IA1: COMPANY ACCOUNTS AND REPORT

COMPANY ACCOUNTS AND REPORT

USERS OF ACCOUNTING INFORMATION

Accounting information is required by a wide range of users for various reasons. These users and their information needs include:

• Individuals, financial institutions or group of investors who need accounting information to determine the liquidity, profitability and viability of the enterprise.
• Mangers in an enterprise require accounting information to measure performance, plan and control operations.
• Customers and employees of an enterprise need accounting information in order to assess the ability of the enterprise to produce goods or render services on a continuous basis.
• Governments and regulatory bodies, such as the Central Bank of Nigeria (CBN), Securities and Exchange Commission (SEC), Nigeria Stock Exchange (NSE), Federal Inland Revenue Services (FIRS) and State Internal Revenue Service (SIRS) need accounting information to regulate certain business and plan, execute and evaluate government projects. The Federal Inland Revenue Service (FIRS) and State internal Revenue Service (SIRS) need accounting information so as to impose and collect taxes.
• Quasi-government established need accounting information in order to meet their statutory obligations.
• Competitors need accounting information to assist in formulating policies to counter competition.
• Creditors need accounting information to assess companies’ liquidity and ability to meet their obligations to creditors as and when due.
• Financial analysts need accounting information in order to facilitate comparison of a company’ financial statements from year to year, evaluation of results of companies within the same industry and between one industry and the other, as well as determining the industry average.

The information expected to be provided in financial statements are those that are quantitative and qualitative in nature, to aid their users in making informed economic decisions. To meet the objectives of its divers users, some of whom may not have accounting knowledge or background, financial statements are expected to be simple, clear and easy to understand.

CONTENTS OF FINANCIAL STATEMENTS

Financial statements are expected to be drawn up:

• In conformity with Generally Accepted Principles (GAAP);
• In accordance with the Statement of Accounting Standards (SAS) issued up-to-date by the Nigerian Accounting Standards Board (NASB);
• In agreement with the books of accounts of the entity; and
• In accordance with the Companies and Allied Matters Act, Cap C20 LFN 2004. Treatment of accounting matters that are not at present covered by the Nigerian Accounting Standards are expected to conform with the provisions of the International Accounting Standards (IAS). This is so because the Institute of Chartered Accountants of Nigeria (ICAN) is a member of International Federation of Accountants (IFAC). Consequently, ICAN members are obliged to comply with the pronouncements of IFAC. Besides, financial statements prepared in Nigeria are expected to be used globally without any problem in interpreting their contents.

All financial statements must as a matter of statutory requirement, contain the comparative figures for the preceding year (or period), to facilitate comparison of performance of the enterprise.

Statement of Accounting Policies

Accounting policies are those bases, rules, principles, conventions and procedures adopted in preparing and presenting financial statements.

Judgment is required in the choice of the accounting policies which are appropriate to the circumstances of an enterprise and will be best suited to present the “true and fair” view of its results and financial position. This had been dealt with in your earlier accounting courses.

Therefore as a form of revision, the highlight of significant accounting policies that have to be stated in the financial statements is as follows:

• Accounting Convention

There should be information as to the fact that the financial statements are prepared on the historical cost basis; that is, no adjustment for specific or general price level changes such as inflation. Where there has been revaluation of some or all the assets, it should be so stated that the historical cost concept is modified to include the revaluations.

• Fixed Assets

Directors may decide the minimum expenditure to be recognized as capital item. It should also be stated that fixed assets are stated at cost or valuation, less accumulated depreciation.

• Depreciation of Fixed Assets:

1. The basis of depreciation of each class of fixed assets has to be stated. The methods which can be used included: straight-line, reducing balance, amortisation over lives of the assets, sum-of-the years digit.
2. The rate of depreciation for each class of fixed assets should be stated.

• Debtors

Debtors are stated after the deduction of specific or general provision for any debts considered doubtful of recovery.

• Stocks

Stocks are stated at the lower of cost and net realisable value, after making provision for obsolete and damaged items. For manufactured goods, ‘cost’ may include a proportion of factory overhead.

• Investments

Investments are stated at cost. Diminution in values is not taken into account unless it is considered to be permanent.

• Turnover: Turnover represents the net invoiced value of sales to external customers.

Deferred Taxation: Deferred taxation is provided for by the liability method which represents taxation at the current rate of company income tax, and the difference between the net book value of the assets qualifying for capital allowances and their corresponding tax written down values.

Foreign Currencies: transactions in foreign currencies are translated to naira at the rates of exchange ruling on the dates of the transactions.

Monetary assets and liabilities denominated in foreign currencies are translated at the official rates ruling at the balance sheet date. Exchange gains and losses are included in the profit and loss account of the period in which they arise.

• Employee’s Retirement benefit Schemes: The company makes annual provision for retirement benefits under its unfunded pension plan, using the aggregate method based upon actual valuation. Under this method, costs related to the plan are charged over the average service lives of active employees.
• Research and Development: Expenditure on research is charged to the profit and loss account in the year it is incurred, while development expenditure can be capitalised if it meets certain criteria set out in IAS 38.
• Consolidation: (for group/holding company) the group financial statements comprise the financial statements of the company and its subsidiaries. All inter-company transactions are normally eliminated.

Balance Sheet

The balance sheet and related notes should disclose the following information:

•  Fixed assets- property, plant and equipment

1. Land-freehold and leasehold.
2. Buildings
3. Plant and equipment
4. Other categories of assets, suitably identified, such as motor vehicles, furniture and fittings.
5. Accumulated depreciation for each class of assets.

Separate disclosure in a note form should be made of assets on lease and assets acquired on instalment purchase plans; that is, hire purchase. Such a disclosure should include the types of assets involved, their amounts and the periods covered.

• Other long-term assets

1. Long-term investments (quoted and unquoted) distinguished between:

• Investments in subsidiaries

• Investments in associated companies; and

• Other investmentsLong-term debts: All long term debts including their tenure

3. Intangible assets like

• Patents, trademarks and similar assets.
• Deferred charges such as: Pre-incorporation and formation expenses; and pre-production expenses and re-organisation expenses.

Any “write-offs” during the period and the market values of investments should be disclosed.

• Current Assets

1. Stocks and work-in-progress.
2. Current portion of long-term debts

3. Trade debts

4. Prepayments and sundry debtors

5. Directors debit balances.

6. Inter-company debit balances of subsidiaries and associated companies.

7. Short-term investments (including treasury bills, certificates of deposits and commercial notes, bills of exchange).

8. Foreign currency deposits for imports.

9. Deposits awaiting remittances to overseas creditors; and

10. Cash and bank balances.

• Capital and Reserves

1. The variety of ownership interest such as deferred shares, ordinary shares, preference shares, cumulative, non-cumulative, participating and non-participating preference shares, stating:

• The number, nominal value and amount of shares authorised and issued.

• The rights, preferences and restrictions with respect to the distribution of dividends and to the repayment of capital.

• Cumulative preference dividend in arrears.

• Shares reserved for future issue under options, sales contracts and options for conversion of loans and debentures into shares, including the terms and amounts; and

• Movements in the share capital accounts during the period.

2. Other shareholders interests, indicating movements during the period and any restrictions on their capitalization by way of bonus shares:

• Capital redemption reserve fund.

• Share premium or discount
• Revaluation surplus.

• Revenue and capital reserves.

• Retained earnings.

• Liabilities

1. Long-term liabilities, distinguishing between:

• Secured loans

• Unsecured loans.

• Loans from holding, subsidiary and associated companies

Details of the applicable interest rates, repayment terms, covenants, subordinations, etc, should be disclosed.

2. Current liabilities, disclosing separately:

• Amounts due to holding, subsidiary and associated companies.

• Trade creditors
• Other creditors and accrued expenses.

• Dividends payable

• Taxation

• Current portion of long-term liabilities

• Bank loans and overdrafts.

• General information to be disclosed include:

1. Restrictions on the title to assets.

2. Restrictions on the distribution of dividends.

3. Securities given in respect of liabilities.

4. The method of providing for pension or retirement scheme together with statement as to whether the scheme is funded or unfunded.

5. Contingent assets and contingent liabilities.

6. Amounts approved or committed for future capital expenditure; and

7. Events that have occurred after the balance sheet date but before the financial statements are approved by the Board.

Profit and Loss Account/Income and Expenditure Account

The profit and loss account with related notes or income and expenditure account (in the case of a company or organization, not trading for profit), should disclose the following information:

• Turnover/sales distinguishing between local and export sales.

• Other operating revenue- for example rental income or exchange gain.

• Other earnings- distinguishing between interest income: income from investments and other sources.

• Cost of sales.

• Gross profit

• Selling and distribution expenses.

• Administrative expenses.

• Interest charges.

• Taxes on income; and

• Unusual charges/credits, otherwise known as abnormal or exceptional items.

These are income items or expenditure, which although unusually large, are within the normal trading activities of the business.

Examples of exceptional items include:

1. Abnormal charges for bad debts and “write-offs” of stocks;

2. Abnormal provision for losses on long-term contracts.

3. Most adjustments of prior year taxation provisions; and

4. Shortfalls on actuarial valuation of gratuity scheme liabilities.

• Extra-ordinary items- these are items deriving from events or transactions outside the ordinary activities of the business and which are both material and expected not to recur frequently or regularly. Examples of extra-ordinary items are profits or losses arising from:

1. The discontinuance of a significant part of a business.

2. The sale of an investment not acquired with the intention of resale.

3. Writing off intangibles, such as goodwill, because of unusual events or development during the period; and

4. The expropriation of assets.

• Profit before taxation.

• Proposed dividend

• Profit after taxation
• Earnings per share
• Dividend per share

NOTES TO THE ACCOUNTS

The financial statements should be accompanied by appropriate explanatory notes to the figures in the balance sheet, profit and loss account and cash flow statement.

In the Nigerian perspective the Companies and Allied Matters Act, Cap. C20 LFN 2004 specifically requires the disclosure of the following information in the notes to the accounts:

• Directors’ emolument stating:

1. Chairman’s emoluments

2. Highest paid Director’s emoluments.

3. Directors’ fees.

4. Other emoluments; and

5. Number of directors earning within a stated band of emoluments.

• Auditors’ remuneration.

• Depreciation charged on fixed assets.

• Number of employees and remuneration, stating:

1. Average number of employees during the period and the related costs; and

2. Number of employees earning within a stated band of emoluments

• Capital commitments stating value of capital expenditure authorized by the Board but not executed as at balance sheet date. Amount committed out of the unspent amount should also be disclosed.

• Contingent liabilities, stating nature of the liabilities, and the Directors’ opinion on the likely loss that may arise from the liability.

• Technical service agreement, stating amount payable for the period covered by the financial statements.

• Post balance sheet events, stating material effect the events will have on the financial statements (if any).

Auditors’ Report

A set of financial statements must contain a signed and dated audit report certifying that:

• The company’s books accounts have been properly kept and proper returns for purpose of audit have been received from branches not visited.

• The financial statements:

1. Are in agreement with the books of accounts;

2. Give a true and fair view of the company’s affairs;

3. Have been prepared in accordance with relevant Statements of Accounting Standards state accounting agencies

4. Have been properly prepared in accordance with the Company’s acts

Directors’ Report

Financial statements must contain a signed and dated report of the Board, highlighting the following

• Directors’ responsibilities in accordance with the accountability laws

• Principal activities of the company.

• Results of the company for the period and appropriation of the profits.

• Changes in the Board of Directors during the period.

• Directors’ interest in the company’s share.

• Directors’ interest in the company’s contracts.

• Major shareholdings, disclosing shares held by individuals and organizations holding more than 10% of the company’s issued share capital.

• Employment and employees, highlighting company’s policies regarding:

1. Employment of disabled persons.

2. Employees’ health, safety and welfare.

3. Employees’ involvement and training.

• Major suppliers and distributors of company’s materials and products respectively.

• Research and development efforts of the company; and

• Donations and gifts by the company, stating organizations to which the company donated and amount made available.

Audit Committee’s Report

The audit Committee is required to:

• Review the external auditors’ scope and planning of the audit requirements;

• Review the external auditors’ memorandum of recommendations on accounting policies and internal controls, together with management responses.

• Ascertain that the accounting and reporting policies of the company are in accordance with legal requirements and agreed ethical practices;

• Recommend to the Board with regard to the appointment, removal and remuneration of the external auditors of the company; and

• Authorise the internal auditor to carry out investigations into any activities of the company which may be of interest or concern to the committee.

The Audit Committee is required to express an opinion on the adequacy or otherwise of the matters stated above and that they are satisfied with the management responses to the external auditors’ findings.

CASH FLOW STATEMENT

This provides information on the derivation and utilisation of funds during the period covered by the financial statements. When cash flow statement is taken together with the balance sheet and profit and loss account, better insight is obtained as to how the activities of an enterprise have been financed.

A cash flow statement should disclose the following:

• Cash flows from operating activities

Profit before taxation for the period covered by the financial statements is appropriately adjusted, for non-cash items such as:

1. Depreciation and amortization charge on fixed assets;

2. Profit or loss on disposal of fixed assets; and

3. Provision for unfunded pension plan.

• Changes in Current Assets and liabilities

Increase or decrease in current assets and liabilities when compared to those in the preceding year is accounted for under this sub-head to reflect:

1. Increase or decrease in stock;

2. Increase or decrease in creditors and accruals; and

3. Increase or decrease in foreign currency deposit for imports;

4. Increase or decrease in creditors and accruals.

• Payments in connection with operations, such as income tax and retirement benefits paid during the period covered by the financial statements are deducted from the addition of (a) and (b) above, before arriving at net cash inflow or outflow from operating activities.

• Cash flows from investing activities

Actual cash outflows or inflows of the following, during the period covered by the financial statements, are disclosed:

1. Purchase of fixed assets, investment or intangible assets.

2. Proceeds from sale of assets, investment or intangible assets; and

3. Dividends and interests received on investments.

• Cash flows from financing activities

Actual cash inflows or outflows on the following during the period covered by the financial statements are disclosed:

1. Dividends paid to shareholders;

2. Repayment of debenture stock; and

3. Proceeds from issue of shares and debenture stock.

• Movement in net liquid funds

The net figure arrived at by pooling together all the net figures obtained in (a) – (e) above, represents net increase or decrease in cash and cash equivalents at the beginning of the period covered by the financial statements are added to the net increase or decrease, we arrive at cash and cash equivalents at the end of the period covered by the financial statements which may consist of:

1. Cash and bank balances;

2. Bank overdrafts; and

3. Investments in commercial papers and other short-term financial instruments.

SELF ASSESSMENT EXERCISE

What should be disclosed by the cash flow statement?

VALUE-ADDED STATEMENT

Value-added statement reports the additional wealth created by an enterprise on its own and by its employees’ efforts during the period covered by the financial statements. It usually shows how the wealth created is distributed among various interest groups (such as, employees, government, creditors, providers of capital and that retained for the future creation of more wealth).

The concept here is the difference between the cost of inputs (bought-in materials and services) and value of outputs (turnover) is the value added by the operations of the business.

The value added can then be analysed to show how it has been applied. Note that wages are not included in cost of inputs from third party (outside the business).

Thus, the statement reports the claims of social and economic groups, reaffirming the contemporary belief that enterprises do not exist for the benefit of their owners (shareholders) only; but, also for the society at large.

The statement shows separately, the following:

• Sales to outsiders (third parties outside the group).
• Purchases of goods and services: distinguishing between imported and local items.
• (a) and (b) above represents value added; and

• Distribution of value-added to various groups such as:

1.  Employees- salaries, wages and fringe benefits;
2. Government – company income and education taxes, excise duties;
3. Providers of finance – dividends, interest, etc;
4. Retained for the replacement of assets and business growth:
5. To provide for depreciation of fixed assets; and
6. To augment reserves.

 FIVE-YEAR FINANCIAL SUMMARY

The five-year financial summary enables an instant comparison for an enterprise’s activities over the five-year period. Information to be disclosed are as follows:

 Results

1. Turnover
2. Profit before tax
3. Taxation
4. Profit after taxation
5. Dividend
6. Retained earnings

Assets Employed

1. Fixed assets
2. Intangible assets
3. Investments
4. Net current assets
5. Long term liabilities and deferred charges

Funds Employed

1. Issued share capital
2. Share premium
3. Revaluation reserves
4. Other reserves- revenue, bonus issue

 Financial Statistic – (per share data)

1. Share price at the end of period
2. Earnings per share
3. Dividend per share
4. Dividend cover
5. Net worth per share
6. Return on capital employed
7. Current assets: Current Liabilities

CONCLUSION

It can be concluded that an annual report is a document produced annually by companies designed to portray a true and fair view of the company’s annual performance, with audited financial statements prepared in accordance with company law and other regulatory requirements, and also containing other non-financial information.

Directors are responsible for the preparation of the accounts which must give a true and fair view. A true and fair view is one where accounts reflect what has happened and do not mislead the readers. The accounts must be prepared in accordance with relevant accounting standards.

Source: National open university of Nigeria