Annual report

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.

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.

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.

The layout of annual reports varies from firm to corporation, but they often include the following sections:

• A letter from the president or CEO
• Performance highlights from the preceding year
• Financial statements
• Management assessment report and assurance opinion
• Performance and outlook for future years
• Voluntary disclosures (optional)

Each section is described in more detail further in the article.

• 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. 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. The letter would likely mention the information of interest to shareholders since they are the primary readers of the report.

• 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.

• 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. 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.

Companies in financial highlights often include small fonts for footnotes indicating that certain charges have been excluded from the figures presented. Additionally, 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. The classification of assets in the balance sheet varies widely in published annual reports.

• Management assesment report and assurance opinion

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. A firm’s annual reports are audited by the external auditors.

• 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.

• Voluntary disclosures

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.

Format of an annual report

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. A large number of companies include all or a portion of their annual reports on their corporate websites.

Users of an annual report

Annual reports are typically available to the general public and address a broad external audience, including shareholders, potential investors, employees, and customers. The general public can also be an audience, as certain businesses and non-profit organizations will likely read an organization's annual report to determine whether a partnership or other collaborative initiatives are possible.

While annual reports are primarily used to transmit financial and performance-related information, they are also used as a promotional tool to showcase some of the company's recently accomplished significant initiatives or goals.

• Shareholders and Potential Investors

In order to make investment decisions, shareholders and potential investors utilize annual reports to better understand the company's present condition. The annual report assists potential investors in determining whether to purchase stock. It also provides insight into the company's future strategies, as well as its aims and objectives.

• Employees

Employees frequently utilize the annual report to understand the company's many areas of concentration. Due in part to stock option rewards and other schemes that incentivize employees to become shareholders, many employees are also shareholders of a company.

• Customers

Annual reports are utilized by a company's customers to gain an overview of competing businesses and determine with whom to establish a relationship. Customers are interested in collaborating with high-quality products or service providers, and an annual report enables businesses to stress their central beliefs and goals. They also effectively use the financial information in the annual report, which provides them with a solid understanding of the company's financial standing.

References

• Corporate Finance Institute. (2022, November 1). Annual Report.
• Palepu, K. G., & Healy, P. M. (2012). Business Analysis and Valuation : Using Financial Statements (5th ed.). South-Western.
• Srinivasan, P., Srinivasan, R., & Marques, A. C. (2015). Narrative Analysis of Annual Reports - A Study of Communication Efficiency. "SSRN Electronic Journal."
• Wahlen, J. M., Baginski, S. P., & Bradshaw, M. T. (2014). Financial Reporting, Financial Statement Analysis and Valuation (8th ed.). Cengage Learning.

Author: Annija Petersone

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