What Is an Annual Report?

What Is an Annual Report?

An annual report is a document that public corporations must provide annually to shareholders that describes their operations and financial conditions. The report chronicles the company's activities over the past year, may make forecasts about the future, and contains detailed financial and operational information.

What's Included

Annual reports became a regulatory requirement for public companies following the stock market crash in 1929 when lawmakers mandated standardized corporate financial reporting. It includes public disclosure of a company's operating and fiscal activities for the previous year.

The report is typically issued to shareholders and other stakeholders who use it to evaluate the firm's financial performance and to make investment decisions. An annual report contains 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

Information for Stakeholders

The annual report defines 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 can understand a company's future direction by analyzing the details provided in its annual report. The annual report contains key 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 several years
• How much of earnings are retained by a company to grow its operations
• The proportion of operational expenses to revenue generated

Mutual Fund Reports

A mutual fund annual report discloses certain aspects of the fund's operations and financial condition. In contrast to corporate annual reports, mutual fund reports are best described as "plain vanilla" in 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 made available to fund shareholders and prospective fund investors.

All mutual funds registered with the SEC must send a full report to all shareholders annually. 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 one-, five- 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

The Bottom Line

Public companies must produce annual reports to show their current financial conditions and operations. Annual reports can examine a company's financial position and, possibly, understand its plans. These reports function differently for mutual funds that report performance to shareholders.