What Is an Annual Report?

An annual report is a publication that public corporations must provide annually to shareholders to describe their operations and financial conditions. The front part of the report often contains an impressive combination of graphics, photos, and an accompanying narrative, all of which chronicle the company's activities over the past year. The back part of the report contains detailed financial and operational information.

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What Is an Annual Report?

Understanding Annual Reports

It was not until legislation was enacted after the stock market crash of 1929 that the annual report became a regular component of corporate financial reporting. The intent of the required annual report is to provide public disclosure of a company's corporate activities over the past year. The report is typically issued to shareholders and other stakeholders who use it to evaluate the firm's financial performance. Typically, an annual report will contain 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 more detailed version of the annual report is referred to as Form 10-K and is submitted to the U.S. Securities and Exchange Commissions (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. Under the proxy rules, reporting companies are required to post their proxy materials, including their annual reports, on their company websites.

Current and prospective investors, employees, creditors, analysts, and any other interested party will analyze a company using its annual report.

The annual report contains 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 a number of years
  • How much earnings is retained by a company to grow its operations
  • The proportion of operational expenses to revenue generated

The annual report also determines 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 attempt to understand a company's future direction by analyzing the details provided in its annual report.

Special Considerations

In the case of mutual funds, an annual report is a required document that is made available to a fund's shareholders on a fiscal year basis. It discloses certain aspects of a fund's operations and financial condition. In contrast to corporate annual reports, mutual fund annual reports are best described as "plain vanilla" in terms of 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, which is made available to fund shareholders as well as to prospective fund investors. Unfortunately, most of the information is quantitative rather than qualitative, which addresses the mandatory accounting disclosures required of mutual funds.

All mutual funds that are registered with the SEC are required to send a full report to all shareholders every year. 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 1-, 5- 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
  • etc.

Key Takeaways

  • An annual report is a publication that public corporations must provide annually to shareholders to describe their operations and financial conditions.
  • It was not until legislation was enacted after the stock market crash of 1929 that the annual report became a regular component of corporate financial reporting.
  • All mutual funds that are registered with the SEC are required to send a full annual report to all shareholders every year.