The importance of annual reports for the stewards and its shareholders

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Harmonizing to Derek Gallic 1985 Stewardship is ‘The responsibilities and duties of a individual who manages something on behalf of other individuals ‘ [ Derek French, 1985 ] The UK Stewardship codification was published in 2010, harmonizing to the Financial Reporting Council the Stewardship Code aims to heighten the quality of battle between institutional investors and companies. However earlier this twelvemonth the Financial Reporting Council have published a study implying farther recommendations on the stewardship map, the FRC encourages in its 2010/11 study the manager ‘s exclusive duty to guarantee that an one-year study provides a true and balanced study on their stewardship concern hence being more crystalline in its communicating with its stockholders. Lennard besides sums up the features of the stewardship map as “ aˆ¦being about information that provides a foundation duologue between direction and investors ” [ Lennard 2006 ] . The duologue described is no other than the company ‘s one-year study.

Annual studies are the most thorough and elaborate communicating method between the stewards and its stockholders. It provides an penetration into the fiscal position of a company by including fiscal statements such as statement of fiscal place, statement of comprehensive income etc. It would besides include concern ventures, information on board of managers including their involvements in respects to the hereafter of the company etc. Companies Act 2006 demands province that the company must give a true and just position and to do it available to every stockholder. Furthermore the steward must guarantee fiscal statements are in conformity with accounting criterions every bit good as carry oning an audit.

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The cardinal recommendation set out by the FRC in its latest published study recommend that managers take full duty of guaranting the one-year study provides a ‘fair and balanced study ‘ on their stewardship of the concern. This would let stockholders to acquire a non biased reappraisal of the company ‘s public presentation giving the study greater weight, farther lucidity and greater dependability for stockholders every bit good as possible investors. A cardinal map of the steward is to be crystalline in delineated information to stockholders.

“ International fiscal describing criterion ” describes the intent of fiscal statements as “ a construction representation of the fiscal place and fiscal public presentation of an entity ” [ Alfredson et al. , 2009, p 651 ] . International Accounting Standard 1 requires that a complete set of fiscal statement must include a statement of fiscal place, a statement of comprehensive income, a statement of alterations in equity and a statement of hard currency flows all of which are included in the Annual study for the stockholders.

The statement of fiscal place summarises the administrations fiscal place, every bit good as an administrations assets, liabilities and equity. It is widely known as the balance sheet and analyses the company ‘s liquidness, solvency and fiscal flexibleness. Common unfavorable judgment made by stockholders is that the measuring of certain assets at historical cost or depreciated historical cost instead than current value is non accurate and can be made misdirecting in the fiscal statements by stewards [ Alfredson et al. , 2009, p 670 ] .

The statement of comprehensive income portrays the fiscal public presentation of an organisation. It analyses the “ rating accommodations impacting net assets during the period. Net income or loss is the most common step of an entities public presentation. ” [ Alfredson et al. , 2009, p 679 ] . Dividend is paid depending on net income or loss therefore being of high importance to stockholders. Statement of alterations in equity entails new portions issues, the payment of dividends and the consequence of any accommodations at the beginning of the period which form the constituents of equity. Stewards require being dependable when stand foring this to stockholders as it would imply how much they will be acquiring as dividends.

IAS7 states that the statement of hard currency flow is to present information about the historical alterations in hard currency and hard currency equivalents of an organisation during a period of clip. The statement of hard currency flow is of import to the steward and every bit to the stockholders as it would let them both to analyze and analyse the motion of money, this could be important for stewards when cut downing costs.

IAS 8, paragraph 5, define accounting policies as ‘the specific rule, bases, conventions, regulations and patterns applied by an entity in fixing and showing fiscal statements ‘ IAS1 ensures that the company policies are stated clearly and applied systematically throughout the statements. Accounting policies play a major function in the portraiture of fiscal accounting as stewards can utilize it to pull strings information if non applied systematically and in conformity with accounting criterions.

The traveling concern policy is outlined in IAS 1 which required direction to do an appraisal of the company ‘s ability to go on as a traveling concern unless the direction intends to neutralize the company. Furthermore if a steward of the concern has important uncertainty upon the entity ‘s ability to go on as a traveling concern it must be disclosed under IAS 1. IAS 1 besides required fiscal statements excepting the hard currency flow to be prepared utilizing the accrual footing of accounting. The model describes this as “ type of information about past minutess and other events that is most utile to users in doing economic determinations ” [ Framework.22 ] hence leting stockholders to acknowledge assets, Liabilitiess, equity and disbursals. Both the UK organic structure and International Standard lineation that Segmental describing requires information should be disclosed by the type of concern it is and its geographical section harmonizing to IAS 14. Disclosure notes allows stockholders every bit good as possible investors information in respects to the accounting schemes used in the compilation of the fiscal statements.

Other policies consist of Consistency, Materiality, collection and beginning. Additionally there are stock list, costing, depreciation and many more policies for stewards to follow.

Enron is a company known for one of the biggest dirts that led to the bankruptcy of one of the biggest scrutinizing companies in the universe Arthur Anderson. Enron is a premier illustration of a steward in this instance Keneth Lay non transporting out his responsibility towards its stockholders. Enron ‘s fiscal statements were really ill-defined about its fundss to its stockholders. Furthermore they used the market-to-market policy, this meant that when long term contracts were signed income was estimated at the present value of net hereafter hard currency flows [ Healey, 2003 ] . This method in contracts is unsafe as the judgements made on possible gross are inaccurate, as can be seen in the instance of Enron and Blockbuster. In another illustration, Enron entered into a $ 1.3 billion, 15-year contract to provide electricity to the Indianapolis Company Eli Lilly. Enron was able to demo the present value of the contract as grosss ab initio and subsequently had to describe the present value of the costs which resulted in a loss. [ Healey, 2003 ] . These are merely some of the jobs taking to the ruin of Enron and therefore foregrounding the importance of regulative model.

In the early old ages at that place have been many efforts to specify accounting and nature, most of the foundations of the accounting criterions were from the US and the early Hagiographas were done in the 1940 ‘s by Paton and Littleton coupled with the American Accounting Association of the nature of accounting.[ 1 ]During the 1970 ‘s and 80 ‘s they were many concerns due to the deficiency of transparence of fiscal studies, hence no clear communicating between stewards and stockholders. This led to the harmonisation of accounting criterions ; which than led to a individual planetary set of fiscal coverage criterions as we know them today.

IASC issued a bill of exchange which stated that ‘conceptual model that underlies the readying and presentation of fiscal statements. ‘ [ Bonham et al. , 2011, p 46 ] . The model defines the aims of fiscal statements and identifies and highlights the information which makes the fiscal statements utile. This allowed stockholders to understand the fiscal studies which had been really hard in the yesteryear.

IASC was reconstituted as the IASB, the grounds behind this was due to the weak relationship with national criterion compositors and deficiency of convergence of IAS and major national GAAP after 25 old ages of seeking. [ Bonham et al. , 2011, ]

IASB describe the model in short as being able “ to supply information about the fiscal place, public presentation and alterations in fiscal place of an endeavor that is utile to a broad scope of users in doing economic determinations. ‘ [ Framework 1.2 ] Therefore leting stockholders to buttockss if the stewardship map within the organisation is working the manner it should every bit good as leting them to do farther determinations such as to purchase or sell portions.

Additionally the model states that the ‘Financial statements show the consequences of the stewardship of direction, or answerability of direction for the resources entrusted to it. Those users who wish to measure the stewardship or answerability or direction do so in order that they may do economic determinations ; these determinations include, for illustration, whether to keep or sell the investing in the entity or whether to reappoint or replace the management’. [ Framework. 14 ] the model goes onto saying that the users of information i.e. the stockholders get an uncomplete image from the statement of comprehensive income if it is non read in concurrence with the statement of hard currency flow and statement of alterations in fiscal place. [ Bonham et al. , 2011 ]

As the model is for the users of fiscal information there are qualities features of fiscal statement which are understandability, relevancy, dependability and comparison. These are the foundations required to battle the lucidity issues the accounting regulators have been confronting for decennaries. IASB Paragraph 25 of the model states “ aˆ¦users are assumed to hold sensible cognition ” hence significance that stockholders are non required to cognize “ a complete proficient apprehension ” hence guaranting farther lucidity from stewards in fiscal statements. Paragraph 26 and 27 of the model states that “ Information has the quality of relevancy when it influences economic determinations of users ” which means that “ the prognostic value of relevant information is emphasized. Not that fiscal statements should be anticipation in the sense of prognosiss, but that information they contain should be relevant to prediction that users might do for themselves about the ‘ability of the endeavor to take advantage of chances and its ability to respond to adverse state of affairs ” [ Bonham et al. , 2011 pg 49 ] . Reliability would travel jointly with relevancy, the model states that the statement should be ‘ free from material mistake and prejudice and can be depended upon by users ‘ this farther highlights the importance of the stewards non being misdirecting to its stockholders in the representation of the fiscal place of the organisation. Last a cardinal ground for the model to be introduces is the comparison job states faced with the statements. This was described as “ accounting policies employed in the readying of the fiscal statements, any alterations in those policies and the effects of such alterations ” [ Framework 40 ] this would farther let stockholders to cognize what policies are being used and to understand why the peculiar policy is used.

The harmonization of the accounting criterions coupled with the regulative model has made the accounting and fiscal statement as we know them today. Stewards need to follow with the IFRS every bit good as GAAP Working in concurrence with one another to present comprehensibility, relevancy, dependability and comparison. These features are of a steward carry throughing the responsibility owed to stockholders. Stockholders would necessitate to analyze the fiscal statements closely in order to do economic determinations as the ‘Enron dirt ‘ highlighted that the accounting ordinances have defects and that companies can mistreat the IFRS to conceal debt in fiscal statements.

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