An annual report is a snapshot that corporations provide the stakeholders, investors, and community by describing their operations, financial conditions, the balance sheet, commercial performance, corporate governance, assessment of the financial trends of the business of the preceding year. Annual reports are prepared at the end of the fiscal year to provide the internal operations of the company such as activities of past and future and performance to the customers. Preferably, every investor must investigate to obtain the financial information and what management is headed to. A typical annual report covers multiple sections that assist investors and creditors understand the company rather than by simply looking at a set of regular purpose financial statements. An annual report acts as a pinnacle in the corporate communications.
Key components of Annual Report: An annual report assists in understanding the assets and pitfalls of an organization's financial conditions as it acts as a reflector of the outline of corporate earnings. An Annual report usually begins with a letter of Chairman of the Board or the CEO, followed by financial information, products that are on the board, the company's subsidiaries, and director's reports.
- Chairman’s Letter: It has been conventional to maintain a letter from the chairman of the board to the stakeholders to present an overview of the preceding year’s key improvements and challenges where they couldn't meet the expectations. This part of the annual report also consists of the future outlooks such as insights, strategies, and growth opportunities. Small businesses might not have a board of directors, but a letter from the president is appropriate to give to investors.
- Ten-year Financial Summary: Prior years annual reports help in analyzing the growth or de-growth over the period of time and also suggests other preeminent pointers of organization’s success.
- List of Directors and other Officers: All the information regarding the prominent delegates of an organization such as CEO, CFO, president, and vice-presidents is available here. The other members who are on the board but may not be a part of the company can also be included here to assist in certain situations.
- Management Discussion and Analysis (MD&A): The management discussion and analysis is the section of the annual report where the management presents the different aspects of the business. It is an overview of the performances of previous years and highlights the business strategy that they intend to pursue the coming fiscal. It could be an inception for a new investor to understand the business fundamentals. Appointments, new product launches, updates on the progress, and other pieces of information are discussed here.
- Director’s Report: As financial reporting is an indispensable part of running a business, a director's report is a financial document that needs to file at the end of every financial year.
- Corporate information: Subsidiaries, brands, addresses: This section of the annual report consists of company locations, product lines, brand names, and contact information.
- General shareholders’ information and corporate governance: Here, the report consists of the aspects that are essential to the shareholder of a company and need not be a part of the daily operations of a company.
- Financial Statements and Schedules: This section includes the financial performance data of the company such as operational performance as the financial strength of a company during the reporting period. There are three financial statements namely, the profit and loss statement, balance sheet, and cash flow.
Reading an Annual Report: Following are the certain things to keep in mind while reading an annual report of any organization.
- Review the company’s financial statements and analyses how to enhance profitability, growth, and sustainability.
- Footnotes and schedules are to be taken seriously for a better understanding of the financial statements.
- One must be able to recognize the signs that the company is providing regarding any disaster or growth ahead
Objectives of Annual Report: It is made with the following objectives:
Taking prospective economic decisions
Providing information about the financial position, performance, and changes in financial position of an entity
Presenting and disclosing information about the company
To lure new investors and make adequate disclosures to the existing ones
Purpose of Annual Report:
Provide Financial Information
An annual report provides information on the company’s fiscal year. The financial information provided in the annual reports helps determine the current status of a business, how the company is funding operations and growth, and how good the company is placed at making money for its investors.
An annual report is considered as the main accountability mechanism. Accountability is a pre-requisite, as it gives an idea of how far the company has met its responsibilities towards its owners and fulfilled the role defined, which through the financial reports should reflect the extent of performance that is related to the entity.
The objective of reporting the financial statements’ is to inform about the performance of the company that could be helpful to a wide range of potential users for evaluating and making economic decisions.