Annual Report

Terms

What is an Annual Report?

Definition: An annual report is a financial summary of a company’s activities during the year along with management’s analysis of the company’s current financial position and future plans. Annual reports are prepared at the end of the fiscal year for external users to gain financial information about the inner workings of the company and what management plans to do in the future.

An annual report is a publication that public corporations must provide annually to shareholders to describe their operations and financial conditions. The front part of the report often contains an impressive combination of graphics, photos, and an accompanying narrative, all of which chronicle the company’s activities over the past year. The back part of the report contains detailed financial and operational information.

Understanding Annual Reports

It was not until legislation was enacted after the stock market crash of 1929 that the annual report became a regular component of corporate financial reporting. The intent of the required annual report is to provide public disclosure of a company’s corporate activities over the past year. The report is typically issued to shareholders and other stakeholders who use it to evaluate the firm’s financial performance. Typically, an annual report will contain the following sections:

  • General corporate information
  • Operating and financial review
  • Director’s Report
  • Corporate governance information
  • Chairpersons statement
  • Auditor’s report
  • Contents: non-audited information
  • Financial statements, including
    • Balance sheet also known as Statement of Financial Position
    • Income statement also profit and loss statement.
    • Statement of changes in equity
    • Cash flow statement
  • Notes to the financial statements
  • Accounting policies
  • Other features

Other information deemed relevant to stakeholders may be included, such as a report on operations for manufacturing firms or corporate social responsibility reports for companies with environmentally or socially sensitive operations. In the case of larger companies, it is usually a sleek, colorful, high-gloss publication. Research has found that annual reports that convey optimistic tone are associated with lower audit fees, suggesting that annual report tone reflects factors that auditors consider in assessing audit risk.

The details provided in the report are of use to investors to understand the company’s financial position and future direction. The financial statements are usually compiled in compliance with IFRS and/or the domestic GAAP, as well as domestic legislation (e.g. the SOX in the U.S.).

In the United States, a more-detailed version of the report, called a Form 10-K, is submitted to the U.S. Securities and Exchange Commission. A publicly held company may also issue a much more limited version of an annual report, which is known as a “wrap report.” A wrap report is a Form 10-K with an annual report cover wrapped around it.

How Does an Annual Report Work?

The Securities and Exchange Commission (SEC) requires all public companies to distribute an annual report to shareholders at the end of each fiscal year. Each report contains the three main financial statements – the Income Statement, Cash Flow Statement and Balance Sheet – as well as a host of other company-related data.

Why Does an Annual Report Matter?

The annual report provides a variety of important financial data. The SEC requires all publicly traded companies to file reports on an annual and quarterly basis, and the reports provide in-depth information on a company’s products, market segments, competitors, customers, management and legal proceedings. Investors can readily access these financial reports for all public companies and mutual funds incorporated in the U.S.

Special Considerations

In the case of mutual funds, an annual report is a required document that is made available to a fund’s shareholders on a fiscal year basis. It discloses certain aspects of a fund’s operations and financial condition. In contrast to corporate annual reports, mutual fund annual reports are best described as “plain vanilla” in terms of their presentation.

A mutual fund annual report, along with a fund’s prospectus and statement of additional information, is a source of multi-year fund data and performance, which is made available to fund shareholders as well as to prospective fund investors. Unfortunately, most of the information is quantitative rather than qualitative, which addresses the mandatory accounting disclosures required of mutual funds.

All mutual funds that are registered with the SEC are required to send a full report to all shareholders every year. The report shows how well the fund fared over the fiscal year. Information that can be found in the annual report includes:

  • Table, chart or graph of holdings by category (e.g., type of security, industry sector, geographic region, credit quality, or maturity)
  • Audited financial statements, including a complete or summary (top 50) list of holdings
  • Condensed financial statements
  • Table showing the fund’s returns for 1-, 5- and 10-year periods
  • Management’s discussion of fund performance
  • Management information about directors and officers, such as name, age, and tenure
  • Remuneration or compensation paid to directors, officers and others
  • etc.

Summary

  • An annual report is a publication that public corporations must provide annually to shareholders to describe their operations and financial conditions.
  • It was not until legislation was enacted after the stock market crash of 1929 that the annual report became a regular component of corporate financial reporting.
  • All mutual funds that are registered with the SEC are required to send a full annual report to all shareholders every year.

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