Annual reports have some mandatory content and some voluntary content. Contents that are found in every annual report are mandatory whereas content that are found in some and not present in other annual reports are the discretionary or voluntary content that are included by the management of the company (Stanton and Stanton, 2002). There are certain regulations on the company and therefore they have to include some of the content in their annual reports.
Like every other company SOHO China has also used many techniques regarding impression management. First of it includes Visual and Presentation effects. They have used the pictures of their head offices and the buildings they have built in their financial statements, which not only provides a good look but also creates a positive image of their growth. Apart from that the major growth areas are highlighted at the starting. Apart from that they have used variances to emphasize the results like, 38% growth or 25% fall in costs.
Another technique which used in the report is the selectivity. The have selected all such areas in the voluntary section which are creating a good impression. These areas also help in creating a better impression of the overall financial report. These include the example of Corporate Social Responsibility and Connected transaction. Connected transaction is emphasizing their long term stability of growth through long term partnerships, while the corporate social responsibility is helping them build a better image in the public.
The positioning of the content is also ideal. They have made the investors part quite separate helping them to analyze and get information separately without reading the things in detail. Apart from that each financial statement is classified in broader parts as well, showing the groups of different information.
Repetition of the good information is one of the techniques used by the company to create an impression. The company knows and recognizes the impact of using important information again and again so that people can remember and retain it. They have used their good points repetitively, specially the heading. The statements are also shown in consolidated as well as non-consolidated form. And all the figures quoted in other parts of the financial report are actually taken from the financial statements provided in the end. So repetitively the user is reading the same thing but each time it is shown in a new way and the user will of the statements will be giving them plus one for the same information multiple times.
There are several important contents in the annual report of a company that are to be included in the annual report because this annual report is not only for shareholders of the company but every stakeholder that is directly or indirectly related to the company go through the annual reports as they are influenced or they influence the company. These contents are also supporting the laws and regulations of the country. Apart from that they have incorporated various things in accordance to the benefit for their own self in supporting their cultural values.
Basis of the Financial Statements:
Since SOHO China belongs is based on the accounting system of Hong Kong, so there are external constraints on the annual financial reporting. These financial statements have been prepared in accordance with all applicable Hong Kong Financial Reporting Standards (HKFRSs). These standards not only include the individual Hong Kong financial reporting standards but also incorporate Hong Kong Accounting Standards, policies provided by Hong Kong Institute of Certified Public Accountants. All these policies are accepted throughout Hong Kong and they are well in accordance with the Hong Kong companies ordinance. So they are incorporating all the laws and policies necessary for the fulfillment of the preparation of the Annual financial report for any company.
Derivative financial instruments
Each derivative instrument is taken on their fair value at start. These fair values are adjusted according their market values at specific balance sheet dates. The gains and losses through these derivatives are immediately taken into the respective income statement accounts. In the case of hedging, these derivatives are recorded in the cash flow statement under the investment in the foreign operations. If there is any further gain or loss it is well represented in the income statement with particular heads and notes at the bottom. The effect of these derivatives give income statement and cash flow statement changes due to hedging and inclusion of gains and losses through derivative instruments.
Influence of shareholders:
As the company basically belongs to the shareholders and it is critical for the management of the company to elaborate where they have spent their money and whether the projects in which they have invested are beneficial for the company. This is the reason why company describes in the annual reports what they are planning and what they are going to do in the next few years. Companies also give reasons about why they are retaining the earnings of the shareholders and where they would be investing this amount.
Also shareholders want to know about the earnings they had in the past year and also they want to compare their previous year's earnings with this year therefore management normally include a comparison of the profitability of this year and previous years.
Influence from tax authorities:
Government has a major influence on any company's performances plus there are certain legal requirements that are to be followed by the company while preparing the annual report (Amran, & Devi, 2008). For instances, taxes are to be paid by every company and to inform the stakeholders including shareholders and government about the amount of taxes paid by the company or if there is any tax liability on the company.
Risk of the company is shown by debt to equity ratio. Higher debt of a company shows higher risk (Guthrie, Petty, Yongvanich, and Ricceri, 2004). However, certain amount of debt is important for every company to maximize the wealth of the shareholders. Share holders do not want that company to have higher level of debt in their capital structure. Not only share holders but investors along with banks do not prefer to invest in companies with higher debt because of their higher level of risk. So, because of this reason companies are bound to explain about the level of debt in their capital structure.
As per the laws, there are double auditing system which includes internal auditing and external auditing. For internal auditing the company gives the responsibility to three non executive directors namely Dr. Ramin Khadem, Mr. Cha Mou Zing Victor and Mr. Yi Xiqun. The committee is chaired by Dr. Ramin Khadem, who has the appropriate accounting and financial management expertise as required under Rule 3.10(2) of the Listing Rules. Apart from that the remaining two are also qualified according to the standards set by Hong Kong accounting Bureau.
The external auditing of SOHO China is done KPMG, Certified Public Accountants. They have audited the consolidated financial statements of SOHO China Limited (the "Company") and its subsidiaries (hereinafter collectively referred to as the "Group") set out on pages 3 to 68, which comprise the consolidated and company balance sheets as at 31 December 2009, and the consolidated income statement, the consolidated statement of comprehensive income, the consolidated statement of changes in equity and the consolidated cash flow statement for the year then ended, and a summary of significant accounting policies and other explanatory notes.
They have conducted our audit in accordance with Hong Kong Standards on Auditing issued by the Hong Kong Institute of Certified Public Accountants. Those standards require that the external auditors comply with ethical requirements and plan and perform the audit to obtain reasonable assurance as to whether the financial statements are free from material misstatement.
The main characteristics of their culture are:
Collectivism (group based)
Less uncertainty avoidance (more relaxed)
Short term (social and face saving)
Transparent information sharing
Classification of the company's accounting system
The company's accounting system is following the UK based IFRS. Yet it is not completely following the IFRS rules but most rules are in accordance with it. As mentioned previously, all the statements in the annual report are in compliance with the HKFRS. The policies of HKFRS are very similar to IFRS but there are certain areas which are slightly different due to the legalities and impact of the culture. Apart from that, the voluntary content is all based on the company's own standards, corporate culture and values they prioritize. Most of the changes in the different systems of the accounting take place in the balance sheet, while there are very few differences in income statement and other statements as well. Cash flow statements are almost identical in all the systems of the accounting. Some of the things which are different in the each statement are mentioned below.
Like in any balance sheet they show the net assets with increasing liquidity, followed by equity.
There is no debit and credit records, the values are simply displayed in vertical columns.
At the beginning of the fiscal year, the hedge items are initially taken on their fair value, after that they were adjusted by the amounts equal to their fair value of hedging at that time. These adjustments will continue to exist until the item which is hedged is completely amortized or disposed off. This is in accordance with HKFRS and it is not exactly applied on normally accepted IFRS. Derivative instruments are reported very differently in different part of the worlds. This is due to two reasons. Firstly, they have very complicated nature in practice. And secondly they are still new instruments in many parts of their world and their practice is not so come so there are no policies designed for them particularly.
There is a change in the definition of Property, Plant and Equipment. Like wise, there is a change in the depreciation time as well. These fixed assets are noted on their fixed value and their values are not changed as per depreciation. The accumulated depreciation balances the difference in their values.
The exchange of any asset occurs with some non-monetary asset, the costs are calculated on the fair value basis. Taking book value for the analysis of their current value is not done in balance sheet and they are noted as gains and losses through fixed assets on the income statement and their differences do not get any position in the income statement as well.
All of the identifiable intangible assets acquired in business combinations must be recognized separately from goodwill. An asset is identifiable when it either arises from contractual or legal rights or is separable. An asset is separable if it could not be sold on its own or with other assets. Assets like customer lists and customer relationships can be included as goodwill in business combinations.
The name of the statement "Income Statement" is as per the IFRS format.
They also have incorporated the value of intangible assets in their statements as per IFRS rules.
The revenue of projects which are partially completed for the sale of development properties is recognized with respect to their contracts.
Financial assets are represented on fair value and securities are shown on their par values.
Currency gains and losses are also incorporated in their financial statements.
Cash Flow Statement:
Cash flow statement is almost same as per GAAP or IFRS or HKFRS.
Statement of Changes in Equity:
According HKFRS it is necessary to show the statement of changes in equity. So there is a detailed statement about the changes happen in equity and it is also discussed in details in the supporting notes as well.