Junior Audit Manager w RSM Poland
When reviewing financial statements for the year 2014, I could not escape the thought that the National Accounting Standard No. 9 (referred to as NAS 9) 'Director's Report' did not result in any visible improvement in the quality of the elaborated documents. You may still come across reports that are roughly one page long, based on financial data from only two years or simply information that has been pasted straight from the financial statement, perhaps with a little comment saying 'increase/decrease by so and so', without any kind of detailed clarification as to the root cause of such changes. Obviously, this is not to say that the management report should be revealing company business secrets. Still, a more comprehensive approach may be expected here, with the information provided allowing the reader to assess the company's actual condition.
Thankfully, there are Boards who now include directors (who are not necessarily members of the issuer's Board themselves) with a good understanding of the document's importance. After all, the director's report, much like the financial statement, is subject to review and approval by the company's approving body, which follows from the provisions of the Code of Commercial Companies. And yet even that body in drafting the director's report tends to make use of only the past two years covered by the financial statement.
A small reminder of the standard's effectiveness
As you know, on 30th April 2014 the Polish Ministry of Finance issued communication no. 4 on the publishing of the resolution of the Accounting Standards Committee on adopting National Accounting Standard No. 9 'Director's Report'. The standard became effective upon publication in the Official Journal of the Minister of Finance and is applicable to management reports covering the financial year commenced in 2014, with possible extension to earlier reports.
What is the intended standard for?
The aim of the published NAS 9 is to 'provide assistance in preparing the Directors' Report' and at the same time to 'promote good practices in that area'. Let us take a moment to compare Article 49 of the Act on Accountancy (referred to as AA) against chapter 6 of NSA 9.
|Subtitle in chapter 6 of NSA 9||Titles as implied in Article 49 of the Act on Accountancy|
|Description of business operations and resources||
1. Information on the business unit's branches/plants
2. Information on purchase of own shares (stocks), especially the purpose of such purchase, the number purchased and their nominal value, with indication as to the part of the capital share these represent, the price of purchasing such shares (stocks) or the price of selling them if that is the case
3. Information on the unit's major achievements in R&D
4. Information on environmental and employment issues
|Objectives and risk||
Information on financial instruments in the following areas:
a) Risk: price changes, credit risk, significant cash flow disruptions and loss of liquidity risk
b) The unit's adopted objectives and methods of financial risk management, including ways of securing major types of planned transactions for which hedge accounting is applied
|Business results and financial condition||
1. Information on the unit's expected development
2. Financial and non-financial ratios
3. Information on events with significant impact on the unit's business operations that occurred in the subject financial year and later, up to the day of approving the financial statement
|Outlooks||Information on the unit's expected financial situation|
|Corporate governance||Information on applied principles of corporate governance in case of units whose securities are listed on an EEA regulated market|
Data presentation and the relevance of such information
As is evident, the division that follows from NSA 9 is convergent with the main items highlighted in Article 49, AA. Each of the mentioned sections is also described in detail in the standard. However, I would like to especially emphasise those provisions that, if applied in practice, are certainly a confirmation of what is most important to the reader (or, in other words, the addressee of the report): namely, the assumption that the going concern principle adopted by the company is indeed justified. Statutory auditors conform with that assumption in their reviews of financial statements, often based on information invisible to the ordinary user in a financial statement that actually covers only two years of business. In commenting the principles of preparing and presenting the Director's Report, NSA 9 points out the following items:
- A good practice is to present financial information that covers periods from 3 to 5 years, allowing for proper assessment of trends and directions. The analysed time horizon obviously depends on the industry, the nature of the given issue, etc.; it also depends on available comparative data;
- Another good practice is to back outlooks with perspectives and projections, including key financial and non-financial ratios that allow for a better assessment of the unit's prospects at least in the coming year. The financial ratios that are the subject of a perspective or projection should be comparable with information included in the financial statement. Indicating objectives and expectations in a longer time horizon is also desirable.
Extending relevant financial data to cover periods of 5 years back and 1 year ahead would allow readers to come to their own conclusions as to the company's financial and economic situation and at the same time either confirm or reject the going concern principle. That is why, in my opinion, it is a good idea to point out the requirements of NSA 9 to members of high management or even the company's bodies in charge of supervising and approving the Directors' Report. The aim of the said standard, as discussed above, is to make the information included in the Directors' Report as useful as possible to its recipients in assessing past, current and future events - to the benefit of all parties involved.