The Annual Report

BE102 – Lecture 2
Lecture Outline
 The corporate annual report
 Contents of annual report
 What is narrative reporting?
 Contents of narrative section
 Survey of UK annual reports
 Analysts’ views on narrative disclosures

2
The Corporate Annual Report
 An annual report is a comprehensive report on a
company’s activities

 Annual reports are intended to give shareholders and

other stakeholders information about the company's
activities and performance

3
The Corporate Annual Report - Contents
 Narrative section
 Financial statements section - (IAS1 requires the following
statements and prescribes the minimum information to be
presented on the face of them):
 Statement of Financial Position (Balance sheet)
 Statement of Profit & Loss (Income Statement) and Other
Comprehensive Income
 Statement of Cash Flows - IAS7
 Statement of Changes in Equity
 Notes to the accounts
4
TESCO 2022 Annual Report

5
Tesla 2021 Annual Report

6
The Financial Statements Section
 Income statement: shows a company's financial
performance over a specific accounting period.
 Balance sheet: shows a company’s financial position at a
specific point in time.
 Cash flow statement: shows the amount of cash entering
and leaving a company during a specific accounting period.

 Statement of changes in equity: shows the changes in

equity (share capital and reserves) that take place during a
specific accounting period.
7
The Financial Statements Section - continued

 Notes to the financial statements play an important role

in helping users to understand the financial statements.
They mainly contain the following information:
 Confirmation that the financial statements comply with
relevant standards
 A summary of the measurement bases (e.g., the basis of
inventories valuation) used and other significant accounting
policies applied
 Supporting information relating to items appearing on the
financial statements
8
What is Narrative Reporting (NR)?

 Narrative reporting shows mainly non-financial information, but

can include financials, which provides a broad and meaningful
picture of the company's business, market position, strategy,
performance and future prospects.
 The Cadbury Committee report (1992) highlighted the
importance of narrative reporting
 “What shareholders (and others) need from the report and accounts is a
coherent narrative, supported by the figures, of the company’s
performance and prospects” (para 4.50)
 “words are as important as figures” (para 4.50)
9
Contents of Narrative Section
 Chairman’s statement
 Directors’ remuneration report
 Directors’ report
 Management commentary on performance:
 The UK: The Strategic Report
 The US: Management’s Discussion and Analysis (MD&A)
 IASB: Management Commentary (IFRS Practice Statement on Management Commentary)
 Other reports such as corporate governance, corporate social
responsibility and environmental reports
 Auditor’s report: some regard it part of the narrative section and some
as part of the financial statements section
10
Chairman’s Statement
 A letter from the chairman of the board to shareholders
reporting on the company's condition.
 The statement, typically no longer than two pages,
includes a summary of initiatives, activities of the
board, and personal perspective of the company's
future.

11
Directors’ Remuneration Report
 This includes, among other items of information:
 payments to directors whether in the form of basic salary
or other rewards,
 details of shares in the company owned by directors.

12
Directors’ Report
 The directors’ report includes, among other items of
information:
 names of directors who served during the reporting year,
 principal activities of the company,
 recommended dividend for the reporting year,
 management commentary on performance (in the UK, this
is now part of the strategic report which is separate from
the directors’ report).

13
The Strategic Report
 In the UK, a number of changes took place:
 The operating & financial review (OFR)
 The business review
 The ‘Strategic Report’
 On 1st October 2013, the requirement to include a business review as
part of the directors’ report was replaced with a requirement to
include a separate ‘Strategic Report’ in a company’s annual report.
This applies to financial years ending on or after 30th September 2013.
 The purpose of the strategic report is to inform members of the
company and help them assess how the directors have performed
their duty.

14
The Strategic Report - continued

 The strategic report must contain:

 A fair review of the company’s business
 Principal risks and uncertainties
 Analysis of performance of the company during the year and
position at the end of the year
 Key performance indicators
 Factors likely to affect the future development, performance
and position of the company
 Information about environmental matters, employees and
social, community and human rights issues
15
The Strategic Report - continued

 A description of the company’s strategy and business model

 A breakdown showing at the end of the financial year:
 the number of persons of each sex who were directors of the
company
 the number of persons of each sex who were senior managers of
the company
 the number of persons of each sex who were employees of the
company
The new strategic report (and remuneration report) have led to an
increase in the average length of the narrative section from 70 pages in
2013 to 77 pages in 2014, contrary to what was expected (Deloitte, 2014).
16
Corporate Governance Report
 This report includes, among other items of information:
 a company’s corporate governance structures with particular
reference to the independence of a company’s non-executive
directors
 details of internal committees such as the audit and
remuneration committees
 Board meetings and attendance

17
The Auditor’s Report
 The auditor’s report includes, among other items of
information:
 whether the financial statements show a true and fair view of
the financial performance, position and cash flows of the
company
 whether the financial statements are prepared by following
relevant standards

18
Survey of UK Annual Reports

Highlights of Deloitte’s (2017) survey:

 The average length of the annual report for the
surveyed companies went up from 155 in 2016 to 164 in
2017
 The narrative section makes up on average 61% of the
annual report compared to 60% in 2016
 This emphasizes the need to consider materiality in the context of
narrative reporting
 Only 13 out of the 100 surveyed companies referred to materiality
outside financial statements
19
Survey of UK Annual Reports - continued

Highlights of
Deloitte’s (201
8) survey
:
20
Analysts’ Views on Narrative Disclosures

The study of Campbell & Slack (2008) reveals the negative

view of analysts on narrative reports:

 “In terms of the sections which are solid text in terms of,
say, ‘our policy’ as regards the environment or our
employees or our shareholders – most of that tends to be
template-driven stuff” (p. 18)

 “Completely not interested. I could probably say that I have

not read any of those” (p. 19)
21
Analysts’ Views on Narrative Disclosures - continued

 “The director’s report largely is a skip-through. As I say it’s

not something I would go to and read specifically first but its
good to have it there as a reference” (p. 19)

 “When somebody stops disclosing something, then your

alarm bells ring automatically. So even if the thing on the
face of it is not particularly relevant or you may discount it in
the general run of things, if it disappears altogether then that
would set alarm bells ringing” (p. 26)

22
“Narrative disclosures are generally improving in
quality, but too much volume and regulation are making
documents bulkier, making it harder for the reader to
see the wood for the trees. I would encourage a
reduction in the amount of information and required
disclosures. This would make the report useful.”
(ACCA & Deloitte, 2010, p. 24)

23
IN-CLASS QUIZZES
Readings

Chapter 5. Accounting for Limited Companies (2)

 Atrill & McLaney

 Additional readings available on Moodle

28
Next week’s class

 Questions on Moodle
 The questions are based on the following
survey:
 ACCA & Deloitte (2010), Hitting the notes,
but what’s the tune? An international survey
of CFOs’ views on narrative reporting, A
report from ACCA in partnership with
Deloitte.

29