Annual Report - Explained
What is an Annual Report?
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Table of ContentsWhat is an Annual Report?How is an Annual Report Used? Special Consideration of Annual ReportsAcademic Research on Annual report
What is an Annual Report?
An annual report is a publication which corporations are required to provide yearly to shareholders to explain their financial conditions and operations. An annual report doesn't have to be bulky in size; five pages will do. The first pages always seem to contain graphics, images, and charts which represent historical data of the company's performance, while the back page contains detailed financial information for the year.
Back to: ACCOUNTING, TAX, & REPORTING
How is an Annual Report Used?
The annual report became a core component of corporate financial reporting after the legislation enacted it during the stock market crash of 1929. This report seeks to provide publicly available information about a corporation so that interested investors or shareholders will have an idea of what they're going into if they decide to hold stocks in such companies. The report is issued to stakeholders and shareholders to analyze how the firm is performing. An annual report typically contains the following:
- General information about the corporation
- Operations highlights
- Financial highlights
- Letter to shareholders or executive summary from the chief executive officer
- Narratives, texts, and graphics
- Management discussions and analysis (MD&A)
- Financial reports, including but not limited to balance sheet, cash flow states, and income statements
- Backings of the financial reports
- Auditory report
- Financial data summary
- Policies guiding accounting
The U.S., however, uses a more detailed report version known as the Form 10-K which is submitted to the Securities and Exchange Commission (SEC). Firms and corporations have access to submit their annual reports through the SECs EDGAR database; a database that allows for online submissions. Also, shareholders are required to get a copy of their firms annual reports anytime they hold annual meetings related to corporate financing and management. The proxy rule also requires firms to upload their annual reports and other related materials on their company websites for easier access by aspiring shareholders or investors. Bottom Line: The annual report is very important to investors, aspiring shareholders, security analysts, creditors, and preferred stock investors, as they make use of this data in analyzing whether a company is a good investment. This is the more reason why the proxy rule has made it a mandatory action for firms to make it readily available on their websites. An annual report is useful as it contains information which can allow interested parties to measure the following:
- A company's growth since its early days
- The amount which can keep a company in business
- Operational cost to revenue ratio
- How far the company has come from its previous year
- A company's ability to pay off its debt when the duration is up
A company's annual report also helps accountants and interested parties determine if the firm has held up to the generally accepted accounting principle (GAAP) in carrying out its operations. Before confirming if this holds, the auditors report will mark this section as an unqualified opinion since we can only know if the company adheres to GAAP only after the annual report is out. Also, fundamental analysts make use of annual reports to understand how a firm might fare in the latter days.
Special Consideration of Annual Reports
Annual reports can be provided at the end of a fiscal year in the case of a mutual fund. This report provides information about select aspects of the funds operation and financial condition. Mutual funds annual reports are not taken as seriously as corporate annual reports, and the reason for this is visible in their presentation. Mutual funds can produce annual reports serves as a source for multiple years funds performance and information which are easily available to funds shareholders and potential investors. However, the information in these types of reports focuses more on quantity rather than quality, which is the main reason for an annual report. SEC-registered mutual funds are mandated to provide full annual reports to each shareholder per annum. This report will allow them to analyze the performance of the mutual fund in the fiscal year and help them make decisions. A mutual funds annual report contains:
- A table, chart, and graphics to illustrate fund performance in each category
- Audited financial statements
- Financial statements
- An analysis of the funds report for 1-year, 5-year, and 10-year periods
- Management analysis of fund performance
- Information about fund directors and officers
- Compensation paid to officers and directors, etc
- An annual report is a publication which a corporation is required to provide yearly to its shareholders for proper examination of its financial performance and operation.
- The stock market crash in 1929 was indeed the most important reason for the enactment of the annual reports legislation.
- SEC-registered mutual funds are required under law, to provide annual reports to shareholders each year.
Academic Research on Annual report
- Annual reportreadability, current earnings, and earnings persistence, Li, F. (2008). Annual report readability, current earnings, and earnings persistence.Journal of Accounting and economics,45(2-3), 221-247. This paper examines the relation between annual report readability and firm performance and earnings persistence. I measure the readability of public company annual reports using the Fog index from the computational linguistics literature and the length of the document. I find that: (1) the annual reports of firms with lower earnings are harder to read (i.e., they have a higher Fog index and are longer); and (2) firms with annual reports that are easier to read have more persistent positive earnings.
- Factors influencing voluntaryannual reportdisclosures by US, UK and continental European multinational corporations, Meek, G. K., Roberts, C. B., & Gray, S. J. (1995). Factors influencing voluntary annual report disclosures by US, UK and continental European multinational corporations.Journal of international business studies,26(3), 555-572. This study examines factors influencing the voluntary disclosures of three types of information (strategic, nonfinancial, financial) contained in the annual reports of MNCs from the U.S., U.K. and Continental Europe. While company size, country/region, listing status, and, to a lesser extent, industry are the most important factors explaining voluntary disclosures overall, the importance of the factors varies by information type.
- Seventh INTERMACSannual report: 15,000 patients and counting, Kirklin, J. K., Naftel, D. C., Pagani, F. D., Kormos, R. L., Stevenson, L. W., Blume, E. D., ... & Young, J. B. (2015). Seventh INTERMACS annual report: 15,000 patients and counting.The Journal of Heart and Lung Transplantation,34(12), 1495-1504. The seventh annual report of the Interagency Registry for Mechanically Assisted Circulatory Support (INTERMACS) summarizes the first 9 years of patient enrollment. The Registry includes >15,000 patients from 158 participating hospitals. Trends in device strategy, patient profile at implant and survival are presented. Risk factors for mortality with continuous-flow pumps are updated, and the major causes/modes of death are presented. The adverse event burden is compared between eras, and health-related quality of life is reviewed. A detailed analysis of outcomes after mechanical circulatory support for ambulatory heart failure is presented. Recent summary data from PediMACS and MedaMACS is included. With the current continuous-flow devices, survival at 1 and 2 years is 80% and 70%, respectively.
- Environmental disclosures in theannual report: Extending the applicability and predictive power of legitimacy theory, ODonovan, G. (2002). Environmental disclosures in the annual report: Extending the applicability and predictive power of legitimacy theory.Accounting, Auditing & Accountability Journal,15(3), 344-371. Much of the extant research into why companies disclose environmental information in the annual report indicates that legitimacy theory is one of the more probable explanations for the increase in environmental disclosures since the early 1980s. Legitimacy theory is based on the idea that in order to continue operating successfully, corporations must act within the bounds of what society identifies as socially acceptable behaviour. The purpose of the practical research undertaken and reported in this paper is to extend the applicability and predictive power of legitimacy theory by investigating to what extent annual report disclosures are interrelated to: attempts to gain, maintain and repair legitimacy; and the choice of specific legitimation tactics. The quasiexperimental method adopted utilised semistructured interviews with senior personnel from three large Australian public companies. The findings indicated support for legitimacy theory as an explanatory factor for environmental disclosures. Moreover, findings about the likelihood of specific microlegitimation tactics being used in response to legitimacy threatening environmental issues/events, and dependent on whether the purpose of the response is designed to gain, maintain or repair legitimacy, are reported.
- The timeliness of the Australianannual report, Dyer, J. C., & McHugh, A. J. (1975). The timeliness of the Australian annual report.Journal of Accounting Research, 204-219.