Chapter 5 Annual Report Narrative Annual Report AR

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Chapter 5 Annual Report: Narrative

Chapter 5 Annual Report: Narrative

Annual Report (AR) z Focus of text: ARs of EU-listed companies z Principal means

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

Annual Report ctd. z Content controlled by statute, regulation, IFRS z Narrative and financial

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

Narrative content z Should supplement financial statements z Required by statute: y. Directors’ Report

Narrative content z Should supplement financial statements z Required by statute: y. Directors’ Report y. Auditor’s Report y. Strategic Report (CA 06) z Not required by statute: y. Chairman’s Statement y. Chief Executive’s Report y. Other, e. g. historical summaries Chapter 5 © Philip O’Regan 2016 4

Chairman’s Statement z Not required by statute z Personal perspective z Comments on macro

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

Directors’ Report z Required by statute z Impact of Combined Code extensive z Includes

Directors’ Report z Required by statute z Impact of Combined Code extensive z Includes sections on: ytrading activity ydevelopments during period ydirectors (especially remuneration) yemployees ycorporate governance ydirectors’ responsibilities for financial statements Chapter 5 © Philip O’Regan 2016 6

Strategic Report z This type of report recommended by Cadbury y. Equivalent of US

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

Auditor’s Report z Auditor conducts “independent review” z Report (ISA 700): y. Opinion on

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

Auditor’s Report ctd. z New style audit reports a response to audit failures z

Auditor’s Report ctd. z New style audit reports a response to audit failures z ISA 700 + Governance Code now require: ygreater insight into conduct of audit yfocus on risks, materiality and audit scope z Companies must also report on how audit committee interacted with auditors y. Reflects growing role of audit committee Chapter 5 © Philip O’Regan 2016 9

Other elements z Some ARs now include report by CEO yallows CEO to communicate

Other elements z Some ARs now include report by CEO yallows CEO to communicate with users ysupplements other elements z Historical summaries ynot required by statute yusually summarize 5 -year performance yoften tabular/graphical presentation z Visual (graphs/photos) commonly used Chapter 5 © Philip O’Regan 2016 10

Summary z AR a principal means of communication z Narrative element: ysubstantial yevolving in

Summary z AR a principal means of communication z Narrative element: ysubstantial yevolving in type and range ypartly controlled by statute yopen to abuse/manipulation z Critical to any informed analysis Chapter 5 © Philip O’Regan 2016 11

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