Wednesday, September 07, 2011

How to Read an Annual Reports ?

Contents: non-audited information
• Narrative items
– Chairmen’s statement
– Directors’ report
– Operating and financial review
– Review of operations
– Statement of corporate governance
– Auditors report
– Statement of directors’ responsibilities for the financial statements
– Shareholder information
• Non-narrative
– Highlights
– Historical summary
– Shareholder analysis

Balance sheet
• A balance sheet is a statement of the resources owned and controlled by a business at a single point in time.
• It gives a snapshot of assets, liabilities and capital at a point in time.
• It provides information about the company’s funds and how they are used in the business.

Profit and loss account
• The Profit and Loss Account is a statement which shows total business revenue less expenses.
• The P&L account quantifies and explains the gains or losses of the company over the period of time bounded by two balance sheets
• It provides a summary of the year’s trading activities:
– Revenue from sales (turnover)
– Business costs
– Profit or (loss)
– How the profit was used.

Cash flow statement
• This is a statement which shows the flow of cash into and out of the business.
• It is not the same as a profit and loss account.
• The cash flow statement only records movements of cash and, for example, does not include credit sales or purchases until such time as cash actually flows.
• This statement became mandatory because of some high profile business failures of the 1980s/90s - these were companies that, in terms of the P&L, were profitable but were short of cash to pay their debts.
• The cash flow statement should not be confused with a cash flow forecast. The former is historical whereas the latter is a forecast about the future.
Statement of total recognised gains and losses
• The STRGL is a financial statement which attempts to highlight all shareholder gains and losses and not just those from trading.
• It is a summary of all the profits and losses made during the year.
• It is necessary because not all gains and losses are shown on the P and L account.
• Example: upward revaluation of a fixed asset is not classed as revenue from trading operations and so it will not shown up on the P and L Account. It does show up as an addition to revaluation reserves on the balance sheet

Notes to the accounts
• Provides a more detailed analysis of some of the entries in the accounts including:
• Disclosure of accounting policies used (e.g. depreciation) and any changes to these policies.
• An explanation for any deviation from accounting standards.
• Sources of turnover from different geographical areas.
• Details of fixed assets, investments, share capital, debentures and reserves.
• Directors emoluments (how much the Directors earned)
• Earnings per share

Accounting policies
• Companies must describe the accounting polices they use in preparing financial statements.
• Companies have a choice of accounting polices in many areas such as foreign currencies, goodwill, pensions, sales and stocks.
• As different accounting polices will result in different figures it is necessary to state the policy that was used so that readers of the accounts can make an informed judgement about performance.
• It is also important to state the effect of any changes in accounting policies – restating prior year numbers where this is materially significant

Chairpersons statement
• An overview of the trading year.
• A personalise overview of the company’s performance over the past year.
• Usually covers strategy, financial performance and future prospects.

Directors’ Report
• Its principal objective is to supplement the financial information with other information consider necessary for a full appreciation of the companies activities. It includes:
• A description of the principal activities of the company.
• A fair review of the current and future prospects of the business.
• Information on the sale, purchase or valuation of assets.
• Recommended dividends.
• Employee statistics.
• Names of directors and their interests.
• Details of political or charitable donations.

Operating and financial review
• This is a statement in the annual report which provides a formalised, structured explanation of financial performance.
• The operating review covers items such as operating results, profit and dividend.
• The financial review discusses items such as capital structure and treasury policy.
Operating and financial review

Operating review
• New product development
• Details of shareholders returns
• Risks and uncertainties
• Future investment
• Sensitivity of financial results to specific accounting policies

Financial review
• Current cash position.
• Sources of finding.
• Treasury policy.
• Capital structure.
• Confirmation of the business as a going concern.
• Factors outside the balance sheet impacting on the value of the business.
• Taxation.

Other features
• Highlights
– An “at a glance” summary of selected figures and ratios.
• Historical summary
– Five years of selected data from the balance sheet and profit and loss account
– Tables and graphs to illustrate trend and comparison of turnover, profit ,dividend and earnings per share.
• Shareholder analysis
– Detailed analysis of the shareholders, for example by size of shareholding

Auditors report
• Auditors are independent accountants who are registered to carry out this work.
• They also have to certify that the accounts are drawn up in accordance with the requirements of the Companies Act.
• Auditors must make a brief report to confirm that the accounts give a true and fair view of the firm’s financial position.

Prepared by CAMFinancialmarket
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