A Directors Report has remained relevant despite the emergence of new reporting tools such as the Operating and Financial Review. From April 1st, 2005, the quoted companies are required to include an Operating and Financial Review in their annual accounts. The Operating and Financial Review or the Management's Discussion and Analysis of Results of Operations and Financial Condition, as it is popularly known, provides a better picture of a company. The Operating and Financial Review discusses and analyzes a company's performance. Yet a Directors Report remains unique because it is a direct communication from the directors to the shareholders.
Companies are legally obliged to include a Directors Report in their annual accounts. Companies House requires companies to include a Directors Report in their annual accounts. Other documents that companies need to file with Companies House include a profit and loss account, a balance sheet, an auditors' report, notes to the accounts and group accounts if any.
What should be included in a Directors Report?
Companies House, however, does not specify the content of the Directors Report. It directs companies to follow the directives of the Companies Act 1985. A Directors Report is mandatory according to the Companies Act 1985. The Act specifies the content that should be included in a Directors Report.
- Directors Reports should provide a review of the company's business.
- The Directors Report should disclose the dividend that the directors are recommending and the amount which they wish to carry to the reserves.
- The directors report should also highlight any changes to the board of directors.
- Other issues that should be included in a Directors Report are details of subsidiary undertakings, directors' interests, details of annual general meeting, statement of responsibilities and the details of the directors' remuneration report.
With corporate governance becoming a critical issue worldwide, a section on corporate governance has become a fixture in the Directors Report. This section reveals the extent to which a company is complying with provisions of the revised Combined Code on corporate governance. Corporations are also including information relating to the composition of their board in the Directors Report. The number of independent directors on the board has become important after the recent raft of accounting scandals.
Although a Directors Report resembles an Operating and Financial Review in many respects, there are certain areas where it differs. The Directors Report contains additional information such as dividend recommendation, details of the directors' remuneration report, changes in the board and the compliance with the revised Combined Code. The Operating and Financial Review, by contrast, focuses on the operational and financial performance of a company.
In the past few years, the front-end of the annual report has become heavy with several messages from the senior management. In addition to the chairman's message, most annual reports contain a letter from the chief executive, business review and more recently, the Operating and Financial Review. The Directors Report, as a result, has been pushed to the middle of the annual report, closer to the financial statements and the auditor report.
With annual reports of most companies comprising several reports from the senior management in addition to directors information repetition of facts has become endemic. While the Directors Report continues to remain unique due to the nature of its communication, the introduction of an Operating and Financial Review may necessitate a rationalisation of the messages from the senior management.