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1 Disclosure in accounts & Review of accounts preparation Week 5.

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1 1 Disclosure in accounts & Review of accounts preparation Week 5

2 2 Why do we need rules on disclosure? Corporate Governance Conflict between Owners (shareholders) and Managers (directors) The system by which businesses are run. This includes the director's duty to ensure that the business is properly and honestly managed.

3 3 Sources of regulation Companies Act 1985 Stock Exchange Regulations Accounting Standards Audit

4 4 Companies Act 1985 Section 221 Every company shall keep accounting records which are sufficient to show and explain the company's transactions and are such as to (a) disclose with reasonable accuracy, at any time, the financial position of the company at that time, and (b) enable the directors to ensure that any balance sheet and profit and loss account prepared under this Part complies with the requirements of this Act.

5 5 Companies Act 1985 Section 234 The directors of a company shall for each financial year prepare a report (a) containing a fair review of the development of the business of the company and its subsidiary undertakings during the financial year and of their position at the end of it, and (b) stating the amount (if any) which they recommend should be paid as dividend and the amount (if any) which they propose to carry to reserves.

6 6 Directors duty to prepare accounts Section 226 The directors of every company shall prepare for each financial year of the company (a) a balance sheet as at the last day of the year, and (b) a profit and loss account. Those accounts are referred to in this Part as the company's "individual accounts". The balance sheet shall give a true and fair view of the state of affairs of the company as at the end of the financial year; and the profit and loss account shall give a true and fair view of the profit or loss of the company for the financial year. A company's individual accounts shall comply with the provisions of Schedule 4 as to the form and content of the balance sheet and profit and loss account and additional information to be provided by way of notes to the accounts

7 7 Chairmans statement Contents Results Summary of companys results Dividend Interim and final dividends Prospects Assessment of financial outlook Employees Details concerning companys interactions with employees and generally including Boards thanks Directors Notes about changes in directors and thanks to outgoing directors

8 8 Tesco 2003 DELIVERING OUR STRATEGY Following a strong performance last year, the Tesco Group has delivered another year of outstanding results. For the full year, Group sales have risen by 11.5% to £28.6bn. Underlying pre-tax profit is £1.4bn up 14.7% and underlying diluted earnings per share is 13.98p up 15.2%. DIVIDEND The Board propose a final dividend of 4.33p. This, together with the interim dividend of 1.87p, gives a total dividend of 6.20p, up 10.7% on last year. Dividend cover increases from 2.17 to 2.25 times. PERFORMANCE Our customer focused strategy for long-term growth has already increased sales by 61% and underlying pre-tax profit by 68% over the last five years. We first set out our strategy six years ago. All four elements of the strategy have contributed to outstanding growth, a strong UK core, non-food, retailing services and international. Our strategy for growth is underpinned by the Tesco core purpose and values. This year we have reported excellent UK figures with sales up 7.9% and underlying operating profit up 6.9%. Our non-food market share has increased to 5%. We have delivered our international targets that we set out in 1999 for 2002/03. We achieved underlying operating profit of £141m and cash return on investment of 9.7%. Profit has grown significantly in retailing services. Pre-tax, post minority interest, Tesco Personal Finance achieved profit of £96m and grew profit from £0.4m last year to £12m this year. Our people are key to delivering for our customers. Without their efforts we would not have delivered such strong results. I would like to thank everyone in the Tesco Group for their contribution. We now employ 296,000 people worldwide, of whom 75,000 are overseas. We will create a further 20,000 new jobs worldwide in the coming year. BOARD CHANGES David Reid will be taking over as Non-executive Chairman in March We are also appointing Rodney Chase as Deputy Chairman and senior Non- executive Director at the same time. David has been at the heart of the business for many years and continuity will be valuable at a challenging time for the industry.

9 9 Honesty Due to the provisions of section 234 and the need to provide a FAIR review Directors must be transparent about prospects Even if it is apologetic See African Gold plc attached

10 10 Operating and Financial Review (OFR) Cadbury Report on Corporate Governance 1991 Suggested review of operations be included in annual report Not currently mandatory But The Government is currently considering responses to its July 2002 White Paper Modernising Company Law This proposes that, in due course, the publication of an OFR should be mandatory for large companies

11 11 OFR Contents Operating Review Review of business environment Prospects Expansion Returns Financial Review Capital Taxation Cash flows Liquidity Ability to remain a going concern

12 12 London Stock Exchange requirements for listed companies Listing on LSE requires additional reporting Interim Reports Disclosure of Price Sensitive Information

13 13 Audit Report Companies Act obligations Section 235 A company's auditors shall make a report to the company's members on all annual accounts of the company of which copies are to be laid before the company in general meeting during their tenure of office

14 14 Audit Report Companies Act obligations The auditors' report shall state whether in the auditors' opinion the annual accounts have been properly prepared in accordance with this Act, and in particular whether a true and fair view is given (a) in the case of an individual balance sheet, of the state of affairs of the company as at the end of the financial year, (b) in the case of an individual profit and loss account, of the profit or loss of the company for the financial year, (c) in the case of group accounts, of the state of affairs as at the end of the financial year, and the profit or loss for the financial year, of the undertakings included in the consolidation as a whole, so far as concerns members of the company. The auditors shall consider whether the information given in the directors' report for the financial year for which the annual accounts are prepared is consistent with those accounts; and if they are of opinion that it is not they shall state that fact in their report.

15 15 Extract from Audit Report Majestic Wine plc We report to you our opinion as to whether the financial statements give a true and fair view and are properly prepared in accordance with the Companies Act We also report to you if, in our opinion, the Directors' Report is not consistent with the financial statements, if the Company has not kept proper accounting records, if we have not received all the information and explanations we require for our audit, or if information specified by law regarding Directors' remuneration and transactions with the Group is not disclosed. We read other information contained in the Annual Report and consider whether it is consistent with the audited financial statements. This other information comprises the Directors' Report, Chairman's Statement and Review of Operations. We consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the financial statements. Our responsibilities do not extend to any other information.

16 16 Extract from Audit Report Majestic Wine plc In our opinion the financial statements give a true and fair view of the state of affairs of the Company and of the Group as at 31 March 2003 and of the profit of the Group for the year then ended and have been properly prepared in accordance with the Companies Act Ernst & Young LLP Registered Auditor Luton 16 June 2003

17 17 Environmental Reporting Companies have a responsibility for the damage that they (may) cause to the environment The (potential) effects depend on the type of company Companies should deal with this in the accounts In the annual report

18 18 Why? Whether for moral, economic, legal or pragmatic reasons, every organisation is having to make an increasingly explicit assessment of its environmental and social impact and to attempt to re- position itself as the terms of the social contract between business and society come under increasing scrutiny

19 19 Should accounts & reports deal with these issues? Pragmatic – accounting Provision for the costs of remedying past contamination should be recognised when an entity is legally or constructively obliged to rectify the damage Abandonment costs - full provision for the total costs should be made when the environmental damage is inflicted.

20 20 Should accounts & reports deal with these issues? Moral Responsibility There is no FRS that deals with Environmental Reports Individual accounting bodies and environmental groups have provided guidance Environmental Report can appear In annual report or As distinct report circulated with annual report

21 21 Suggested Contents CEO statement Organisational profile Key environmental impacts Environmental policy statements Management system and procedures Performance and compliance Targets and achievements Independent verification statement

22 22 Objective should be… The provision of information about the environmental impact and operational performance of an entity that is useful to relevant stakeholders in assessing their relationship with the reporting entity It should be transparent information on the companys policies and successes Which means….

23 23 Concern for the planet… (or profits?) Benefits from this greater transparency may include: an increase in the number of customers who consider, respect or share the same values being placed on preferred suppliers lists of companies that consider environmental responsibility upstream to their own operations stronger relationships with stakeholders by involving them in the reporting process and general public approval, thus lowering reputational risk. ACCA Singapore advice publication

24 24 Examples – the pathetic.. African Gold plc No policy Firestone Diamonds plc A detailed environmental management programme report covering rehabilitation of both historical and planned mining operations has been completed and submitted to the Department of Minerals & Energy for approval. Why? RSA legislation.

25 25 Examples – and the top notch EMI The Body Shop

26 26 Crawling on the bandwagon? Yearly percentage of companies producing a corporate environmental report % % % %

27 27 The Audit Problem Auditors have no guidelines on auditing the Environmental Report Social Audit Ltd – hidden agenda Role Conflict – auditors as employees of shareholders/stewardship of funds Do we need audit guidelines? Do we need environmental reports? Should they be highlighted as simply public relations?

28 28 Accounts Preparation Worked Example Westbury Ltd

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