The Annual Information of Sparkle Plc along with the Financial Statements - Essay Example

The Annual Information of Sparkle Plc along with the Financial Statements Executive Smmary This study aims to advice Sparkle Plc. and its board of directors regarding the information that should be included in the annual report of the company along with the financial statements. Information that is significant and has to be included is termed as compulsory information according to the Company Act of 2006, while voluntary information is those which are important but optional and may be included at the discretion of the company. That means the presence of such information would be useful and surely enhance value and goodwill of the company, but it is up to the decision of the directors. To support the significance of such information, theories of concepts are also explained. The recommendations included are from the perspective of a financial account which is responsible to advice the directors of Sparkle Plc. Table of Contents The Annual Information of Sparkle Plc along with the Financial Statements 1 Executive Smmary 1 Introduction 4 Research and Discussion 5 Compulsory Information 5 Report Summary 5 Management Commentary – IFRS Standards 5 Auditors Report 6 Directors Report 6 Directors Remuneration Report 7 Circulation of the Annual Report 7 Website 7 Voluntary Information 8 Ethics 10 Corporate Governance 10 Discussion – Theories and Concepts 11 Conclusion and Recommendation 12 References 14 Introduction A comprehensive report which contains the activities, financial and non-financial performance evaluation statements of the company is called the Annual Report. The annual report is prepared to give the stakeholders of the company, mainly the shareholders an elaborate and transparent view of the company (Friedlob, and Welton, 2008, p. 3). It is also essential in attracting prospective investors to make investments. The annual report not only contains the financial statements such as income statement, balance sheet, or cash flow statements, but also other reports such as director’s report, auditor’s report, corporate social responsibility information, etc. In short, the annual report contains company’s business functions, products or services, sources of finances and resources, human resource involvement, countries of operation, responsibilities and contribution towards society, performance in terms of revenue generation, financial and accounting standards that it follows, and future goals or objectives structured for the next year (Thomsett, 2007, p. 5). This report is Sparkle Plc., a company which deals in cleaning products. Sparkle Plc. want to prepare their annual reports to attract more investors and also present a transparent image to their existing shareholders. The board of directors of the company already has the idea that the annual report would include the financial statements of the company. However, as discussed it is not only the financial statements that are important because many investors do not and cannot assess the financial health of the company only through revenue figures. So this report would include a detailed analysis as to what information should be included to make the annual report of Sparkle Plc. complete and appropriate to the shareholders and potential investors. Research and Discussion This section of the report would include the information that should be present in an annual report according to the Company Act 2006. The information can be segregated into two divisions: a) compulsory information, and b) voluntary information. Compulsory information are those which have to be mentioned under the Company Act 2006, while voluntary information are those which are not compulsory but can be mentioned to present a better image of the company. The discussion in this section would include various theories like agency theory, legitimacy theory, stakeholder theory, or relativism/ ethnocentrism theory, for explaining the reasons behind including the above stated information in the annual report. Compulsory Information The compulsory information contains the information required under the Company’s Act of 2006. Report Summary The report summary page in the annual report comes just after the cover page of an annual report. It contains the summary of the report, such as the revenue and profit earned by the company for the different business it is in. The strategies and goals set at the beginning of the year and the achievements. Management Commentary – IFRS Standards The management commentary as described in International Financial Reporting Standards (IFRS) includes the financial statements of the company, according to section 393 of the Company’s Act of 2006. It also contains the financial information or notes which describes relevant information in the statements. These descriptions include the management’s point of view in both positive and negative light. It also involves the implications for the future plans. The management of Sparkle Plc. has to provide their point of view on their progress, position and performance. Management commentary would describe the nature of the company’s business, objectives, strategies set for the year, resources, operations, risks, indicators, and performance measures critical for the firm (IFRS, 2010, p. 8-11; Jones, 2007, p. 258). Auditors Report The auditor’s report needs to be mentioned in the annual report according to section 475 of Company’s Act of 2006. It contains formal opinion of the internal and independent auditor on the financial health and viability of the company. It is an essential tool to provide true and verified financial information of the company to the investors and shareholders. That is the reason why it is generally included under the head of financial statement (Ingram, Albright, and Ingram, 2006, p. 232). Directors Report The director’s report is also a part of compulsory information as stated in the Company Act of 2006 in section 415. It contains information on the responsibilities of the directors in the company according to the IFRS standards, disclosure of relevant information to the auditors, the conventions and principles the company follows to run the business, status of internal control, and a brief description regarding the code of corporate governance. The basic mission is to reveal the management structure of the company to the investors (Gowthorpe, 2005, p. 247). Directors Remuneration Report The remuneration section provides the detail remuneration structure of the board of directors, CEO, and other members of the top level management. The total remuneration of the directors consists of the basic salary, annual bonus, other benefits, long term incentives, and other perks. The remuneration report also consists of the remuneration policy of the company for that year which is a comprehensive description of the guidelines, the performance targets, and the other plans formed for the employees such as the pension or the retirement plans (Rathore, 2009, p. 37-38). Circulation of the Annual Report The Annual Report is prepared mainly for the stakeholders of the company such as the shareholders, investors, creditors, suppliers, and the others present in the society. So it is important that the report reaches the concerned people or enterprises on time. Circulation of the annual report on time to its stakeholders is compulsory under section 473 of the Company Act of 2006. Website Under section 430 of the Company Act of 2006, it is necessary that the company also makes the annual report available on the website of the company, so that the investors, customers and every individual around the world can view the annual report of the company (Stittle, 2003, p. 207-208). Voluntary Information The voluntary information is those which are vital but not compulsory and can be included in the annual report for perfection. Corporate Social Responsibility (CSR) CSR simply means the programs or projects that the company or business undertake for the welfare of the society. This might include the environmental programs and initiatives of the company, supporting needy individuals of the society, or various other voluntary works which are undertaken without the motive of generating revenue. In turn the company receives recognition in society and thus the goodwill of the company increases. The various projects planned and undertaken by the company for welfare should be mentioned so as to present a sustainable image of the company to the investors and shareholders. However, Michael E. Porter, and Milton Friedman has presented two different views for CSR. Michael E. Porter has included the concept of generating shared value through CSR, and not only focus on the shareholders. According to this model the corporate success and social welfare are two different aspects. Company should have educated, skilled and healthy workforce to utilize the resources and thrive competitive and profitable business to develop a stable society, which would create revenue, tax and other opportunities. On the other hand Milton Friedman argued that CSR means maximizing benefits to the shareholders because it is the people who are responsible for the welfare of the society and not the company. They have no obligation towards the society legally. Both of these theories are different but both the common thing is that both indicate the same thing that companies’ are not responsible for the welfare of the society. However, the modern concept is different and welfare of the society does make lot of difference (Hopkins, 2012, p. 113-115; Solomon, 2007, p. 236). Ethics Business ethics is the approach of the company to conduct its business ethically or legally. Ethics in business means complying with the laws of Company Act, IFRS, IAS, and other norms which the company should follow. The company should also avoid unfair and fraudulent practices and set proper human resource management framework to avoid exploitation of employees. The motive should be to conduct clean business, attain sustainability and develop the business (Weiss, 2008, p. 40-43). The ethical practices of the company are included in the corporate governance report in the annual report. It contains the policies and framework which the company follows to conduct its operational functions and carry on the significant business activities. It also contains the structure of human resource policies prepared for the employees for fair performance appraisal. Issues like providing equal opportunity to every employee irrespective of class, gender, creed, and religion is very important in organization (Ferrell, Fraedrich, and Ferrell, 2012, p. 16-18). Corporate Governance Corporate governance section consists of the structure of the board of directors and comprehensive description of each board member in the company. Apart from the board of directors, detail description of the responsibilities of the executive team members in the company is also mentioned (Solomon, 2011, Introduction). The motive is to present the information to the investors regarding the experience and skill of the top level members of the company because they are the ones who take decisions for the company and run the business. It is designed according to the code of corporate governance of the country, as in case of Sparkle Plc would be the code of UK. It includes the risk management approaches and the composition of the board in the company. The corporate governance section also includes the ethical codes followed by the company (Keasey, Thompson, and Wright, 2005, p. 97-99). Discussion – Theories and Concepts This section would include a discussion on the theories or concepts on the basis of which the above compulsory and voluntary information were suggested to be included in the annual report of Sparkle Plc. The concepts such as the conceptual framework of International Accounting Standard Board (IASB), agency theory, legitimate theory, stakeholder’s theory and theory of relativism and ethnocentrism would be explained to explain the reasons. The IASB framework includes the reasons and ways of preparing the financial statements of the company. According to these standards the financial standards are the parameters for measuring the financial viability of the company. It consists of useful information to assist investors, creditors and shareholders to understand the financial reports of the companies. The agency theory is helpful in explaining the relationship between the principle and the agents. It assists in resolving the agency problems that may arise between the shareholders and managers or between stockholders and the creditors. The problems may arise due to the difference in their risk tolerance levels. Agency theory is very much applicable in corporate governance. The legitimacy theory is applicable in case of CSR because it explains that the business is bound to the society and social contracts. So the firms must perform various society driven activities to reward its stakeholders (Clarke, 2004, p. 78-79). The stakeholders’ theory states that organizations should change according to the global business environment, but the morals and the values should always remain constant. This can be also regarded as ethical business practices of the company. Stakeholders of the company should be given primary importance and their welfare should always be kept in mind (Phillips, 2011, p. 163-165; Phillips, 2003, p. 3-4). Relativism theory depicts that no point of view is absolutely true. They are subjected to alteration according to requirements or situations. So the annual report of the company should be designed based on the norms and policies of the country the company is operating in (Duska, 2006, p. 131). It should be different based on the business environment and regulations of the country. Ethnocentrism in this case means designing the annual report in such a way that those regulations of the home country should be followed which is applicable in the whole world (Francis, 2010, p. 16; Aswathappa, 2010, p. 191). Conclusion and Recommendation The report was designed to analyze the importance of certain information that needs to be included in the annual report of Sparkle Plc. Valid theories and concepts were suggested to prove how and why this information were significant for the investors and shareholders. The information to be included can be segregated into compulsory information and voluntary information. It would be recommended that Sparkle Plc should include information in a comprehensive manner in its annual report. The annual report should be colorful to grab attention and also include pictures of the products of the company. The motive is to present an attractive yet comprehensive and easy to understand annual report so that stakeholders feel secured investing in the company. References Aswathappa, K., 2010. International Business. 4th ed. New Delhi: Tata McGraw-Hill Education. Clarke, T., 2004. Theories of Corporate Governance: The Philosophical Foundations of Corporate Governance. Virginia: Routledge. Duska, R. F., 2006. Contemporary Reflections on Business Ethics. Netherlands: Springer. Ferrell, O. C., Fraedrich, J., and Ferrell, W. E., 2012. Business Ethics: Ethical Decision Making & Cases. 9th ed. Connecticut: Cengage Learning. Francis, C., 2010. International Business: Text and Cases. 5th ed. New Delhi: PHI Learning Pvt. Ltd. Friedlob, G. T., and Welton, R. E., 2008. Keys to Reading an Annual Report. New York: Barron's Educational Series. Gowthorpe, C., 2005. Business Accounting and Finance for Non-Specialists. 2nd ed. Connecticut: Cengage Learning. Hopkins, M., 2012. 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