An Annual Report is all about presenting your company’s results to the public. Be the public the government officials, investors, owners, suppliers or employees, it’s a detailed summary of what happened during the financial year with all the relevant information that’s needed to further understand the content behind numbers. Various parties are interested in different information and the depth of information is subject to the interest; however that’s going into too much detail for an introduction.
What we offer with our course is in fact a simple understanding of what an Annual Report really is, how it is composed and what are the general pitfalls to look out for. We try to bring all this to you with simple words making sure the key messages are stressed and brought forward.
The course itself is structured with the aim to have it easily follow able and understandable with examples to illustrate where possible. There will be just simple words and everything written in “down to earth” style for an easy and quick understanding.
But enough about the introduction, let’s go!
What’s an Annual Report?
Technically, what an Annual Report is, it is a document about your company’s financial result. It shows the results, it comments them and furthermore, it gives the users a general overview of how the financial year went for your company.
An Annual Report is also your chance to explain, justify and elaborate on what happened, why it happened and what are your future actions. Let me clarify, an Annual Report should include all relevant information about the most significant events and their affect on the financial statements. They are usually disclosed in one note separately and it’s there where you give the users an overview of what was mentioned above – what, why and how. All this of course only if it’s applicable as in some transactions for an example don’t really have future impact.
To illustrate, let’s say your company made a considerable donation to a community project. That’s something you’d disclose in the notes themselves and as such, you’d say which project the mentioned amount was given to and also the reason why. The latter can be something along the lines of the company really wanting to support the community it operates in etc. Now most probably the donation does not have a future impact on your company’s financial statements, but what it does, is affecting the project. It’s up to your consideration, but it’s probably worth mentioning what the project is about really. And that’s it. Remember that this applies to significant transactions that are not directly part of the business process itself, i.e. you do not need to disclose separately all material purchases from suppliers – they are part of your everyday business and do not need special disclosures.
Some say that an Annual Report is a score card for your company; others think it’s a short novel with the contents of a financial year. There are various definitions, but the general aim of them is the same. An Annual Report is supposed to give an overview of how your company did during the year and why it performed as it performed.
An Annual Report includes …
We did start off with a general definition of an Annual Report so as such, we’ll now move onto what it really is inside. Technically an Annual Report consists as a minimum of following sections:
- The management report giving an overview of the highlights of the reporting period, plans and future actions, comments on financial ratios as well as summary of investments, personnel related information and details of social and environmental activities as applicable, etc.
- Financial Statements consisting of the 4 main statements – balance sheet, income statement, statement of cash flows and statement of changes in equity. Those are the four main statements that are presented for the reporting period. Everything else following is notes and detailed additional information about those very same statements. Please note that the order of them can be different based on which really describes your company better – if it’s not really an asset based business, i.e. there aren’t many fixed assets, but you sell services, it may be more presentable to have the income statement as your first statement.
- An overview of the accounting principles used and applicable to the entity. Keep in mind here that you should only disclose those principles that are applicable to your company and nothing else. If you don’t own inventory, there’s no need to disclose principles about inventory accounting. However, if you rented some assets, the applicable operating or finance lease accounting measurement should be disclosed.
- Notes to those four main statements with detailed tables more expanding line items and if need be, also explaining the contents behind a number. Notes also include additional information that doesn’t necessarily reflect on the statements themselves, i.e. interest rates, material conditions of loan or rental agreements, an overview of the composition of the share capital, etc. It’s really subject to the business, the performance of the company, the items existent etc. There isn’t a rule of thumb of what should be disclosed, but there is a general expectation that all information the public, the consumers of the report would be interested in, should be disclosed in the Annual Report.
- A proposal on how to allocate profits or to cover for the losses dependant on which one there is as a result of the reporting period.
Whilst this list is more or less complete when it comes to compulsory components of an Annual Report, please bear in mind that the local legislation for you may impose more of them. Examples may be the IFRS requirements like an overview of risks and the level of the company being open to them etc.
Essentially and ideally, your company’s Annual Report should give a true and fair overview of its financial year’s performance, disclose all relevant information needed to make decisions and be easily understandable and readable. Yes, nobody will fine you for typos, but is it really you want people to see in the official summary document about your company’s performance for the reporting year? I don’t think so.
Anyhow, now that we’ve covered the general theory behind the Annual Report, we’ll move onto where to start with your own company’s report.
Where to start?
Starting with your Annual Report is actually very easy. When you think about it, there’s not much new you have to figure out or come up with. You have prepared the main financial statements anyhow after the year end and now all you have to do is just add that extra bit of text really. And even this text is either similar to prior period or just reflecting on the numbers presented, i.e. you don’t really have to invent something new or make it a bestseller for that matter. What you have to do, is make sure it’s easy to read and understandable, consistent and sufficient.
When we talk about “understandable”, what we mean is that the context is readable and informative to people with sufficient reasonable knowledge of about accounting and the industry. It means that you wouldn’t have to explain and define things that are general knowledge like the meaning of “accounts receivable” for an example. However, what someone would expect is that you explain any terms you use in your company and that are not general knowledge.
Consistent Annual Report is something that’s using the same terms, forms (tables, numbers), font of the text and isn’t contradictive in any of its sections. An Annual Report should be consistent in terms of presentation, but also be consistent with prior year figures and the presentation of them. If communication expenses like phone charges and internet were disclosed under “communication charges” on last year’s income statement, they should be disclosed under the same group this year as well.
Sufficiency is measured on the level of the reader of the report. Are they going to get enough information about the event or transaction from your report? It’s hard to measure it and it’s dependable on the event itself, the reader and what’s the reason behind the reader using the information. What you as the preparer should think about, is imagine yourself into the shoes of the reader and evaluate whether the information disclosed is sufficient. Is the level of detail about the transaction sufficient to make decisions?
Composing an Annual Report
As we went through the different parts of an Annual Report we described very shortly what to watch out for and what the mentioned section should essentially include. With this part of the course we’ll now move onto more detailed guidance about each of these sections and try to give you some tips as to how compile an Annual Report of your own company.
Usually the first bit of text to write up is the management report, which let’s face it, is up to your creativity. Just make sure the important bits about the reporting period are covered.
Things to write about include:
- Comments on the reporting period results in general, an overview of main products and services performance;
- Investments done and budgeted for the next period;
- Future expectations, plans and projects;
- Personnel related information like number of employees, salaries and benefits paid;
- Any other information that’s not exactly presented in the notes, but that’s also important to understanding on how’s the health of the company, i.e. an overview of the macro-economic environment, social affairs like donations and if applicable, also the environmental activities taken up;
- An overview of and comments on industry specific and the most important financial ratios for the reporting period.
- And whatever more you feel is needed to comment on your business and the reporting period.
Now, not to put too much pressure on you, but the management report is the first bit most people read when they open the Annual Report. Hence it needs to be a summary of what’s described in more detail in the rest parts of the report. What you’d also want to do, depending on the targeted audience of course, is to be creative and really write to the audience that reads the report when it’s released. But as I said, you’re not writing a bestseller so don’t be all stressed about it and spend too much time on it.
After all, the part that’s coming next says a lot more.
Main financial statements
Now they are the most important things! Those four statements – balance sheet, income statement, statement of cash flows and statement of changes in equity – are the real face of your company’s performance. They tell the story of how the year went; everything else is just a comment and describing events in more detail. But, these statements are already put together after the year end so all that’s left when preparing the Annual Report is to quite literally copy-paste or add the tables onto the pages. And that’s that. Nothing more left to say or do about those statements. Yes, adding cross-references to notes obviously, but that’s it really.
Something to possibly consider is the ordering of the statements. What usually can be different is that the income statement is in fact followed by the balance sheet and not the other way around. It’s really mostly up to you, but there are businesses, which do not have much to show on the balance sheet and the income statement is more reflective of the company. As I said, it’s really up to you.
Now this is something that’s more or less the text from prior periods. The accounting principles do not change this often or on such a scale that you’d have to rewrite the entire section on your report.
Although the text is pretty much the same from year to year, the content plays big enough importance to the Annual Report. The idea behind disclosing relevant principles is about describing how all significant line items of the main financial statements are accounted for. Most important principles always present are revenue and receivables related usually, fixed assets accounting and taxation. Also financial liabilities and share capital. The rest is more dependent on what your company actually has as financial statement line items – does it have inventory or donations for an example? Keep it in mind, that only applicable principles should be disclosed and as such, only those that are significant. For an example, if you just had one rental agreement during the period, it’s hardly worth disclosing a rental agreement recognition policy unless it’s like significant and not like an agreement for renting office equipment or something similar.
It’s all about applicable and relevant principles and what’s also important, is to make sure that if some principles change, it’s to be disclosed as a part of the section as well. Not only the fact it changed, but also the impact of the change (retrospectively if needed also disclosing the initial and adjusted figures).
The accounting principles logically follow the main statements giving a starting ground to further understand the approach used to reach the figures. It’s explaining the detailed logic behind the figures from general point of view. What follow afterwards is company specific details of all significant balance on those statements.
Notes to the financial statements
Those details are essentially called the notes to the financial statements. Notes as in we have already covered the first note, which was about accounting principles being used to also create a link between the statements, explaining the methods used in reaching the figures present and now going into more in depth with analyzing the contents of numbers presented. Note here that as always, only significant balances should be disclosed in more detail. For an example if you have very little cash and cash equivalents, ask yourself if it’s really this relevant to make a separate note about it saying that you have x amount in bank accounts? Does it really give the readers anything relevant they did not yet read from the balance sheet? Always ask yourself what the readers are getting extra if you make the note.
Essentially though, what the notes are about, is disclosing in more details what a certain balance on the main statement consist of by breaking it down to subgroups and also disclosing in a text form any other additional information like the reason, conditions and other applicable bits (i.e. interest rates and any collateral present on loan agreements etc.).
Notes are also prepared for those balances, which have considerable movement during the period that’s not so apparent from an income statement. Mostly the movements apply to fixed assets or funding received from government or similar projects, but as always there are other transactions and balances that could be disclosed for an entire reporting period – received and used amounts alongside with carried and brought forward balances.
As a general rule the notes should be following the order the main statements are presented in – if it’s the balance sheet that’s first than the notes to the financial statements should also take off from the balance sheet ones.
And that’s that. You have the management report, the main statements and the notes – all the important and compulsory parts of the Annual Report all done.