UK Annual Reports and Accounts - Assignment Example

 UK Annual Reports and Accounts Introduction Annual corporate reporting pattern in the United States of America and in United Kingdom is largely different due to different statutory requirements and different GAAP regulating the accounting. This write up has undertaken a study of comparative annual corporate financial reporting pattern between two contrasting countries. For this purpose the published annual reports of one company from each of the countries is selected, namely Wal- Mart Stores Inc.1 from US and Tesco Plc2 from UK. A comparison of annual reporting pattern of each of the companies has been undertaken with regard to their institutional, legal, regulatory, and cultural background. Both companies are in the same industry called Super-market distribution. The companies are almost of same size but represent contrasting regulatory and cultural conditions. Contents Introduction Contents Categories of reporting in Annual Reports Chief Executive’s statement Report of directors and Directors’ Remuneration Report Financial Statements and Report of Independent Auditors Conclusion References Categories of reporting in Annual Reports: Categories of reporting and providing information in the annual reports of companies in each of the countries are both conventional as well those making compliances of legal and regulatory requirements. Annual report of Tesco plc, a UK company, provides information under the categories of Chief Executive’s Statement, Report of the directors that contains business review, general information, and report on corporate governance, Directors’ Remuneration Report, and Financial Statements that include a statement of directors’ responsibility, independent auditor’s report, group financial statements including notes thereto, parent company’s financial statements and independent auditor’s report on that. Annual Report is required to be filed along with accounts with Registrar of companies, and also published, circulated, and made available on websites of the company in accordance with the provisions of the Companies Act, 2006. On the other hand the information in the annual report of Wal- Mart Stores Inc., a US company, is provided under the categories of Statement of Chief Executive or President of the company, Report of Chairman of board of directors that includes financial review and summary, management discussion and analysis (MDA) of financial conditions and results of operations, Consolidated Financial Statements and notes thereto that include report of independent registered public accounting firm, report of independent registered public accounting firm on Internal Control over financial reporting, and Management Report to shareholders. ‘As the name implies a company’s annual report summarizes activities during the past year. While certain information is required by the U.S. Security and Exchange Commission, a portion of annual report gives company executives a chance to put their own spin on financial results and operational activities.’(Chris Roush, page 103)3 It may be noted that US companies have to file an annual report in Form10K with Security and Exchange Commission (SEC). Form 10- K is required to be filed with in 60 days of the end of the fiscal year. Form 10-K is required to be filed by every listed company, and company having more than 500 shareholders or one million or more of gross assets.10- K return and published annual report are almost similar documents. Published annual report like Form 10- K contains previous year information except that annual report provides certain sticky financial details. ‘Annual reports are more informal and are frequently used by a company to enhance its image with customers, investors, and industry peers.’(Jack W. Plunkett)4 Chief Executive’s Statement There is no legal requirement of a Chief executive’s statement in an annual report. This statement is more of conventional in nature in the annual reports of companies of both the countries. Therefore it is not necessary for annual reports to have a chief executive’s statement either. Normally an annual return starts with chairman or chief executive’s statement. In a way chairman’s report sets the tone of annual report. It is seen that chairman’s report is normally short, brief and straight forward, and to the point. ‘As a general rule we expect the chairman’s statement to be cautiously optimistic. The chairman has to bear in mind the impact of statement on shareholders and potential investors and therefore while stressing the good performance of the company during the past year, he/ she has to be careful not to overstate the prospects for the future.’(John Laidler and P.J. Donaghy, page 20)5 In an annual report the main stress has always been on financial achievements. President and CEO’s report in the Wal-Mart annual report for 2008 contained among other information the financial highlights of company’s achievements in a graph providing a comparative study over the years. On the other hand Tesco Chief Executive’s report provided a range of information from financial achievements to responsibility towards stakeholders, to changing market conditions, and to the target of reduction of number of carrier bags to customers. Report of directors and Directors’ Remuneration Report As per sec 416, 417, and 418 of CA 2006 directors’ report of a UK company has to contain following information: Names of persons who were directors at any time during the financial year; principal activities of the company; dividend recommendations of the directors; a fair review of the business and principal risks and uncertainties facing the company; in case of quoted company a) the main trends and factors affecting future development, performance, and position of the company, b) information about environmental matters, c) information about company employees, d) information about social and community issues, and e)information about contractual and other arrangements essential for the business of the company; key performance indicators; and the statement of the awareness of each director about relevant audit information. Tesco has divided the information under directors’ report category in its 2008 annual report into three parts, namely business review, general information, and corporate governance. In these parts the directors’ report not only contains the information required under companies act, 2006 but also additional information. The ‘Corporate Governance’ section of directors’ report fully comply with requirements Combined Code Principles of Corporate Governance and the Code of Best Practices, as it contains a report on all sub committees of the board like Remuneration committee, Audit committee etc. , and also an evaluation of risk management and internal controls among other features. Directors’ Report in annual reports issued by US companies is guided by the required contents of Form 10- K issued by SEC. In comparison with directors’ report of UK companies, SEC requires the US companies to provide Management’s Discussion and Analysis of financial conditions and results of operations; selected financial data; and quantitative and qualitative disclosures about market risks. In this regard, Wal- Mart 2008 annual report contains the information on fiscal high lights along with strategic high lights of Wal Mart; information about members of board of directors; financial review containing 11 years financial summary; and Management’s Discussion and Analysis (M D & A) of financial conditions and results of operations. M D & A is an elaborate report containing not only information on market risks but also a summary of critical accounting policies besides the review of financial conditions and results of operations. Section 420 of UK Companies Act 2006 seeks directors’ remuneration report from every quoted company for each financial year. Tesco annual repot 2008 duly contains such detailed directors’ remuneration report. On the other hand there is no such requirement for quoted companies in US to provide directors’ remuneration report in the annual report. Wal- Mart 2008 annual report does not contain any such separate directors’ remuneration report. Financial Statements and Report of Independent Auditors This is a very crucial and important segment of any annual report. Instructions issued by SEC of US in respect of filing form 10- K contain that every company has to furnish the following data and information with regard to financial statements: Financial statements and supplementary data of the company; Consolidated financial statements and supplementary data of the registrant and its subsidiaries; Exhibits and financial statement schedules; Separate financial statements of subsidiaries not consolidated and of fifty persons or less owned persons; and Separate financial statements of affiliates whose securities are pledged as collateral. Annual reports of US companies have to provide the following special information as per the provisions of Sarbanes and Oxley Act, 2002 in respect of financial statements and internal controls: ‘a) Section 302 requires the CEO and Chief financial officers to certify that the financial statements accurately and fairly represent the financial conditions and operations of the company. b) Section 409 requires rapid disclosure of material changes in the financial conditions of the firm. c) Section 404 requires that each annual report contain an internal control report. This report states the responsibility of management for establishing and implementing adequate procedures for financial reporting. This report must include: assessment of effectiveness of internal control structure and procedures, any code of ethics and contents of that code. ‘(Brief Summary of Sox Act)6 Also the “management must report annually on the effectiveness of the company’s internal control over financial reporting; and in conjunction with the audit of company’s financial statements, the company’s independent auditor must issue a report on internal control over financial reporting, which includes both an opinion on management assessment and an opinion on the effectiveness of the company’s internal control over financial reporting.”(Jae K Shim and Joel G Siegel, page 10)7 Wal- Mart has duly complied with above legal requirements of Sox Act and regulations prescribed by SEC in its annual report for 2008. Management of Wal- Mart in its report on page 50 of 2008 annual report has certified the accuracy of financial statements as required under sec 309 of Sox Act. The 2008 annual report also contains a report on internal controls over financial reporting. Similarly Independent Registered Public Accounting Firm’s report at page 40 of the 2008 annual report includes compliance statement in respect of effectiveness of internal controls over financial reporting as stated in proceeding paragraph. Annual report of Wal- Mart includes financial statements prepared following US GAAP as prescribed in the standards issued by Financial Accounting Standard Board (FASB). Note 13 to consolidated financial statements contain description about recently pronounced SFASs that became applicable during the course of financial period under consideration and applied by Wal- Mart in preparing financial statements. Financial statements of UK listed companies are regulated by IFRSs (earlier known as IASs) issued by IASB besides the FRSs issued by UK Accounting Standard Board (ASB). Also companies have prepared consolidated group accounts for the first time in respect of financial year ending in 2008 using IFRS instead of UK GAAP. UK companies preparing accounts following International accounting standards (IFRSs) have to notify that in the notes to the accounts as per provisions of CA 2006. 2008 annual report of Tesco Plc includes group financial statements required under CA 2006 and prepared as per IFRSs along with Independent auditor’s report and Statement of directors’ responsibilities. Note 1 to group financial statements describes in details that the accounts of the company have been prepared following IFRS. It also includes Tesco Plc.- parent company’s financial statements along with Independent auditor’s report to the members of the company. Note 1 to accounts states that financial statements have been prepared using UK GAAP and applicable provisions of CAs 1985 and 2006. Conclusion Legal requirements and GAAP regulations for information to be included in the annual reports of US companies are different from those applicable to the annual reports of UK companies. Annual reports of Wal- Mart Stores Inc and Tesco Plc provide very aptly a comparative application and display of these legalities and regulations. However certain customary requirements like the statement of Chief Executive Officer or the President of the company are similar in both the countries. Whatever may be the regulations and legalities, the basic aim of published annual reports remain the same in each of the countries and that is to impress stakeholders and attract future investors. References Read More