AUSTRALIAN LISTED COMPANIES
NOVEMBER 2019 A GUIDE TO
UNDERSTANDING
ANNUAL REPORTS: A GUIDE TO UNDERSTANDING ANNUAL REPORTS
| 2 TABLE OF CONTENTS CONTRIBUTORS 3 FOREWORD 4 WHAT IS AN ANNUAL REPORT? 5 WHAT IS A DIRECTORS’ REPORT? 6 WHAT IS A CORPORATE GOVERNANCE STATEMENT? 7 WHAT IS A FINANCIAL REPORT? 8 WHAT IS AN AUDITOR’S REPORT? 9 WHAT DO THE FOUR PRIMARY FINANCIAL STATEMENTS SHOW? 11 WHY IS THE STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE
INCOME DIFFERENT FROM THE STATEMENT OF CASH FLOWS? 12 WHY ARE THE FIGURES IN A FINANCIAL STATEMENT
SUBJECT TO JUDGEMENT AND INTERPRETATION? 13 FEATURES OF THE FINANCIAL STATEMENTS 14 AN APPROACH TO READING FINANCIAL STATEMENTS 16 WHEN ARE ANNUAL FINANCIAL REPORTS PREPARED? 18 WHEN ARE THE FINANCIAL REPORTS PUBLISHED? 19 OPPORTUNITIES FOR SHAREHOLDERS 20 SAMPLE FINANCIAL STATEMENTS 21 NOTES TO THE FINANCIAL STATEMENTS (EXTRACT) 24 GLOSSARY 26 ISBN: 978-0-6482919-1-6 ©CPA Australia Ltd (ABN 64 008 392 452) (‘CPA Australia’), 2019. All rights reserved. First published 1995
Second edition 2012
Third edition 2013
Fourth edition 2014
Fifth edition 2019
The reproduction, adaptation, communication or sale of these materials (‘the Materials’) is strictly prohibited unless expressly permitted under Division 3 of the Copyright Act 1968 (Cth).
For permission to reproduce any part of these materials, please contact the CPA Australia Legal Business Unit - [email protected] DISCLAIMER
CPA Australia and HLB Mann Judd do not warrant or make representations as to the accuracy, completeness, suitability or fitness for purpose of the Materials and accept no responsibility
for any acts or omissions made in reliance of the Materials. These Materials have been produced for reference purposes only and are not intended, in part or full, to constitute legal or
professional advice. To the extent permitted by the applicable laws in your jurisdiction, CPA Australia and HLB Mann Judd, their employees, agents and consultants exclude all liability
for any loss, damage, claim, proceeding and or expense including but not limited to legal costs, indirect special or consequential loss or damage, arising from acts or omissions made in
reliance of the Materials. Where any law prohibits the exclusion of such liability, CPA Australia and HLB Mann Judd limits their liability to the resupply of the information. A GUIDE TO UNDERSTANDING ANNUAL REPORTS
| 3 CPA Australia acknowledges the support of
following members and thanks them for their
contributions in developing this version of
the guide: Jude Lau FCPA David Hardidge FCPA Siva Sivanantham CPA Dean Hanlon CPA Technical Support Ram Subramanian CPA Claire Grayston FCPA John Purcell FCPA Gary Pflugrath CPA Other Support This version of the guide has been developed
with the assistance of Michael Gummery,
Partner, Audit and Assurance at HLB Mann
Judd. HLB Mann Judd is a leading provider of
Advisory and Accounting services to across
Australia. The HLB Mann Judd Australasian
network has over 90 Partners with offices in all
major Australian business centres. Their services all include Assurance, Tax,
Advice & Wealth to Corporate, Private
& Family Business and Individuals. Further information on HLB Mann Judd
and the services they provide can be found
at www.hlb.com.au CONTRIBUTORS A GUIDE TO UNDERSTANDING ANNUAL REPORTS
| 4 For more than a century now, annual reports
that incorporate financial reports have been
regarded as the primary source of trustworthy,
independently verified information provided by
listed companies to their investors and other
stakeholders. Evolving business practices,
increasingly sophisticated business models
and the myriad of information sources all pose
challenges to annual reporting and its role as
a meaningful, timely and relevant source of
information on company performance. There is an argument that the proliferation
of near real-time information in the digital era
has led to a decrease in relevance of financial
reports that are published on a once-a-year
basis. Analyst recommendations, media releases
and even information snippets provided on
social media platforms can all have an impact on
investor behaviour and share price. Whilst there
is no doubt we live in an era where there is a
significant amount of information available at
any given point in time, the credibility
attributable to financial reports from the
existence of a well-established reporting, legal
and auditing framework underpinning their
preparation is something that other information
sources cannot provide. Financial reports are effectively a dashboard
view into company performance and reflect
complex economic transactions and business
models as accurately as possible. A Guide to
Understanding Annual Reports: Australian
Listed Companies has been written to assist
existing and prospective shareholders and
other providers of capital without expertise in
accounting to further their understanding of
listed company annual reports. The guide aims
to assist shareholders and other providers of
capital who are not well-versed in accounting
standards and the Corporations Act 2001 to
interpret financial statements and make better
use of the information contained within these
documents. I would like to thank the members of
CPA Australia who have contributed their time
and effort in reviewing this fifth edition of the
guide. I also wish to thank HLB Mann Judd and
others who have contributed to this revised
version of the guide. Peter Wilson AM FCPA
President FOREWORD A GUIDE TO UNDERSTANDING ANNUAL REPORTS
| 5 The annual report comprises information about
a company and, where applicable, entities it
controlled during the reporting period. The
annual report is a primary document through
which companies communicate details of their
activities, financial results and strategies to
shareholders and other stakeholders.
Information found in the annual report includes
material required by statutory and regulatory
requirements articulated in the Corporations
Act 2001 and Australian Securities Exchange
(ASX) Listing Rules, including: •
the directors’ report (which includes
the remuneration report) •
the corporate governance statement
(or the URL of the homepage on the
company’s website where the statement
is located)
•
the financial report •
the auditor’s report on the financial
and remuneration reports Additional non-compulsory reporting which
supports good corporate governance is
normally reflected in reports from the chairman
and the chief executive of the company. These
are typically located towards the beginning of
the annual report prior to the audited financial
report and remuneration report. The emergence of environmental, corporate
social responsibility (“CSR report”), integrated
and sustainability reports are further
examples of the non-compulsory reporting
which companies are choosing to provide to
shareholders. In June 2017, the G20 Financial
Stability Board’s Task Force on Climate-related
Financial Disclosures (TCFD) released its final
report, providing a framework for a set of
voluntary, consistent climate-related financial
disclosures for use by investors, lenders and
the market generally in assessing and pricing
climate-related risks and opportunities. Whilst
such reporting is not yet mandatory, there
appears to be an increasing awareness of
the importance of disclosures about climate
related risk. This is becoming increasingly evident as
the Australian Securities and Investments
Commission (ASIC) has been clear in its
message to directors of listed companies that
they should carefully consider the requirements
relating to the Operating and Financial Review
(OFR) disclosures under s299A(1)(a)(c) of the
Corporations Act 2001. In Regulatory Guide
247 (RG 247), ASIC recommends that directors
should consider the systemic risk arising from
climate change, which could have a material
impact on the future financial position,
performance or prospects of a company.
WHAT IS AN ANNUAL REPORT? A GUIDE TO UNDERSTANDING ANNUAL REPORTS
| 6 The directors’ report of a listed company has
an important role in meeting the information
needs of shareholders. While a company’s
financial report provides useful information
about financial position and performance, it
will rarely provide all the information required to
ascertain the underlying reasons for a company’s
financial results. It will also provide little, if
any, information about business strategies
and prospects relevant to future financial
performance. The directors’ report contains information that
shareholders of the company would reasonably
require to make an informed assessment of: •
the operations of the company reported on, •
the financial position of that company, and •
the business strategies of that company
and its prospects for future financial years
(unless their inclusion would be unreasonably
prejudicial). This information is complemented by: •
a review of operations and other information
required in the OFR, •
details of significant changes in the
company’s state of affairs, •
a statement of the company’s principal
activities and any significant changes
in the nature of those activities, •
details of matters since the end of the year
that may significantly affect the company’s
future operations, results or state of affairs, •
reference to likely developments in
the company’s future operations and
expected results of those operations
(unless their inclusion would be unreasonably
prejudicial), and •
details of the company’s performance
in relation to any particularly significant
environmental regulation. The report by the directors will identify the
names of the directors and officers of the
company, and is required to contain information
about options including share options,
executive options, indemnity and insurance
directors'. It also includes information on
directors membership of other committees (such
as audit committees, remuneration committees,
etc.) and discloses attendance of directors at
board and other committee meetings. The directors’ report includes a remuneration
report that must include a discussion of
the board’s policy on remuneration and its
relationship to company performance. The remuneration report includes information
about the cost to the company of providing
its directors and key management personnel
with short-term employee benefits,
post-employment benefits, other long-term
employee benefits, termination benefits
and share-based payment arrangements. WHAT IS A DIRECTORS’ REPORT? A GUIDE TO UNDERSTANDING ANNUAL REPORTS
| 7 The answer to the question “What is a corporate
governance statement?” will depend on how
one defines corporate governance. The ASX
listing rules do not provide a definition, but
they require listed companies to disclose in their
corporate governance statement the extent to
which they have followed the non-mandatory
guidelines of the ASX Corporate Governance
Council’s (ASX CGC) Corporate Governance
Principles and Recommendations or explain
why they have not done so (“if not, why not?”
reporting). The corporate governance statement
may be included in the annual report or,
alternatively, companies can include a URL link
to the location of the statement on their website.
The corporate governance statement needs
to be dated and approved by the board of the
listed company. The ASX CGC principles (4th edition), which is
applicable for financial years commencing on or
after 1 January 2020, include 8 central principles
and associated recommendations. The
corporate governance statement must disclose
the extent to which the company has followed
the recommendations made under the 8
central principles: Principle 1 – Lay solid foundations
for management and oversight A listed entity should clearly delineate the
respective roles and responsibilities of its board
and management and regularly review their
performance. Principle 2 – Structure the board to be
effective and add value
The board of a listed entity should be of an
appropriate size and collectively have the skills,
commitment and knowledge of the entity and
the industry in which it operates, to enable it to
discharge its duties effectively and to add value. Principle 3 – Instil a culture of acting lawfully,
ethically and responsibly A listed entity should instil and continually
reinforce a culture across the organisation of
acting lawfully, ethically and responsibly. Principle 4 – Safeguard the integrity
of corporate reports A listed entity should have appropriate
processes to verify the integrity of its
corporate reports. Principle 5 – Make timely and balanced
disclosure A listed entity should make timely and balanced
disclosure of all matters concerning it that
a reasonable person would expect to have
a material effect on the price or value of its
securities. Principle 6 – Respect the rights
of security holders
A listed entity should provide its security holders
with appropriate information and facilities to
allow them to exercise their rights as security
holders effectively. Principle 7 – Recognise and manage risk
A listed entity should establish a sound risk
management framework and periodically review
the effectiveness of that framework. Principle 8 – Remunerate fairly
and responsibly A listed entity should pay director remuneration
sufficient to attract and retain high quality
directors and design its executive remuneration
to attract, retain and motivate high quality senior
executives and to align their interests with the
creation of value for security holders and with
the entity’s values and risk appetite. WHAT IS A CORPORATE
GOVERNANCE STATEMENT? A GUIDE TO UNDERSTANDING ANNUAL REPORTS
| 8 The financial report provides people who are
interested in a company – such as shareholders,
lenders, analysts, employees and other
stakeholders – with information about the
financial performance and financial position of
the company. It is one means by which directors
of the company advise shareholders on how
the business has performed during the year.
The financial report also provides information
to shareholders on how the directors have
discharged their responsibilities. Financial reports consist of four primary financial
statements for the current financial period and
the comparative prior financial period, the notes
to the financial statements and the directors’
declaration. The four primary financial statements are: •
the statement of profit or loss and other
comprehensive income (sometimes referred
to as a profit and loss statement), •
the statement of financial position
(sometimes referred to as a balance sheet,) •
the statement of changes in equity, and •
the statement of cash flows. Financial statements present information
relevant to the current financial period and
comparative figures for the previous period to
illustrate how the financial performance and
position of the company have changed. The notes to the financial statements explain
the accounting policies used in preparation, and
provide additional information about particular
amounts. In recent times, there has been a
movement towards the use of “streamlined
financial reporting”, whereby the needs of
investors and stakeholders are put first, by
providing them with the information they
need in a format and language that is easier to
understand, whilst continuing to comply with
the underlying requirements. The notes also provide financial information
which is not contained in the primary financial
statements, such as information about
uncertainties facing the company that meet the
definition of contingent liabilities. Later in this Guide we illustrate the possible form
and content of the four financial statements and
some notes by providing the partial financial
report of a fictitious Australian listed iron ore
mining company, CPA Australian Resources Ltd. The directors’ declaration comprises statements
from the directors that: •
the financial statements and the notes
are in accordance with the Corporations
Act 2001 and comply with applicable
accounting standards, •
the financial statements and notes give
a true and fair view of the financial position
and performance of the company, and •
there are reasonable grounds to believe that
the company will be able to pay its debts as
and when they become due and payable. This declaration is required by the
Corporations Act 2001. WHAT IS A FINANCIAL REPORT? A GUIDE TO UNDERSTANDING ANNUAL REPORTS
| 9 Auditors are independent accounting
practitioners appointed by the directors and
confirmed at the AGM to provide an opinion
on the financial report and the remuneration
report prepared by the directors.1 The auditor’s
report comprises several key components, the
content or applicability of which will depend on
the outcome of the audit. Opinion The auditor’s opinion is presented first, about
whether the financial report gives a true and
fair view of the reported financial position and
performance of the company and complies
with the Corporations Act 2001, Australian
Accounting Standards and the Corporations
Regulations 2001 (and if not, the auditor
modifies their report).
Basis for Opinion In the “basis for opinion” section, the auditor
explains that the audit was performed in
accordance with Australian Auditing Standards
and confirms compliance with applicable
independence and ethical requirements. If the
auditor’s report has been modified, this section
will also include an explanation of the reason(s)
why the opinion has been modified. Key Audit Matters For listed companies, the auditor’s report
includes a section in respect of Key Audit
Matters (KAM). KAM are those matters that,
in the auditor’s professional judgment, were
of most significance in performing the audit.
In simple terms, such matters will generally
represent those that required greater audit
attention. The number of KAMs the auditor
identifies is not fixed and is therefore a matter
of judgment. For each KAM identified, the
auditor’s report will include a description of the
KAM and details of how the auditor addressed
it. It is possible, although not particularly
common, that the auditor might not identify
any KAMs. In such cases the KAM section of
the auditor’s report must include a statement
to that effect.
WHAT IS AN AUDITOR’S REPORT? 1 The other information that forms the directors’ report along with the directors’ report itself are not subjected to a report from the auditor. A GUIDE TO UNDERSTANDING ANNUAL REPORTS
| 10 Emphasis of Matter, Other Matter or Material
Uncertainty Relating to Going Concern
Paragraphs If applicable, the auditor’s report brings to the
attention of users a matter fundamental to the
understanding of the KAMs financial report but
not included in KAM. This is either an emphasis
of matter paragraph if the matter has been
appropriately disclosed by the entity or an
“other matter” paragraph if the matter is not
something disclosed in the financial report. If
there exists a material uncertainty as to whether
the company will continue as a going concern: • it may lead the auditor to conclude that the
going concern basis of preparation of the
financial statements is not appropriate; or • the auditor’s report will include a “material
uncertainty relating to going concern”
paragraph drawing attention to this and
referring to the associated disclosure by the
company of a going concern uncertainty
within the financial report. Other Information Opinion on the Remuneration Report The auditor’s report also includes an opinion
on the remuneration report. The auditor
expresses an opinion as to whether the
remuneration report complies with Section
300A of the Corporations Act 2001. Modifications to the Auditor’s Report The auditor will issue a modified opinion
if the financial report contains (a) material
misstatement(s), as a qualified or adverse
opinion, or if the auditor cannot obtain sufficient
appropriate audit evidence, as a qualified
opinion or disclaimer. Where an auditor’s report
is modified, this will be stated in the opinion
section of the report and further explained
in the basis for opinion section. A modified
opinion will also be issued if the auditor is of the
opinion that the remuneration report is not in
accordance with the applicable requirements of
the Corporations Act 2001. Limitations Whilst the auditor’s report provides the reader
with confidence in the information contained
in the financial report, it does not guarantee
the accuracy of the financial information, or
the continued viability of the company. This
is explained in the section on the auditor’s
responsibilities. The auditing framework
is designed to enable auditors to make an
assessment that is based on a number of factors,
including materiality. The CPA Australia publication A Guide to
Understanding Auditing and Assurance:
Australian Listed Companies explains the
value and purpose of the auditor’s report in
plain language. A GUIDE TO UNDERSTANDING ANNUAL REPORTS
| 11 WHAT DO THE FOUR PRIMARY
FINANCIAL STATEMENTS SHOW? The primary purpose of financial
statements is to aid current and prospective
shareholders and stakeholders in making
resource-allocation decisions. The statement of profit or loss and other
comprehensive income provides an overall
picture of a company’s performance by
reporting the total monetary measure of all
events that have changed the value of an
owner’s interest in the company, other than
those events with owners when acting in
their capacity as owners. In simple terms, this
statement shows the income and expenses of
the company during the reporting period. The statement of financial position shows
the monetary measure of all the resources
controlled by a company and all the
obligations due by the company at a
particular point in time, classified as current
or non-current or in order of liquidity.
The statement of changes in equity reports all
changes to equity during the financial period,
including transactions with owners in their
capacity as owners.
The statement of cash flows shows the cash
inflows and outflows for the financial period,
split between operating, investing and
financing activities.
The content of the four primary statements
is supported by notes. The notes include
items such as the accounting policies applied,
further information on balances within the
primary statements and other disclosures not
directly related to the primary statements. Financial statements are prepared in
accordance with Australian Accounting
Standards and Interpretations as issued by
the Australian Accounting Standards Board
(AASB). The standards and interpretations
provide the principles to follow when
accounting for and disclosing transactions
and events. A listed company complying
with Australian Accounting Standards will also
be in compliance with International Financial
Reporting Standards (IFRS). A GUIDE TO UNDERSTANDING ANNUAL REPORTS
| 12 WHY IS THE STATEMENT OF PROFIT OR LOSS AND
OTHER COMPREHENSIVE INCOME DIFFERENT
FROM THE STATEMENT OF CASH FLOWS? Companies prepare their financial statements,
with the exception of the statement of cash
flows using the accruals basis of accounting.
This means the financial effect of a transaction
is recorded in the financial statements when the
transaction occurs. This may be different from
when the cash relating to the transaction
is received or paid. In simple terms, the cash flow statement will
show an inflow when cash is received (e.g.
through the sale of goods/services, receipt of
funds from borrowings, etc.) and an outflow
when cash is paid (e.g. when purchasing an
asset, paying for services, etc.). For example, our fictitious mining company
CPA Australian Resources Ltd may have entered
into a contract to sell iron ore, and will recognise
the sale proceeds as revenue when the
customer has taken delivery of the ore, being
the point at which it has satisfied its performance
obligations under the contract. However, the
cash may not be received until later, which may
be after the end of the financial year. Thus, the
sale will be included in the statement of profit
or loss and other comprehensive income for
the year and a receivable recognised in the
statement of financial position. However, as no
cash has changed hands, the proceeds will not
be reflected in the statement of cash flows until
the following year. In addition, some transactions that are
recognised in the statement of profit or loss and
other comprehensive income are non-cash in
nature. For example, items of property, plant
and equipment are subject to depreciation
which appears as an expense in the statement of
profit or loss and other comprehensive income.
However, depreciation represents an accounting
entry only and does not result in an outflow of
cash. As such, a depreciation expense appears
in the statement of profit or loss and other
comprehensive income but not the statement
of cash flows. A GUIDE TO UNDERSTANDING ANNUAL REPORTS
| 13 WHY ARE THE FIGURES IN A FINANCIAL
STATEMENT SUBJECT TO JUDGEMENT
AND INTERPRETATION? Financial statements portray the financial
effects of what are often complex commercial
transactions, and judgment may be required to
determine how some transactions and events
are to be represented. Accounting standards
play an important part in ensuring that similar
transactions are treated in a similar manner. However, a principles-based approach to
setting accounting standards means that
explicit rules are not written to cover all
situations. Therefore, professional judgement
may be needed when interpreting and
applying an accounting standard. Directors are required to use judgement to
decide how long an asset will remain useful
and the resulting effect on depreciation of
property, plant and equipment assets. Clear and concise disclosure of the significant
judgements and estimates made by the
directors in preparing the financial report is
paramount to assisting the readers to better
understand the financial report. In many cases,
it is often these matters which are commented
on in the KAMs section of the auditor’s report. A GUIDE TO UNDERSTANDING ANNUAL REPORTS
| 14 FEATURES OF THE FINANCIAL STATEMENTS STATEMENT OF PROFIT AND LOSS AND
OTHER COMPREHENSIVE INCOME The financial performance report of
CPA Australian Resources Ltd uses the single
statement format of the statement of profit or
loss and other comprehensive income, and
starts with revenue.2 Note 3 in the statement of profit or loss and
other comprehensive income identifies the types
of revenue earned by CPA Australian Resources
Ltd. Accounting standards require that the
expenses present finance costs and tax expense
separately. The notes would contain further
information on some items of expense. For
some expenses, the accounting standards allow
the company to choose between presenting the
information in the statement of profit or loss and
other comprehensive income or in the notes to
the financial statements. STATEMENT OF FINANCIAL POSITION The statement of financial position does not
purport to be a valuation of the company,
rather it is the outcome of applying accounting
standards in valuing the assets and liabilities of
the company. Therefore, it would be incorrect
to conclude that the current monetary value of
CPA Australian Resources Ltd is $266,358,000
(see the Statement of Financial Position on
page 21). Some of the assets of CPA Australian
Resources Ltd are shown at a current valuation
(such as trade and other receivables), while
other assets, for example property, plant and
equipment, are presented at their cost of
purchase less accumulated depreciation. Notes
2(a) and (e) provide some further information
about the approach taken by CPA Australian
Resources Ltd in the preparation of the financial
statements. The accounting standards only allow
the recognition of purchased goodwill, whereas
the goodwill a company builds up during its
years of operation is not recognised on the
statement of financial position.
For example, a company may generate goodwill
in respect of areas such as its reputation,
customer base, brand exposure, etc. but cannot
recognise an asset for such internally generated
goodwill under accounting standards. Although CPA Australian Resources Ltd is
profitable and has operated for a number of
years, its statement of financial position
does not include goodwill as it has not
purchased other businesses. CPA Australian Resources Ltd classifies its assets
and liabilities presented in the statement of
financial position as current or non-current.
The distinction is based on an assessment of
the expected timing of recovering or settling
the amounts. An item will be classified as “current” when
its amount is expected to be recovered or
settled no more than 12 months after the date
of the report, otherwise its classification is as
“non-current”. Some companies may choose to classify their
assets and liabilities only in order of liquidity
and not separately presented as current
or non- current, while others may use a
combination of liquidity and current or
non-current classifications. The equity section of the CPA Australian
Resources Ltd statement of financial position
includes capital invested by shareholders
and accumulated profits retained from
previous years. For companies that adopt
accounting policies different from those used
by CPA Australian Resources Ltd, the equity
section might include reserves that result from
the accounting standards requirements for
asset revaluations, the classification of financial
assets as fair value through other comprehensive
income, cash flow hedges and/or foreign
currency translations (the example does not
include reserves).
2 Some listed companies use the following two statements to present information about performance:
• a profit or loss statement
• a statement displaying components of other comprehensive income
Whatever the format used, the minimum information presented is that specified by the accounting standard. A GUIDE TO UNDERSTANDING ANNUAL REPORTS
| 15 Listed companies will sometimes control other
companies, while CPA Australian Resources
Ltd does not. In those situations, the financial
statements of the controlling company show
information for the consolidated group. The
equity section of the statement of financial
position would separately present equity
attributed to the shareholders of the controlling
company, and any non-controlling interests. STATEMENT OF CHANGES IN EQUITY The statement of changes in equity shows the
overall change in equity during a period which
represents: •
profit or loss and other comprehensive
income during that period •
the changes resulting from transactions with
owners acting in their capacity as owners
and associated costs. In the current financial
year, CPA Australian Resources Ltd activities
with its owners are the issue of new shares at
$336,000 and the payment of dividends of
$35,912,000 (see the example Statement of
Changes in Equity on page 23). STATEMENT OF CASH FLOWS The statement of cash flows shows movements
of cash (cash on hand and demand deposits)
and cash equivalents (short-term, highly liquid
investments that are readily convertible to cash).
It highlights the sources and uses of cash and
cash equivalents, and analyses the areas of
CPA Australian Resources Ltd activity as follows: •
operating activities •
investing activities •
financing activities The information in a statement of cash flows
about cash and cash equivalents including their
source can be used to assess the company’s
ability to meet its financial commitments and
fund its activities (see the example Statement
of Cash Flows on page 23). A GUIDE TO UNDERSTANDING ANNUAL REPORTS
| 16 AN APPROACH TO READING
FINANCIAL STATEMENTS Financial statement reporting by listed
companies is all about communicating
monetary measures and supporting information
to current and prospective shareholders and
other providers of capital. Other stakeholders,
including analysts and employees, may also be
interested. Some parts of the story might be of
interest to all, while other parts will be of interest
to a particular group. Those readers planning to
use the financial statements to make decisions
need to be aware that a listed company’s
financial statements do not and cannot provide
all the information they may need. Analysts’
reports, the financial press, and the ASX website
are other sources of information to assist
decision-making. A final word of caution – financial statements
are not designed to show the market value of
the company, but they do provide information
to assist shareholders, other providers of capital
and other stakeholders in estimating that value. STEP 1 The importance of preparation should not be
underestimated when analysing the financial
statements of a listed company. Making yourself
knowledgeable about the environment in which
the company operates in now and its direction
in the future, for example getting information
about local, national or global macro and micro
economic conditions and the risk profile of the
company’s business(es) is a good and necessary
start. Returning again to our fictitious Australian
listed iron ore mining company example,
the current and prospective shareholders of
CPA Australian Resources Ltd are likely to be
interested in the projected international demand
for iron ore. Most readers gain an overview of
the company, an understanding of the business
it is in and the risks the business is facing from
reading other parts of the annual report. The
statements from the Chairman and the Chief
executive officer (CEO) that put the company’s
performance highlights into context against
strategies and the directors’ report are often
important to read as well. Readers should be mindful that statements
from the Chairman or CEO, except for the
remuneration report section of the directors’
report, are not subject to audit in the same way
as the financial report and the remuneration
report. However, although the audit does not
cover such other information contained in the
annual report beyond the financial report and
remuneration report, the auditor is required
to read the other information and report on
whether it is materially inconsistent with the
financial report, or knowledge gained through
the audit, or appears to be materially misstated. STEP 2 Read the auditor’s report to see if the auditor’s
opinion has been modified or contains some
other communication by the auditor. If so, read
carefully why the auditor has issued a modified
opinion or included another communication
such as an emphasis of matter paragraph. Read
the details of any KAM communicated by the
auditor to gain an understanding of the areas of
greatest audit effort. STEP 3 Next, have a look to the statement of profit
or loss and other comprehensive income and
the statement of financial position to assess
the size of the company and its profitability.
CPA Australian Resources Ltd generated
profit after income tax for the current period
of $40,674,000. But this figure means little
unless we compare it to another time period or
another company to give it context. Horizontal
or trend analysis can be used for intracompany
comparative analysis. For example, you might
decide to evaluate performance by using the
comparative information in the CPA Australian
Resources Ltd financial statements to
benchmark the current year performance (profit
after income tax $40,674,000 compared to the
previous year figure of $26,705,000). Vertical
analysis can be used for intracompany and
intercompany comparative analysis. A GUIDE TO UNDERSTANDING ANNUAL REPORTS
| 17 A base amount is established and the monetary
measure in the current period financial
statement of CPA Australian Resources Ltd
would be expressed as a percentage of this
base amount. For example, you might be
interested in the relationship of cash and cash
equivalents to total assets and how it compares
to the previous year. For the current financial
year, the relationship expressed as a percentage
is 26.8 per cent (and the comparative financial
year 25.6 per cent). Ratio analyses compare
the relationships of financial statement
information, and are worked out by dividing
one monetary measure by another and can
be used for intracompany and intercompany
comparative analysis. For example, CPA Australian Resources Ltd has
current period current assets of $117,387,000
and $57,623,000 in current liabilities, which
results in a current ratio of 2.04:1. You can use the
outcomes from performing horizontal, vertical
and ratio analysis to compare the results for the
previous year, the industry sector or competitors. Now consider the statement of cash flows and
the information this provides on the company’s
cash and cash equivalents transactions
and position. For the listed companies of some sectors such as
property, banking and insurance, the current and
prospective shareholder is likely to pay particular
attention to the statement of financial position,
while retaining a focus on the statement of profit
or loss and other comprehensive income. For
companies of other sectors, it is possible that
current and prospective shareholders will be
interested in the statement of profit or loss and
other comprehensive income. This is because
they may reason that an understanding and
assessment of the economic productivity of
the company is all important to estimating
performance which in turn will determine their
actions of buy, sell or hold. The level of focus stakeholders place on the
different primary statements will depend on the
nature of the business. For example, in sectors
where the asset base of the company is very
important (such as banking, property, funds
management, etc.) the statement of financial
position may receive greater attention. However,
in a company where revenue, profit or dividend
payments are important to stakeholders,
the statement of profit or loss and other
comprehensive income may receive greater
attention. STEP 4 Turn to the notes to the financial statements. For
example, Note 2 to the financial statements of
CPA Australian Resources Ltd states the basis
of preparation for the financial statements is
on an accruals basis and is based on historical
costs which do not take into account changing
monetary values. Cost is based on the fair
value of the consideration given in exchange
for assets. Further, the accounting policies
have been consistently applied, unless
otherwise stated. Read the accounting policies which are used for
any items which have attracted your attention
in the financial statements. Look for accounting
policies which have changed during the year,
the reasons for the change and the effect of the
change on the financial statements. Companies
are required to provide information on changes
to accounting policies in the notes. STEP 5 The remaining notes to the financial statements
contain detailed financial information, including
information on the areas in which the company
operates, specific items of revenue and expense,
and an explanation of the tax expense. Again,
look for the notes which elaborate on any
amounts which have come to your attention in
the financial statements. A GUIDE TO UNDERSTANDING ANNUAL REPORTS
| 18 WHEN ARE ANNUAL FINANCIAL
REPORTS PREPARED? Listed companies are required to prepare and
issue to shareholders a financial report and
directors’ report annually including the auditor’s
report on the financial and remuneration
reports. Alternatively a company may issue
a concise report to shareholders. A concise
financial report provides shareholders with
information relevant to evaluating the business,
without providing full detailed accounting
disclosures. These reports should be issued to
shareholders within four months of the end of
the financial year. They are also required to prepare a half-yearly
financial report which can either be audited or
reviewed and issued to the shareholders within
2 months of the end of the half-yearly reporting
period (or 75 days for certain exploration
companies within the mining sector).
The period of the financial report is referred
to as the reporting period and is typically
for a period of one year. Companies are
required to lodge the annual financial report
with the Australian Securities and Investment
Commission (ASIC) and the ASX within three
months of the end of the financial year.
A GUIDE TO UNDERSTANDING ANNUAL REPORTS
| 19 WHEN ARE THE FINANCIAL
REPORTS PUBLISHED? Unless a member specifically requests not to
receive the financial report, listed companies
must prepare and send a copy of their financial
accounts to all members at least 21 days before
the AGM and within four months of the end of
the financial year. Most listed companies publish their financial
statements and reports on their website and
notify shareholders of their action. Alternatively,
a company may elect to send shareholders a
hard copy of the full report or a concise report.
A shareholder has the right to receive a hard
copy, but must specifically request the printed
version. There are provisions for shareholders to
specifically request to receive an electronic copy
as an alternative. Copies are lodged with ASIC and the ASX and
are available for inspection online. A GUIDE TO UNDERSTANDING ANNUAL REPORTS
| 20 OPPORTUNITIES
FOR SHAREHOLDERS Shareholders are sent a notice of the AGM,
which is an opportunity for shareholders to ask
questions of the auditor about their report, of
the directors on any aspect of the company’s
operations and performance and of the annual
accounts tabled at the AGM. A GUIDE TO UNDERSTANDING ANNUAL REPORTS
| 21 SAMPLE FINANCIAL STATEMENTS CPA Australian Resources Ltd is a fictitious
Australian listed iron ore mining company with
primary operations in Australia and secondary
operations in Brazil. These sample financial
statements of CPA Australian Resources Ltd
show the way in which many listed companies
present yearly financial statements. The figures are simplified to assist you in
reading the statements. A selection of the
notes to the financial statements is provided
for illustrative purposes. NOTE 20XC 20XB $’000 $’000 Revenue 3 643,066 539,189 Raw materials and consumables 4 (123,142) (98,342) Depreciation (29,367) (44,461) Employee benefits expense (248,623) (189,151) Exploration expenses written off (28,322) (18,342) Finance expenditure (22,789) (19,408) Impairment of exploration expenditure 11 (114,251) (121,000) Other expenses 4 (18,492) (10,174) Profit before income tax expense 58,080 38,311 Income tax expense 5 (17,406) (11,606) Profit after income tax for the period 24 40,674 26,705 Other comprehensive income Items that may subsequently be reclassified to profit or loss (Loss) / gain on translation of foreign operations 31 1,678 Other comprehensive income for the period, net of tax 31 1,678 Total comprehensive income for the period attributable
to CPA Australian Resources Limited 40,705 28,383 Earnings per share for profit from comprehensive income cents cents Basic earnings per share 27 20.62 15.19 Diluted earnings per share 27 20.62 15.19 The statement of profit or loss and other comprehensive income should be read in conjunction with the accompanying notes. CPA AUSTRALIAN RESOURCES LIMITED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME For the year ended 30 June 20XC A GUIDE TO UNDERSTANDING ANNUAL REPORTS
| 22 NOTE 20XC 20XB $’000 $’000 Current assets Cash and cash equivalents 6 102,801 98,879 Trade and other receivables 7 8,945 5,474 Inventories 8 5,641 7,131 Total current assets 117,387 111,484 Non-current assets Trade and other receivables 9 42,323 23,021 Property, plant and equipment 10 27,370 40,142 Exploration expenditure 11 184,540 201,135 Deferred tax 12 11,353 10,345 Total non-current assets 265,586 386,127 TOTAL ASSETS 382,973 386,127 Current liabilities Trade and other payables 13 29,054 4,689 Provisions 14 6,875 37,303 Income tax 15 11,266 4,268 Employee benefits 16 10,428 9,953 Borrowings 17
- 5,700 TOTAL CURRENT LIABILITIES 57,623 61,913 Non-current liabilities Provisions 18 22,911 8,326 Borrowings 19 18,374 37,476 Deferred tax 20 4,081 3,917 Employee benefits 21 13,626 13,266 TOTAL NON-CURRENT LIABILITIES 58,992 62,985 TOTAL LIABILITIES 116,615 124,898 Net assets 266,358 261,229 Equity Contributed equity 22 223,610 223,274 Reserves 23 5,500 5,469 Retained profits 24 37,248 32,486 TOTAL EQUITY 266,358 261,229 The statement of financial position should be read in conjunction with the accompanying notes. CPA AUSTRALIAN RESOURCES LIMITED STATEMENT OF FINANCIAL POSITION For the year ended 30 June 20XC A GUIDE TO UNDERSTANDING ANNUAL REPORTS
| 23 ISSUED
CAPITAL RESERVES RETAINED
PROFITS TOTAL
EQUITY $’000 $’000 $’000 $’000 Balance at 1 July 20XA 128,238 3,791 27,313 159,342 Profit after income tax for the period 26,705 26,705 Other comprehensive income for the period 1,678 1,678 Total comprehensive profit for the period 1,678 26,705 28,383 Transactions with owners in their capacity as owners Shares issued, net of costs 95,036 95,036 Dividends paid (21,532) (21,532) Balance at 30 June 20XB 223,274 5,469 32,486 261,229 Balance at 1 July 20XB 223,274 5,469 261,229 Profit after income tax for the period 40,674 40,674 Other comprehensive income for the period 31 31 Total comprehensive profit for the period 31 40,674 40,705 Transactions with owners in their capacity as owners Shares issued, net of costs 336 336 Dividends paid (35,912) (35,912) Balance at 30 June 20XC 3,791 5,500 37,248 266,358 CPA AUSTRALIAN RESOURCES LIMITED STATEMENT OF CHANGES IN CHANGES IN EQUITY For the year ended 30 June 20XC CPA AUSTRALIAN RESOURCES LIMITED STATEMENT OF CASH FLOWS For the year ended 30 June 20XC NOTE 20XC 20XB $’000 $’000 Cash flows from operating activities Receipts from customers 686,141 278,342 Payments to suppliers and employees (292,348) (215,474) Interest received 24 9 Net cash generated by operating activities 28 393,817 62,877 Cash flows from investing activities Proceeds from disposal of property, plant and equipment 10,321 879 Proceeds from disposal of exploration assets 632 2,783 Purchase of property, plant and equipment (365,272) (1,370) Net cash (used in)/generated by investing activities (354,319) 2,292 Cash flows from financing activities Proceeds from issue of shares 336 24,322 Dividends paid (35,912) (21,532) Net cash provided by/(used in) financing activities (35,576) 2,790 Net increase in cash and cash equivalents 3,922 67,959 Cash and cash equivalents at the beginning of the financial year 98,879 30,920 Cash and cash equivalents at the end of the financial year 29 102,801 98,879 The statement of cash flows should be read in conjunction with the accompanying notes. A GUIDE TO UNDERSTANDING ANNUAL REPORTS
| 24 NOTES TO THE FINANCIAL
STATEMENTS (EXTRACT) NOTE 1: ADOPTION OF NEW AND REVISED
ACCOUNTING STANDARDS The principal accounting policies adopted in the
preparation of the financial statements are set
out below. These policies have been consistently
applied to all the years presented, unless
otherwise stated. New, revised or amending Accounting
Standards and Interpretations adopted. The company has adopted all of the new, revised
or amending Australian Accounting Standards
and Interpretations issues by the AASB that are
relevant to the operations and mandatory in the
current reporting period. Any new, revised or amending Australian
Accounting Standards or Interpretations that are
not yet mandatory have not been early adopted. NOTE 2: SUMMARY SIGNIFICANT
ACCOUNTING POLICIES (EXTRACT) (a) Basis of preparation The financial statements have been prepared
on an accruals basis and are based on historical
costs and do not take into account changing
money values. Cost is based on the fair value of
the consideration given in exchange for assets.
The accounting policies have been consistently
applied, unless otherwise stated. The financial statements are presented in
Australian Dollars and all values are rounded to
the nearest thousand dollars ($000) or in certain
cases to the nearest dollar, in accordance with
ASIC Corporations (Rounding in Financial/ Directors’ Reports) Instrument 2016/191. (b) Statement of compliance The financial statements are general purpose
financial statements and have been prepared
in accordance with Australian Accounting
Standards and Interpretations issued by
the AASB and the Corporations Act 2001,
as appropriate for profit-oriented entities.
These financial statements also comply with
International Financial Reporting Standards
as issued by the International Accounting
Standards Board (IASB). (c) Critical accounting judgements, estimates
and assumptions The preparation of financial statements
requires management to make judgements,
estimates and assumptions that affect the
reported amounts in the financial statements.
Management continually evaluates its
judgements and estimates in relation to assets,
liabilities, contingent liabilities, revenue
and expenses. Management bases these
assumptions on experience and on other
factors such as expected future events
it believes to be reasonable under the
circumstances. The resulting accounting
judgements and estimates will seldom equal
the related actual results. The judgements,
estimates and assumptions that have a
significant risk of causing a material adjustment
to the carrying amounts of assets and
liabilities within the next financial year are
discussed below. (d) Estimation of useful lives of assets The company determines the estimated useful
lives and related depreciation charges for its
property, plant and equipment and deferred
exploration expenditure. The useful lives
could change significantly as a result of
technical innovations or some other event.
The depreciation charge will increase where the
useful lives are less than previously estimated
lives, or technically obsolete or non-strategic
assets that have been abandoned or will be
written off or written down. A GUIDE TO UNDERSTANDING ANNUAL REPORTS
| 25 20XC 20XB $’000 $’000 Revenue from Contracts with Customers Sales of iron ore 629,249 278,342 Sales of other metal 12,492
641,741 1,868
538,529 Other sources of revenue Interest 1,325 660 643,066 539,189 20XC 20XB $’000 $’000 Cash on hand 95 103 Cash at bank 45,706 51,776 Cash on deposit 57,000 47,000 102,801 98,879 NOTE 3: REVENUE NOTE 6: CURRENT ASSETS – CASH AND CASH EQUIVALENTS A GUIDE TO UNDERSTANDING ANNUAL REPORTS
| 26 Accumulated depreciation The cumulative depreciation of an asset to the date of the current financial year. Accumulated profits The amount of past years profit
not paid in dividends. Sometimes referred to as retained profit.
In contrast, losses from previous years not absorbed by past years profit
are accumulated losses. Asset revaluation The application of an accounting policy choice, whereby the monetary measure of the asset is the
amount for which it could be exchanged between knowledgeable, willing parties in an arms-length
transaction. Assets Items of value which the company can trade or use in its business. ASX listing rules Listing rules govern the admission of companies to the official list of listed companies, quotation of
their shares, suspension of those shares from quotation and removal of companies from the official
list. The listing rules also govern disclosure and some aspects of a listed company’s conduct. Contingent liabilities A potential liability dependent on uncertain future events which are beyond the control of
the company. Corporate social
responsibility report A report on how the company manages its business processes to produce an overall positive impact
on society. Current assets Cash and cash equivalents and assets which are expected to be turned into cash in the next year. Current liabilities Amounts which the company is obliged to pay to others in the next year. Depreciation The systematic allocation of the cost of the asset over its useful life. Emphasis of matter A paragraph included in the auditor’s report that refers to a matter appropriately presented or
disclosed in the financial report that, in the auditor’s judgement, is of such importance that it is
fundamental to users’ understanding of the financial report. Employee benefits Represent benefits offered to employees of the company and can include short-term (e.g. salaries
and wages), long-term (e.g. long service leave), post-employment benefits (retirement benefits) and
termination benefits. Equity Total assets less total liabilities; includes share capital, reserves and accumulated profit Expenses The costs of deriving revenue. Goodwill An asset representing the future economic benefit
arising from other assets acquired by a company
when gaining control of one or more other businesses that are not individually identified and
separately recognised. Liabilities Amounts which the company is obliged to pay to others. Liquidity The case with which assets and liabilities may be converted into cash. Listed company A company which is publicly listed on a securities exchange like the ASX. Key management
personnel Persons having authority and responsibility for planning, directing and controlling the activities of the
entity, directly or indirectly, including any director (whether executive or otherwise) of that company. Modified opinion The auditor may issue a modified opinion, being a qualified opinion, an adverse
opinion or a disclaimer of opinion. Profit Surplus of revenues and other income over expenses. Remuneration Remuneration of directors or executives will typically include all or some of cash salary,
shares or share options, superannuation, annual and long service leave. Reporting period The period that the financial statements cover. This will typically be one year
(e.g. the year ended 30 June 20XX) but can be shorter or longer in certain circumstances. Reserves Surpluses arising from (for example) revaluations of certain assets. Revenue Earnings arising in the ordinary activities of the company. Fees from the rendering of
services are examples of revenue, as is revenue from the sale of goods. Share option A contract that gives the holder of the option the right, but not the obligation, to subscribe
to the company’s shares at a fixed or determinable price for a specified period of time. Share-based payment
arrangement An arrangement between the company and another party (including an employee) that entitles the
other party, on satisfying any conditions specific to the arrangement, to shares or share options of
the company, or cash or other assets of the company that are based on the price of those shares or
share options. Sustainability report A report that provides information about the company’s performance towards
the goal of sustainable development. *A glossary of key technical words used in this Guide has been provided to aid understanding. Bold font is used on the first appearance of the term. GLOSSARY cpaaustralia.com.au 51作业君版权所有
