MEMORANDUM OF TRANSMISSION
Purpose of the Report
The purposes of this report is to (1) understand the key features of a good annual report, (2) elucidate the important legal requirements, (3) state a checklist which should be followed to make a good annual report, and (4) explain the various parameters on which to evaluate a report.
Secondary research was conducted using resources such as International Journal of Commerce and Management.
Writing a Good Annual Report
Findings from professional and scholarly journals revealed that some authors have identified certain sections which are essential to make a good annual report. The report elucidates all these sections. Writing an annual report is a long drawn process for which planning needs to be done in advance. It is essential to understand the audience who will receive the report. Readers generally evaluate an annual report based on its content, design and form, and service and delivery. Summarizing the annual report is a crucial activity and therefore conclusions, recommendations, annexure and bibliography should be written with due diligence. Most firms do not follow these guidelines and make unimpressive annual reports while some firms use very creative methods to write annual reports.
Conclusions and Recommendations
Annual Reports of a company reach a number of stakeholders. For an outside reader, the first impression of the company is formed by the quality of its annual report. So it is important that the report be accurate and impressive. The difference between a complete report and an excellent report lies in its presentation. The case studies presented in the report show that excellent reports communicate more than just data and numbers. The more the report ‘talks’ to the reader, the better are the chances that the objective might be accomplished.
Major recommendations are 1) Themes should be used in reports to communicate the thrust areas of the company. 2) Management Discussion and Analysis should include the vision of the company. 3) Annual report should focus on the key accomplishment rather than activities.
An Annual report is a comprehensive report on a company’s activities throughout the preceding year. Annual reports are intended to give shareholders and other interested persons information about the company’s activities and financial performance. Annual reports also help shareholders understand how their investment is doing. They are also a good starting point for people who are considering buying shares in a company for the first time. Many individual shareholders choose to receive the Annual Review, which is a shortened version of the Annual Report.
Annual reports traditionally begin with a review of the year from the company’s Chairman and Chief Executive. These are the most widely read parts of annual reports because they provide a short summary of events during the year. Most reports also contain a longer and more detailed review of the performance of the business. Many companies include information on other issues of importance, such as new products and services, the environment and social responsibility. There are also statements that describe how the directors maintain control over the company (corporate governance) and how they are paid (directors’ remuneration).
The purpose of this report is to understand the characteristics of a good annual report. It also mentions the critical legal requirements of an annual report. The report also highlights the key criterions on which an annual report is judged. Moreover, it discusses a sample annual report and its key features. It also lists down imperative checklists which are critical to follow while drafting an annual report.
The goals of this report are to (i) explain the key features of good annual report, (ii) highlight the important legal requirements, (iii) emphasize on the checklist to be followed while making an annual report and (iv) elucidate the various criterions on which a good annual report is evaluated. Finally, the report draws conclusions from the collected information and suggests recommendations based on those conclusions.
2. LEGAL REQUIREMENTS OF AN ANNUAL REPORT
The Act in India that specifies the contents of a listed company’s annual report is the Companies Act – 1956 (and the Companies Amendment Act, 2000). The main objects of the Act are as under:
> Sections 211 and 212 of this act clearly specify the content of an annual report and the form and content of balance sheet, profit and loss statement respectively.
> Section 212 of the Companies act requires the following item to be present in an Annual report.
* Directors Report
* Auditors Report
* P and L statement
* Balance Sheet
* Notes to Subsidiary Companies
> Section 211 of the Companies act specifies the form and content of the Profit and Loss statement and Balance Sheet respectively
To sum up, the mandatory sections of a publicly traded company’s annual report are:
1) Cover, Content, Directors’ List, Highlights
2) Management Discussion and Analysis
3) API and New Product Lists
4) Directors’ Report
6) Financial Report
7) Annexure to the Directors’ Report
8) Auditors’ Report and Annexure
9) Balance Sheet and Profit and Loss Account – Standalone
10) Cash flow statement and Schedules- standalone
11) Financial Information on Subsidiary Companies
12) Corporate Governance Report
13) Auditors’ Report – Consolidated
14) Balance Sheet and Profit and Loss Account – Consolidated
15) Consolidated Cash Flow Statement and Schedules
3. SECTIONS OF A GOOD REPORT
An annual report becomes absolute when it comprises nine distinct sections. It is a definite measure of considering an annual report as good. All these nine sections are separately discussed as a part of following subheadings. However it is critical to note that sections discussed in subheadings 1.5, 1.6, 1.7 & 1.8 are mandatory to be included in every annual report. While section 1.4 is a requirement of the lenders & SECs while 1.9 being critical for analysts.
3.1 LETTER FROM COMPANY CHAIRMAN/CEO
This marks a beginning of an annual report & is limited to initial five pages. It comprises of goals achieved & recent developments in the company. Actions taken in past one year to improve upon current company conditions are also briefly mentioned under this section only.
3.2 SALES AND MARKETING
This section usually follows the letter from the company and is usually written by the marketing department of the organization. It also comprises of the supply chain management system of the company and the manner in which a market is segmented in order to maximize the profits. It is ensured in this section that the scope of lines & divisions is clearly mentioned.
3.3 FINANCIAL HIGHLIGHTS
This section briefly outlines the summary of financial figures of past 10 years of the company. It is written by the Chief financial officer of the organization. It also mentions risk factors & a letter to shareholders.
3.4 MANAGEMENT DISCUSSION AND ANALYSIS
The objective of a Management Discussion & Analysis section is to provide an objective and easily readable analysis of a company’s financial activities based on currently known facts, decisions, or conditions. The MD&A can provide taxpayers with readable information surrounding company management’s framework for decision making. The MD&A assists taxpayers and stakeholders to hold the organization more accountable. The MD&A can be a benchmark to determine if the company is meetings its stated objectives in its strategic plan. Also, an effective MD&A can strengthen internal management focus before financial statements, written by CFO. IT also has arguments of noteworthy trends of past two years
3.5 CPA OPINION LETTER
The CPA opinion letter gives an excellent explanation of what the report bring about and how financial officers attain their final conclusions. This section is written by the CPA firm to give an estimate of their opinion on the company’s financials.
3.6 FINANCIAL STATEMENTS
This section explains the three important financial statements from the annual report of a fictitious company:
Income Statement How good the company is at making money Cash Flow Statement How they’re paying for their operations and their future growth Balance Sheet What the company owns and owes 3.7 SUBSIDIARIES, BRANDS AND ADDRESSES
This section is provided by the legal department of the company. It states the legal aspects, terms & conditions, rules & a regulation the organizations abides by. It covers the last few pages of the annual report.
3.8 COMPLETE LIST OF BOARD OF MEMBERS & OFFICERS
This section is written by the corporate secretary of the company & extends upto one or two pages.
3.9 OUTSTANDING SHARE OF STOCK
This section is mainly important for analysts. If it is part of an annual report it is kept at the near front. It contains the stock, trading, stock symbol, price, dividend trends, beta values, high-low history. This section is also written by the corporate secretary of the organizations
3.10 SUMMARIZING THE REPORT
Drawing conclusions is the main goal of writing your report. For readers, the conclusion section often becomes the focal point of your report. This is the part of your report readers read to understand the meaning of the whole report. For some readers, it may be the most important section. Nearly all reports need a conclusion of some type.
The first steps in drawing conclusion occur during the process of interpreting the data. To help ensure objectivity, writers should test for a variety of factors. These include the following tests:
* TESTS FOR FAIRNESS: Does the writer have any preconceptions about the results, or does he have any biases that will influence the results?
* TESTS FOR LOGICAL DEVELOPMENT: Is the explicit and implicit proposition in the argument true? Is each new proposition a logical consequence of the preceding proposition? Is the proof valid?
* TESTS FOR USE OF LOGICAL FALLACIES: Since business reports need to be objective and rely on logic to convince, the report materials should be checked for the unintentional use of the common logical fallacies.
* TESTS FOR STATISTICAL ACCURACY: The data collected should justify the conclusions. If in doubt the sample size should be increased, or another population can be used to replicate results.
The most important rule, however, is simply to be fair and to let the reader know exactly how the conclusion has been reached.
When the conclusions are presented it should be done in an orderly manner. The conclusions should be clearly linked to the supporting data. Generally the conclusions are presented in a hierarchical fashion, with the most important conclusion first.
New data should not be introduced as a part of or in support of the conclusions. If new data is discovered while drawing conclusions then the report needs to be revised so that the conclusions are based on the data in the report.
Recommendations are the writers’ view of how the problem under investigation should be solved. The recommendations must be based on the conclusions just as conclusions were based on the data. If the report leads to recommendations, this section should be included. Sometimes, recommendations appear in the conclusion section; other times the recommendations form a separate section.
In a recommendation section the following questions should be answered:
* What should the reader do?
* What action(s) should be taken?
To make recommendations work, the following points need to be adhered to:
* The recommendations should be based on conclusions
* It should be simple and less technical. Conclusions and Recommendations are the sections most people refer to.
* A hierarchy should be followed while listing recommendations. The most recommendation should come first and less important later.
* Recommendations should be explicit and straightforward
Not This: Perhaps we should consider purchasing a new computer system.
Not This: A new computer system might solve our problem
But This: It is recommended that a new computer system be purchased
3.10.3 ANNEXURES AND APPENDICES
An annex should be used where information (which would normally make sense in the main body of the document) is placed at the end of the document for reasons of clarity. The report is incomplete without the annex.
An appendix is a document can be used to supplement the main text. It is a storage warehouse, the place to put material that needs to be included in the report, but is not essential. Putting material (such as raw data, processed data, analytical procedures, details of equipment, etc.) at the end keeps the report from being buried in a mass of detail, but keeps all that detail available if needed by any of your various readers. Each appendix is numbered or lettered consecutively and given a title.
3.10.4 BIBLIOGRAPHY AND REFERENCES
References usually come at the end of a text (essay or research report) and should contain only those works cited within the text.
A Bibliography is any list of references at the end of a text, whether cited or not. It includes texts you made use of, not only texts you referred to in your paper, but your own additional background reading, and any other articles you think the reader might need as background reading.
4. EVALUATION OF ANNUAL REPORTS
4.1 ELEMENTS AFFECTING READER’S PERCEPTION CHANGE
The main factors of an annual report which affect the reader’s perception are:
* Design and Form
* Service and delivery
Content factors are used in the rating of the Annual Reports. Financial performance is a core driver of a firm’s reputation amongst many of its stakeholders; the way in which this information is communicated has a significant effect on perceptions. Even at times of lower than expected performance, firms can maintain support when they transparently and honestly communicate the real reasons behind lacking performance and explain steps underway to remedy the situation. A recent Deloitte study has shown that currently more than 55% of the annual report consists of narrative content. Other studies show that there is some divergence between narrative sections and the accounting data – raising questions about the necessity to regulate this discourse. Some researchers have noted that companies expecting both good and bad earnings surprises will exhibit much clearer, more truthful, sincere and legitimate communications in their reports than the composite average firm would. Whatever previous and expected performance looks like, it makes solid business sense to adhere to accurate and correct communications. Many content factors must be taken into account when drawing together a report and companies should combine corporate communications and marketing specialists with the financial experts to get the most out of this exercise. An important step in the process must be to consider the desired attitudes and behaviours of their target audiences. Content can then be drawn up that portrays the facts accurately and brings across the required message whilst being effective in strengthening and modifying stakeholder perceptions.
Design factors include the look and feel and especially the degree to which the company’s own corporate brand is conveyed through the report. The most admired companies are able to stamp their own identity throughout the report on par with all other communications output, whilst not allowing form to overtake function. Only through consistency and authenticity can the annual report work in tandem with all other corporate communications to manage the firm’s reputation collectively.
Service and delivery factors are to do with the timely delivery of the reports, online access to supporting information and general follow-up. Customer care of the report’s readers is essential in maintaining favourable reputation.
All of these factors mean that corporate reporting is more than a financial communications or investor relations exercise – it has taken place firmly as a key tool in stakeholder engagement and an essential part of corporate reputation management. Reports should be the first link for stakeholders by providing more than a financial picture – giving clear insight into the company’s values, strategy, vision, internal structures and operational aspects. Annual reports thus become an essential tool in reputation management allowing companies to enhance the way all its readers perceive them on all fronts.
4.1.1 Inform – Communicate – Integrate – Capitalize
Another model to evaluate the annual reports is the “Inform-Integrate-capitalize” model. The raw material is the raison d’être of any annual report. Information is necessary but it’s not sufficient, it may be written but is not per se self-explanatory. A report that informs may be good but the one that communicates is better. The best reports are substantial and stylish; made of facts and figures and faces; readable and visible; focused on financials and business; stockholder and stakeholder-aimed. The annual report should be valued as a key corporate vehicle and capitalize on it as much as you can. Some companies clearly capitalize on their report (and besides, reporting practice) and still regard it a key vehicle towards shareholders, investors, and a number of audiences.
5. THE CRITICAL STEPS TO SUCCESS
Tackling a project as important and encompassing as an annual report requires organization. Use the following eight steps to ensure the process moves forward and does not become an onerous burden to your organization.
6. TIMELINE FOR PREPARING AN ANNUAL REPORT
Annual reports are printed to coincide with annual meetings, board meetings or other special events. To ensure annual report being published and delivered on time, work backward from the date of the meeting or event. Advance planning will let working around travel, vacations and the schedules of staff and volunteers. Plus, there will be time to recruit sponsors to underwrite costs.
General guideline of steps to be taken when and the order in which they should be taken
Estimate budget 3 months out Prepare detailed schedule 3 months out Recruit sponsors 3 months out Brainstorm theme, content, photos 3 months out Select consultants (if needed) 2.5 months out Draft, refine, proofread copy 2.5 months out Approve initial design concept 2 months out Draft layout 1.5 months out Route for final approvals 1.5 months out Request quotes from printers 7 weeks out Choose printer 6 weeks out Prepare final art for printer, proofread 4 weeks out Send to printer 3 weeks out Receive finished reports due date 6.1 DISTRIBUTING ANNUAL REPORTS
* Appropriate Audiences
Because annual reports are generally expensive to produce, they are usually reserved for VIPs – community leaders, key donors, investors, partners and policy-makers. When you need to make an impact at meetings to request funding or at meetings with government officials, include a copy in the information package. Sending it to potential donors and grant makers is also smart, as it summarizes your non-profit’s experience and track record.
* Appropriate Uses
Many nonprofits distribute their annual report at well-attended events like annual meetings or fund raisers. This saves mailing costs, gives people a great first impression of your non-profit and gives them a reference they can keep. When celebrating benchmark anniversaries, some nonprofits produce more lavish annual reports to mark the occasion.
Because reporters usually will not take the time to read annual reports, do not include them in media kits or media pitches; use a one-page marketing sheet instead.
If you do not already have your mailing list in a computer database, take the time to create one that includes your various audiences – from individuals to organizations to businesses. While this can be time-consuming, think of it as an initial capital investment. There is a variety of inexpensive, database management software programs available for most computer systems that will make the job easier and the information more useful.
For example, the contact at a particular organization may change or a volunteer may get an email address. If your staff does not have the time or the skill to manage the database or handle mass mailings, you can hire companies to do this for you.
7. CHECKLIST FROM START TO FINISH
> Assign responsibility to one person.
> Collect samples of other annual reports for ideas.
> Establish the due date.
> Plot timelines and deadlines on your calendar.
> Allocate budget dollars or recruit underwriter(s)
> Hire a freelance writer and designer (if necessary and budget permits) or select a public relations firm or ad agency.
> Hold a brainstorming session to generate a theme and establish primary stories or messages.
> Develop your theme.
> Notify your accountant or your financial officer of what financial information will be required and when.
> Check with dignitaries and staff for photos. Request photography bids, hire photographer, arrange and coordinate photo shoot (if necessary).
> Collect financial information.
> Write the copy – including headlines and photo captions.
> Decide on quantities.
> Solicit printing quotes.
> Select a printer, establish the delivery date.
> Design and lay out the front and back covers and the inside pages.
> Select photos and write the captions.
> Choose ink colours, type fonts and paper stock.
> Edit and refine copy.
> Proofread everything – triple-check the financials, the spelling of names and the accuracy of telephone numbers.
> Route for final approvals.
> Set up mailing database.
> Prepare the final art for printer (text, financials and photographs).
> Deliver art to the printer with instructions.
> Proof blue-line and colour proofs from the printer.
> Take delivery of annual reports.
> Distribute or mail annual reports.
> Thank sponsors.
8. CASE STUDIES ON EXCEPTIONAL ANNUAL REPORTS:
The Adidas annual report won the award for the best Annual Report for the year by Report Watch. This is an independent company that keeps a close watch on company reports, benchmarking and reporting best practices around the world. These awards are an initiative to reward those that present information in the most succinct manner. The reports were analyzed on ten parameters listed below:
We found that the report scored on the following points:
1. In the report the colours have been used to good effect to highlight the important facts and figures.
2. The report stands out on the quality of tables and charts used to represent the data and numbers.
3. The reports is clearly is showing the various trends in growth. It is not evasive on declining prospects right from the start.
The annual report of Podravka (a food company) is shipped to its readers wrapped in foil, and needs to be baked in an oven in order to make the thermal-reactive ink illustrations show up. Croatian creative agency, Bruketa & Zinic, have designed this particular annual report. Called ‘Well Done’, the report features blank pages printed with thermo-reactive ink that, after being wrapped in foil and cooked for 25 minutes, reveal text and images. Empty pages become filled with content after being baked at 100°C for the required time. It consists of two parts:
a. Big book containing numbers and a report of an independent auditor
b. Small booklet that is inserted inside the big one that contains the very heart of Podravka as a brand: great Podravka’s recipes.
To be able to cook like Podravka you need to be a precise cook. That is why the small Podravka booklet is printed in invisible, thermo-reactive ink. To be able to reveal Podravka’s secrets you need to cover the small booklet in aluminium foil and bake it at the specified temperatures. If not precise, the booklet will burn, just as any overcooked meal. If you have successfully baked your sample of the annual report, the empty pages will become filled with text, and the illustrations with empty plates filled with food.
No wonder, the company catches the eye of its readers!
Infosys is known for producing one of the best annual reports in India. In fact in the study done by Reportwatch to rate the top 500 annual reports, Infosys was ranked 233, the highest by an Indian company.
Apart from the normal requirements of a simple annual report, Infosys publishes its Human Resource valuation, Brand valuation, Economic Value-Added (EVA(r)) statement, Report on environment, health and safety, audited US GAAP financial statements and Global presence.
All the annual reports of Infosys, over the past 5 years, are weaved around one of their staunch company value or strategy. In their latest report they start off with talking about their initiatives to nurture talent throughout the country. This report was published on 100% recycled paper. These themes are supported by relevant pictures which make their message even more appealing. The first few pages of Infosys annual report can be a treat to read even for the literary lovers.
THE THEMES OF INFOSYS REPORTS OVER THE YEARS:
Year Theme Tagline Initiatives Emphasized 2003-04 Managing Change New Game. New Rules. Global Delivery Model
Strategic Global Sourcing
Business Solutions 2004-05 Riding value partnerships Think Scale Large accounts drive growth
Industry academia partnership
2005-06 Dream and plan big Changing Mindsets 25 years completed
Legacy and values of Infosys:
Redefining India’s image
Leader in corporate governance
People at its core
Giving back to Society 2006-07 Winning in the flat world Think Flat Fuel for growth-cost
Faster innovation and co-creation
Money from information: Analytics+ information
Winning in the Turns 2007-08 Valuing the employees Power of Talent Campus Connect
Enable Empower and Retain Talent
Annual Reports of a company reach a number of stakeholders. For an outside reader, the first impression of the company is formed by the quality of its annual report. So it is important that the report be accurate and impressive. An annual report should have all the sections without which it would be incomplete. But the difference between a complete report and an excellent report lies in its presentation. The case studies presented in the report show that excellent reports communicate more than just data and numbers. They showcase the company’s values and attitude. The report’s presentation supplements the claims made in it. There is an objective which has to be accomplished by printing and distributing annual reports. It might be to attract investment from an investor or to declare the company’s accomplishments to the industry. The more the report ‘talks’ to the reader, the better are the chances that the objective might be accomplished.
10.1 Sales and Marketing Primer
A comprehensive section on sales and marketing performance should be included in every annual report. It should be written by the marketing department. It should clearly describe where the company sells and where it makes most of its money. The scope of lines, divisions and operations should be clear.
10.2 Management Discussion and Analysis
Every reader of the financial report is interested in knowing the vision of the management of the company, more than merely the facts and figures. Therefore it is critical to summarize management discussion and analysis before the financial statements. This should be written by the CEO and should cover the discussion of significant trends over the past two years.
10.3 Stock Price
This is required by the analysts. We recommend that it is best to have it at the start of the report. It should have High/Low history and price/dividend trends over time.
10.4 Graphs and Diagrams
To most people numbers make sense when represented graphically. Therefore we recommend extensive use of graphs, diagrams and charts to depict the company’s performance.
10.5 Use of Themes
An annual report can also be a literary feast if a theme underlies it. For example Infosys has a unique theme in the annual reports which depicts its annual performance in the form of storyboarding.
10.6 Focus Areas
Instead of focusing on activities throughout the year, the report should focus on the accomplishments of the company. This creates a positive and optimistic picture rather than being a mundane account of facts and figures.
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2. Purdue Online Writing Lab, Purdue University
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