What Is an Annual Report?
An annual report is a document that public corporations must provide annually to shareholders that describes 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 and may also make forecasts about the future of the company. The back part of the report contains detailed financial and operational information.
Key Takeaways
- An annual report is a corporate document disseminated to shareholders that spells out the company's financial condition and operations over the previous year.
- It was not until legislation was enacted after the stock market crash of 1929that the annual report became a regular component of corporate financial reporting.
- Registered mutual funds must also distribute a full annual report to their shareholders each year.
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Understanding Annual Reports
Annual reports became a regulatory requirement for public companies following the stock market crash of 1929 when lawmakers mandated standardized corporate financial reporting. The intent of the required annual report is to provide public disclosure of a company's operating and financial 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 and to make investment decisions.
Typically, an annual report will contain the following sections:
- General corporate information
- Operating and financial highlights
- Letter to the shareholders from the CEO
- Narrative text, graphics,and photos
- Financial statements, including the balance sheet, income statement,and cash flow statement
- Notes to the financial statements
- Auditor's report
- Summary of financial data
- Accounting policies
Current and prospective investors, employees, creditors, analysts, and any other interested party will analyze a company using its annual report.
In the U.S., a more detailed version of the annual report is referred to as Form 10-Kand is submitted to the U.S.Securities and Exchange Commission (SEC). Companies may submit their annual reports electronically through the SEC's EDGAR database. Reporting companies must send annual reports to their shareholders when they hold annual meetings to elect directors. Under the proxy rules, reporting companies are required to post their proxy materials, including their annual reports, on their company websites.
Special Considerations
The annual report contains key information on a company's financial position that can be used to measure:
- A company's ability to pay its debts as they come due
- Whether a company made a profit or loss in its previous fiscal year
- A company's growth over a number of years
- How much of earnings are retained by a company to grow its operations
- The proportion of operational expenses to revenue generated
The annual report also determineswhether the information conforms to the generally accepted accounting principles (GAAP). This confirmation will be highlighted as an "unqualified opinion" in the auditor's report section.
Fundamental analysts also attempt to understand a company's future direction by analyzing the details provided in its annual report.
Mutual Fund Annual Reports
In the case of mutual funds, the 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 mutual 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 one-, five-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
How Do You Write an Annual Report?
An annual report has a few sections and steps that must convey a certain amount of information, much of which is legally required for public companies. Most public companies hire auditing companies to write their annual reports. An annual report begins with a letter to the shareholders, then a brief description of the business and industry. Following that, the report should include the audited financial statements: balance sheet, income statement, and statement of cash flows. The last part will typically be notes to the financial statements, explaining certain facts and figures.
Is an Annual Report the Same As a 10-K Filing?
In general, an annual report is similar to the 10-K filing in that both report on the company's performance for the year. Both are considered to be the last financial filing of the year and summarize how the company did for that period. Annual reports are much more visually friendly. They are designed well and contain images and graphics. The 10-K filing only reports numbers and other qualitative information without any design elements or additional flair.
What Is a 10-Q Filing?
A 10-Q filing is a form that is filed with the Securities and Exchange Commission (SEC) that reports the quarterly earnings of a company. Most public companies have to file a 10-Q with the SEC to report their financial position for the quarter.
The Bottom Line
Public companies must produce annual reports to show their current financial conditions and operations. Annual reports can be used to examine a company's financial position and, possibly, understand what direction it will move in the future. These reports function differently for mutual funds; in this case, they are made available each fiscal year and are typically simpler.
