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Annual Report



Introduction

If you have a school going child at home, then you must be getting school report card at the end of the academic year or semester tracking her or his academic progress for the period. The report card is the main source through which the school administration communicates to you about the performance of your child in studies. Grades or marks given in the report tells the whole story about your child’s performance during the year. Annual reports too do the same job for companies by talking about their performance to the shareholders during the year. In case of annual reports, grades or marks are replaced by financial statements.  

 

To put it in simple words, an annual report is nothing but an annual communication by the board of directors to the shareholders of the company giving comprehensive overview of the company’s performance and achievements. Annual reports are prepared at the end of the financial year giving an account of the financial performance of the company in the just concluded financial year. 

 

Since its preparation and filing is mandatory under the Companies Act, even a closely held private company (where shareholders and directors are usually one and the same) is also legally bound to submit an annual report every year. Further, since it’s a statutory obligation, an annual report has to be prepared even when there are no operations or transactions (for whatever reason) in a year for the company. 

 

There are several sources from where you can get annual report of a company. For a listed company, its website is main the source from where you can get the annual report. Usually, companies provide annual reports of current year as well as past many years under “investors” segment. Stock exchanges too provide annual reports of all listed companies.

Importance of annual report

It doesn’t mean that only the shareholders of the company will be interested in the annual reports, though it’s addressed to them. Since the annual report is publicly available document, even the potential investors can use the contents of the annual report to know more about the company and its financials. Analysts are interested in fundamental analysis who seek to understand the potential course of an organisation by examining the information set out in the annual report. A banker will be interested in it as it throws light on the financial health of the company which will ultimately decide the fate of money lent by him to the company. The supplier of raw materials and services to the company will be interested in knowing whether the company is moving in the right direction and the annual report provides needed information for him. In case he finds that the company’s profits are decreasing year after year he may try to play safe by deciding to deal with the company on cash basis rather than on credit. For credit rating agencies, annual report will help to update the financial details of the company in their records which will help them to know the financial condition of the company. For the government, annual reports of the companies are necessary to ensure that the company is in compliance with all the provisions of the Companies Act as well as various other Acts. For the Income Tax Department P&L account is the basis on which the company’s taxable income is computed.

Contents of an annual report

Contents of an annual report depend upon the type and nature of the company. Though basic requirements under Companies Act are more or less the same for all companies, contents of annual reports of public limited companies and private limited companies differ in some respects. Further, in case of listed companies’ disclosure requirements prescribed by SEBI should also be adhered to. Further disclosure requirements for top 500 companies differ, in some respects, from other listed companies.

Under Companies Act, an annual report should contain:

Annual General Meeting Notice Strictly speaking, notice for annual general meeting (AGM) is not a part of the annual report and can be sent to the shareholder separately. However, Companies Act says that a shareholder should get annual report and the notice to the AGM 21 days in advance of the meeting and companies generally follow the practice of sending the notice of the meeting along with annual report. As the annual reports are prepared in digital form and uploaded in the company’s website, companies show the notice in the annual report itself.
Director’s Report & Annexures A director’s report traditionally used to contain details like state of company’s affairs, amount proposed to be transferred to reserves, dividend recommended (which has to be approved by the shareholders) and material changes and commitments affecting the financial position. However, 2013 amendment to the Companies Act requires some additional information to be given in the report such as explanation to auditor’s qualifications/remarks, if any, extract of annual return, number of board meetings held, ratio of remuneration of each director to median employees’ remuneration, company’s policy on director’s appointment and remuneration and particulars of transactions with related parties. Further details about Director’s report will be discussed later.
Auditors Report (Stand Alone & Consolidated) Auditor’s report tells whether the financial statements in the annual report gives true and fair view of the company and is free from any material misrepresentation. The auditor may also comment in his report if there is threat or doubt about the continuation of business. An auditor is appointed in the AGM by the shareholders.
Financial Statements (Standalone & Consolidated) Financial statements are an important part of the annual report and they contain balance sheet, profit and loss account, cash flow statement and schedules to various items appearing in the statements. It’s important that one should study both the stand alone and consolidated financial statements to get holistic view of the company. Sometimes it may so happen that the troubles in the subsidiary may affect the operations of the holding company and vice versa.
Notes to Financial Statements They contain the basis of preparation of accounts, accounting policies and supporting details and data about how the figures in the financial statements are arrived at. 
Performance of subsidiaries & associates The report shall also contain a section wherein the performance of subsidiaries, joint venture companies, and associated companies shall be highlighted. 

Contents as per listing requirements under SEBI rule

Management Discussion and Analysis Management Discussion and Analysis (MD&A) Report summarizes the financials and gives management’s insights into the company’s performance. It may contain information which the company is not legally bound to disclose but its disclosure would help informed decision making by the investors and other stakeholders.
Corporate Governance Report If the company meets the paid-up share capital (above Rs 10 crore) and networth (above Rs 25 crore) criteria it has to file this report showing how it monitors its actions, policies, practices and decisions as well as the effect of its actions on the affected stakeholders.
Business Responsibility Report The company has the responsibility not just towards shareholders but also towards its employees, customers and the society at large. The company is supposed to adopt responsible business practices towards all stakeholders and the same should be disclosed in this report. SEBI has given a new dimension to this by adding sustainability reporting along with responsibility reporting from 2022-23 for the top 1,000 companies.
Secretarial Audit Report It’s certified by a qualified Company Secretary who will comment on the compliance of various legislations including the Companies Act and other corporate and economic laws applicable to the company. This again is applicable to certain class of companies only.

Directors’ Report

A Directors’ Report is an important part of the annual report as it gives overview of its operations during the year, steps taken to mitigate the challenges and future prospects of the company. Some of the information contained in the Directors’ Report may also help while analysing the financial statements. 

Fundamental Analysis Final

 

In the financial statements which is also a part of the annual report you will come to know about the variations in various items of cost and income as they provide data for the current year as well as previous year. However, Directors’ Report, as in the above case, can help you to find out the reasons for any variation in the various items of cost and income. Also, some reports give the steps taken by the management to overcome the challenge of cost increase as in the above case. 

Management Discussion and Analysis (MD&A)

The MD&A provides information on a company’s performance during the current year vis-à-vis its previous year and also a commentary on future performance. Most importantly, it also contains long term goal of the company and how it is planning to achieve the same.

Fundamental Analysis Final

 

Given above is the extract of MD&A of a major steel manufacturer. In the extract you can see the long-term goal of the company and also how the company aims to achieve its goals. MD&A also comments on opportunities and challenges in the business environment and various plans of the company to maintain/achieve leadership position. 

 

In fact, MD&A usually presents picture in a broader perspective and also on a longer time horizon. Through this you can also come to know the vision and mission of the company.

Limitations of annual report

It doesn’t mean that the annual report that complies with all rules and regulations is a perfect report because a collusion between auditors and directors (as had happened in the case of Satyam Computers) may defy the very logic of the report itself. Therefore, the role of Audit Committee and independent directors is also important in ensuring the integrity of the report.

 

Another drawback of the report is that it mostly gives historical information and may not be of much significance in deciding the future prospects of the company. However, closer scrutiny of management discussion analysis and requirement of throwing light on material events happened between the date of balance sheet and its signing provides some cushion to the analysts and investors. 

 

There is also criticism that the annual reports give too much significance to financial data while ignoring environmental and human abuse issues which is true to an extent. However, rising level of investor activism may help to throw light on such issues and act as deterrent for the companies from misreporting.  

 

On the whole, as an investor you should bear in mind that annual report is only one of the sources, though main one, of information and not the only source of information. Therefore, an investor has to depend on multiple sources of information to arrive at a meaningful conclusion.

Frequently Asked Questions (FAQs)

What does an annual report contain?

An annual report contains information such as Chairman/Managing Director’s communication to shareholders, corporate information, performance highlights of the company, financial statements like balance sheet, income statement, and cash flow statement, Auditor’s report and Report on Corporate governance.

 

How frequently an annual report is published?

As the name itself suggests, an annual report is published every year. According to Companies Act, annual report has to be published within six months from the date of end of financial year. Thus, if the financial year of a company starts on, say 1st April 2021 and ends on 31st March 2022, it has to publish its annual report before 30th September 2022.

 

What’s the significance of management discussion analysis (MDA) in an annual report?

MDA usually gives company management’s perspective about the economy, sector (in which the company operates) and about the company. The discussion also throws some light on how the year ahead looks like in general terms. It also contains SWOT (Strengths, Weaknesses, Opportunities and Threats) analysis of the company.




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Semih Durmuş