Annual Report is a comprehensive report prepared by an organization to showcase their yearly performance to shareholders or stakeholders.
The objective of an annual report is to satisfy the needs of existing and possible future shareholders by providing financial and other information about a company.
The annual report is an important document containing the company’s financial statements, notes to accounts, auditors report and management reports.
It’s the formal report presented by the board of directors of the company every year to their shareholders to show them how the company has performed during the financial year and what is its financial position at the end of the financial year.
The accounts are formally presented in the company’s annual general meeting (AGM).
Annual reports are published every year by the management with a year wise comparison to past performance of the company. Annual reports can be used by general public, banks, creditors, debtors, employees and investors for their reference.
If a company is registered in stock exchange then as per security exchange board of India’s guidelines, they have to compulsorily prepare two kinds of annual reports which in turn will be submitted to stock exchange and other regulatory bodies. These annual reports are;
- Quarterly Reports
- Annual Reports
Quarterly reports are prepared and released by the company for each quarter which contains a balance sheet, Statement of Profit and Loss Account and Statement of Cash Flow.
The company must state whether it has been audited by a local auditor or not. For USA, its the Certified Public Accountants who does audit on behalf of company’s shareholders.
In India it’s the Indian chartered accountant being a member of ICAI conduct audits for those companies that are registered in India. In other countries they have their own local auditors who does periodic audit as per their legal requirements.
Annual report is a comprehensive statement prepared by companies for the stakeholders to update them on the past performances and future prospects of company.
Annual Report of a company contains;
- an outlook of the industry and company
- financial statements of the current year with comparison to past years.
- director’s letter to shareholders
- auditor’s report and various other statements based on the statutory compliance of the country where the company is registered.
Who uses the company’s annual report?
Annual report of the company is a very important document used by many individuals and institutions. Here is the list showing who used the company’s annual report;
- Shareholders and their advisers
- Lenders
- Management
- Employee and unions
- Government
- Creditors
Shareholders are the owners of the company. They own the company’s share with an expectation that their investment will give them a good return. However they don’t manage the company’s day to day business to know how the company is performing. Therefore, they use annual reports to assess how effectively their investments are managed by the company’s board of directors during the financial year to earn profit. The annual report can be used to assess past trends to predict the future profitability.
Advisers who help investors to invest their hard earned money wisely use annual reports to measure company’s performance. They use a variety of financial tools and indicators to find out potential risk of investing in the company.
Lenders are banks and financial institutions who provide long term and short term loans to companies based on their financial conditions and future profitability. They use annual reports to assess a company’s performance in order to know whether it can meet its debt obligations. They focus on profitability and cash flow of the company to know how financial costs will be managed in the past.
Similarly the management, creditors, employees and unions will be interested to know how the company has performed to show that their interest in the company is not getting affected. Government will make sure that based on financial statements presented in the annual report, taxes are paid by the company in time. They are also interested to know how the industry has performed based on various companies’ performance within that industry.
Government Agencies are required to know whether the company has complied with all the regulations. They also use information as a base to understand the macroeconomic position of the industry.
Customers are interested to know thefuture credentials of the company and the product development of the company
Bankers uses annual report for credit assessment and to know whether the profitability is sufficient to meet their obligations so that they can take lending decisions in future.