below.
If the company revalues its inventory to £60,000, what will happen to profit?
The answer is that profit increases by £10,000, as the new statement of financial position shows.
Depreciation
Depreciation is the expense incurred when property, plant and equipment is written down in value over its useful life. Unfortunately, estimates of useful lives vary. For example, if an asset has an estimated useful life of five years then depreciation, using a straightline basis, would be 20% per year. If the asset's estimated useful life was ten years, depreciation would be 10% per year. In other words, by extending the useful life, we halve the depreciation rate and halve the amount that is treated as an expense in the income statement. Managers can thus alter profit by choosing a particular rate of depreciation. They would argue that they are more fairly reflecting the useful life of the asset.
Narrative Enhancement
Narrative enhancement occurs when managements use the narrative parts of the annual report to convey a more favourable impression of performance than is actually warranted. They may do this by omitting key data or stressing certain elements. Many companies stress, for example, their ‘good’ environmental performance. Indeed, social and environmental disclosures are nowadays exceedingly common. Since such disclosures are voluntary and reviewed rather than audited, there is great potential for companies to indulge in narrative enhancement. This can be seen from Real-World View 12.5. In this, the news reported by Australian corporations is overwhelmingly positive which is unlikely to be true in reality.
Environmental Accounting
An interesting example of narrative measurement is given by Craig Deegan and Ben Gordon. They studied the environmental disclosure practices of Australian corporations.
The number of positive and negative words of environmental disclosure in annual reports from 1980 to 1991 are recorded for 25 companies. They find:
They conclude:
‘The environmental disclosures are typically self-laudatory, with little or no negative disclosures being made by all firms in the study.’
Source: Craig Deegan and Ben Gordon (1996), A Study of the Environmental Disclosure Practices of Australian Corporations, Accounting and Business Research, Vol 26, Issue 3, p. 198. Taylor & Francis.
Graphs
Graphs are a voluntary presentational medium. Used well they are exceedingly effective. However, they also present managers with significant opportunities to manage the presentation of the annual report. For example, a variety of research studies show that managers are exceedingly selective in their use of graphs. They tend to display time-series trend graphs when performance is good, with these graphs presenting a rising trend of corporate performance. By contrast, when the results are poor, graphs are omitted.
Even when included, there is a potential for graphical misuse. The increase in the height of the graph should be proportionate to the increase in the data. However, graphs are often drawn more favourably than is warranted. For example, graphs may be (and often are) drawn with non-zero axes that enhance the perception of growth. Or graphs may simply be drawn inaccurately.
Currently, graphs are not regulated; therefore companies are free to use them creatively. An interesting example is shown in Company Snapshot 12.11. These five graphs represent the financial performance of Polly Peck. This company had spectacular results just before the company collapsed into a totally unexpected bankruptcy. Although not inaccurately drawn, they do present a very effective, and misleading, display. Who could guess that this company was about to fail? Certainly not the investors or even the auditors. Polly Peck is one of Britain's most important business scandals.
Conclusion
The annual report is a key part of the process by which managers report to their shareholders. It is central to the corporate governance process. There are three overlapping objectives: stewardship and accountability, decision making and public relations. The annual report is built around three core audited financial statements: the income statement, the statement of financial position and the statement of cash flows. However, in the UK another seven important audited financial statements are normally present: statement of total recognised gains and losses; reconciliation of movements in shareholders' funds; note on reconciliation of net cash flow to movement on net debt; note on historical cost profits and losses; accounting policies; notes to the accounts; and the principal subsidiaries. Most large enterprises are groups consisting of subsidiary and associated companies. The main accounts are therefore group accounts.
The modern annual report also consists of non-audited sections. These can be divided into narratives and non-narratives. In the UK, the ten narratives comprise the chairman's statement, the business review, the directors' report, the review of operations, the social and environment statement, the statement of corporate governance, the directors' remuneration report, the auditors' report, the statement of directors' responsibilities for the financial statements and shareholder information. The three non-narratives are the highlights, the historical summary and the shareholder analysis. As well as these sections, the modern annual report commonly uses graphs and photographs to enhance its presentation. Managements face many incentives to influence the financial reporting process in their favour. This can be done, for example, through creative accounting, narrative enhancement or the use of graphs.
Selected Reading
Unfortunately, there is no one book or article which really covers the modern annual report. Readers are referred to the following four sources which cover some valuable material.
1. Deloitte Touche Tohmatsu (2009) A Telling Performance: Surveying Narrative Reporting in Annual Reports.
This publication takes a good look at the rapid growth of the narrative parts of the annual report.
2. Deegan, C. and Gordon, B. (1996) ‘A Study of Environmental Disclosure Practices of Australian Companies', Accounting and Business Research, Vol. 26, No. 5, pp. 187–99. This article provides an interesting insight into how individual companies accentuate the good news and downplay bad news of their environmental activities.
3. The full Companies Act 2006 can be seen at http://www.legislation.gov.uk/ukpga/2006/46/contents. At this site there are also all the previous Companies Acts. Deloittes have produced a guide which specifically covers the Companies Acts. It is available at http://www.pwc.co.uk/eng/publications/practical_guide_to_companies_act_2006.html.
4. McKinstry, S. (1996) ‘Designing the Annual Reports of Burton plc from 1930 to 1994’, Accounting, Organizations and Society, Vol. 21, No. 1, pp. 89–111. This rather heavyweight article looks at how one company's annual reports have changed over time, concentrating particularly on the public relations aspects.
Discussion Questions
Questions with numbers in blue have answers at the back of the book.
| Q1 | Explain the role that the annual report plays in the corporate governance process. |
| Q2 | Evaluate the stewardship/accountability, decision making and public relations roles of the annual report and identify any possible conflicts. |
| Q3 | In your opinion what are the six most important sections of the annual report. Why have you chosen these sections? |
| Q4 | Why do companies prepare group accounts? |
| Q5 | What do you understand by the term ‘impression management’? Why do you think that managers might use the annual report for impression management? |
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