Solutions to Assignments
MBA and MBA (Banking & Finance)
MMPC 004 - Accounting for Managers
MMPC-004/TMA/JULY/2022
Question No. 4. Explain in detail the various contents of an Annual Report.
Solution:
Let‘s look at the contents of an annual report. Figure 1 displays the four
broad contents of an annual report, namely, 1) Non-audited information, 2)
Financial statement, 3) Notes to the accounts and 4) Accounting policies.
Let‘s understand each of the four broad contents one by one.
1) Non-audited information
The non-audited information is further classified into:
a) Narrative items and
b) Non-narrative items.
a) Narrative items
Within narrative items in the annual report, following are some of
the important statements: Chairman‘s statement, Directors‘ report,
Operating and financial review, Statement of corporate governance,
Auditors report, Statement of directors‘ responsibilities,
Sustainability report and Management Discussion and Analysis.
i) Chairman‘s statement
Chairman‘s statement highlights corporate activities, strategies,
researches, labour relations, main achievements, focuses on future
goals, growth. In corporate annual report, the chairman‘s statement
may or may not always be found but may be provided to
shareholders as a separate document. Chairman‘s statement may
concentrate on economic condition of the industry to which the corporate unit belongs and the economy of the country. It also
provides an overview of the trading year, a personalized overview of
the company‘s performance over the past year and usually covers
strategy, financial performance and future prospects.
ii) Directors‘ Report
Its principal objective is to supplement the financial information
with other information consider necessary for a full appreciation of
the company‘s 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
iii) Operating and financial review
This is a statement in the annual report which provides a
formalized, 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
iv) Statement of corporate governance
Statement of corporate governance includes a statement of corporate
governance procedures and compliance, information on board
composition, statements on the company's performance, and information
about compliance and conformance with best practices for good
corporate governance. Corporate Governance focuses on a company‘s
structure and processes to ensure transparent and responsible corporate
behaviour. Corporate governance is a dynamic process. Effective
corporate governance not only reduces the agency costs incurred due to
division of ownership but it helps in saving of time and resources of
investors. On one hand, poor corporate governance practices enhance the
agency costs and reduce firm valuation whereas on the other, good
corporate governance facilitates independent supervision of company‘s
management and encourages effective decision making which enhances
firm value, reputation, credit rating, improves overall performance,
lowers cost of capital, improves access to capital markets and increases
competitive edge.
v) Auditor‘s report
The independent and external audit report is typically published with
the company's annual report. The auditor's report is important
because banks and creditors require an audit of a company's
financial statements before lending to them. The auditors shall make
a report to the members of the company. It is the obligatory duty of
the directors to get the accounts of company audited every year by
qualified auditors. An auditor is appointed by the shareholders of a
company to audit accounts and as such, auditor addresses the report
to the shareholders of the company on the accounts audited by him.
It is the duty of the board of directors to attach the auditor‘s report to
the balance sheet so as to provide a copy of auditor‘s report to every
member of company.
vi) Statement of directors‘ responsibilities
It is an important statement in the annual report and is prepared in
accordance with section 135 (5) of the Companies Act, 2013.
vii) Sustainability report
A sustainability report is a report published by a company about the
economic, environmental and social impacts caused by its everyday
activities. A sustainability report is the key platform for
communicating sustainability performance and impacts – whether
positive or negative.
Apart from the broader overview of sustainability, the Sebi (Securities and
Exchange Board of India) has developed new norms, voluntary this year
(2019-20) and mandatory thereafter, which would apply to the top 1,000
listed entities. The Sebi reporting norms on business responsibility follow the
National Guidelines on Responsible Business Conduct, put forth by the
ministry of corporate affairs last year. The norms require that businesses
conduct themselves with integrity and transparency, provide goods and
services in a safe, sustainable manner, and respect the interests of all their
stakeholders, which is unexceptionable.
The new requirements include disclosure on redressal procedures for
complaints/grievances, including on those pending resolution, R&D spends
on better environmental and social outcomes, employee skill levels, including
of those differently abled, and provision for insurance, maternity, paternity
and day-care facilities. But also required now are routine disclosures upfront
of energy consumed to turnover, ditto for water, and, more generally, the percentage of recycled or reused input materials to total raw material usage
(by value) is also to be revealed.
Gender diversity should get more attention in the reporting, and a board
committee, rather than just a board member, should be accountable for ESG
reporting.
Businesses are, of course, accountable to their shareholders. But,
increasingly, consumers, employees and investors also seek sustainability,
social responsibility and good governance in corporate performance.
ESG — short for environment, social and governance — is quite the rage
among large investors. That means that companies must disclose their
governance processes, social practices and environmental impacts. That is
what Sebi wants.
viii) Management Discussion and Analysis
This section is perhaps one of the most important sections in the
whole of Annual Report. The most standard way for any company to
start this section is by talking about the macro trends in the
economy. They discuss the overall economic activity of the country
and the business sentiment across the corporate world. If the
company has high exposure to exports, they even talk about global
economic and business sentiment. Following this, the companies
usually talk about industry trends and what they expect for the year
ahead. This is an important section as we can understand what the
company perceives as threats and opportunities in the industry.
Remember, until this point, the discussion in the Management
Discussion and Analysis is broad-based and generic (global
economy, domestic economy, and industry trends). However, in the
future, the company would discuss various aspects related to its
business. It talks about how the business had performed across
various divisions, how it fares compared to the previous year, etc.
b) Non-narrative items
Within non-narrative items in the annual report are: Financial
highlights, highlights of the year and shareholder information.
i) Financial highlights
Financial highlights include year on year comparison of revenue
from operations, EBITDA (Earnings before Interest, Tax,
Depreciation and Amortization), ROE (Return on Equity) and PAT
(Profit after Tax) for the financial years 2018-19 and 2019-20.
ii) Highlights of the year
It includes other than financial highlights, for instance, launching
new products, brands, opening new showrooms and the like.
2) Financial Statements
There are three financial statements discussed in the annual report,
namely,
a) Balance Sheet,
b) Profit and Loss account and
c) Cash flow
statement
a) 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. Balance
sheet which is also known as position statement provides a bird‘s
eye view on company‘s financial position as well as condition. This
statement indicates whatever company has and whatever company
owes. The excess of assets over liabilities is known as owners
equity/shareholders funds.
b) 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 cost, and
profit or (loss). The profit and loss account which is also known as
Income Statement indicates net profits earned by company during
current financial year. Income statement also indicates profits
available for distribution and appropriation after meeting tax
liabilities. Profit and Loss Appropriation Account or Retained
Earnings Account is also submitted with profit and loss account
which indicates appropriations made during the period.
c) 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
3) 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
Inventories
Sources of turnover from different product segments
Details of fixed assets and share capital
Directors‘ emoluments (how much the Directors earned)
Earnings per share
In this part, we will look at some of the important notes to the accounts
sourcing the same from Titan Company‘s Annual Report 2019-20.
i) Depreciation
Depreciable amount for assets is the cost of an asset, or other
substituted for cost, less its estimated residual value. Depreciation is
calculated on the basis of the estimated useful lives using the
straight line method and is generally recognized in the statement of
consolidated profit and loss. Depreciation for assets purchased / sold
during the year is proportionately charged from/up to the date of
disposal. Free hold land is not depreciated.
ii) Inventories
Inventories [other than quantities of gold for which the price is yet to
be determined with the suppliers (Unfixed gold)] are stated at the
lower of cost and net realizable value determined on an item-by-item
basis. Cost is determined as follows:
a) Gold is valued on first-in-first-out basis.
b) Stores and spares, loose tools and raw materials are valued on a
moving weighted average rate.
c) Work-in-progress and finished goods (other than gold) are
valued on full absorption cost method based on the moving
average cost of production.
d) Traded goods are valued on a moving weighted average rate/
cost of purchases.
iii) Revenue from operations
In this note, sources of revenue from different product segments like
watches, jewellery, eyes wear and others are stated.
iv) Details of fixed assets and share capital
Fixed assets: Land and buildings held for use in the production or
supply of goods or services, or for administrative purposes, are
stated at cost less accumulated depreciation and accumulated
impairment losses. Freehold land is not depreciated. Property, plant
and equipment are carried at cost less accumulated depreciation and
impairment losses, if any. The cost of property, plant and equipment
comprises its purchase price/ acquisition cost, net of any trade
discounts and rebates, any import duties and other taxes (other than those subsequently recoverable from the tax authorities), any
directly attributable expenditure on making the asset ready for its
intended use, other incidental expenses and interest on borrowings
attributable to acquisition of qualifying property, plant and
equipment up to the date the asset is ready for its intended use.
Machine spare parts are recognized in accordance with this Ind AS
(Indian Accounting Standard) when they meet the definition of
property, plant and equipment; otherwise, such items are classified
as inventory. Subsequent expenditure on property, plant and
equipment after its purchase / completion is capitalized only if such
expenditure results in an increase in the future benefits from such
asset beyond its previously assessed standard of performance. The
estimated useful life of the tangible assets and the useful life are
reviewed at the end of the each financial year and the depreciation
period is revised to reflect the changed pattern, if any. An item of
property, plant and equipment is derecognized upon disposal or
when no future economic benefits are expected to arise from
continued use of the asset. Any gain or loss arising on the disposal
or retirement of an item of property, plant and equipment is
determined as the difference between the sales proceeds and the
carrying amount of the asset and is recognized in the statement of
consolidated profit and loss.
v) Directors’ emoluments
The information required under Section 197 of the Act read with
Rule 5(1) of the Companies (Appointment and Remuneration of
Managerial Personnel) Rules, 2014 are given below:
The above snapshot shows the ratio of the remuneration of each director to
the median remuneration of the employees of the company and the
percentage increase in remuneration of each Director, Managing Director,
Chief Financial Officer and Company Secretary in the financial year.
vi) Earnings per share
Basic Earnings Per Share (‗EPS‘) is computed by dividing the net
profit attributable to the equity shareholders by the weighted average
number of equity shares outstanding during the year. Diluted
earnings per share is computed by dividing the net profit by the
weighted average number of equity shares considered for deriving
basic earnings per share and also the weighted average number of
equity shares that could have been issued upon conversion of all
dilutive potential equity shares. Dilutive potential equity shares are
deemed converted as of the beginning of the year, unless issued at a
later date. In computing diluted earnings per share, only potential
equity shares that are dilutive and that either reduces earnings per
share or increases loss per share are included.
4) Accounting policies
Companies must describe the accounting policies they use in
preparing financial statements
Companies have a choice of accounting policies in many areas such
as foreign currencies, goodwill, pensions, sales and stocks
As different accounting policies 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 judgment 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.
