What Is an Annual Report? (original) (raw)

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 report chronicles the company's activities over the past year, may make forecasts about the future, and contains detailed financial and operational information.

Key Takeaways

• An annual report is disseminated to shareholders that spell out the company's financial condition and operations over the previous year.
• After the stock market crash in 1929, the annual report became a regular component of corporate financial reporting.
• Registered mutual funds must distribute a full annual report to their shareholders.

Investopedia / Jake Shi

What's Included

Annual reports became a regulatory requirement for public companies following the stock market crash in 1929 when lawmakers mandated standardized corporate financial reporting. It includes public disclosure of a company's operating and fiscal activities for the previous 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. An annual report contains the following sections:

• General corporate information
• Operating and financial highlights
• Letter to the shareholders from the CEO
• Narrative text, graphics, and photos
• Management's discussion and analysis (MD&A)
• 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

In the U.S., a detailed version of the annual report is referred to as Form 10-K and 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.

Information for Stakeholders

The annual report defines whether 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 can understand a company's future direction by analyzing the details provided in its annual report. 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 several years
• How much of earnings are retained by a company to grow its operations
• The proportion of operational expenses to revenue generated

Mutual Fund Reports

A mutual fund annual report discloses certain aspects of the fund's operations and financial condition. In contrast to corporate annual reports, mutual fund reports are best described as "plain vanilla" in 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 made available to fund shareholders and prospective fund investors.

All mutual funds registered with the SEC must send a full report to all shareholders annually. 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 Companies 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. 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?

An annual report is similar to the 10-K filing in that both report on the company's activity. Both are considered the last financial filing of the year and summarize how the company performed. Annual reports are much more visually friendly with images and graphics. The 10-K filing only reports numbers and other qualitative information.

What Is a 10-Q Filing?

A 10-Q filing is a form filed with the Securities and Exchange Commission (SEC) that reports quarterly earnings. 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 examine a company's financial position and, possibly, understand its plans. These reports function differently for mutual funds that report performance to shareholders.