Among the various financial reports that a public corporation is required to issue to shareholders, the Annual Report is perhaps the best known.
An annual report is used by shareholders, prospective investors, and lending institutions for a wide variety of tasks. Prior to the stock market crash of 1929, annual reports were not required.
Congress passed laws after 1929 that mandated standard corporate reporting.
Annual reports are also used by non-public entities to convey information to investors or lenders. Registered Mutual Funds are also required to issue annual reports to shareholders.
There are benefits to following standardized accounting and reporting policies that regulators require. For this reason, many businesses choose to voluntarily produce an annual report each year.
In this FAQ, we will discuss what an annual report is, why it is important, and the basic information required in an annual report.
What is an Annual Report?
An annual report is a corporate document issued to shareholders as required by regulators. Its purpose is to communicate the financial status of the company and to comment on operations over the prior year.
An annual report is one component of corporate financial reporting that spans a number of required forms and filings. The detailed annual report that is filed by public companies with the Securities and Exchange Commission (SEC) in the United States is referred to as the 10-K.
The SEC requires public companies and registered mutual funds to submit their annual reports electronically. Public companies must also post proxy materials, including the annual report, on their websites.
The intention of the annual report is to force public corporations to be transparent with their shareholders. The annual report will always contain pertinent information on the financial health of a business, including its liquidity, profit and loss details, growth, and debt obligations.
The annual report also contains an Auditor’s Opinion, which is the letter from a qualified auditor that the business conforms to US GAAP.
This type of opinion is referred to as an unqualified opinion, and it confirms that a business has recorded and presented information fairly, accurately, and in accordance with US GAAP.
Why Is an Annual Report Important?
An annual report contains transparent information on the financial status of a business. It contains information on a business’ ability to generate profit and will also communicate to readers that the accounting is performed according to US GAAP and in accordance with US law.
This is perhaps one of the most beneficial aspects of an annual report, and it is behind the intention of the annual report, which is to force public corporations to be transparent with its investors.
It is also a forum for which CEOs communicate to investors, usually in the form of a “letter to shareholders.” This is a letter written by the organization’s executive team to provide an overview and summarize the business’ operations over the past year.
Another benefit afforded to investors by the annual report is that it mandates Management Discussion and Analysis (MD&A), which addresses the business’ performance over the last year.
The presentation is both quantitative and qualitative and usually contains useful information regarding the outlook of the business and the market for the coming year.
How to Make an Annual Report
Because it is a standardized presentation, an annual report is almost always composed of the same components.
Making an annual report requires that a firm engages an independent auditor and produces US GAAP financial statements.
General Information
This section contains general corporate information, usually the executive team, contact information, and address.
Sometimes it will also include service providers like the auditor, tax service provider, or legal counsel.
Operating and Financial Highlights
This section highlights key operating metrics and financial information. Usually, this is a summarized section on EPS.
Letter to the Shareholders
This letter is essentially communication from the firm’s CEO and executive team on the prior year’s activities.
Management Discussion and Analysis
This is information regarding management’s view on how the business operated the prior year.
It also contains analysis on the potential challenges the business may face in the coming year, market conditions updates, and any other pertinent information to the business’ operations.
Financial Statements
Financial statements must be prepared in conformity with US GAAP and must include a balance sheet, income statement, cash flow statement, and statement of changes in equity.
Notes to the Financial Statements
The notes to the financial statements describe any assumptions that were made in the course of creating the financials, any accounting policies pertinent to the production financial statements, and any schedules impacting values on the face of the financials.
Notes also disclose any material risk, and AICPA creates standards that the notes must follow.
Independent Auditors Report
This is the official opinion of the independent auditor and will confirm that business has presented the information fairly and in accordance with US GAAP and applicable law.
Summary of Financial Data and Accounting Policies
Usually, annual reports will contain a brief summary of the financial data presented in the financial statements as well as the pertinent accounting policies the business followed in the production of the financial statements.
Using Datarails to Build Your Annual Report
Every finance department knows how challenging creating and issuing an annual report can be. Regardless of the budgeting approach your organization adopts, it requires big data to ensure accuracy, timely execution, and of course, monitoring.
Datarails is an enhanced FP&A software that can help your team create and monitor budgets faster and more accurately than ever before.
By replacing spreadsheets with real-time data and integrating fragmented workbooks and data sources into one centralized location, you can work in the comfort of excel with the support of a much more sophisticated data management system behind you.
This takes budgeting from time-consuming to rewarding.