An annual report is the yearly document in which a company or an investment fund presents its audited financial statements and explains its results, activities and risks to shareholders. Listed companies, banks, insurers, mutual funds and many charities and public bodies publish one. It is the main record of how an organisation performed over its financial year and what it owns and owes at year end.
In most countries the annual report is a legal requirement for listed issuers. In the United States, public companies file an annual report on Form 10-K with the Securities and Exchange Commission (SEC), and registered funds send shareholder reports under the Investment Company Act of 1940. In the EU and UK, the Transparency Directive and the Financial Conduct Authority (FCA) rules require listed issuers to publish an annual financial report within four months of year end.
An annual report in plain terms
An annual report works like a yearly school report for a business. It shows the marks (profits or losses), lists what the pupil owns and owes, and includes comments from the headteacher (the chair and chief executive) on what went well, what went badly and what comes next.
An outside examiner, the auditor, checks that the numbers have been prepared fairly. Shareholders, lenders, employees, journalists and regulators all read the same report, so it gives everyone a common set of facts to argue about.
Company annual reports and Form 10-K
A US public company's Form 10-K follows a set structure, including:
- Business. What the company does, its markets, competition and regulation.
- Risk factors. The main risks to the company and its securities.
- Management's discussion and analysis (MD&A). Management's explanation of results, liquidity and capital resources.
- Financial statements. The balance sheet, income statement, cash flow statement and notes, with an opinion from an independent auditor.
- Controls. Management's assessment of internal control over financial reporting, required since the Sarbanes-Oxley Act of 2002.
- Governance and pay. Information on directors, executive compensation and ownership, often incorporated from the proxy statement.
Filing deadlines depend on size: 60 days after year end for large accelerated filers, 75 days for accelerated filers and 90 days for others. Many companies also publish a glossier "annual report to shareholders" that accompanies the proxy materials for the annual meeting, where shareholders vote through proxy voting. Quarterly updates are filed on Form 10-Q, and audited financials appear only in the annual filing.
Outside the US, annual reports follow local company law and accounting standards, usually IFRS for listed groups in the EU, the UK and many other countries. They typically include a strategic report, a directors' report, a corporate governance statement and, increasingly, sustainability disclosures.
A registered mutual fund must send shareholders an annual report and a semi-annual report, each within 60 days of the period end, under Rule 30e-1. The annual report includes audited financial statements, and both are also filed with the SEC on Form N-CSR.
In October 2022 the SEC adopted the tailored shareholder report rule, with compliance required from 24 July 2024. Open-end funds and most ETFs now send a short, share-class-level report that shows:
- Fund costs. The cost of a hypothetical $10,000 investment over the period, in dollars and as a percentage.
- Performance. A discussion of what affected results, a line graph and a table of returns against a benchmark over one, five and ten years.
- Key statistics. Net assets, number of holdings, portfolio turnover and advisory fees paid.
- Holdings. A graphical breakdown of the portfolio, for example by sector, credit quality or asset class.
- Material changes. Changes to the fund's objective, fees, portfolio manager or other key matters.
The full financial statements and schedule of investments moved to Form N-CSR and the fund's website, where they remain available free on request. Before this rule, fund annual reports were often more than 100 pages long. A fund's annual report is distinct from its prospectus, which looks forward and describes how the fund will operate, and from a fund fact sheet, an unaudited monthly or quarterly marketing summary.
How annual reports are used
Equity analysts use annual reports to calculate measures such as earnings per share (EPS) and valuation ratios. Lenders check them for credit risk and covenant compliance. Compliance teams use them during know your business (KYB) checks on corporate customers, and payment firms often ask applicants for their latest audited annual report before granting a licence or a banking relationship. For fund investors, the annual report is where actual costs, actual total return and changes to the portfolio can be compared with what the prospectus promised.
Limitations
Annual reports are backward-looking and published weeks or months after the period they cover. Management commentary is written by the company and can be selective, and accounting standards allow judgement in areas such as asset values and provisions. Audits give reasonable, not absolute, assurance, as large accounting frauds have shown. Length is a further problem: company reports of 200 pages or more can hide important points in the notes, which is why regulators keep trying to make key information shorter and easier to compare.