As an owner of a company the directors act on your behalf. They are usually voted in at the Annual General Meeting and must provide a financial update to you each year. This is known as the Annual Report.
It is easy to be daunted by the size of this document. Remember it is not produced for your benefit only, but for other involved parties such as bankers, lenders, the ASX, ASIC maybe APRA, each of whom want it to present certain information relevant to them. There are also the corporate regulations to consider. Many companies are now registered globally, and these other jurisdictions require their own information. This is what increases the size of a report.
Let’s start at the other end of the process – you. What do you want to know about the company? What parts of the financial statements give you, an owner, reassurance or otherwise regarding your investment?
Suggested Checklist to focus on
- Chairman’s statement – this is the helicopter view of the year ended and the prospects and outlook for those ahead. It tends to put the business in context with the economy, markets and regulations.
- The CEO’s report drops this down a notch and tends to reflect and expand upon on specific aspects of the company, both good and bad, and makes some comments about the future.
- At this point stop and think about what these two summaries have said – do they make sense to you? Are you left feeling that there is too much optimism or pessimism?
- The auditor’s report will tell you if your company got a clean audit or if there are unresolved issues within the company and its accounting practices.
- Governance reporting explains some of the measures that directors see as important when overseeing the business. These are the rules they are applying and delegating to management. Some are associated with process, some with trading, some with ethical and some with social responsibilities. If these values line up with yours then, even if the bottom line isn’t attractive, they are running the business the way you want them to.
- Director details focus on each director’s attendance at board and associated meetings, as well as their remuneration. Who appears less than diligent? Are they worth the money you are paying them? Do you want them to continue representing you when they come up for re-election?
- Financial statements are just numbers. They only make sense when compared against measures such as ratios and the year-on-year performance. There are some regulators working for you. The ATO will be using standards to identify if certain expenses are not within industry average. Subscribing to ratio and comparative research could be money well spent because they give you a feel for the strength of the management’s skills and ability to deliver.
When reading an Annual Report, know what information you are looking for and focus on it. This will help you not be overawed by the sheer volume of the data presented in this document.