topic 25 published financial statements

• Reasons why firms publish their financial statements:

  • statutory - public limited companies are required by law to publish their financial statements, company law exists to protect the interests of shareholders and other parties due to the divorce of ownership and control
  • information - users of financial statements can use the financial statements to assess the performance of the company to allow them to make decisions
  • publicity - published statements can be a marketing tool, the statements are attractively presented and can be used to advertise products and present good public relations
• Advantages of published financial statements:

  • provide audited figures from the company's accounting records
  • profitability, liquidity and gearing can be assessed
  • may be the only reliable source of information
  • companies must disclose their accounting policies
• Disadvantages of published financial statements:

  • historical - not a good predictor for the future
  • may be window dressed - this means presenting the company in its best light which might not reflect the real trading position
  • total figures - do not give a breakdown of individual products/departments
  • monetary measurement - ignores non-financial aspects
  • no info on markets/external factors
  • only two years for comparison - insufficient to calculate any trends
• Regulatory framework:

  • the directors of a limited company manage the company on behalf of the shareholders fulfilling their stewardship role
  • shareholders need to be confident that the financial statements present a true and fair picture of the profitability, liquidity and solvency of the company
  • framework consists of: companies act 1985, accounting standards and regulations by the stock exchange
• The companies act 1985 - as amended by the companies act 1989 ensures that directors report annually to the shareholders on the way that they have run the company for the owners (the shareholders)
• Accounting standards (how items or transactions are to be treated in the financial statements):

  • understandable - by different interested stakeholders
  • relevant - to help with business decisions
  • reliable/correct - by not containing errors or bias or fraud
  • consistent and comparable
  • complete - contain all the main documents within a set of financial statements
  • fairly presented - to show a fair and true view
  • support the auditor's report
  • support compliance with the companies acts 1985/1989
• The UK accounting standards board was established to reduce the scope for inconsistency, fraud and misrepresentation
• IFRS (international financial reporting standards) - to ensure that all parts of the business in different countries apply the same rules
• IAS I requires that certain accounting standards are applied in the preparation of financial statements:

  • going concern
  • accruals
  • consistency
  • materiality
  • prudence
  • business entity
  • money measurement
  • historical cost
  • duality
• IAS I requires that:

  • financial statements are clearly shown separately from other information shown in the corporate report
  • the name of the company is shown
  • the period covered by the financial statements is shown
  • the currency used
• Dividends - only dividends that have actually been paid are to be recorded in the financial statements
• Director's report contains details of:

  • the principal activities of the company
  • a review of company's activities
  • likely developments
  • names
  • proposed dividends
  • significant differences between the market value and book value of land and buildings
  • political and charitable contributions
  • actions taken on employee involvement and consultation
  • company policies on: employment of the disabled, health and safety and payment of suppliers
• Auditor's report has three main sections:

  • the respective responsibilities of directors and auditors
  • the basis of audit opinion
  • the opinion
• Other written statements:

  • chairman's statement - this provides an overview of the company's performance over the year, try to present a positive view of the company in order to retain shareholder interest
  • social audit - where the company informs shareholders and other stakeholders of its activities which support the wider community
  • environmental audit - where the company informs stakeholders about its strategies to protect the environment and its 'green' policies