A review of financial reporting from a range of construction industry sectors

Annual reports have changed quite dramatically between mid 1970s and today. The overall amount of information given has increased considerably, and this is equally true for the financial statements and the discussion section of the annual report.New financial statements have emerged with the funds flow/cash flow statement or more recently the statement of total recognised gains and losses, and existing statements now offer a greater level of dis-aggregation.â€Å"In addition to the basic financial statements underwriters expect to find schedules of contracts in progress and completed contracts and a reconciliation of the income and the costs of these contracts to the current year's income statement.Certain balance sheet accounts are unique to the construction industry– costs in excess of billings on uncompleted contracts (an asset) or billings in excess of costs (a liability). Using the percentage of completion method costs in excess of billing result when the billings on unc ompleted contracts are less than the income earned to date.These under billings result in increased assets. Conversely, where billings are greater than the income earned on uncompleted contracts, a liability, billings in excess of costs results. Many bonding companies request other specific information as supplementary data. A timely and detailed response can provide many answers to bonding agent's questions and increase the likelihood of a positive reaction to a request for bonding.The absence of the appropriate and sufficient information in the financial statements will give rise to scepticism and, at the very least, additional questions from the survey.As a result the TABULAR DATA OMITTED bonding agent will be seriously inhibited in his or her attempt to convince the insurance carrier that the reward outweighs the risk of providing performance bonds for the contractor.† (Dufek, 1992)2-2- Shareholders Users of annual reports are many and varied, but it is generally agreed th at investors form one of the largest and most important groups of potential users (Day, 1986). It is generally recognised that information contained in company financial reports should be useful to shareholders in their investment activities.Yet if annual reports are to succeed in being a primary means of communication between the business enterprise and its shareholders, they must contain disclosed information that shareholders need in order to take their investment decision (Lee and Tweedie, 1975).2-3- Disclosure of risk As defined by the ASB (1998) risk is â€Å"Uncertainty as to amount of benefits. The term includes both potential for gain and exposure to loss.† Risk thus is essential to an enterprise, because it is inherent in the pursuit of opportunities to earn return for its owners.It follows that in order to understand properly the potential for the future performance of any company; investors need a proper understanding of the risks it undertakes. This will be based on the following information