Directors’ report – What is a directors’ report?
A directors’ report is a financial document that larger limited companies are required to file at end of the financial year.
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At the end of each accounting year, private limited companies are required to provide a set of financial reports known as statutory accounts. Amongst these accounts is the directors’ report, which is produced by the board of directors and outlines the financial state of the company.
Which companies need to create directors' reports?
Only large organisations are required to produce directors’ reports; small companies or micro-entities are exempt. A private limited company is no longer considered a small company, and must therefore submit a directors’ report to HMRC, once it fulfils at least two of the following criteria:
- A turnover of more than £10.2 million
- £5.1 million or more on the balance sheet
- 50 employees or more.
What is the purpose of a directors’ report?
Under Section 415 of the Companies Act 2006, the directors of a company are required to prepare a directors’ report at the end of each financial year. This legislation is part of a general move towards greater corporate transparency.
The information provided by the directors’ report helps shareholders understand:
- Whether the company’s finances are in good health;
- Whether the company has the capacity to expand and grow;
- How well the company is performing within its market, and how well the market is performing in general;
- How well the company is complying with financial regulations, accounting standards and social responsibility requirements.
By knowing this information, shareholders can make better informed decisions and can hold the directors of the company to greater account.
What is included in a directors’ report?
As a minimum, a directors report should always state:
- The names of each director who served during the reporting year;
- A summary of the company’s trading activities;
- A summary of future prospects;
- The principle activities of the company and, if relevant, the principle activities of its subsidiaries;
- Recommendations for dividends for the reporting year;
- Any financial events that occurred after the date on the balance sheet, if these events could affect the company’s finances;
- Significant changes to the company’s fixed assets.