CPA AFR: DIRECTOR’S REPORT

C.P.A PART III-SECTION SIX

ADVANCED FINANCIAL REPORTING

DIRECTOR’S REPORT

A Directors Report has remained relevant despite the emergence of new reporting tools such as the Operating and Financial Review. The quoted companies are required to include an Operating and Financial Review in their annual accounts. The Operating and Financial Review or the Management’s Discussion and Analysis of Results of Operations and Financial Condition, as it is popularly known, provides a better picture of a company. The Operating and Financial Review discusses and analyzes a company’s performance. Yet a Directors Report remains unique because it is a direct communication from the directors to the shareholders.

Companies are legally obliged to include a Directors Report in their annual accounts. Companies House requires companies to include a Directors Report in their annual accounts. Other documents that companies need to file with Companies House include a profit and loss account, a balance sheet, an auditors’ report, notes to the accounts and group accounts if any. A directors report will give you information on all the directors of a specific company. This information can be used to judge the direction that a company may take in the future in relation to the other companies that the directors hold directorships at.

What should be included in a Directors Report?

Companies House, however, does not specify the content of the Directors Report. It directs companies to follow the directives of the Companies Act 1984. A Directors Report is mandatory according to the Companies Act 1985. The Act specifies the content that should be included in a Directors Report.

Contents of the directors’ report

  1. Directors Reports should provide a review of the company’s business.
  2. The Directors Report should disclose the dividend that the directors are recommending and the amount which they wish to carry to the reserves.
  3. The directors report should also highlight any changes to the board of directors.
  4. Other issues that should be included in a Directors Report are details of :
    1. Subsidiary undertakings,
    2. Directors’ interests,
    3. Details of annual general meeting,
    4. Statement of responsibilities and
    5. The details of the directors’ remuneration report.
  5. The principal activities of the company

With corporate governance becoming a critical issue worldwide, a section on corporate governance has become a fixture in the Directors Report. This section reveals the extent to which a company is complying with provisions of the revised Combined Code on corporate governance. Corporations are also including information relating to the composition of their board in the Directors Report. The number of independent directors on the board has become important after the recent raft of accounting scandals.

Difference between directors report and operating/financial  review

Although a Directors Report resembles an Operating and Financial Review in many respects, there are certain areas where it differs. The Directors Report contains additional information such as

  • Dividend recommendation,
  • Details of the directors’
  • Remuneration report,
  • The names of the persons who, at any time during the financial year, were directors of the company;
  • The principal activities of the company in the course of the year;
  • The Operating and Financial Review, by contrast, focuses on the operational and financial performance of a company.

In the past few years, the front-end of the annual report has become heavy with several messages from the senior management. In addition to the chairman’s message, most annual reports contain a letter from the chief executive, business review and more recently, the Operating and Financial Review. The Directors Report, as a result, has been pushed to the middle of the annual report, closer to the financial statements and the auditor report.

With annual reports of most companies comprising several reports from the senior management in addition to directors information repetition of facts has become endemic. While the Directors Report continues to remain unique due to the nature of its communication, the introduction of an Operating and Financial Review may necessitate a rationalization of the messages from the senior management.

Key performance indicators

Management uses a range of performance measures to monitor and manage the business. Certain of theseare particularly important in the generation of shareholder value and are considered key performance indicators are as follows:

  • The cash resources of the Group
  • The level of sales and repeat sales
  • The timeliness and efficiency of the research and development team
  • Manpower levels and their effectiveness

Risks and uncertainties

Risks and uncertainties are inherent in all businesses and our group is no exception. Risk management is seen as an important element of internal control and is used to mitigate the Group’s exposure to such risks.

Number of meeting of Board of Directors

It is important information demanded by the Government, previously unlisted company need not to require make any information regarding it, but under the Companies Act, 2013 it is favorable, and it is mandatory for companies to put information about the Board Meeting. In that case, an unlisted company cannot play with the dates of meetings at least.

Directors Responsibility Statement

The Directors’ Responsibility Statement referred to in clause (c) of sub-section (3) shall state that—

(a) In the preparation of the annual accounts, the applicable accounting standards had been followed along with proper explanation relating to material departures;

(b) the directors had selected such accounting policies and applied them consistently and made judgments and estimates that are reasonable and prudent so as to give a true and fair view of the state of affairs of the company at the end of the financial year and of the profit and loss of the company for that period;

(c) The directors had taken proper and sufficient care for the maintenance of adequate accounting records in accordance with the provisions of this Act for safeguarding the assets of the company and for preventing and detecting fraud and other irregularities;

(d) The directors had prepared the annual accounts on a going concern basis; and

(e) The directors, in the case of a listed company, had laid down internal financial controls to be followed by the company and that such internal financial controls are adequate and were operating effectively.

Explanation.—For the purposes of this clause, the term “internal financial controls” means the policies and procedures adopted by the company for ensuring the orderly and efficient conduct of its business, including adherence to company’s policies, the safeguarding of its assets, the prevention and detection of frauds and errors, the accuracy and completeness of the accounting records, and the timely preparation of reliable financial information;

(f) the directors had devised proper systems to ensure compliance with the provisions of all applicable laws and that such systems were adequate and operating effectively.

 Risk Management

In its Directors Report, a statement must be enclosed which shows the development and implementation of risk management policy of the company.  Under new Act, there is no meaning and definition of Risk Management. Hence, the statement which is enclosed the director report, may include the following elements: – (the following points are just opinion)

  1. Introduction
  2. Meaning and definitions Risk Management
  3. Types of Risks
  4. Risk Management
  5. Risk Assessment
  6. Risk Identification Activities
  7. Risk Handling
  8. Monitoring and Reporting
  9. Conclusion

 CSR

The director report shall be contained the policy, development and implementation of CSR project. What initiations have been taken by the Company? It shall also be disclosed in the Director Report.

Signature

The Directors Report and its annexure shall be signed by the Chairperson of the Company where he is authorized by the Board.

In case of no authorization, Two Directors, one of whom shall be a managing director or by the Director where there is one director only@sporta

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