What Is an Annual Report and How to Write One (With Tips)
By Indeed Editorial Team
Published June 10, 2022
The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.
During a certain period of a business year, public companies produce their financial and operational status in an annual or yearly report. This information helps potential and existing shareholders and investors make their business plans. As a finance or accounting professional, examining a company's report might help you see where it stands financially and, perhaps, where it plans to go in the long-term. In this article, we define what a yearly report is, briefly explain its background, show how to structure it, explore what it contains, examine why they write it, discuss a mutual fund's report, and share some FAQs about it.
What is an annual report?
An annual report, or yearly report, is a document that summarizes the results of a public company's operations and financial position that it presents after a year of business. To do this, many companies typically prepare infographics, pictures, and financial details to describe their year's activities and offer predictions about their future. The beginning part of the document usually contains the graphics and image presentations, while the later parts contain more financial and operational information in detail.
With this document, which summarizes the company's financial and operational performance for the preceding year, shareholders and investors part of or interested in the company make their financial decisions. Documentation of a company's financial reports annually didn't become a standard part of corporate financial reporting until legislators made it so following the stock market crash of 1929.
Brief background of annual reporting
Following the stock market crisis of 1929, lawmakers worldwide laid regulations to enforce corporate financial reporting, making the annual reports from public companies a legislative requirement. This rule came as a result of the company's tradeable status on the stock exchange. Some public companies publicly compile and publish their report for the preceding year, while some merely file it in their company's registry. The method of publicizing the report may often depend on a company's reputation.
In Canada, the Canadian Securities Administrators (CSA) mandates public companies to publish a comprehensive yearly report known as the Form 10-K. The CSA's System for Electronic Document Analysis and Retrieval (SEDAR) database allows companies to submit their reports electronically. The CSA's regulations ensure that companies hold annual meetings to elect directors to submit their reports to their shareholders. Additionally, the regulations urge public companies that use proxy materials or statements to publish them. The proxy statement shows how many shares an investor holds and which ones are eligible for voting.
How public companies write their yearly report
Public companies usually hire auditors to create the report for transparency and accuracy. The report follows a uniform structure and differs from mutual fund reports. Although public companies can withhold some information for confidentiality, there are some key elements that the Canadian Securities Administrators (CSA) mandate to be in the report.
The report usually begins with brief corporate information about the company, followed by the CEO's letter to existing and potential shareholders, stakeholders, and investors. This letter may not be compulsory, but many companies often include it for a tone of formality. After that comes more compulsory sections, such as an audited balance sheet, income statement, and cash flow statement. It's also typical for the final section of financial statements to include notes that clarify important facts and numbers.
The contents of the report
To make the report practical, it's essential that it contains some key elements. Typically, the annual financial report of a company may contain the following sections:
General corporate information: It refers to administrative and corporate information assets, including details about financial data, human resources data, facility management, and customer service.
Highlights of the business and financial situation: Financial highlights refer to a portion of the report that compares a company's operational and business data over a timeframe. Financial highlights can offer an overview of the company's recent performance to investors at a glance.
CEO's letter to shareholders: The CEO's letter is a descriptive one that highlights the accomplishments and issues encountered by the company and a summary of what the company wants to do in the future. It addresses shareholders, stockholders, investors, and other people who have a stake in the company.
Management discussion and analysis (MD&A): Executives and managers of the company offer an analysis of the company's performance in this part of the report, which includes qualitative and quantitative data. There may also be a discussion of future plans like goals and new projects in this section.
Financial statements: Financial statements are written documents that reflect a company's operations and financial status. This statement typically includes the company's balance sheets, cash flow statements, income statements, and statements of shareholder equity.
Further notes to the financial statement: The accountant's notes follow immediately after the financial statements section. These notes explain the calculations and factors in the financial statement.
Report of the internal auditor: The results of an internal audit show a review of the company, highlighting all aspects of the company's overall management and finances. It also typically includes the auditor's remarks on possible solutions to financial issues.
Accounting policies: Accounting policies are the rules and principles that a public company chooses to follow while compiling and publishing its financial accounts. A public company's accounting standards are critical because they follow a standard framework to provide a comparative and reliable financial statement that shareholders or investors may use for comparison to other companies.
Why public companies publish the report
The report contains vital information on a company's financial position that investors, shareholders, and stakeholders can use to measure:
If a company has debt and if it can service its debt
If the company made a profit or loss in the previous year
The public company's growth with respect to other competitive companies
How much of its earnings a company can retain to service its expenses
The proportion of revenue generated to operational costs
Compliance with Generally Accepted Accounting Standards (GAAP)
How the company may perform in future
What is a mutual fund annual report?
Asides from public companies, mutual funds may also provide their report after a fiscal year. Mutual funds are companies that pool together funds from investors to invest in securities such as bonds and stocks. The report reveals the mutual fund's operations, financial situation, and other helpful details for shareholders and investors. Although, yearly reporting of a mutual fund is not as strict a requirement as that of public companies.
A significant difference between public companies' reports and mutual funds' is that mutual fund's yearly report accounting typically requires quantitative information rather than qualitative. The Canadian Securities Administrators require all mutual funds to send the financial report of their fiscal year to their shareholders and not necessarily to the general public.
Contents of mutual fund's yearly report
The contents of the mutual fund report are not as strict as the one for public companies. It contains less information and usually employs many explanatory charts and tables. The mutual fund's report contains information such as:
Holdings, such as type of security, credit quality, geographic region, maturity) in a diagram of graphs, tables, charts, or a spreadsheet
A list of their top 50 holdings based on their audited financial statements
Financial statements in a simplified form
A table showing returns for one, five, and ten years
Deductions from the management's discussion of the fund's performance
Payment of earned funds or compensation for employees, officers, and directors
Frequently asked questions about the public companies' report
Below are answers to some frequently asked questions about the report that may help you understand it better:
Is the report the same as a 10-k filing?
The yearly report and the 10-k filing are very similar. Although, the 10-k file only reports numbers and qualitative information about a public company, while the public company's yearly report contains graphs, charts, photos, and infographics, making them more comprehensive.
What is a 10-q filing?
The 10-q filing is the report that public companies present quarterly compared to the usual yearly report. The only difference is because of its submitting period. The CSA also regulates the submission of the 10-q filing.
Please note that none of the companies, institutions, or organizations mentioned in this article are affiliated with Indeed.
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