ANNUAL REPORT

Compiled by Dr. Divya

 Annual Report of a company

A company’s annual report has following components:

• Complete set of financial statements including:
• Directors’ Report
• Auditors’ Report
• Management discussion and analysis
• Corporate governance report
• Balance sheets of subsidiary companies
• Voluntary disclosures
 SOURCES OF DISCLOSURES
COMPANIES LISTING ACCOUNTING VOLUNTARY
ACT AGREEMENT STANDARDS DISCLOSURES
(MANDATORY) (MANDATORY) (MANDATORY)

 Auditors’ report  Management  Contingent  Value added

 Directors report discussion and liabilities statement
 Foreign analysis  Segment  Economic value
exchange  Corporate reporting added
earnings and governance  Related party  Human
expenses report disclosure resource
 Details  Interest in joint accounting
regarding ventures  Brand valuation
subsidiary
companies
 Annual Report – Financial Statements

A company’s annual report has complete set of financial

statements including:
Statement of Profit and Loss
Balance Sheet
Cash Flow Statement
Statement of changes in equity
Notes to accounts including accounting policies
 Annual Report – Financial Statements
Companies Act Requirements are as follows:
• Accounts must be maintained on accrual basis and according
to double entry bookkeeping system.
• The balance sheet, and P&L A/c must be prepared for every
financial year.
• The financial statements must be laid before the AGM of
shareholders for approval within 6 months of the close of the
year.
• The balance sheet, and P&L A/c must be prepared as per
format in Schedule III and must show figures for the current
year and comparative figures for the previous year.
 Annual Report – Financial Statements

Notes to Accounts (Explanatory Notes) discloses the

following:
• Clarificatory information
– to help understand implications of financial statements
• Information on items that cannot be recognised in financial
statements eg contingent liabilities
• Information required to be disclosed by various accounting
standards
• Other disclosure required by any regulations
 1. Auditor’s Report
• External, independent statutory auditor reports to the
shareholders of the company on the account of the company,
every balance sheet and P&L A/c and every other document
which is to be a part of or annexed to the balance sheet or P&L A/c
• Auditors evaluate the truth and fairness of financial statements
and also the quality of the financial statements.
• Comments and qualifications in the auditors’ report provide
important information and independent opinion on financial
statements
• Auditor’s report only gives an opinion and is not a certificate.
 1. Auditor’s Report
• The report shall state that, in auditor’s opinion and to the best
of his information, and according to the explanations given
to him
 Proper Books of A/c have been kept
 Accounts gives information required by the Companies Act.
 Financial statem’ts comply with applicable a/cing standards
 The balance sheet gives a true and fair view of the
company’s affairs as at the end of the financial year.
 The P&L A/c gives a true and fair view of the profit and
loss for that financial year.
An audit report which affirms the above is called a clean report
 Qualified Audit Report

• If the auditor cannot form an opinion based on available

information he gives Disclaimer opinion.
• If the auditor is of an opinion that financial statements do not give
true & fair view he gives Adverse opinion.
• If the auditor is not entirely satisfied or has reservations about any of
the matter required to be reported by the auditor but not enough to
give disclaimer or adverse opinion then he qualifies his report by
giving observations and comments.
• A qualified report is one in which in the Auditor qualifies his
opinion by stating that the company’s financial records are fairly
presented aside from certain areas.
 Qualified Audit Report

• Qualified opinions may be issued :

 if a company has not followed GAAP, accounting standards,
 if a company has inadequate disclosures in the footnotes to the
financial statements or
 if there is a disagreement between auditor and management on
some accounting or disclosure issue.
• Board of Directors in its report comment on audit
qualifications
• Analysts adjust their numbers in financial analysis to give
effect to audit qualifications
Companies (Auditor’s Report) Order (CARO)
Report

– Specific comments by auditors

– Adequacy of internal control

– Physical verification of fixed assets

– Physical verification of inventories

– Loans and advances to related parties

– Outstanding wealth tax, income tax, sales tax liabilities

– Acceptance of deposits by the companies

 2. Directors’ Report
1. Extract of annual return
2. No. of meetings of Board
3. Directors’ responsibility statement
4. The state of Company’s affairs
5. Amount proposed to be carried to any reserve.
6. Proposed dividend: Amount recommended as dividend.
7. Comment and Explanation on qualified auditors’ report
• on every reservation, qualification or adverse remarks in
auditors’ report.
 2. Directors’ Report
8. Material Post-balance sheet events and developments:
• Material changes & commitments affecting company’s
financial position between end of financial year & date of
report.
9. Employees receiving remuneration in excess of the
prescribed sum.
10. Conservation of energy, technology absorption, foreign
exchange earnings and outgo.
11. Statement on risk management policy
12. Policy on CSR initiatives taken during year
13. Statement that formal annual evaluation by BOD of its own
performance and that of committees and each director
 Directors’ Report –Directors’ Responsibility statement

 In the preparation of the annual accounts, all applicable

accounting standards had been followed.
 Directors have selected accounting policies and applied them
consistently, and made judgements and estimated that are
reasonable and prudent.
 Directors have taken proper and sufficient care for
maintenance of adequate accounting records in accordance
to the Companies Act for safeguarding the assets of the
company and for preventing and detecting frauds and other
irregularities.
 Directors have prepared the accounts on a going concern
basis.
 3. Management discussion and analysis
• Mandatory requirement of Listing Agreement.
Includes:
 Industry structure and developments
 Opportunities and threats
 Segment–wise or product-wise performance
 Outlook
 Risks and concerns
 Internal control systems and their adequacy
 Discussion on financial performance with respect to
operational performance
 Material developments in human resources/industrial
relations front, including number of people employed.
 4. Corporate Governance Report
Mandatory requirement of Listing Agreement.
 A brief statement on company’s philosophy on code of
governance.
 Details of Board of Directors and its committees
 Audit Committee
 Remuneration Committee
 Shareholders Committee
 Disclosures.
 Materially significant related party transactions
 Non-compliance by the company, penalties
 Whistle-blower policy
 Market price data – high/low prices, comparison with indices
 Distribution of shareholding
 Outstanding GDR/ADR, warrants or convertible instruments
 Foreign Exchange - forex earnings & expenses (including export &
import of goods).
 4. INFORMATION ON SUBSIDIARY COMPANIES

• Information on subsidiary companies includes:

– The extent of holding company’s interest in the subsidiary
company.
– The aggregate amount of its share in the subsidiary’s profit
or loss which has not been dealt with the holding company’s
accounts.
– Salient features of financial statements of subsidiary
companies
 DISCLOSURES REQUIRED BY ACCOUNTING STANDARDS
1. Segment Reporting [AS17 (segment reporting) & IndAS 108
(Operating segments)]
• Reporting of Segment information which is financial
information on different types of products & services produced
and different geographical areas in which company operates.
Includes following:
 Segment Revenue
 Segment Result
 Carrying amount of segment assets
 Segment liabilities
 Cost of segment tangible/intangible fixed assets acquired during yr
 Depn charge for year on segment’s assets and other non-cash
expenses
 DISCLOSURES REQUIRED BY ACCOUNTING STANDARDS

1. Segment Reporting [AS17 (segment reporting) & IndAS 108

(Operating segments)]
• Segment contributing revenue > 10% of combined revenue is
identified as reporting segment
• Reporting of financial infor. on business segments &
geographic segments to assess risk & returns of diversified
enterprise based on following factors:
– Incase of business segments : Nature of products & services,
nature of customers, distribution method, regulatory environment
– Incase of geographic segments: economic & political
environment, proximity of operations, currency risk
DISCLOSURES REQUIRED BY ACCOUNTING STANDARDS
2. Contingent Liabilities (AS 29)
• Contingent liability is a possible future obligation existing
on balance sheet date as a result of some past events which
may or may not arise on happening or non-happening of a
uncertain future event.
• Includes present obligation where a reliable estimate cannot
be made of the amount of obligation
• Contingent liabilities are referred to as “off-balance sheet”
liabilities as exposure because they are not shown as liabilities
in balance sheet but are shown in “NOTES TO ACCOUNTS”.
• Examples: Disputed Tax liability, Guarantees given by company on
bank loans to subsidiary company, accumulated preference dividends
DISCLOSURES REQUIRED BY ACCOUNTING STANDARDS

2. Contingent Liabilities (AS 29) (Continued)

• Disclosures required:
Nature of contingency
Estimate of Financial effect of contingency (where
practical)
• If possibility of liability arising is remote then no disclosure
required.
 DISCLOSURES REQUIRED BY ACCOUNTING STANDARDS
3. Related party disclosures (AS18)
• Related party: Parties are considered to be related, if at any
time during reporting period one party has the ability to
control the other party or exercise significant influence over
the other party in making financial and/or operating decisions.
• Disclosures required:
 Name of the related party
 Nature of the related party relationship
 Description of nature of transactions
 Volume of transactions (amount/proportion)
 Outstanding items pertaining to related parties
(amount/proportion), also write-offs, prov’ns for doubtful
debts
DISCLOSURES REQUIRED BY ACCOUNTING STANDARDS

4. Interest in Joint ventures

• Joint venture is an agreement by 2 or more
enterprises to jointly carry on an economic activity
• Disclosures:
– List of all joint ventures and description of interests in
significant joint ventures
– proportion of ownership interest, name & country of
incorporation/residence.
– The aggregate amounts of each of the assets, liabilities,
income and expenses related to its interests in the jointly
controlled entities.
 VOLUNTARY DISCLOSURES
• Additional disclosures are made voluntarily to increase
transparency of annual reports which may include:
– Economic Value Added (EVA) Statement
– Market Value Added (MVA) Statement
– Value added statement, Human Resource Accounting,
Brand valuation
– New products added, new consumers added
– Capital expenditure plan, budgets
– Financial forecasts, etc
 Economic Value Added
• Economic Value Added is a measure of profitability of an
enterprise after meeting the cost of capital employed.
• EVA = Operating profits after Tax – Capital charge
= NOPAT – (Capital employed x Cost of capital)
= NOPAT – (Capital employed x WACC)

Kd x D Ke x E
D+E D+E
Where
WACC = Weighted Average Cost of Capital
Kd = Cost of debt
Ke = Cost of equity
 Market Value Added

• MVA is difference between the market capitalization of a

company and Shareholders’ Funds.

MVA = (Market Price per Share – Book Value per Share)

X No. of shares

• Also called `Management Value Added’

 MVA can be viewed as the present value of the expected
series of EVA.
 Value Added Statement

• Has a Stakeholders’ perspective as opposed to P&L

A/c which has shareholders’ focus.

• Value added = Value of output – Value of input

• Application of value addition to different stakeholders

is disclosed
 Human Resource Accounting

• Involves Putting a value at the human

resources of the company.
• Valuation based upon the present value of the
future earning of the employees.
• Disclosures: Information about number of
employees, age profile, revenue, profit or value
added per employee, etc.
 Brand Valuation

• Based upon the ‘excess earning’

 Determine brand profits by eliminating non-brand
profits
 Restate the historical profits at present-day values
 Calculate weighted average profits
 Deduct cost of capital
 Adjust for taxes
 Apply a multiple towards brand strength.
 REFERENCES
• Sanjay Dhamija
• Ashish Bhattacharya
• Narayanaswamy