Strategic Report
Purpose and principles
(a) To provide insight into the entitys business model and its main strategy and objectives
(the business model is defined as the basis on which the company generates or preserves
value over the longer term)
(b) To describe the principal risks, the entity faces and how they might affect its future
prospects
(c) To provide an analysis of the entitys past performance
(d) Should be fair, balanced and understandable
(e) Should address the positive and negative aspects of the development, performance,
position and future prospects of the entity openly and without bias
(f) Directors should seek to ensure that shareholders are not misled as a result of the
presentation of, or emphasis given to, information in the strategic report or by the
omission of material information from it.
Strategic report content
The key contents of the strategic report are as follows:
(a) Strategic management: how the entity intends to generate and preserve value:
Strategy and objectives
Business model
(b) Business environment: the internal and external environment in which the entity
operates:
Trends and factors
Principal risks and uncertainties
Environmental, employee, social, community and human rights matters
Financial Accounting
(c) Business performance: how the entity has developed and performed and its position at
the year end:
Analysis of performance and position
Key performance indicators (KPIs)
Employee gender diversity
KPIs are quantified measures of factors that help measure the performance of the business
effectively. They reflect success factors.
Examples:
Return on capital employed (see Chapter 13)
Market share the revenue of the entity as a percentage of the industry total (e.g. a market
leader demonstrating a dominant position)
Average revenue per customer (e.g. in a pay-per-view television service)
Highlights statement
Turnover
Profits
Earnings per share
Return on capital employed
Historical summaries and trend analysis
Five-year summaries frequently provided.
Trends, for example, percentage changes, may give indication of expectations.
Financial Accounting
Main categories are:
matters of a general nature including political donations and expenditure,
the acquisition by a company of its own shares or a charge on them,
the employment, training and advancement of disabled persons,
Users needs for information
(a) A better understanding of the entitys past performance and a better assessment of its future
prospects
(b) An awareness of changes in significant components of a business as a whole
Information provided in the financial statements
Parent company
In the annual report, there is a column or a page for the statement of financial position (balance
sheet) of the parent company. This is relatively uninformative and not used for ratio analysis.
Group
One statement of financial position (balance sheet) represents assets and liabilities of all the
companies of the group.
Income statement (profit and loss account) for the group as a whole
Benefit of bringing together a large amount of information in a financial statement for the total
Financial Accounting
Remove an asset and liability from the statement of financial position (balance sheet). This
reduces gearing (reduces appearance of financial risk). But have the benefits and risks also
gone?
Sale and leaseback of property
Special purpose entities
Companies integrate social and environmental concerns with their business operations and their
interactions with stakeholders.
Disclosures may be:
environmental report,
Provides guidelines on good practice in CSR reporting. Recommendations include reporting on
the following:
Vision and strategy
Profile of the organisation
Governance structure
Management system
Performance indicators
Triple bottom line equals economic, environmental and social performance.
An agreement on carbon emissions. Creates assets and liabilities based on the right to make
emissions (up to a limit) and penalties for making emissions over that limit.
Financial Accounting
The way in which directors manage a company is termed corporate governance.
Combined Code of corporate governance guidance set by the Financial Reporting Council;
Comply or explain in the annual report.
Directors remuneration
True and fair view
Required by law and by European regulation
Present fairly/fair presentation
Wording used in other countries. Some say present fairly in accordance with generally accepted
accounting principles.
Historical cost has limitations, only relevant at the date of acquisition.
Subsequently remeasure which value to choose?
Entry price (cost of buying in)
Financial Accounting
Value to the business could be:
selling price;