Illustrative Individual Financial Statements for a UK Company applying FRS 101 (Reduced Disclosure Framework)

Transcription

1 Illustrative Individual Financial Statements for a UK Company applying FRS 101 (Reduced Disclosure Framework) Complying with FRS 101, the Companies Act 2006 and other UK requirements extant 31 December 2014

2 Copyright Ernst & Young LLP The United Kingdom firm Ernst & Young LLP is a limited liability partnership registered in England and Wales with a registered number OC and is a member practice of Ernst & Young Global. Apart from any fair dealing for the purposes of research or private study, or criticism or review, as permitted under the Copyright, Designs and Patents Act, 1988, this publication may only be reproduced, stored or transmitted, in any form or by any means, with the prior permission in writing of the publishers, or in the case of reprographic reproduction in accordance with the terms of licences issued by the Copyright Licensing Agency, 90 Tottenham Court Road, London, W19 9HE, United Kingdom. Enquiries concerning reproduction outside those terms should be sent to the authors at the undermentioned address: Financial Reporting Group Ernst & Young LLP 1 More London Place London SE1 2AF United Kingdom Published 2015 by: Ernst & Young LLP Financial Reporting Council (FRC). Adapted and reproduced with the kind permission of the Financial Reporting Council. All rights reserved. For further information, please visit or call +44 (0) This publication contains information in summary form and is therefore intended for general guidance only. It is not intended to be a substitute for detailed research or the exercise of professional judgement. Accordingly, to the fullest extent permitted by law, neither Ernst & Young LLP nor any other member of the global Ernst & Young organisation accept or assume any responsibility or liability for loss occasioned to any person acting or refraining from action as a result of any material in this publication. On any specific matter, reference should be made to the appropriate adviser. The Illustrative Financial Statements have been prepared by the Financial Reporting Group of Ernst & Young LLP.

3 Contents INTRODUCTION... III ABBREVIATIONS... V REPORT AND FINANCIAL STATEMENTS OF ENTITY UK LIMITED... 1 CORPORATE INFORMATION... 3 STRATEGIC REPORT... 7 DIRECTORS REPORT DIRECTORS RESPONSIBILITIES STATEMENT INDEPENDENT AUDITOR S REPORT INCOME STATEMENT STATEMENT OF COMPREHENSIVE INCOME STATEMENT OF CHANGES IN EQUITY BALANCE SHEET NOTES TO THE FINANCIAL STATEMENTS Authorisation of financial statements and statement of compliance with FRS Accounting policies Turnover Operating profit Auditor s remuneration Exceptional items Staff costs and directors remuneration Interest receivable interest payable Taxation Discontinued operations Dividends paid and proposed Tangible fixed assets Intangible assets Investments - non-current Business combinations Investments - current Other debtors Stocks Trade creditors Financial liabilities Obligations under leases and hire purchase contracts Financial instruments Provisions Authorised and issued share capital Share-based payments Reserves Post balance sheet event Capital commitments Contingent liabilities Pensions and other post-employment benefits Directors loans and other directors interests Off-balance sheet arrangements Other related party transactions i

4 35. Ultimate Group undertaking Transition to FRS APPENDICES The Companies Act 2006 Financial Statements format ii

5 Introduction This publication contains the annual report of a fictional UK company, Entity UK Limited, a private company preparing individual financial statements in accordance with FRS 101 Reduced Disclosure Framework (August 2014). Entity UK Limited has transitioned to FRS 101 from previously extant UK GAAP. The annual report and financial statements are illustrative only and do not attempt to show all possible disclosure requirements. If there is doubt as to the applicable legal or other requirements, readers should refer to the relevant source and, where necessary, seek professional advice. This publication is laid out with the commentary on the left hand pages and the illustrative disclosures on the right hand pages. Gaps between items exist to align commentary with the relevant disclosure item, as far as possible, for the convenience of users. The disclosures and related commentary which are shaded illustrate those IFRS disclosure exemptions that are conditional on the provision of equivalent disclosures in the consolidated financial statements of the group in which the entity is consolidated. IFRS disclosure exemptions which are not conditional on equivalent disclosures have not been shown. Entity UK Limited is not a financial institution and is therefore able to take advantage of all of the IFRS disclosure exemptions in FRS 101. Although the illustrative financial statements attempt to show the likely disclosure requirements of manufacturing companies, they should not be regarded as a comprehensive checklist of statutory and accounting requirements. They comply with FRS 101, the Companies Act 2006 and with other requirements in force at 31 December Narrative accompanying the illustrative financial statements The narrative accompanying the illustrative financial statements (on the left-hand pages) contains source references to the Companies Act, International Financial Reporting Standards, Interpretations of the IFRS Interpretations Committee, and pronouncements of the Institute of Chartered Accountants in England and Wales. When the narrative accompanying the financial statements is italicised, it indicates that the requirement discussed is not in fact illustrated. Such narrative has not been given for every conceivable disclosure requirement. Accordingly the narrative should not be regarded as a comprehensive checklist. Entity UK Limited These are the financial statements of a private company preparing its accounts under FRS 101 and taking advantage of all of the IFRS disclosure exemptions allowed under this standard. Entity UK Limited is a qualifying entity in accordance with FRS 100 Application of Financial Reporting Requirements, and therefore these are not IAS Accounts as defined by section 395(1) (b) of the Companies Act 2006, so the entity must make amendments to EU adopted IFRS requirements where necessary, in order that the financial statements it prepares are Companies Act individual accounts as defined by s395(1)(a) of the Act. The annual report and financial statements are illustrative only and they should not be regarded as a pro forma set of financial statements. These financial statements have been prepared for the year ended 31 December 2014, and therefore IFRS 11 Joint Arrangements and IFRS 12 Disclosure of interests in other entities along with the amendments to IAS 27 Separate Financial Statements have been adopted as these are mandatory for this year end. iii

6 Narrative accompanying the illustrative financial statements (continued) FRS 101 FRS 101 was issued in November 2012 with amendments issued in July 2014 and is part of the Financial Reporting Council s (FRC s) revised financial reporting standards in the United Kingdom and Republic of Ireland. The revisions fundamentally reform financial reporting, replacing almost all extant standards with three Financial Reporting Standards: FRS 100 Application of Financial Reporting Requirements (November 2012) FRS 101 Reduced Disclosure Framework (August 2014); and FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland (August 2014). FRS 101 applies to the individual financial statements of a qualifying entity, as defined below, that are intended to give a true and fair view of the assets, liabilities and financial position and of the profit or loss for a period. A qualifying entity is a member of a group where the parent of that group prepares publicly available consolidated financial statements which are intended to give a true and fair view (of the assets, liabilities, financial position and profit or loss) and that member is included in the consolidation (as set out in s474(1) of the Companies Act. A charity may not be a qualifying entity. In applying FRS 101, a qualifying entity may take advantage of the disclosure exemptions in the standard. In order to take advantage of these disclosure exemptions: Its shareholders must have been notified in writing about, and do not object to, the use of the disclosure exemptions. It otherwise applies its financial reporting framework the recognition, measurement and disclosure requirements of EU adopted IFRS, but makes amendments to EU adopted IFRS requirements where necessary in order to comply with the Act and the Regulations, given that the financial statements that it prepares are Companies Act accounts as defined in section 395(1)(b) of the Act. It discloses in the notes to its financial statements: o o A brief narrative summary of the disclosure exemptions adopted; and The name of the parent of the group in whose consolidated financial statements it financial statements are consolidated and from where those financial statements may be obtained. Entity UK Limited complies with Schedule 1 of the Companies Act 2006, and is not a financial institution. A qualifying entity which is a financial institution may not take advantage of the exemptions from IFRS 7, IFRS 13 (in respect of disclosures of financial instruments) and paragraphs 134 to 136 of IAS 1. FRS 101 is effective for accounting periods beginning on or after 1 January 2015, although early application is permitted. If the entity applies this FRS before 1 January 2015 it must disclose this fact. Formats The formats used in the illustrative financial statements are taken from Schedule 1 to the Regulations. The profit and loss account is in the format 1 and balance sheet is in format 1. iv

7 Abbreviations The following abbreviations are used in these illustrative financial statements: Companies Act The Companies Act 2006 s235(3) Companies Act, Section 235, paragraph 3 7 Sch 2(1) Large and Medium-Sized Companies and Groups (Accounts and Reports) Regulations 2008, Schedule 7, paragraph 2(1) APB FRC Auditing Practices Board Financial Reporting Council FRS Financial Reporting Standard 101, paragraph 10 FRS 101.AG1(k) Financial Reporting Standard 101, Application Guidance paragraph AG1 subsection (k) IFRS 1.39 International Financial Reporting Standard 1, paragraph 39 IAS 39.AG71 International Accounting Standard 39, application guidance, paragraph 71 IAS 39.G.1 IASB ICAS Guidance on Implementing IAS 39: Financial Instruments: Recognition and Measurement, Section G, item G.1 International Accounting Standards Board The Institute of Chartered Accountants in Scotland ISA (UK&I) 700(14) International Standard on Auditing (UK and Ireland) No. 700, paragraph 14 ICAEW IFRIC The Institute of Chartered Accountants in England and Wales Interpretations issued by the IFRS Interpretations Committee LR 9.8.6(5) The UK Listing Authority Listing Rules, chapter 9, rule 9.8.6, paragraph (5) Regulations SI 2011/2198 Large and Medium-Sized Companies and Groups (Accounts and Reports) Regulations 2008 The Companies (Disclosure of Auditor Remuneration and Liability Limitation Agreements) (Amendment) Regulations 2011 (Statutory Instrument 2011 No. 2198) SIC 12.8 SIC Interpretation 12, paragraph 8 TECH 2/10 Technical Release 02/10, issued by the ICAEW and ICAS v

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9 Entity UK Limited Entity UK Limited Report and Financial Statements 31 December

10 Illustrative financial statements General comments on the financial statements Registered number and name s1068, Registrar s Rules 2009 The 2006 Act allows the registrar to impose requirements as to the form, manner and delivery of documents required to be delivered to him. Under the Registrar s Rules 2009, all accounts and related documents are required to state the name and the registered number of the company on at least one of the balance sheet (or abbreviated accounts where applicable), profit and loss account, directors report, directors remuneration report and audit report. Author s note Entity UK Limited has stated the registered number in the Directors Report on page 13. List of directors, advisers and other information IAS An entity shall disclose the following if not disclosed elsewhere in information published within the financial statements: the domicile and legal form of the entity, its country of incorporation and the address of the registered office (or principal place of business, if different from the registered office); a description of the nature of the entity s operations and its principal activities; and the name of the parent and the ultimate parent of the Group. Author s note There is no requirement to give most of the information on the adjacent page, although it is common practice to do so. Components of financial statements IAS 1.10 A complete set of financial statements comprises: a statement of financial position as at the end of the period; a statement of profit or loss and other comprehensive income for the period; a statement of changes in equity for the period; a statement of cash flows for the period; notes, comprising a summary of significant accounting policies and other explanatory information; and a statement of financial position as at the beginning of the earliest comparative period when an entity applies an accounting policy retrospectively or makes a retrospective restatement of items in its financial statements, or when it reclassifies items in its financial statement. An entity may use titles for the statements other than those used in IAS 1. IAS 1.49 The financial statements shall be identified clearly and distinguished from other information in the same published document. IAS 1.51(a) An entity shall clearly identify each financial statement and the notes. In addition, an entity shall display the following information prominently, and repeat it when necessary for information presented to be understandable: the name of the reporting entity or other means of identification, and any change in that information from the end of the preceding reporting period. Reporting period s394 The directors of every company shall prepare accounts for the company for each of its financial years. s390(3) The financial year begins with the day immediately following the end of the company s previous financial year and ends with the last day of its next accounting reference period or such other date, not more than seven days before or after the end of that period, as the directors may determine. IAS 1.36 An entity shall present a complete set of financial statements (including comparative information) at least annually. When an entity s balance sheet date changes and the annual financial statements are presented for a period longer or shorter than one year, an entity shall disclose, in addition to the period covered by the financial statements: the reason for using a longer or shorter period; and the fact that amounts presented in the financial statements are not entirely comparable. IAS 1.37 Normally, financial statements are consistently prepared covering a one-year period. However, for practical reasons, some entities prefer to report, for example, for a 52-week period. IAS 1 does not preclude this practice. True and fair view 1 Sch 45, s396, s404 The requirement to show a true and fair view overrides all other accounting requirements of the Companies Act. Where compliance with the requirements of the Companies Act would not be sufficient to give a true and fair view, the necessary additional information must be given in the financial statements or notes. In special circumstances it may be necessary to depart from the requirements of the Companies Act, or accounting standards in order to show a true and fair view. In such circumstances, disclosure must be made, in a note, of the particulars of the departure, the reasons for it and its effect. Accounting standards and UITF abstracts are applicable to all financial statements whose purpose is to give a true and fair view, and in applying them preparers should be guided by the spirit and reasoning behind the standards and abstracts. However, they do not supersede the exercise of an informed judgement in determining what constitutes a true and fair view in each circumstance. 2

11 Entity UK Limited Corporate information Directors Professor M C Holman Sir Alexander Scott J N Smith D C Barraclough H C Black R P Brierley P A MacBryde Secretary J Harris Auditors Chartered Accountants & Co. LLP 7 Christian Street London EC2 1VQ Bankers Bank P.L.C. George Street London EC3 4XA Solicitors Solicitors & Co. 7 Scott Street London WC3 4AB Registrars Registration Services 45 Market Street London W2 7JA Registered Office Homefire House Ashdown Square London EC2A 3XS 3

12 Illustrative financial statements General comments on the financial statements True and fair view 1 Sch 45, s396, s404 (continued) A justifiable reason may therefore exist why an accounting standard or UITF abstract may not be applicable in a given situation, for example, when application would conflict with the giving of a true and fair view. However, because accounting standards and UITF abstracts are formulated with the objective of ensuring that the information resulting from their application faithfully represents the underlying commercial activity, the ASB envisages that only in exceptional circumstances will departure from the requirements of an accounting standard or UITF abstract be necessary in order for the financial statements to give a true and fair view. Particulars of any material departure from an accounting standard or UITF abstract, the reasons for it and its financial effects should be disclosed in the financial statements. The disclosure made should be equivalent to that given in respect of departures from specific accounting provisions of companies legislation. Although medium-sized companies* are not required to comply with 1 Sch 45 (and state whether the financial statements have been prepared in accordance with applicable accounting standards*, disclosing particulars and reasons for any departure), the requirements of the Foreword to accounting standards result in the same information, plus the financial effect, being given. Realised profits 1 Sch 10(2), 13(a) Only realised profits* may be taken to the profit and loss account, unless there are special reasons for a departure from this principle. Where there is a departure the particulars, reasons and effect have to be disclosed. FRS 101.A2.14 Paragraph 40(2) of Schedule 1 to the Regulations then requires that, in general, movements in the value of financial instruments, investment properties or living animals or plants are recognised in the profit or loss account, notwithstanding the usual restrictions allowing only realised profits and losses to be included in the profit and loss account. Paragraph 40 of Schedule 1 to the Regulations thereby overrides the requirements of Paragraph 13(a) of Schedule 1. FRS 101.AG1(k) Paragraph 88 of IAS 1 Presentation of Financial Statements is amended as follows: An entity shall recognise all items of income and expense arising in a period in profit or loss unless an IFRS requires or permits otherwise, or unless prohibited by the Act. Comparative information and consistency of presentation IAS 1.38 Except when IFRSs permit or require otherwise, comparative information shall be disclosed in respect of the previous period for all amounts reported in the current period s financial statements. Comparative information shall be included for narrative and descriptive information when it is relevant to an understanding of the current period s financial statements. Author s note In accordance with paragraph 8(f) of FRS 101, comparative information is not required in respect of: paragraph 79(a)(iv) of IAS 1 paragraph 73(e) of IAS 16 paragraph 118(e) of IAS 38 paragraphs 76 and 79(d) of IAS 40 paragraph 50 of IAS 41 IAS 1.41 When the presentation or classification of items in the financial statements is amended, comparative amounts shall be reclassified unless the reclassification is impracticable. When comparative amounts are reclassified, an entity shall disclose: the nature of the reclassification; the amount of each item or class of items that is reclassified; and the reason for the reclassification. IAS 1.42 When it is impracticable to reclassify comparative amounts, an entity shall disclose: IAS 1.45 the reason for not reclassifying the amounts; and the nature of the adjustments that would have been made if the amounts had been reclassified. The presentation and classification of items in the financial statements shall be retained from one period to the next unless: it is apparent, following a significant change in the nature of the entity s operations or a review of its financial statements, that another presentation or classification would be more appropriate having regard to the criteria for the selection and application of accounting policies in IAS 8; or an IFRS requires a change in presentation. Offset and aggregation in the financial statements IAS 1.32 Assets and liabilities, and income and expenses, shall not be offset unless required or permitted by an IFRS. IAS 1.29 Each material class of similar items shall be presented separately in the financial statements. Items of a dissimilar nature or function shall be presented separately unless they are immaterial. 4

13 Entity UK Limited 5

14 Illustrative financial statements Comments on the Strategic Report General s414a All companies except companies entitled to the small company exemptions are required to prepare a strategic report for each financial year of the company, For a financial year in which the company is a parent company and the directors prepare group accounts, the strategic report must be a consolidated report relating to the undertakings included in the consolidation. s414b A company is entitled to small companies exemption in relation to the strategic report for a financial year if (a) it is entitled to prepare accounts for the year in accordance with the small companies regime, or (b) it would be so entitled but for being or having been a member of an ineligible group. s423 The directors report and annual accounts should be sent to every member of the company, every holder of the company s debentures and every person who is entitled to receive notice of general meetings. Author s note There is no statutory requirement for private companies to lay their annual accounts and reports before a general meeting of members. However, such companies may have such a requirement in their Articles. Review of the business s414c The strategic report must contain: (a) (b) a fair review of the company s business; and a description of the principal risks and uncertainties facing the company. The review required must be a balanced and comprehensive analysis of the development and performance of the company s business during the financial year and the position of the business at the end of that year, consistent with the size and complexity of the business. The review must, to the extent necessary for an understanding of the development, performance or position of the business, include: (a) analysis using financial key performance indicators and (b) where appropriate analysis using other key performance indicators including information related to environmental and employee matters. The report must, where appropriate, include references to and additional explanations of amounts included in the annual accounts of the company. Author s note Entity UK Limited has stated in its Strategic Report that it has transitioned to FRS 101 and taken advantage of the disclosure exemptions, and that the parent company did not object to the use of the disclosure exemptions. There is no explicit requirement to state this in the Directors Report. 6

15 Entity UK Limited Strategic Report The Directors present their strategic report for the year ended 31 December Business review The profit for the year, after taxation, is 10,571,000 (2013: 8,987,000). The directors recommend a final ordinary dividend of 3.52p per ordinary share amounting to 874,000 making a total of ordinary dividends of 2,071,000 for the year. During the year the company transitioned from previously extant UK GAAP to FRS Reduced Disclosure Framework and has taken advantage of the disclosure exemptions allowed under this standard. The Company s parent undertaking, Listed UK Group PLC, was notified of and did not object to the use of the EU-adopted IFRS disclosure exemptions. Details of the recognition or measurement differences arising on the adoption of FRS 101 are included in note 36 to these financial statements. The Company s key financial and other performance indicators during the year were as follows: Change % Turnover (continuing operations) 189, , % Operating profit 16,586 13, % Profit for the financial year 10,571 8, % Shareholder s equity 83,815 63, % Current assets as % of current liabilities ( quick ratio ) 217% 304% -87% Customer satisfaction % Average number of employees % Turnover from continuing operations increased by 5.6% during the year, primarily due to the acquisition of the Extinguishers business on 1 May 2013, which made a full years contribution in Extinguishers contributed 22,000,000 of turnover in the period post acquisition in The full impact of the July 2014 acquisition of the Ring Circuits business will not be felt until Turnover for this business in the next financial year is expected to be significantly higher than that achieved this year. The balance of the increase in turnover from continuing operations is primarily attributable to the successful launch of a new EC-approved fire hydrant which was sold to a number of UK local authorities. Operating profit increased by 19.5% during the year. This improvement was caused by the contribution from the acquisition of the Extinguishers business in

16 Illustrative financial statements Comments on the Strategic Report s414c (6) The strategic report of medium sized company need not provide key performance indicators relating to nonfinancial information. Key performance indicators means factors by reference to which the development, performance or position of the company s business can be measured effectively. s414c(14) No disclosures are required about impending developments or matters in the course of negotiation if the disclosure would, in the opinion of the directors, be seriously prejudicial to the interests of the company. Author s note The Strategic Report shown on pages 7 to 23 is intended to be illustrative only and should not be used as a model for companies financial statements since the level of detail required, including key performance indicators, will depend on the specific circumstances of each company. 8

17 Entity UK Limited Strategic Report Business Review (continued) There was also a better underlying return from existing UK business although a substantial improvement is expected next year due to the new fire hydrant product. This was also impacted by the operating profit from the Hose business which has been recognised as discontinued operations which increased to 1,434,000 from 57,000. Hose manufactures rubber hosepipes and has been operating in an unpredictable product environment, making it difficult for management to derive growth and profitability from the business. On 1 December 2014, the Directors announced their decision to dispose of the Hose business. Profit after tax increased by 17.6%. This increase in profit after tax arose from organic growth of 10% and the inclusion of results from the Ring Circuits business since acquisition in July Shareholders equity increased by 32.9% due to retained earnings and the new shares issued during the year. The company s quick ratio (current assets as a percentage of current liabilities) has reduced due to the purchase of stocks prior to the year end in order to meet future demand which resulted in an increase in trade creditors. Customer satisfaction is a key indicator given the company s reliance on contracts which are subject to periodic tender. This is monitored by annual questionnaires and other informal feedback. The results of our questionnaires showed a 10% improvement in customer satisfaction compared to last year. The total average number of employees increased by 5% during the year. This was partially attributable to the acquisition of the Extinguishers business but also due to an increased number of persons engaged in research and development activities related to the new fire hydrant. Average employee numbers are expected to decline slightly in the next year as a result of the disposal of the Hose business. The number of employees participating in our employee share scheme increased by 8% during the year. The products manufactured and sold by the company have minimal environmental impact. However, the board believes that good environmental practices support the board s strategy by enhancing the reputation of the company, the efficiency of production and the quantity of products. Consequently, the company continues to put environmental responsibilities high on the agenda and increased the percentage of its products recycled from 45% to 52% during the year. In terms of a direct impact on the environment carbon dioxide emissions have reduced by 4% during the year. This was achieved by increasing energy efficiency and reducing wastage. Principal risks and uncertainties The Company has established a risk committee that meets quarterly and which evaluates the company s risk appetite. The principal risks and uncertainties facing the Company are broadly grouped as competitive, legislative and financial instrument risk. Competitive Risks In the UK the Company is reliant on certain major local authorities for contracts which are subject to periodic competitive tender. Renewal of these contracts is uncertain and based on financial and performance criteria. In the USA the principal competitive risk relates to the probability of large multi-nationals entering into the market via loss leader products. Legislative Risks In the UK and Europe, fire safety equipment must be manufactured to EU standards. These standards are subject to continuous revision and any new Directive may have a material impact on the ability of the company to manufacture and supply products at a profit. In addition compliance imposes costs and failure to comply with the standards could materially affect the company s ability to operate. 9

18 Illustrative financial statements Comments on the Strategic Report Signature s414d The strategic report must be approved by the board of directors and signed on behalf of the board by a director or the secretary of the company. 10

19 Entity UK Limited Strategic Report Principal risks and uncertainties (continued) In the USA, the equivalent standards are subject to individual State legislatures. These standards vary considerably between individual States and make it difficult to supply a uniform product that meets all requirements. Exposure to price, credit, liquidity and cash flow risk Price risk arises on financial instruments because of changes in, for example, commodity prices or equity prices. Listed investments with a book value of 1,894,000 are exposed to price risk but this exposure is within the Company s risk appetite. Credit risk is the risk that one party to a financial instrument will cause a financial loss for that other party by failing to discharge an obligation. Company policies are aimed at minimising such losses, and require that deferred terms are only granted to customers who demonstrate an appropriate payment history and satisfy credit worthiness procedures. Details of the Company s receivables are shown on the face of the balance sheet. The Company limits individual trade receivable counterparty exposure to 3,000,000 and at the balance sheet date no single trade debtor exceeded 50% of that amount. Liquidity risk is the risk that an entity will encounter difficulty in meeting obligations associated with financial liabilities. The Company aims to mitigate liquidity risk by managing cash generation by its operations, applying cash collection targets throughout the Company. The Company also manages liquidity risk via revolving credit facilities and long term debt. During the year additional shares were issued and debt raised to fund the purchase of Extinguishers. Cash flow risk is the risk of exposure to variability in cash flows that is attributable to a particular risk associated with a recognised asset or liability such as future interest payments on a variability rate debt. The Company manages this risk, where significant, by use of derivatives as explained above. By order of the board J Harris Secretary 22 February

20 Illustrative financial statements Comments on the Directors Report Directors of the Company s416(1)(a) Disclose names of persons who were directors at any time during the financial year. Author s note Also, it is regarded as good practice to show any changes between the year end and the date of the report. Recommended dividend s416(3) State the amount of dividend recommended (if any). Companies subject to the small companies exemption are exempt from this requirement. s830(1) A company shall not make a distribution except out of profits available for the purpose. s837(4) If the audit report is qualified (i.e. it is not a report without qualification to the effect that, in the auditors opinion, the financial statements have been properly prepared in accordance with the Companies Act), a distribution cannot be made unless and until the auditor has made a statement in writing that the qualification is not material for determining whether a distribution would contravene the Act. This statement must have been circulated to members in accordance with s423 for a private company or laid before the company in a general meeting. Future developments 7 Sch 7(1)(b) Give an indication of likely future developments in the business of the company. Financial instruments 7 Sch 6 In relation to the use of financial instruments by the company and its subsidiary undertakings, the directors report must contain an indication of: the financial risk management objectives and policies of the company and its subsidiary undertakings included in the consolidation, including the policy for hedging each major type or forecasted transaction for which hedge accounting is used; and the exposure of the company and its subsidiary undertakings included in the consolidation to price risk, credit risk, liquidity risk and cash flow risk. Disclosure is not required if such information is not material for the assessment of the assets, liabilities, financial position and profit or loss of the company and its subsidiary undertakings included in the consolidation. Author s note The expressions, hedge accounting, price risk, credit risk, liquidity risk and cash flow risk have the same meaning as they have in Council Directive 78/660/EEC on the annual accounts of certain types of companies, and in Council Directive 83/349/EEC on consolidated accounts, as amended. Research and development 7 Sch 7(1)(c), Give an indication of the activities (if any) in the field of research and development of the company and its subsidiary undertakings. 12

21 Entity UK Limited Directors Report Registered No The directors present their report for the year ended 31 December Directors of the company The current directors are shown on page 3. P A MacBryde was appointed on 1 January 2014 and M C Holman was appointed on 22 July In addition, A Stanton was a director until 7 January 2014 when he resigned. J Smith and B Baraclough retire from the board at the Annual General Meeting and, being eligible, offer themselves for re-election. H Black retires by rotation and, being eligible, offers himself for re-election. Dividends The directors recommend a final ordinary dividend of 3.25 pence per share amounting to 874,000, making a total of ordinary dividends of 1,940,000 for the year. Future developments The Company intends to continue operating in the areas of electronics and manufacture and installation of fire prevention equipment, consolidating recent acquisitions and to increase profitability. Financial instruments The Company finances its activities with a combination of bank loans, debentures, convertible noncumulative redeemable preference shares, finance leases and hire purchase contracts, cash and short term deposits, as disclosed in note 23. Overdrafts are used to satisfy short term cash flow requirements. Other financial assets and liabilities, such as trade debtors and trade creditors, arise directly from the Company s operating activities. The Company also enters into derivative transactions, including principally interest rate swaps and forward currency contracts. The purpose is to manage the interest rate and currency risks arising from the Company s operations and its sources of finance. Financial instruments give rise to foreign currency, interest rate, credit, price and liquidity risk information on how these risks arise is set out above, as are the objectives, policies and processes for their management and the methods used to measure each risk. Use of derivatives The company uses forward foreign currency contracts to reduce exposure to the variability of foreign exchange rates by fixing the rate of any material payments in a foreign currency. The company also uses interest rate swaps to adjust interest rate exposures in order to guarantee fixed interest payments where payments are variable and hence exposed to interest rate movements. Hedge accounting is used when certain criteria is met as explained in the accounting policy note on page 61. Research and development The acquisition of the Extinguishers business last year saw the number of staff employed by the Company on research and development more than double. There are two main fire prevention research and development projects: improved fire detection and sprinkler systems and fire retardant fabrics for motor vehicles and aircraft. Research and development in the electronics business is concentrated on the development of internet enabled safety equipment. 13

22 Illustrative financial statements Comments on the Directors Report Events since the balance sheet date 1 Sch 13(b) Include all material adjusting events up to the date that the financial statements are formally approved by the directors. 7 Sch 7(1)(a) Give particulars of any important events affecting the company or any of its subsidiary undertakings which have occurred since the end of the year. IAS IAS 10 also requires that certain post balance sheet events be disclosed in a note to the financial statements. See note 28. Political contributions 7 Sch 3 If the company or its subsidiaries have made any political donation to any political party or other political organisation, any political donation to any independent election candidate or incurred any political expenditure and the amount of the donation/expenditure or the aggregate amount of all donations/expenditure exceeded 2,000, disclose: (a) the name of each political party, organisation or independent election candidate to whom any such donation has been made; (b) the total amount given to that party, organisation or candidate by way of such donations in the financial year; and (c) the total amount incurred in respect of political expenditure in the financial year. Wholly-owned subsidiaries of companies incorporated in the United Kingdom are exempt. 7 Sch 4 If the company or its subsidiaries have made any contributions to a non-eu political party disclose: (a) the amount of the contribution; or (b) if it has made two or more contributions in the year a statement of the total amount of the contribution. A non EU political party means any political party which carries on, or proposes to carry on, activities wholly outside member States. Wholly-owned subsidiaries of companies incorporated in the United Kingdom are exempt. Foreign branches 7 Sch 7(1)(d)(2) Give an indication of the existence of branches (as defined in s1046(3)) of the company outside the United Kingdom. Disabled employees 7 Sch 10 This requirement relates to any company with more than 250 employees under contracts of service working wholly or mainly in the UK. Give a statement describing the policy applied by the company during the financial year: for giving full and fair consideration to applications for employment by the company made by disabled persons, having regard to their particular aptitudes and abilities; for continuing the employment of, and for arranging appropriate training for, employees who have become disabled during the period when they were employed by the company; and otherwise for the training, career development and promotion of disabled employees. Employee involvement 7 Sch 11 This requirement relates to any company with more than 250 employees under contracts of service working wholly or mainly in the UK. Give a description of the action taken during the year to introduce, maintain or develop arrangements aimed at: providing employees systematically with information on matters of concern to them as employees; consulting employees or their representatives on a regular basis so that the views of employees can be taken into account in making decisions which are likely to affect their interests; encouraging the involvement of employees in the Group s performance through an employees share scheme or by some other means; and achieving a common awareness on the part of all employees of the financial and economic factors affecting the performance of the company. 14

23 Entity UK Limited Directors Report Events since the balance sheet date On 14 January 2015, a short leasehold building with a net book value of 880,000 was severely damaged by flooding. It is expected that insurance proceeds will fall short of the costs of rebuilding and loss of stocks by some 350,000. No provision has been made in the financial statements for this loss. Disabled employees The Company gives full consideration to applications for employment from disabled persons where the candidate s particular aptitudes and abilities are consistent with adequately meeting the requirements of the job. Opportunities are available to disabled employees for training, career development and promotion. Where existing employees become disabled, it is the Company s policy to provide continuing employment wherever practicable in the same or an alternative position and to provide appropriate training to achieve this aim. Employee involvement The Company operates a framework for employee information and consultation which complies with the requirements of the Information and Consultation of Employees Regulations During the year, the policy of providing employees with information, including information relating to the economic and financial factors affecting the performance of the company, has been continued through the newsletter Entity UK Limited News in which employees have also been encouraged to present their suggestions and views on the Company s performance. Regular meetings are held between local management and employees to allow a free flow of information and ideas. Employees participate directly in the success of the business through the Company s profit sharing schemes and are encouraged to invest in the Company through participation in share option schemes. 15

24 Illustrative financial statements Comments on the Directors Report Directors liabilities s236 If the company has made a qualifying indemnity provision which is in force at the time when the directors report is approved for the benefit of one or more directors of an associated company, or was in force at any time during the financial year for the benefit of one of more persons who were then directors of an associated company, the directors report must state that any such provision is or (as the case may be) was so in force. The term qualifying indemnity provision applies to both a qualifying third party indemnity provision and a qualifying pension scheme indemnity provision. s234 A qualifying third party indemnity provision is any provision for indemnity against liability incurred by the director to a person other than the company or an associated company in relation to which conditions below are satisfied. (3) (a) The provision does not provide any indemnity against any liability incurred by the director to pay: (i) a fine imposed in criminal proceedings; or (ii) a sum payable to a regulatory authority by way of a penalty in respect of non-compliance with any requirement of a regulatory nature (however arising). (3)(b) The provision does not provide any indemnity against any liability incurred by the director: (i) (ii) in defending any criminal proceedings in which he is convicted; or in defending any civil proceedings brought by the company, or an associated company, in which judgement is given against him; or (iii) in connection with any application under any of the following provisions in which the court refuses to grant him relief (namely s661(3) or (4) (acquisition of shares by innocent nominee) or s1157 (general power to grant relief in case of honest and reasonable conduct)). (5) Under condition (b) above, the reference to any such conviction, judgement or refusal of relief is a reference to one that has become final, being: (i) (ii) if not appealed against, at the end of the period for bringing an appeal, or if appealed against, at the time when the appeal (or any further appeal) is disposed of. An appeal is disposed of if it is determined and the period for bringing any further appeal has ended, or if it is abandoned or otherwise ceases to have effect. Author s note The term qualifying third party indemnity provision excludes the purchase or maintenance of insurance against liability as this falls under s233. s235 A qualifying pension scheme indemnity provision is any provision indemnifying a director of a company that is a trustee of an occupational pension scheme against liability incurred in connection with the company s activities as trustee of the scheme and in relation to which conditions below are satisfied. (a) The provision does not provide any indemnity against any liability incurred by the director to pay: (i) a fine imposed in criminal proceedings; or (b) (ii) a sum payable to a regulatory authority by way of a penalty in respect of non-compliance with any requirement of a regulatory nature (however arising). The provision does not provide any indemnity against any liability incurred by the director in defending any criminal proceedings in which he is convicted. 16

25 Entity UK Limited Directors Report Directors liabilities The Company has granted an indemnity to one or more of its directors against liability in respect of proceedings brought by third parties, subject to the conditions set out in the Companies Act Such qualifying third party indemnity provision remains in force as at the date of approving the directors report. During the year the Company had in force an indemnity provision in favour of one or more directors of the Company, against liability in respect of proceedings brought by third parties, subject to the conditions set out in section 234 of the Companies Act On 1 November 2014, P A McBride became a trustee of the Entity UK Employee Pension Plan, on which date the Company granted indemnity against liability in respect of proceedings brought by third parties, subject to the conditions set out in section 235 of the Companies Act This qualifying pension scheme indemnity provision remains in force as at the date of approving the directors report. 17

26 Illustrative financial statements Comments on the Directors Report Going concern Author s note Good Practice has made a going concern statement in accordance with the FRC guidance, Going Concern and Liquidity Risk: Guidance for Directors of UK Companies This guidance applies to all UK companies. The going concern statement made by Entity UK Limited is based on Example 1(a) of Appendix II of the FRC guidance. This is because the company has uncomplicated circumstances and little or no exposure to economic difficulties that may impact the going concern assumption. Purchase of own shares 7 Sch 8, 9, Where shares or a beneficial interest therein are purchased under s659 or where shares are subject to a lien or charge under s670(2) or (4), disclose: the number, nominal value and percentage of the called-up shares of that class of shares acquired or charged during the period and, if acquired by purchase, give also consideration paid and reasons for purchase; the maximum number, nominal value and percentage of the called-up shares of that class held or charged at any time during the period; the number, nominal value and percentage of the called-up shares of that class so acquired or charged which have been disposed of or cancelled during the period, and the amount of the proceeds of disposal, if any; and where any shares have been charged, the amount of the charge. 18

27 Entity UK Limited Directors Report Going Concern The Company s business activities, together with the factors likely to affect its future development, its financial position, financial risk management objectives, details of its financial instruments and derivative activities, and its exposures to price, credit, liquidity and cash flow risk are described in the Strategic Report on pages 7 to 11. The Company has considerable financial resources together with long-term contracts with a number of customers and suppliers across different geographic areas and industries. As a consequence, the directors believe that the group is well placed to manage its business risks successfully despite the current uncertain economic outlook. After making enquiries, the directors have a reasonable expectation that the Company has adequate resources to continue in operational existence for the foreseeable future. Accordingly, they continue to adopt the going concern basis in preparing the annual report and accounts. 19