Financial Statements – Business Reviews – they needn’t be a chore
The purpose of the Business Review (‘Review’) is to add further substance to a company’s financial statements and inform the users of those financial statements about the events that have happened during the company’s financial year just gone and to inform the stakeholders of the company about future prospects – you could say that the Review adds the flesh to the bones of the numbers contained in the financial statements.
Broadly speaking, ‘small companies’ are exempt from the requirement to prepare a Review, however, the directors’ of ‘medium’ and ‘large’ companies must prepare one in their Directors’ Report. Having said this, there is no reason why a small company cannot prepare a Review in their financial statements. Please contact me if you would like clarification on the rules determining the size of companies.
However, many directors see the preparation of their Review as a chore and these are sometimes very brief.
The Review need not be pages and pages of glossy facts, figures and graphs that you see in the financial statements of large, listed companies, but something that fits the size and complexity of your business.
The guidance issued by the Financial Reporting Council states that the Review must contain a fair review of the business of the company and a description of the principal risks and uncertainties facing the company. In order to understand the development, performance or position of the company, the Review must also contain analysis of key financial performance indicators and, where applicable, other key performance indicators, including information relating to environmental and employment matters.
It is understandable that the Directors of a company face a dilemma – 1) they prefer not to disclose too much information to the outside world (especially if they are owner managed businesses) and 2) the financial statements they are reporting on contain historic information, so some directors’ are reluctant to use the Review to the best of its potential.
Following on from the above, the world has just witnessed one of the longest and prolonged recessions in recent history and the fragile green shoots are only beginning to emerge.
Some companies have seen some disappointing results in recent times and whilst their financial statements are a true and fair view reflection of the financial position of the company for the period under review, the directors may want to use the Review to show a positive outlook for the development of the business going forwards – for example by stating new sales contracts entered into/new revenue streams/new acquisitions etc. and, as long as these can be substantiated, the directors could disclose this.
For companies not subject to the small companies regime, the Review, which is contained in the Directors’ Report, is filed at Companies House, so credit reference agencies, suppliers, customers etc. can not only assess the financial information in the financial statements, they can also see the Directors’ comments regarding the year just gone and the Directors’ can use the Review to promote the future prospects of the company to all stakeholders.
Another reason for a more comprehensive Review would be if the company were looking to attract a potential buyer in the foreseeable future, then providing a more holistic Review may also be beneficial as Companies House is most likely going to be the starting point for a potential buyer. As mentioned, there is no reason why small companies cannot make use of a Review in their financial statements and file full financial statements at Companies House.
However, I must stress that the Directors’ of a company cannot just write anything. The statements contained in the Directors’ Report must be consistent with the financial statements and any interaction between the Review and the financial statements must be factually accurate (i.e. if a key performance indicator is sales growth and it is stated in the Review that sales have grown 20% yet sales have only grown 15% in the statutory profit and loss account, then this is not consistent).
So the overriding purpose of this Review is to inform the stakeholders of the financial statements and help them assess how the directors have performed their duties to promote the success of the company.
The Review must be a balanced and comprehensive analysis of the development and performance of the company’s business during the financial year under review and provide analysis of the position of the company at the balance sheet date. The Review should be consistent with the size and complexity of the company’s business.
In a nutshell, the Review should not be seen as a chore, but as an excellent opportunity to promote the business to the outside world.