Five amusing topics in annual reports

Hiding R&D

Having announced research and development expenses are expensed as incurred, pharmaceutical companies show capitalised research and development costs in their balance sheet. But they hide them away and make them difficult to find.

Glaxo Smithkline for instance hide them under the heading “Licensed patents amortised brands etc” which includes amounts “still in development”, without specifying a figure. Astra Zenica hide them in “Product, marketing and distribution rights” which is not quite the same. We know because they have an important impairment charge “recorded against products in development”. Sanofi are more open, because they have a clear heading “Acquired R&D”. This gives us the clue.  When companies purchase research and development they capitalise them.

Roche Groupe even has a heading called “Intangible assets not available for use”. I am not sure how they can have a value and record it without impairment. But they do give us:

‘these assets mostly represent in-process research and development assets acquired’, and then they explain the different types of acquisition.

American companies under FASB standards have the same procedure. Abbvie for instance has ‘indefinite-lived research and development’ assets. Abbott too has ‘intangible assets which relate to IPR&D [1] acquired in a business combinations’. Note the IP here does not refer to the more famous Internet Protocol, as in IP address, or the well known Intellectual Property.

So even when the standards have the same rules, the wording in the financial statements is totally different. European pharmaceutical companies tend to hide their ‘purchased R&D’ in vague terms. The US companies use acronyms and odd peculiar accounting terms such as ‘indefinite-lived’ assuming that the normal user is educated enough in accounting terms to understand them easily.

 [1] Abbott do not reveal what IPR&D stands for: In-Process Research & Development, they assume the ordinary user of financial statements know what it means. Bristol Myers Squib use a similar acronym, but not quite the same: IPRD.

Cyber security risk

One real risk is cyber security. Companies today cannot survive without adequate cyber protection which gives them a chance to spray buzzwords in their risk statement, to fill out its importance and to show how serious it really is.

The list is long:

‘cyber attack, malicious intrusion, breakdown, destruction, loss of data privacy, target of malware, hacking, data leakage, invasion, corruption of data, security breaches, disruption, degradation or breakdown.’

Here is an example:

“Breaches of data security, disruptions of information technology systems and cyber threats could result in financial, legal, business or reputational harm. “

And then comes the inevitable ‘BUT’. Despite all our efforts: ‘there can be no assurance that our measures and efforts will prevent future attacks.’

Having announced the risk then what? Understandably none of the companies give us information or assurance on the state of their defences. Anything specific would help the hackers. They leave the risk hanging there for the investors and readers to worry about. They do not give us any information we didn’t know before reading the annual report. Everyone knows they operate in a threatening cyber security environment which is nothing but business as usual.

However the risk does not depend only on management’s cyber protection. Even if they have robust protection, hackers may get in and here the impact can lead to bankruptcy. So companies only know how good their defences are after an attack, and even then they rarely tell us about it.

Unable to predict

I wonder sometimes whether top management read their annual reports. If they did they would realise that some of their statements reach the level of ludicrous.

Here, for instance are some ‘unable to predict’ statements taken from annual reports:

“We are also unable to predict if and when any changes to laws or regulatory policies will occur and how they will affect our business …” [1]

This statement relates to the risk of delays in the development and commercialisation of new products.

Now what reasonable shareholder or simple reader of annual reports would expect management to predict future changes to any country’s laws or regulatory policies? None at all.

How about these two:

“The Company cannot predict the effect of the planned separation on the trading price of shares of its common stock …” [2]

 “Abbott cannot predict with any certainty changes in foreign currency exchange rates …”

Can anyone predict the trading price of any share in any company in the future, or predict changes in foreign currency exchange rates? Of course not.

But what if top management have read these statements and decided to keep them in their annual report.  This tells us another story.  I can only conclude these companies consider their shareholders as illiterate in business matters or complete idiots, or both.

[1] Bristol Myers Squibb, Forms 10-K, for the fiscal years ended 31st December 2021, page 25 and 31st December 2022, page 24. The statement appears in both years with no change, pure ‘copy paste’ from prior year annual reports!

 [2] Johnson & Johnson, Annual report 2021, for the fiscal years ended 31st December 2021, page 14 and 31st December 2022, page 14. The statement appears in both years with no change, pure ‘copy paste’ from prior year annual reports!

Dividend risk

Most people believe companies which pay dividends revel in financial health. Why then put fear into the hearts of shareholders with risk statements such as this:

“There can be no guarantee that we will pay dividends or repurchase stock.”

Every normal shareholder knows the board of directors decides on the payment of dividends and any changes can affect the stock price both positively and negatively. Yet instead of making a factual statement in a neutral manner somewhere in their annual reports, they make it a material risk in a negative way.

Some companies pay dividends but have no dividend risk: Johnson and Johnson, AstraZenica GlaxoSmithKline, Sanofi, and Novartis. Others like Abbvie and Bistol Myers have a dividend risk.

As usual they give us no explication of these differences, but above all, no reason why these companies think a dividend is a material risk.


I recently discovered a new accounting term in the 2022 annual report of Associated British Foods: headroom which I had always thought measured the space between the top of my head and the ceiling. However a more figurative meaning of headroom does exist meaning: ‘freedom of action’, and perhaps accountants have adapted this meaning to the accounting term.

But I discovered headroom can have a value:

“Headroom was $232m on a CGU carrying value of $1,003m.”

To me, this statement means completely nothing. Now naturally, I have taken it out of context and thrown it into my article for effect, but believe me I have no idea what it means even in the context of impairment testing and judgements made by management. The same annual report includes another one in a similar context, giving a little more insight:

“Each of the Group’s CGUs had headroom under the annual impairment review.”

Reading this, I guess when the accountants do their impairment tests, the future cash flows exceed the carrying value, giving headroom. If so, my assumption above is incorrect. Accounting headroom is closer to the space between the top of my head and the ceiling than it is to freedom of action.

The writers of the annual report of Associated British Foods appreciate headroom by mentioning the word 14 times in 2021, and another 16 times in 2022. They associate the word with many accounting issues: goodwill, intangible assets and property plant and equipment, but also in the appreciation of going concern and surprisingly in the company’s liquidity risk.

Headroom has become versatile, very much part of the accounting environment in Associated British Foods.

Therefore, one day headroom might get out into the accounting public domain as a recognised, much used accounting term. It would certainly contribute to enlivening the rather austere vocabulary we use. But for the moment, headroom remains colloquial and relatively unknown.

It still made me smile.

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