What is the Annual Report?

Components of Annual Reports

Across global markets, Annual reports have different formats and components; this happens due to statutory requirements in different economies. Following are some of the components in general:

  • Director’s message to shareholdersInformation on corporate governanceInformation On Corporate GovernanceCorporate governance is a set of rules or practices through which an entity is directed and controlled to increase shareholders wealth by increasing the economic value and is concerned about its relations with various entity stakeholders.read moreFinancial highlightsManagement discussion and analysisShareholding pattern, management/board of directors’ informationDetailed and audited financial statementsStatement of financial positionStatement Of Financial PositionStatement of Financial Position represents the current financial status of an entity in terms of assets and liabilities. This statement is used by the stakeholders and shareholders as it affects their investing decisions.read moreIncome statementIncome StatementThe income statement is one of the company’s financial reports that summarizes all of the company’s revenues and expenses over time in order to determine the company’s profit or loss and measure its business activity over time based on user requirements.read moreStatement of CashflowsStatement Of CashflowsA Statement of Cash Flow is an accounting document that tracks the incoming and outgoing cash and cash equivalents from a business.read moreStatement of Changes in EquityStatement Of Changes In EquityStatement of changes in equity is the adjustment of opening and closing balances of equity during a particular reporting period. It explains the connection between a company’s income statement and balance sheet. It also includes all those transactions not captured in these two financial statements.read moreNotes to financial statementsUsage of accounting policiesAccounting PoliciesAccounting policies refer to the framework or procedure followed by the management for bookkeeping and preparation of the financial statements. It involves accounting methods and practices determined at the corporate level.read more and changes, if anyOther information or disclosure.

You are free to use this image on you website, templates, etc., Please provide us with an attribution linkHow to Provide Attribution?Article Link to be HyperlinkedFor eg:Source: Annual Report (wallstreetmojo.com)

Annual Report Format

It usually starts with the director’s message to shareholders. This message intends to brief them about the key performance points of the current year. It also acknowledges the growth prospects relative to its industry landscape to mostly get shareholders’ attention to the company’s potential for excellence.

These reports also give an account of corporate activities and legal highlights. In addition, the MD&A section emphasizes management commentary on the business.

Then comes the most important section – financial statements and associated notes. Financial statements give financial details of the current year and the past year; this makes year-on-year comparisons easier for a shareholder. In addition, the notes to financial statements describe the technical anomalies and assumptions taken in preparing the financial statements.

The later sections of this accounting reportAccounting ReportAccounting reports are created using a company’s accounting data to check ledger-by-ledger transactions over a given time period. Accounting reports also include financial statements such as cash flow statements, profit and loss statements, and balance sheets.read more present changes in accounting policies, financial disclosure, capital projects, and other information relevant to shareholders.

Note: In the United States, these reports can also be presented in a format known as the 10-K. However, there are many differences between these two documents. An annual report is more graphical and interactive to its shareholders.

Example

Source: https://s2.q4cdn.com

How to Read an Annual Report?

There are no specific guidelines to read annual reports. However, these are some general tips on how to make the most out of it –

  • It starts with the director’s note. It outlines the highlights of the current year and recent past and a brief on prospects and strategies.It gives a section on management discussion and analysis. This section helps the stakeholder know what the management thinks about company performance and prospects. It also gives a view of the industry and economy in which the business operates.Financial StatementsFinancial StatementsFinancial statements are written reports prepared by a company’s management to present the company’s financial affairs over a given period (quarter, six monthly or yearly). These statements, which include the Balance Sheet, Income Statement, Cash Flows, and Shareholders Equity Statement, must be prepared in accordance with prescribed and standardized accounting standards to ensure uniformity in reporting at all levels.read more are perhaps the most important section. It is crucial to know the structure of the subject business by reading the information on shareholding patterns; this helps define if the report is a consolidated or standalone publication.Notes to financial statements are an unavoidable reading as this section backs up the data contained in the three financial statements. To analyze financial statements and carry out forecast methodologies, notes to financial statements are significant.

Source: https://ir.aboutamazon.com

Benefits

  • Annual reports are intended to provide information and disclosure on business prospects and financial performance, its stakeholders, which include investors, creditors, auditors, government officials, etc. Moreover, they serve the employees, suppliers, customers, etc.Institutional and individual investors use them to analyze and forecast financial statements to evaluate the company’s prospects.These reports are, in essence, standardization practices for companies to report their business performance. Such standardization helps government authorities in taxation and audit purposesAudit PurposesThe primary purpose of an audit is to conduct an independent and unbiased verification of all financial and non-financial material information to ensure that it is in line with what the management has reported.read more.

Limitations

  • Annual reports are comprehensive but are not always fulfilling in terms of completeness. They are used with other SEC filingsSEC FilingsSEC filings are formal documents submitted to the Securities and Exchange Commission in the United States that contain financial information about the company as well as any other relevant information about recent or upcoming activities.read more, corporate press releases, management notes, proxy statements, etc.These are sometimes released to attract investors and supply-chain parties. The prospective expenditures and income are projected in a way that makes the business appealing.They are based on historical performance. Hence, the estimation of future performance is not always best measured.

Important Points to note

  • Annual reports contain financial informationFinancial InformationFinancial Information refers to the summarized data of monetary transactions that is helpful to investors in understanding company’s profitability, their assets, and growth prospects. Financial Data about individuals like past Months Bank Statement, Tax return receipts helps banks to understand customer’s credit quality, repayment capacity etc.read more for the past several years. However, these financial data are subject to changes in the future. Changes in accounting policies can lead to prospective as well as retrospective applications. The users should consider this and perform their analysis accordingly.Besides these reports, companies also release quarterly reportsQuarterly ReportsQuarterly reports are unaudited financial reports that are summarized versions of financial statements released by public companies every three months (quarter) to comply with compliance requirements.read more. It is good to refer to both kinds of reports to gather relevant information.While using these reports to analyze and forecast financial statements, the best practice is to use data from the most recent years. For instance, data for FY2016 should be taken from the Annual report 2016-17; this is because companies keep on revising data with changes in accounting policies regarding the retrospective approach.

Below is an excerpt from the Annual Report of Airbus company highlighting the Changes in Accounting Policies and disclosures:

Source: https://www.airbus.com

Conclusion

An annual report is helpful for its stakeholders in understanding the strengths and weaknesses of the business. This document is prepared for different purposes and serves different users. In preparing this document, companies must follow accounting standards and depict business to its investors and creditors as clearly as possible.

Independent teams of auditorsAuditorsAn auditor is a professional appointed by an enterprise for an independent analysis of their accounting records and financial statements. An auditor issues a report about the accuracy and reliability of financial statements based on the country’s local operating laws.read more verify this report, and credibility depends on the report’s accuracy. These reports are published and released online and made available in hard print to stakeholders.

This article is a guide to what is an annual report. Here we discuss components, examples, and how we read an annual report and its benefits and limitations. You can learn more about financing from the following articles –

  • Reporting PeriodAnnual Financial StatementsAudit Report ContentsFinancial Reporting