Annual report
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Annual report is a comprehensive report of company`s activity during the prior year. Its purpose is to provide users with information on the company's activities and financial performance, such as shareholders and potential investors.[1]
Annual reports - the most popular medium
Annual reports are the most popular medium via which companies share their previous performance, understanding of the external environment, goals, plans for the near and immediate future, and performance expectations. Because annual reports are vehicles for communication with numerous stakeholders (investors, employees, customers, etc.), adequate information results in clarity and information asymmetry. It is also essential that corporate communication is open, straightforward, and simple for all stakeholders to comprehend. In the absence of high-quality, timely, and sufficient information regarding corporate performance and strategies, investor risk rises, which may result in increased capital costs.[2]
Elements of an annual report
Annual reports provide a significant quantity of information to their readers, who will gain a comprehensive understanding of the company's success throughout the past year. It is crucial to note that many annual reports are not standard reports with a broad range of text; many businesses frequently include a large portion of graphics and photos, resulting in an aesthetically attractive document.[3]
The layout of annual reports varies from firm to corporation, but they often include the following sections:[4]
- A letter from the president or CEO
- Performance highlights from the preceding year
- Financial statements
- Management assessment report
- Performance and outlook for future years
1. Letter from the CEO The letter from the CEO is addressed to shareholders and provides a summary of the company’s performance in the previous year. CEOs typically spend a lot of time on their letters to highlight the company’s achievements, as its performance is relative to the industry it operates in. The letter would likely mention the information of interest to shareholders since they are the primary readers of the report. (Corporate Finance Institute, 2022) Some firms apply the Letter to the Shareholders section of their annual report to outline the firm's industry conditions, competitive standing, and future ambitions. Others use the Letter to exaggerate the firm's financial performance and skim over any potential competitive challenges. (PALEPU & HEALY, 2012, p.3-11))
2. Performance Highlights
Annual reports usually dedicate a section to highlighting some of the company’s key achievements, such as special initiatives, goals reached, or awards received by the company or its employees. The main goal of the section is to ensure that shareholders are satisfied with their investment in the company and persuade potential investors to do the same. (Corporate Finance Institute, 2022)
3. Financial Statements Financial statements are a key component of the annual report and provide its users with quantitative data regarding specific aspects of its financial performance in the previous fiscal year. (Corporate Finance Institute, 2022)
Annual reports typically include financial statements, such as balance sheets, income statements, and cash flow statements. In addition, there will often be graphs or charts included, helping break down the financials into easily readable information. (Corporate Finance Institute, 2022) The classification of assets in the balance sheet varies widely in published annual reports. (Wahlen et al., 2014) p23
There are numerous variations in the format of income statements in corporate annual reports. Typically, businesses list numerous sources of revenue from the sale of their goods and services, followed by the cost of goods sold on p.30. (Wahlen et al., 2014) p23 \ For example, firms often include financial highlights in their annual reports but use small fonts for footnotes indicating that certain charges have been excluded from the figures presented. However, most firms now make it easier for investors to understand how management views nonrecurring or unusual charges with separate disclosures. For example, in Pep p253 (Wahlen et al., 2014)
4. Management Assesment Report Each annual report must include a "internal control report" specifying management's responsibility for building and maintaining an adequate internal control structure and procedures (Management Assessment Report). The annual report must also include the auditor's evaluation of the effectiveness of the internal control structure and processes (Assurance Opinion). The assurance opinion can be unqualified, qualified, adverse, or a disclaimer. This report must be signed by the chief executive officer and the chief financial officer. . P 40 . (Wahlen et al., 2014) p23
4. Outlook for Future Years Annual reports typically include information regarding its future performance in order to provide shareholders with information on the company’s future goals and objectives. Investors are able to get a thorough understanding of the company’s current position in its respective industry and the company’s plans for future growth. The reports also include information regarding a company’s strategy and how it plans to implement that strategy in the coming years. (Corporate Finance Institute, 2022) 5. Format While hardcopy annual reports are still common, electronic versions are increasingly popular and can be found on the websites of many companies. Electronic versions allow the reports to be made accessible to a larger audience in PDF or other formats. (Corporate Finance Institute, 2022)
Increasingly common are interactive online reports, which allow users to virtually flip through the report and expand graphics, among other things. (Corporate Finance Institute, 2022) A large number of firms include all or a portion of their annual reports and SEC filings on their corporate websites. F p57(Wahlen et al., 2014)
Voluntary disclosures may be presented in the company's annual report, in brochures prepared to describe the company to investors, in management meetings with analysts, or in investor relations' responses to requests for information. (12-13) (PALEPU & HEALY, 2012)
Footnotes=
References
Corporate Finance Institute. (2022, November 1). Annual Report.
Srinivasan, P., Srinivasan, R., & Marques, A. C. (2015). Narrative Analysis of Annual Reports - A Study of Communication Efficiency. SSRN Electronic Journal.
