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Thursday, August 25, 2016

Tricks companies play to avoid divulging too much to investors in the annual report

After reading around 30 annual reports of Indian listed companies this year, I have come to the conclusion that hardly 10% of the report is helpful. However, one needs to read the entire report to find out which footnote/portion is the most useful.

Typically, the reports follow the standard format of Directors Report(Managerial remuneration, director remuneration, board activity), Compliance Certificate, CSR Annexure and then audit report preceeding the audited financials. For companies with subsidiaries, consolidated financials are presented in addition to the standalone one. An annual report should ideally help one understand the story behind the numbers but this is usually not the case because

  1. Companies try and avoid segment reporting citing that they operate in 'one reportable segment'. This even when they claim geographical niches etc.  This helps them avoid divulging data on revenue, EBIT and capex at the segment level
  2. MD&A is merely commentary on up/down without insight
  3. There is no strategy outline, or even if there is, rarely any connection to long term trends
  4. Managerial Remuneration is not justified-rarely are performance KPIs and the scorecard publicly disclosed
  5. Even for the particulars of employee remuneration(those earning above 6MINR/year), companies usually exclude it from the report and send it to shareholders on request. This does  not help a casual reader get a feel for the company's HR/remuneration policy
  6. Where certain footnotes can be incriminating, companies change the alignment of the text from horizonal to vertical or vice versa. This is the case for segment reporting, related party transactions etc. 
All these can be overcome with diligence but it makes the process more painful. For those of you still interested in reading an annual report, following links may help

Two excellent resources for those interested in reading further

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