A GUIDE TO

UNDERSTANDING
ANNUAL REPORTS:
AUSTRALIAN LISTED COMPANIES
OCTOBER 2014

BE HEARD.
BE RECOGNISED.
CPA Australia Ltd (‘CPA Australia’) is one of the world’s largest accounting bodies representing more than 150,000 members of the financial, accounting
and business profession in 121 countries.
ISBN: 978-1-921742-61-3
For information about CPA Australia, visit our website cpaaustralia.com.au
First published 1995
Second edition 2012
Third edition 2013
Fourth edition is a revision and update of the publication titled A guide to understanding annual reports: listed companies
CPA Australia Ltd
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3 | A GUIDE TO UNDERSTANDING ANNUAL REPORTS:

CONTENTS

Contributors 4
Foreword 5
What is an annual report? 6
What is a directors’ report? 7
What is a corporate governance report? 8
What is financial report? 10
What is audit report? 11
What do the four primary financial statements show? 12
Why is the statement of comprehensive income different from the statement of cash flows? 13
Why are the figures in a financial statement sometimes subject to disputes and disagreements? 14
Features of the financial statements 15
An approach to reading financial statements 17
When are financial reports prepared? 19
Where are financial reports published? 20
Opportunities for shareholders 21
Sample financial statements 22
Notes to the financial statements (extract) 25
Glossary* 27
4 | A GUIDE TO UNDERSTANDING ANNUAL REPORTS:

CONTRIBUTORS

CPA Australia acknowledges the work of the External Reporting Centre of Excellence.

EXTERNAL REPORTING CENTRE OF EXCELLENCE

David Hardidge FCPA Chairman

Indra Abeysekera CPA

Tong-Gunn Chew FCPA

Ric De Santi FCPA

Thomas Egan FCPA

Amir Ghandar CPA Technical Support

Piotr Jakubicki CPA

Alan Lee CPA

Jeffrey Luckins CPA

Carmen Ridley

Mark Shying CPA Technical Support

Julie Sinclair FCPA

Ram Subramanian Technical Support

5 | A GUIDE TO UNDERSTANDING ANNUAL REPORTS:

FOREWORD

Existing and prospective shareholders are entitled

to information about the financial performance
and state of affairs of the listed company in which
they have invested or may invest. The company
annual report is one important source of that
information. Analysts and media commentaries
are others. However, the annual report is only
useful to those who can understand and interpret
the messages conveyed.
The Australian Securities Exchange (ASX) is
one of the world’s top-10 listed exchange
groups measured by market capitalisation with
2,192 listed companies, $A1.6 trillion market
capitalisation and total capital raisings of over
A$66 billion. The ASX attracts a diverse investor
group of Australian and international investors
both institutional and retail.
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
the annual report of a listed company. Other
stakeholders, including employees, may find
it and the companion piece useful. The Guide
should assist shareholders and other providers
of capital who are not literate in accounting
standards and the Corporations Act 2001 to
interpret financial statements and therefore
to be able to make better use of them.
This Guide has been produced in the public
interest and is an initiative of the External
Reporting Centre of Excellence of CPA Australia.
I congratulate them on their continued
contribution to a CPA Australia publication that
has an important role to play in the promotion
of improved financial literacy.

Alex Malley FCPA

Chief Executive
CPA Australia Ltd
6 | A GUIDE TO UNDERSTANDING ANNUAL REPORTS:

WHAT IS AN ANNUAL REPORT?

The annual report comprises information about

the company, and some commentators believe
that it is the primary source of information about
a company’s activities and strategies. The peak
body of Australia’s senior finance executives (the
G100) publication Reporting to Shareholders
 Good Practice Guide (May 2008) states
A
the primary purpose of the annual report is
accountability, particularly to shareholders.
Information found in the annual report includes
material framed by statutory and regulatory
requirements articulated in the Corporations Act
2001 and Australian Securities Exchange (ASX)
listing rules, including:
• the directors’ report (of which the remuneration
report is part)
• the corporate governance report
• 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.
The emergence of corporate social
responsibility and sustainability reports
are further examples of the non- compulsory
reporting which companies are choosing to
provide shareholders with to enhance market
knowledge and understanding of their strategies
and performance operating the business.
7 | A GUIDE TO UNDERSTANDING ANNUAL REPORTS:

WHAT IS A DIRECTORS’ REPORT?

The directors’ report of a listed company has The report by the directors will identify the names
an important role in meeting the information of the directors and officers of the company, and
needs of shareholders. While company’s financial is required to contain information about options
report provides useful information about financial including share options, executive options,
position and performance, it will rarely provide all indemnity and insurance. The directors’ report
of the information needed to readily assess the includes a remuneration report that must include
company’s financial position and to appreciate a discussion of the board’s policy on remuneration
the underlying reasons for the entity’s results. and its relationship to company performance.
It will also provide little, if any, information about The remuneration report includes information
business strategies and prospects relevant to about the cost to the company of providing its
future financial performance. directors and key management personnel with
The directors’ report contains information that short-term employee benefits, post-employment
shareholders of the company would reasonably benefits, other long-term employee benefits,
require to make an informed assessment of: termination benefits and share-based payment
arrangements.
• the operations of the company reported on
• the financial position of that company
• 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
• 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)
• details of the company’s performance in
relation to any particular and significant
environmental regulation
8 | A GUIDE TO UNDERSTANDING ANNUAL REPORTS:

WHAT IS A CORPORATE GOVERNANCE

REPORT?

The answer to the question “What is a corporate Principle 7 – Recognise and manage risk
governance report?” will depend on how one Companies should establish a solid system of risk
defines corporate governance. The ASX listing oversight and management and internal control.
rules do not provide a definition, but they require
Principle 8 – Remunerate fairly and responsibly
listed companies to disclose in their annual
Companies should ensure that the level and
report the extent to which they have followed the
composition of remuneration is sufficient
non-mandatory guidelines of the ASX Corporate
and reasonable and that its relationship to
Governance Council’s (ASX CGC) Corporate
performance is clear.
Governance Principles and Recommendations
(2nd edition) or explain why they have not done so In March 2014 the ASX CGC issued the 3rd
(“if not, why not?” reporting). edition of its Corporate Governance Principles
and Recommendations that take effect for an
The ASX CGC principles (2nd edition) are:
entity’s first full financial year commencing on
Principle 1 – Lay solid foundations for or after 1 July 2014. Accordingly, entities with a
management and oversight 30 June 2014 balance date will report against
Companies should establish and disclose the the principles described in the 2nd edition
respective roles and responsibilities of board and of the Corporate Governance Principles and
management. Recommendations unless they elect to early
adopt the 3rd edition.
Principle 2 – Structure the board to add value
Companies should have a board of an effective The ASX CGC principles (3rd edition) are:
composition, size and commitment to adequately 1. Lay solid foundations for management
discharge its responsibilities and duties. and oversight:
Principle 3 – Promote ethical and responsible A listed entity should establish and disclose
decision-making the respective roles and responsibilities of
Companies should actively promote ethical and its board and management and how their
performance is monitored and evaluated.
responsible decision-making.
2. Structure the board to add value:
Principle 4 – Safeguard integrity in financial
A listed entity should have a board of an
reporting
appropriate size, composition, skills and
Companies should have a structure to
commitment to enable it to discharge its duties
independently verify and safeguard the integrity effectively.
of their financial reporting.
3. Act ethically and responsibly:
Principle 5 – Make timely and balanced A listed entity should act ethically and
disclosure responsibly.
Companies should promote timely and balanced
4. Safeguard integrity in corporate reporting:
disclosure of all material matters concerning the
A listed entity should have formal and
company. rigorous processes that independently verify
Principle 6 – Respect the rights of shareholders and safeguard the integrity of its corporate
Companies should respect the rights of reporting.
shareholders and facilitate the effective exercise 5. Make timely and balanced disclosure:
of those rights. 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.

1
The guidelines articulate aspirations of best practice for optimising corporate performance and accountability in the interests
of shareholders and the broader community as statements of eight core principles with recommendations for implementation.
9 | A GUIDE TO UNDERSTANDING ANNUAL REPORTS:

6. Respect the rights of security holders:

A listed entity should respect the rights of
its security holders by providing them with
appropriate information and facilities to allow
them to exercise those rights effectively.
7. Recognise and manage risk:
A listed entity should establish a sound risk
management framework and periodically
review the effectiveness of that framework.
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.
A listed company may decide to voluntarily
report on more than the eight principles (and
the recommendations made to implement the
principles). The form, substance and quantity
of its voluntary reporting will very much depend
on the way the company defines corporate
governance and the view taken by directors
on for whom they govern. Commentators have
noted that a number of definitions of corporate
governance refer to it as the system by which
companies are directed and controlled. Some
commentators consider that good corporate
governance should have the maximisation of
shareholders’ wealth as its objective, while others
focus on social responsibility or sustainability.
10 | A GUIDE TO UNDERSTANDING ANNUAL REPORTS:

WHAT IS FINANCIAL REPORT?

The financial report provides people who are The directors’ declaration comprises statements
interested in a company – such as shareholders, from the directors that:
lenders, analysts and employees – with • the financial statements and the notes comply
information about the financial performance with accounting standards
and financial position of the company. It is one
means by which directors of the company advise • the financial statements and notes give a true
shareholders on how the business has performed and fair view
during the year. The financial report also provides • there are reasonable grounds to believe that
information to shareholders on how the directors the company is solvent
have discharged their responsibilities.
This declaration is required by the Corporations
Financial reports consist of four primary financial Act 2001.
statements for the current financial period and the
comparative previous financial period, the notes
to the financial statements and the directors’
declaration.
The four primary financial statements are:
• a statement of comprehensive income
• a statement of financial position
• a statement of changes in equity
• a statement of cash flows
Financial statements present information relevant
to the current financial period and comparative
figures for the previous year to illustrate how
the financial performance and position of the
company have changed.
The notes in the financial report explain the
accounting policies used in its preparation, and
provide additional information on many of the
amounts.
The notes also provide financial information
which is not contained in the primary financial
statements, such as information about the
uncertainties facing the company that meet the
definition of contingent liabilities and leasing
commitments.
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.
11 | A GUIDE TO UNDERSTANDING ANNUAL REPORTS:

WHAT IS AUDIT REPORT?

Auditors are independent accountants appointed In addition, emphasis of matter paragraphs

by shareholders to provide an independent relevant to the going concern assumption
opinion on the financial report and the and other matter paragraphs will be included
remuneration report prepared by the directors.2 in the audit report in certain circumstances.
The audit report to the financial report comprises The CPA Australia publication A guide to
two parts. The first part of the report is the understanding auditing and assurance: Listed
auditor’s opinion about whether the financial companies explains the value and purpose of
report complies with the Corporations Act 2001 the audit report in plain language and can be
(and if not why not), the Australian Accounting accessed at here.
Standards and International Financial Reporting
Standards (and if not, the quantitative effect
of that non-compliance) and gives a true and
fair view of the reported financial performance,
financial position and cash flows of the company.
The second part of the audit report is the
auditor’s opinion about whether all information,
explanations and assistance necessary for the
audit has been given, whether sufficient financial
records have been kept to enable the financial
report to be prepared and audited, and whether
other records and registers as required by the
Corporations Act 2001 have been kept as well
as confirming that the audit was conducted in
accordance with Australian Auditing Standards.
The audit report provides the reader with added
assurance of an independent opinion on the
information contained in the financial report,
but it does not guarantee the accuracy of the
financial information, or the continued viability
of the company. Further, the auditing framework
is designed to enable auditors to make an
assessment that is based on a number of factors,
including materiality.
The auditor will issue a modified opinion when
they are of the opinion that the financial report
does not present a true and fair view, or is not in
accordance with Australian Accounting Standards,
International Financial Reporting Standards,
Interpretations and corporations legislation and
regulation. Another example of an auditor issuing
a modified opinion is when they decide that the
remuneration report is not in accordance with the
Corporations Act 2001. Their modified opinions
will identify the shortcomings of the relevant
report.

The other information that forms the directors’ report along with the directors’ report itself are not subjected to a report from
2

the auditor.
12 | A GUIDE TO UNDERSTANDING ANNUAL REPORTS:

WHAT DO THE FOUR PRIMARY

FINANCIAL STATEMENTS SHOW?

The primary purpose of financial statements

is to aid current and prospective shareholders
and other providers of capital in their resource-
allocation decisions.
The statement of comprehensive income provides
a complete picture of company 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.
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 one 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.
The cash flow statement shows the historical cash
inflows and outflows for the financial period from
operating, investing and financing activities. The
content of the four statements is supported by
notes.
Financial statements are prepared in accordance
with the Australian Accounting Standards
and Interpretations 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.
13 | A GUIDE TO UNDERSTANDING ANNUAL REPORTS:

WHY IS THE STATEMENT OF

COMPREHENSIVE INCOME
DIFFERENT FROM THE
STATEMENT OF CASH FLOWS?

Companies prepare their financial statements

using the accrual 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.
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, the risks and rewards
are transferred to the customer and there is a
valid sales 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 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 next year.
14 | A GUIDE TO UNDERSTANDING ANNUAL REPORTS:

WHY ARE THE FIGURES IN A FINANCIAL

STATEMENT SOMETIMES SUBJECT TO
DISPUTES AND DISAGREEMENTS?

Financial statements portray the financial

effects of what are often complex commercial
transactions, and judgement 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 accounting rules
are not written to cover all situations. Therefore,
professional judgement may be needed when
interpreting and applying an accounting standard.
Returning to the CPA Australian example,
the monetary amount shown as exploration
expenditure in the statement of financial
position is the cost that directors estimate
will be recovered in future financial years. The
application of accounting standards means the
effect of the directors’ estimate is also seen in
the statement of comprehensive income as an
impairment expense. Judgement is frequently
required in determining those monetary amounts
and directors will often make use of an external
valuation expert.
Directors are also 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.
15 | A GUIDE TO UNDERSTANDING ANNUAL REPORTS:

FEATURES OF THE FINANCIAL STATEMENTS

The performance report of CPA Australian An item will be classified as “current” when its
Resources Ltd uses the single statement format amount is expected to be recovered or settled no
of the statement of comprehensive income, and more than 12 months after the date of the report,
will always starts with revenue.3 otherwise its classification is as “non-current”.
Note 3 in the statement of comprehensive Some companies may choose to classify their
income identifies the types of revenue earned assets and liabilities only in order of liquidity and
by CPA Australian. Accounting standards require not separately presented as current or non-
that the expenses present finance costs and tax current, while others may use a combination of
expense separately, and the notes would contain liquidity and current or non-current classifications.
further information on some items of expense. For The equity section of the CPA Australian
some expenses, the accounting standards allow statement of financial position includes capital
the company to choose between presenting the invested by shareholders and accumulated
information in the statement of comprehensive profits retained from previous years not yet paid
income or in the notes to the financial statements. out as dividends. For companies that adopt
The statement of financial position does not accounting policies different from those used
purport to be a valuation of the company, by CPA Australian, the equity section might
rather it is the outcome of applying accounting include reserves that result from the accounting
standards. Therefore, it would be incorrect to standards requirements for asset revaluations,
conclude that the current monetary value of the designation of financial assets as available
CPA Australian is $266,358,000. Some of the for sale, cash flow hedges and foreign currency
assets of CPA Australian are shown at a current translations (the example does not include
valuation (such as trade and other receivable), reserves). Some reserves are available for
while other assets, for example property, plant distribution to shareholders.
and equipment, are presented at their cost of Listed companies will sometimes control other
purchase less accumulated depreciation. Notes companies, while CPA Australian does not. In
2(a) and (e) provide some further information those situations, the financial statements of the
about the approach taken by CPA Australian in controlling company show information for the
the preparation of the financial statements. The consolidated group. The equity section of the
accounting standards only allow the recognition statement of financial position would separately
of purchased goodwill, whereas the goodwill a present equity attributed to the shareholders of
company builds up during its years of operation the controlling company, and the non-controlling
is not recognised on the statement of financial interest.
position.
Although CPA Australian 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 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.

3
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.
16 | A GUIDE TO UNDERSTANDING ANNUAL REPORTS:

The statement of changes in equity shows the

overall change in equity during a period which
represents:
• the total amount of income and expenses,
including gains and losses, generated by the
company’s activities 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 activities with its owners are
the issue of new shares at $336,000 and the
payment of dividends of $35,912,000
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 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, fund its
activities and generate positive cash flows in the
future.
17 | A GUIDE TO UNDERSTANDING ANNUAL REPORTS:

AN APPROACH TO READING
FINANCIAL STATEMENTS

Financial statement reporting by listed companies Readers should be mindful that statements
is all about communicating monetary measures from the chairman or CEO may highlight the
and supporting information to current and positive side of the company’s operations and
prospective shareholders and other providers that except for the remuneration report section
of capital. Other stakeholders, including analysts of the directors’ report none of this information
and employees, may also be interested. Some is subject to the opinion of the auditor.
parts of the story might be of interest to all, while
other parts will be of interest to a particular group.
STEP 2
Also, those readers planning to use the financial
Read the audit report to see if the audit opinion
statements to make decisions need to be aware
has been modified or contains some other
that a listed company’s financial statements do
communication by the auditor. If so, read carefully
not and cannot provide all the information they
why the auditor has issued a modified opinion
need. Analysts’ reports, the financial press, and
or included another communication such as an
the ASX website are other sources of information
emphasis of matter paragraph.
to assist decision-making.
A final warning – financial statements are not
designed to show the market value of the STEP 3
company, but they do provide information to Next, have a look to the statement of
assist shareholders, other providers of capital comprehensive income and the statement of
and others stakeholders in estimating that value. financial position and assess the size of the
company and its profitability. CPA Australian
generated profit after income tax for the current
STEP 1
period of $40,674,000. But this figure means little
The importance of preparation should not be unless we compare it to another time period or
underestimated as you settle down to analyse the another company to give it context. Horizontal
financial statements of a listed company. Making or trend analysis can be used for intracompany
yourself knowledgeable about the environment comparative analysis. For example, you might
in which the company operates in now and decide to evaluate performance by using the
its direction in the future, for example getting comparative information in the CPA Australian
information about local, national or global financial statements to benchmark the current
macro and micro economic conditions and the year performance (profit after income tax
risk profile of the company’s business(es) is a $40,674,000 compared to the previous year figure
good and necessary start. Returning again to of $26,705,000). Vertical analysis can be used for
our fictitious Australian listed iron ore mining intracompany and intercompany comparative
company example, the current and prospective analysis. A base amount is established and
shareholders of CPA Australian Resources Ltd the monetary measure in the current period
are likely to be interested in the projected financial statement of CPA Australian would be
international demand for iron ore. Most expressed as a percentage of this base amount.
readers gain an overview of the company, an For example, you might be interested in the
understanding of the business it’s in and the risks relationship of cash and cash equivalents to total
the business is facing from reading other parts assets and how it compares to the previous year.
of the annual report. The statements from the For the current financial year the relationship
chairman and the Chief executive officer (CEO) expressed as a percentage is 26.8 per cent (and
that put the company’s performance highlights the comparative financial year 25.6 per cent). Ratio
into context against strategies and the directors’ analyses compares the relationships of financial
report are often read. statement information, and are worked out by
dividing one monetary measure by another and
can be used for intracompany and intercompany
comparative analysis.
18 | A GUIDE TO UNDERSTANDING ANNUAL REPORTS:

For example, CPA Australian has current period STEP 5

current assets of $117,387,000 and $57,623,000
The remaining notes to the financial statements
in current liabilities, a current ratio of 2.04:1. You
contain detailed financial information, including
can use the outcomes from performing horizontal,
information on the areas in which the company
vertical and ratio analysis to compare the results
operates, specific items of revenue and expense,
for the previous year, the industry sector or
and an explanation of the tax expense. Again,
competitors. You can use the web to increase
look for the notes which elaborate on any
your understanding of how to use these tools.
amounts which have come to your attention
Now consider the statement of cash flows and the in the financial statements.
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
comprehensive income. For companies of other
sectors, it is more likely current and prospective
shareholders will be interested in the statement
of comprehensive income. This is because they
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.

STEP 4
Turn to the notes to the financial statements.
For example, Note 2 to the financial statements
of CPA Australian states the basis of preparation
for the financial statements are 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. 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 effect of the change
on the financial statements. Companies are
required to provide information on changes to
accounting policies in the notes.
19 | A GUIDE TO UNDERSTANDING ANNUAL REPORTS:

WHEN ARE FINANCIAL REPORTS

PREPARED?

Listed companies are required to prepare and

issue to shareholders a financial report and
directors’ report annually. They must also issue the
auditors’ report on the financial and remuneration
reports, or they may issue a concise report. These
reports should be issued to shareholders within
four months of the end of the financial year.
Most company reports are prepared for the
period from 1 July to 30 June, but this is not
obligatory. The period of the financial report is
referred to as the financial year. Companies are
required to lodge the issued reports with the
Australian Securities and Investment Commission
(ASIC) and the ASX within three months of the
end of the full financial year. Half-year reports are
lodged with ASIC and the ASX within two months
of the end of the half-year financial year.
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WHERE ARE 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 annual general meeting 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 its action. Alternatively, a
company may elect to send shareholders a hard
copy or a concise report. A shareholder has the
right to receive a hard copy, but must specifically
request the printed version.
Copies are lodged with ASIC and the ASX and are
available for inspection online.
21 | A GUIDE TO UNDERSTANDING ANNUAL REPORTS:

OPPORTUNITIES FOR SHAREHOLDERS

Shareholders are sent a notice of the Annual

General Meeting (AGM), which is an opportunity
for shareholders to ask questions of the auditor
about their report and the directors on any aspect
of the company’s operations and performance
and of the annual accounts tabled at the AGM.
22 | A GUIDE TO UNDERSTANDING ANNUAL REPORTS:

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 show the way in which many listed companies present yearly financial statements.
The figures are simplified to assist you in reading the statements. A subset of the notes to the financial
statements is provided for illustrative purposes.

CPA AUSTRALIAN RESOURCES LIMITED

STATEMENT OF COMPREHENSIVE INCOME
For the year ended 30 June 20XC

NOTE 20XC 20XB

$’000 $’000

Revenue 3 643,066 539,189

Corporate expenditure (300,105) (206,844)

Depreciation (29,367) (44,461)

Employee benefits expense (114,986) (105,909)

Exploration expenses written off - (10,660)

Finance expenditure (18,779) (19,408)

Impairment of exploration expenditure (114,251) (103,422)

Other expenses 4 (7,498) (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

(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 40,705 28,383

attributable to CPA Australian Resources Limited

Earnings per share for profit from comprehensive cents cents

income

Basic earnings per share 27 20.62 15.19

Diluted earnings per share 27 20.62 15.19

The statement of comprehensive income should be read in conjunction with the accompanying notes.
23 | A GUIDE TO UNDERSTANDING ANNUAL REPORTS:

CPA AUSTRALIAN RESOURCES LIMITED

STATEMENT OF FINANCIAL POSITION
For the year ended 30 June 20XC

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.
24 | A GUIDE TO UNDERSTANDING ANNUAL REPORTS:

CPA AUSTRALIAN RESOURCES LIMITED

STATEMENT OF CHANGES IN CHANGES IN EQUITY
For the year ended 30 June 20XC

ISSUED RESERVES RETAINED TOTAL

CAPITAL PROFITS 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
25 | A GUIDE TO UNDERSTANDING ANNUAL REPORTS:

NOTES TO THE FINANCIAL STATEMENTS

(EXTRACT)

NOTE 1: ADOPTION OF NEW (c) |Critical accounting judgements, estimates

AND REVISED ACCOUNTING and assumptions
STANDARDS The preparation of financial statements requires
The principal accounting policies adopted in the management to make judgements, estimates and
preparation of the financial statements are set assumptions that affect the reported amounts in
out below. These policies have been consistently the financial statements. Management continually
applied to all the years presented, unless evaluates its judgements and estimates in
otherwise stated. relation to assets, liabilities, contingent liabilities,
revenue and expenses. Management bases these
New, revised or amending Accounting Standards
assumptions on experience and on other factors
and Interpretations adopted.
such as expected future events it believes to be
The company has adopted all of the new, revised reasonable under the circumstances. The resulting
or amending Australian Accounting Standards accounting judgements and estimates will seldom
and Interpretations issues by the AASB that are equal the related actual results. The judgements,
relevant to the operations and mandatory in the estimates and assumptions that have a significant
current reporting period. risk of causing a material adjustment to the
Any new, revised or amending Australian carrying amounts of assets and liabilities within
Accounting Standards or Interpretations that are the next financial year are discussed below.
not yet mandatory have not been early adopted. (d) Estimation of useful lives of assets
The company determines the estimated
NOTE 2: SUMMARY SIGNIFICANT useful lives and related depreciation charges
ACCOUNTING POLICIES (EXTRACT) for its property, plant and equipment and
(a) Basis of preparation deferred exploration expenditure. The useful
lives could change significantly as a result of
The financial statements have been prepared technical innovations or some other event. The
on an accruals basis and are based on historical depreciation charge will increase where the useful
costs and do not take into account changing lives are less than previously estimated lives, or
money values. Cost is based on the fair value of technically obsolete or non-strategic assets that
the consideration given in exchange for assets. have been abandoned or will be written off or
The accounting policies have been consistently written down.
applied, unless otherwise stated.
The financial statements are presented in
Australian Dollars and all values are rounded
to the nearest thousand dollars ($000) unless
otherwise stated.
(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).
26 | A GUIDE TO UNDERSTANDING ANNUAL REPORTS:

Note 3: Revenue

20XC 20XB

$’000 $’000
Sales revenue
Sales of iron ore 629,249 536,661
Sales of other metal 12,492 1,868
641,741 538,529
Other revenue
Interest 1,325 660
643,066 539,189

Note 6: Current assets – cash and cash equivalents

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
27 | A GUIDE TO UNDERSTANDING ANNUAL REPORTS:

GLOSSARY*

Accumulated depreciation The cumulative depreciation of an asset to the date of the current financial year.
Accumulated profits The amount of past years profits not paid in dividends. Sometimes referred to as retained
profits. In contrast, losses from previous years not absorbed by past years profits 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 A report on how the company manages its business processes to produce an overall
responsibility report 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.
Equity Total assets less total liabilities; includes share capital, reserves and accumulated profits.
Expenses The costs of deriving revenue.
Goodwill An asset representing the future economic benefits 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 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.
Reserves Surpluses arising from (for example) revaluations of certain assets.
Revenue Earnings arising in the ordinary activities of the company. Interest, 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 An arrangement between the company and another party (including an employee)
arrangement 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.