Introduction
In any organisation, institution, or industry that sells services or products, various departments work in unison to achieve the set goals and objectives. The functionality of these organisations may be dependent or not, but in the long run, they are connected with a typical chain which is the finance and accounting section or department. The department serves a unique purpose in the organisation as it keeps records of all the financial activities and provides reports to the stakeholders. Despite the department giving various types of reports, the most significant report is the financial reporting which portrays how the organisation is performing internally and externally. The financial report forms a significant part of any organisation because it plays a critical role in corporate governance. The papers show the objectives of financial reporting and determine whether the Burberry Group 2021 annual report meets the qualitative characteristic of the financial report and the most important qualitative characteristics.
Objectives of Financial Reporting
Financial reporting entails the disclosure of information pertaining to organisation finance to stakeholders. The information reveals the company’s financial position and performance in a given period. The stakeholders provided with this information include government agencies, debt providers, government, investors, the public, and creditors. Listed companies provide this information on a quarterly or annual basis. The components of financial reporting include financial statements, which involve a statement of change in stakeholder equity, profit and loss account, balance sheet, and cash flow statement. Other components include financial statement notes, prospectus, quarterly and annual reports, and management discussions and analysis (Melville, 2019). These components bring about the objectives of financial reporting, which include providing information to investors, tracking useful information to the organisation, and analysis of the owner’s equity, company’s assets, and liabilities.
First, the main goal of financial reporting is to provide critical information to the investors, as they are the primary source of the organisation’s funding. Investors usually require this information to determine whether the generated income is being reinvested and how the capital provided is being used (Melville, 2019). It enables the investors to decide if they can continue funding the business or not, depending on the financial outcome provided by the report. Knowing the returns generated from the business is a crucial requirement by the investor as businesses are profit-oriented.
Potential investors who want to invest with the organisation will want to know how the business has been performing in the previous periods to ascertain whether the business is worthy of investment. For instance, the profit and loss statement provides essential information on the organisation’s net profit and the available profit that the shareholders get as dividends in the current period and the previous years (Elliott & Elliott, 2019). When the organisation’s profits are enormous and have been increasing in the previous periods, it portrays that the company is growing and operating efficiently. This shows that the investors’ funds are being used appropriately. However, when the organisation is undergoing losses, it depicts that the investors’ funds are at risk, and potential investors may not engage in such business.
Second, the financial report provides valuable information that enables the organisation to determine if it can provide credit to the clients, invest, or lend to a borrower. The three financial statements, cash flow, income, and balance sheet, have specific objectives. It is necessary for the company to track its cash flow to identify where the money is coming from and where it is going (Alexander et al., 2022). Cash flow enables the organisation to identify whether it is performing well or not to cover the debts and grow. Cash flow provides clues on places that require improvements by identifying flaws. The income statement provides information regarding the business’s revenue and expenses in a given period.
Lastly, financial reports analyse the owner’s equity, organisational assets, and liabilities. Through their analysis, it is able to identify what is coming in the future based on the current resources that are available for the organisation (Alexander et al., 2022). This objective is attained through monitoring the balance sheet since it provides information on the company’s current position. It also provides the company’s current worth, providing critical information for its decision-making.
Review of the 2021 Annual Report of the Burberry Group
The qualitative characteristics evaluated on the Burberry 2021 annual report include relevance, faithful representation, comparability, and understanding. These factors are essential in determining whether the annual report is valid for providing critical information for investors. First, relevance focuses on the extent to which the provided information in the annual report is significant to the users and how it can impact their economic decisions. It entails information necessary for the report, and its omission may change the economic outcomes of the users. The Burberry 2021 annual report highlights the company’s revenue in various regions such as America, Europe, Africa, India, Asia Pacific, and the Middle East (Burberry, 2021, p. 2). The variation of the reported revenue in these regions shows that the information is relevant for decision-makers and investors when deciding the best region for business expansion.
The report also shows revenue generation based on the channel and the product. This provides insights into identifying when there is a significant problem on either the channel or the product. Based on channel, retail generated £1910m in 2021, which decreased compared to 2020, generating £2110m. The wholesale generated £396m in 2021, and in 2020 it had £476m. Licensing generated £38m in 2021, and in 2020 it had £47m. Revenue by product also experienced a decrement in 2021 compared to 2020 (Burberry, 2021, p. 2). In 2020, accessories, women’s, and men’s products generated £948m, £796m, and £715m, respectively. However, children’s, beauty, and other products were the only group that reported increased sales of £144 in 2021 from £127 in 2020.
Overall revenue generation of Burberry Group has been declining since 2017. The revenue generation include £2,766m in 2017, £2,733m in 2018, £2,720m in 2019, £2,633m in 2020, and £2,344m in 2021 (Burberry, 2021, p. 3). The above data shows the relevancy of the information based on the predictive value and confirmatory value. The revenue generation from one year to another makes it possible to predict the subsequent years’ revenue as the group has been experiencing a downward trend. The Burberry financial data also have confirmatory value as one can compare financial data from one year to another and the revenue generated by the various channels and products.
Second, faithful representation is based on the financial information providing information that represents the actual phenomena of the organisation. The information is supposed to be complete, neutral, and without errors. When reporting the performance of the Burberry luxury sectors, the report provides neutral information without the omission of areas where the company performed poorly. For example, the report shows that in 2020, the personal luxury sector performed poorly for the first time in ten years. During this period, the sector reported a significant reduction in the volume of sales and market size with a reduction of 23%. This resulted in a substantial decrease in the overall profit with an approximately 60% profit decline (Burberry, 2021, p. 20). Additionally, it portrays the completeness of the information included in the report to enable investors and other stakeholders to understand the Burberry group’s exact situation. Information on the geographic performance of the group in terms of sales and revenue generation is well portrayed. The report shows that in 2020, Asia had a decline in the first months, but at the end of that period, it was the only region that had reported an increase in revenue generation of approximately 45%.
The Burberry report meets the prudence characteristic of faithful representation since the assets and the gains are not overstated. Furthermore, the liabilities of the organisation are not understated. In 2021, the organisation had a total asset of £3,502.2m, which increased compared to the previous year’s asset of £3,292.2m (Burberry, 2021, p. 226). The group’s total liability decreased from £2,073.4m in 2020 to £1,942.5m in 2021. The inclusion of this information provides a caution to investors and other stakeholders.
It is imperative to note that prudence provides room for investors to analyse the relationship between the assets and liabilities as it dramatically determines the future outcome of the group. Prudence is the inclusion of a degree of caution in the exercise of the judgements needed in making the estimates required under conditions of uncertainty, such that gains and assets are not overstated, and losses and liabilities are not understated. The report conforms to the free from error characteristic of faithful representation. The income statement correctly portrays information critical for the organisation’s stakeholders clearly and accurately. Notes are provided when on most parts of the financial statements, such as the operating profit and profit of the year.
Third, Burberry group’s annual report has used comparability in most of its financial analysis. The annual report portrays a comparison of various product revenue generation, sector comparison as well as geographic areas. The report shows a five-year comparison in revenue and profit based on the channel. The groups are categorised into retail, wholesale, and licensing. Profit and revenue generation by channel in a five-year comparison is essential in providing investors with information regarding the channel that is either growing, declining or not having a significant change in the last five years (Burberry, 2021, p. 287). The trend is essential in predicting the future outcome and is attained through comparability. Other useful comparisons in the report include cash flow, variation in assets and liabilities, and the statement of change in equity. All these comparisons enhance the understanding of investors regarding the performance of Burberry.
Lastly, understandability has been greatly enhanced by the Burberry report through its presentation of the financial information. The annual reports use graphs to easily understand the organisation’s profit, revenue, and total assets (Burberry, 2021, p. 214). Visual presentation of information makes it easy to comprehend factual information. Minor tables have summarised critical information such as revenue by channel and product, revenue for the last five years, operating profit, adjusted operating profit, total assets, and total liabilities (Burberry, 2021, p. 2). Footnotes and notes have also enhanced the understanding of financial presentation and information through clarifications.
Most Important Qualitative Characteristic
Relevancy is the most important qualitative characteristic of financial information. This is because the information presented in the financial report must be relevant to enable the stakeholders to make informed economic decisions. For example, the Burberry annual reports contain information on the business channels, products, and geographic distributions (Burberry, 2021). The data on these areas shows the revenue and profit that have been generated. Furthermore, it portrays the growth and decline of these sections, thereby enabling the stakeholders to decide whether to continue investing in the business.
Additionally, the relevancy of the information provides room for potential investors to engage in the business. Other relevant information includes financial statements such as profit and loss. This information needs to be relevant since it is vital for the growth of the business. Providing erroneous information in this area results in a critical problem that may lead to the organisation’s downfall. A perfect example of the problem that results when the information provided is not relevant is the fall of Enron Corporation in 2001. The organisation recorded losses, and instead of providing relevant information, they utilised accounting loopholes. The outcome was devastating as shareholders lost more than $74 billion (Robert, 2018). It is therefore essential to ensure that the provided financial data is relevant.
Conclusion
In conclusion, the financial report provides critical information regarding the organisation’s performance. The report has three main objectives: provision of information to investors, tracking useful information to the organisation, and analysis of the owner’s equity, organisation’s assets, and liabilities. Investors require convincing information that reflects the actual performance of the company. The company also needs this data to ensure that its activities are in good condition. In the Burberry Group 2021 annual report review, the four qualitative characteristics portrayed include relevance, faithful representation, comparability, and understanding. The essential qualitative characteristic of a financial report is relevancy. The information recorded has to be relevant to ensure informed economic decisions are made.
References
Alexander, D., Jorissen, A., Hoogendoorn, M., Mourik, C., & Kirwan, C. (2022). International Financial Reporting & Analysis (8th ed.). Annabel Ainscow.
Burberry. (2021). Annual Report 2020/21(pp. 1-306). Web.
Elliott, J., & Elliott, B. (2019). Financial accounting and reporting (19th ed.). Pearson Education Limited.
Melville, A. (2019). International Financial Reporting (7th ed.). Pearson Education Limited.
Robert, B. (2018). Enron Ascending: The Forgotten Years, 1984-1996, 183-207. Web.