Chapter 11

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Disclosures in Annual Reports

Financial Accounting for Managers Author: Sanjay Dhamija

 Sources of Disclosures

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Companies Act Listing Accounting Voluntary
Agreement Standards Disclosures

 Auditors’  Management  Contingent  Value added

report discussion and liabilities statement
 Directors analysis  Segment  Economic
report  Corporate reporting value added
 Foreign governance  Related party  Human
exchange report disclosure resource
earnings and  Interest in accounting
expenses joint ventures  Brand
 Details valuation
regarding
subsidiary
companies

Financial Accounting for Managers Author: Sanjay Dhamija

 Companies Act Requirements

• Accounts must be maintained on an accrual basis and

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according to double entry bookkeeping system (Section 209).
• The balance sheet, and the profit and loss account must be
prepared for every financial year.
• The financial statements must be laid before the Annual
General Meeting of the shareholders for approval within six
months of the close of the year (Section 210).
• The balance sheet of a company shall be either in horizontal
form or vertical form.
• The balance sheet must show figures for the current year and
comparative figures for the previous year.
• Information required under any head may be given in
separate `Schedule’.
Financial Accounting for Managers Author: Sanjay Dhamija
 Auditor’s Report

• Auditors’ report is made to the shareholders of the company

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• On the account of the company and on every balance sheet,
profit and loss account, and every other document which is to
be a part of or annexed to the balance sheet or profit and loss
account.
• The report shall state that the, in his opinion and to the best of
his information, and according to the explanations given to him
The balance sheet gives a true and fair view of the
company’s affairs as at the end of the financial year.
The profit and loss account gives a true and fair view of the
profit and loss for that financial year.
Accounts gives the information required by the Companies
Act.

Financial Accounting for Managers Author: Sanjay Dhamija

 Qualified Report

• If the auditor is not entirely satisfied about any of the matter

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required to be reported by him.

Financial Accounting for Managers Author: Sanjay Dhamija

Companies (Auditor’s Report) Order
(CARO) Report

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• Specific comments by auditors
• Adequacy of internal control
• Physical verification of fixed assets
• Physical verification of inventories
• Loans and advances to related parties
• Outstanding wealth tax, income tax, sales tax liabilities
• Acceptance of deposits by the companies

Financial Accounting for Managers Author: Sanjay Dhamija

 Directors’ Report

• Directors’ Report (Section 217)

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The state of Company’s affairs.
Amount proposed to be carried to the balance sheet.
Amount recommended as dividend.
Material changes affecting the financial position of the
company since the end of the financial year.
Conservation of energy, technology absorption, foreign
exchange earnings and outgo.
Fullest information and explanation on every reservation,
qualification or adverse remarks in the auditors’ report.
Employees receiving remuneration in excess of the
prescribed sum.

Financial Accounting for Managers Author: Sanjay Dhamija

 Directors’ Report

• Directors’ responsibility statement

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In the preparation of the annual accounts, all applicable
accounting standards had been followed.
Directors have selected accounting policies and applied them
consistently, and made judgements and estimated that are
reasonable and prudent.
Directors have taken proper and sufficient care for
maintenance of adequate accounting records in accordance to
the Companies Act for safeguarding the assets of the company
and for preventing and detecting frauds and other
irregularities.
Directors have prepared the accounts on a going concern
basis.

Financial Accounting for Managers Author: Sanjay Dhamija

 Listing Agreement

• Management discussion and analysis

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Industry structure and developments
Opportunities and threats
Segment–wise or product-wise performance
Outlook
Risks and concerns
Internal control systems and their adequacy
Discussion on financial performance with respect to
operational performance
Material developments in human resources / industrial
relations front, including number of people employed.

Financial Accounting for Managers Author: Sanjay Dhamija

 Foreign Exchange

• Foreign exchange earnings

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Export of goods calculated
Royalty, know-how, professional and consultation fees
Interest and dividend
Other income, indicating the nature thereof.
• Foreign exchange expenses
Import of goods
Royalty, know-how, professional and consultation fees
Interest and dividend.

Financial Accounting for Managers Author: Sanjay Dhamija

 Subsidiary Companies

• The extent of holding company’s interest in the subsidiary

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company.
• The aggregate amount of holding company’s share in the
subsidiary company’s profit or loss which has not been dealt
with the holding company’s accounts.

Financial Accounting for Managers Author: Sanjay Dhamija

 Corporate Governance Report

• A brief statement on company’s philosophy on code of

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governance.
• Board of Directors
• Audit Committee
• Remuneration Committee
• Shareholders Committee
• General Body meetings
• Disclosures.
Materially significant related party transactions
Non-compliance by the company, penalties
• Means of communication
• General shareholder information

Financial Accounting for Managers Author: Sanjay Dhamija

 Contingent Liabilities

• Contingent liability: A possible future obligation which is

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dependent upon a future uncertain event.
• Any possible obligation existing on the date of the balance
sheets as a result of some past events gives rise to a
contingent liability.
• Contingent liability also includes a present obligation where a
reliable estimate of the amount of obligation cannot be made.

Financial Accounting for Managers Author: Sanjay Dhamija

 Segment Reporting (AS-17)

• Reporting financial information about different types of

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products and services that an enterprise produces and the
different geographical areas in which it operates.
• Such information helps users of financial statements to:
Better understand the performance of the enterprise
Better assess the risks and returns of the enterprise
Make more informed judgments about the enterprise as a
whole.
• Total revenue attributable to reportable segments < 75 per
cent of the total enterprise revenue
Identify additional segments

Financial Accounting for Managers Author: Sanjay Dhamija

 Segment Identification

• A business segment or geographical segment should be

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identified as a reportable segment, if:
Segment revenue is 10 per cent or more of the total
revenue
Segment profit or loss is 10 per cent or more of the
combined result of all segments
Segment assets are 10 per cent or more of the total assets
of all segments.

Financial Accounting for Managers Author: Sanjay Dhamija

 Related Party Disclosures (AS 18)

• Related party: Parties are considered to be related, if at any

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time during the reporting period one party has the ability to
control the other party or exercise significant influence over
the other party in making financial and/or operating
decisions.

• Name of the related party and nature of the related party

relationship where control exists.

Financial Accounting for Managers Author: Sanjay Dhamija

 Related Party Disclosures (AS 18)

• If there have been transactions between related parties

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The name of the transacting related party
A description of the relationship between the parties
A description of the nature of transactions
Volume of the transactions either as an amount or as an
appropriate proportion
Any other elements of the related party transactions necessary
for an understanding of the financial statements
The amounts or appropriate proportions of outstanding items
pertaining to related parties at the balance sheet date and
provisions for doubtful debts due from such parties at that
date
Amounts written off or written back in the period in respect of
debts due from or to related parties.

Financial Accounting for Managers Author: Sanjay Dhamija

 Interest in Joint Ventures

• List of all joint ventures and description of interests in

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significant joint ventures.

• In respect of jointly controlled entities, the proportion of

ownership interest, name and country of incorporation or
residence.

• The aggregate amounts of each of the assets, liabilities,

income and expenses related to its interests in the jointly
controlled entities.

Financial Accounting for Managers Author: Sanjay Dhamija

 Value Added Statement

• Stakeholders’ perspective

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• Value added = Value of output – Value of input

• Application of value addition to different stakeholders

Financial Accounting for Managers Author: Sanjay Dhamija

 Economic Value Added

• EVA = Operating profits after Tax – Capital charge

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= NOPAT – (Capital employed x Cost of capital)
= NOPAT – (Capital employed x WACC)
WACC = Kd x D + Ke x E
D+E D+E
Kd = Cost of debt
Ke = Cost of equity
WACC = Weighted Average Cost of Capital

Financial Accounting for Managers Author: Sanjay Dhamija

 Market Value Added

• Difference between the market value of a company and the

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sums invested in it.
• Also called `Management Value Added’
• Relationship between MVA and EVA:
No one-to-one correlation because market value is
impacted by a number of factors.
Over a long-term strong correlation between changes in
MVA and changes in EVA.
MVA can be viewed as the present value of the expected
series of EVA.

Financial Accounting for Managers Author: Sanjay Dhamija

 Human Resource Accounting

• Information about number of employees, age profile,

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revenue, profit or value added per employee, etc.

• Putting a value at the human resources of the company.

• Valuation based upon the present value of the future earning

of the employees.

Financial Accounting for Managers Author: Sanjay Dhamija

 Brand Valuation

• Based upon the ‘excess earning’

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Determine brand profits by eliminating non-brand profits
Restate the historical profits at present-day values
Calculate weighted average profits
Deduct cots of capital
Adjust for taxes
Apply a multiple towards brand strength.

Financial Accounting for Managers Author: Sanjay Dhamija