Before investing in any company, it is important to have a clear understanding of its financial position. This information can be available through various sources like market research and carrying out a fundamental analysis of the company. The annual reports of the company are another reliable source for such information and allow the investors, shareholders, and other parties to get the necessary information about the company.
Given below are the meaning, relevance, and other details related to the company’s annual reports.
What is an annual report?
Annual reports are the summarized record of the financial position and all the events in the company’s previous financial year. It is a mandatory requirement for every company whether listed or not. Public companies, as well as private companies, are required to provide annual reports for their shareholders and other stakeholders which can help them in their decision-making process by providing information about the financial performance of the company.
Preparing and submitting annual reports is mandatory compliance as per the Companies Act 2013 and other prevailing Acts, Rules, and regulations like SEBI, Income Tax Act, 1961, etc. Non-compliance with the laws related to the preparing and filing of the annual reports will lead to penalty as per the applicable laws to all the parties involved like directors, auditors, promoters, and employees.
What are the contents of an annual report?
After learning about the meaning of annual reports, the key factors to understand are the contents of the annual reports. Annual reports are to be prepared based on set guidelines and format as per the Companies Act 2013. The details of the contents of the annual reports of a listed company or a private limited company are mentioned hereunder.
a. Chairman’s letter
The Chairman’s letter or the CEO’s letter is the starting point for the annual report. It is a short message from the chairman that showcases the various highlights of the company in the past year and the future pathway for the company. This letter is written with a lot of care to provide confidence to the shareholders as well as potential investors of the company. The Chairman’s letter also contains the reasons or the factors responsible for any deviations from the past projections or the directions set for the company.
b. Company philosophy
This section highlights the company’s vision and mission. The vision of the company is usually a generic statement that tells about the ethics and the essence of the company and its management. The vision of the company tells the stakeholders about the various future milestones set by the management and the broad direction to achieve them.
c. Information about business operations
The next section to be included in the company’s annual report is related to basic information about the company and its operations. In this section, the performance of the company in the past year is mentioned in detail. Other important features to be included in this part of the annual report are details regarding the products or the services offered by the company, its competitors, its market share, and the national and international presence of the company.
d. Financial statements
The financial statements of a company are also the backbone of the annual reports. It is the most crucial part where the stakeholders can get the facts about the performance of the company. The various components of the financial statements are mentioned below.
- Balance sheet
The balance sheet is the record of the financial position of the company on a given date. Companies Act, 2013 specifies a set format for the balance sheet that has to be followed by all the public and private companies whether listed or not. A company’s balance sheet provides information about its share capital and the total assets and liabilities of the company at a given point in time. A balance sheet can be used to calculate various financial ratios that are used in the fundamental analysis of such a company. It can help the investors evaluate the company and make sound investment decisions.
- Profit and loss statement
The profit and loss statement is the record of the income and expenses incurred by the business during the financial year. The income of the business represents the operating as well as non-operating income of the business. On the other hand, the expenses include the operating and non-operating expenses that are incurred by the business during the financial year. The profit and loss statement can also be drafted for an interim period or a quarterly period.
- Cash Flow statement
This is another component of the financial statements which records only the cash transactions for the given period. The cash flow statement includes all the cash inflow and outflow transactions of the business and helps in evaluating its liquidity position. The cash flow statement includes the record of cash transactions in three broad categories,
- Cash flow from operating activities
Cash transactions related to the day-to-day business operations of the company.
- Cash flow from investing activity
The cash transactions related to the investments and acquisitions made by the company during the given period are recorded under this category in the cash flow statement.
- Cash flow from financial activity
Under this section, the transactions related to the financial transactions of the company like the dividend or the interest paid or received are recorded.
- Notes to accounts
This section records the extra information related to the financial statements like the assumptions, mandatory declarations, explanations relating to the provisions made by the company, the accounting policies adopted by the business, contingent liabilities of the business, additional information about the various segments of the company, etc.
e. Auditor’s Report
The Auditor’s Report is an integral part of the company’s annual reports. The auditors of the company draft their reports based on the financial transactions during the previous year. It contains information about the responsibilities of the auditors, the nature and purpose of the audit, and finally, their opinion based on their findings. This report is mandatory as per various laws like the Companies Act, 2013, Income Tax Act, 1961, SEBI. There are various types of audit reports issued by auditors which highlight the true picture of the company’s financial position and alert the shareholders of any possible discrepancies or mismanagement of funds that can affect the investors’ or shareholders’ wealth. The types of audit reports issued by auditors,
- Unqualified opinion
An unqualified audit report assures the stakeholders of the correctness of the company’s financial statements. It is issued when the auditors are satisfied with the company’s books of accounts and do not find any red flags that need to be highlighted to its stakeholders.
- Qualified opinion
This is the opposite of an unqualified report and is issued when the auditors cannot confidently state that the financial statements of the company reflect its true and correct picture i.e. when they do not agree with a particular aspect (a transaction or its treatment in the books of accounts) in the financial statements. A qualified report has many repercussions on the credit rating as well as investor confidence and hence, companies should try their best to avoid such instances. Auditors issue a qualified report after much care and consideration and also have to provide an explanation to the stakeholders for such opinion.
- Disclaimer of opinion
When the auditors do not have clarity of any transaction or any sufficient supporting documents that provide enough backing to their treatment in the books of accounts, the auditors can issue the audit report with a disclaimer
. Such a report is issued when the auditors want to distance themselves from giving any definitive opinion and it cautions the stakeholders with possible discrepancies in the financial statements of the company. The auditors can provide an explanation regarding such a disclaimer at the end of the audit report.
- Adverse opinion
An adverse opinion is the worst opinion issued by auditors on the financial statements of a company. It is issued when the auditors find multiple misrepresentations or irregularities, mistreatment, or wrong reporting of transactions. It not only affects the credit rating of the company but also alerts the investors and shareholders about the wrongdoings of the management to help them make sound business decisions.
f. Management comments
This is the final part of an annual report. It contains the management representation with respect to many aspects of the company that require a thorough explanation as well as the business analysis as per the management. It highlights the strengths and the weaknesses of the company along with a better understanding of the industry and the company’s position as well as its future projections.
Investors should focus on the management comments in the past audit reports too in order to better understand the company’s past and current performance. This will help them understand if the company has been able to meet its goals or the reasons for not meeting them in other cases.
Who is the target audience for annual reports?
The annual reports of the company, as mentioned above, reflect the financial health of the company. Annual reports are used by the following entities as an essential tool in evaluating the company for possible investments and understanding its future trajectory.
a. Shareholders
Shareholders are the owners of the company who subscribe to its capital. They do not take part in the day-to-day workings of the company. Therefore, they can use the annual reports to review the performance of the company and ensure that the management decisions are not detrimental to their interest.
b. Potential investors
Annual reports are also reviewed by the potential investors to evaluate the financial health of the company as well as its relative position in the industry. It can tell them if investment in the company is a safe bet and help them in their risk-return and cost-benefit analysis.
c. Employees
The employees of the company are also its important asset. Some employees are also offered shares in the company as part of their remuneration which acts as an incentive and boosts their morale. The annual reports of the company can showcase its target areas and help the employees understand the management’s direction.
d. Customers and suppliers
Customers and suppliers can also use the annual reports as a tool to evaluate their current and potential business relationships to safeguard their interests or to increase their business with the company. It is also used to compare the business with the competitors in the industry to make sound business decisions.
What is the importance of annual reports?
Annual reports are the company’s communication to all its relevant parties (suppliers, investors, shareholders, etc.) regarding its true and correct financial position and the record of its transactions during the given period. The financial statements of the company may help in its fundamental analysis but an annual report is an extensive report by the company. It will also provide the required explanations from the auditors and the management regarding other key areas that are not reflected in the financial statements. It helps in creating shareholder and investors confidence in the company to ensure its long-term growth and progress.
How to get annual reports?
The annual reports of the company are to be provided to its shareholders mandatorily every year. These reports are sent to the shareholders at their registered email id and also as a physical copy if they opt for it.
Apart from the above requirements, the annual reports of the company are also made available on the website of the company and have to be filed with the Registrar of Companies within the prescribed deadlines. Other interested parties like investors, customers, suppliers, etc. can find these reports from such portals for their reference.
Conclusion
The annual reports of a company are among the most important and mandatory documents that have to be prepared and published while adhering to various regulations and guidelines in this regard. Annual reports act as a guiding light and portray the true picture of the financial affairs company. It helps in the evaluation of the business for investments thereby enabling the decision-making process.
FAQs
The annual reports are prepared by the management of the company.
No. The financial statements are a mandatory part of the annual reports. They have to be duly prepared and approved by the Board of Directors and published along with a valid auditors report failing which the annual reports are incomplete and cannot be published.
Annual reports have to be published and dispatched to all the shareholders at least 21 days before the Annual General Meeting (AGM) of the company.
Yes. All the listed companies are mandatorily required to prepare and publish their annual reports as per the prevalent laws and provide them at their websites for investor reference.
Yes. Annual reports are a mandatory requirement as per various laws. The information provided in this document has legal binding and any false information provided by the management in these reports make them liable for penal provisions like fine or jail term as per the Companies Act, 2013 and other relevant laws.
