Annual Reports: A Summary Guide for Preparing and Filing

Annual Reports are statutory documents that provide an overview of a company’s financial performance and position along with relevant legal or regulatory information. For directors, preparing and filing these reports accurately and on a timely basis is crucial for maintaining transparency, compliance, and investor confidence.

This guide summarises key components of annual reports and suggests best practices for preparation.

Understanding the Purpose of Annual Reports

Annual reports serve three principal purposes:

1. Performance review: The annual report is required to provide shareholders with relevant and useful information that is fair, balanced and understandable to allow them to make informed decisions. Annual reports provide shareholders information on the company’s:

• Development, performance and position.
• Prospects.
• Business strategy.
• Business model; and
• Governance

2. Transparency – Annual reports also allow shareholders to assess the directors’ performance and their stewardship of the company.  To do so annual reports include information on the company’s:

• Governance
• Directors’ remuneration

3. Wider stakeholder needs – while the main audience of the annual report is intended to be the shareholders, information in the annual report is used by other stakeholders such as lenders, customers, and employees. The annual report should address issues relevant to these stakeholders where these issues influence the strategy and future development of the company.

Key Components of an Annual Report

1. Strategic Report:  This report must be published by medium sized and larger companies (small companies are exempt). The report provides information for shareholders to help them to assess how directors have performed their duty to promote the success of the company by providing narrative context for the performance and position as reported in the financial statements.

The strategic report also provides a summary of the company’s business model and strategy with a description of the principal risks the company faces and how they might affect its future prospects. Increasingly company law requires the strategic report to provide relevant non-financial and sustainability information and other complementary information.

2. Directors Report: The directors report is used to publish other statutory and regulatory information about the company.    All companies aside from micro companies must prepare a Directors Report, however there are many exemptions and simplifications for small companies.

3. Financial Statements The financial statements are the heart of the annual report. They include:

• Income Statements Shows the company’s revenues, expenses, and other income over the reporting period.
• Balance Sheet Provides a snapshot of the company’s financial position at the end of the reporting period.
• Cash Flow Statement Provides information on the company’s cash inflows and outflows, highlighting its liquidity, financing, uses and generation of cash.
• Statement of Changes in Equity Shows changes in the company’s equity over the reporting period, including transactions, such as dividends paid.
• Notes to the Financial Statements Detailed notes that provide additional information about the financial statements, including accounting policies, significant transactions, and other relevant details.

4. Corporate Governance Report: The requirements here normally only apply to listed companies and the precise content and format of this report will be determined by the legal form of the company and the corporate governance code followed.  The aim of the report is to provide information to explain how the composition and organisation of the entity’s governance policies and structures support the achievement of the entity’s objectives.

5. Directors Remuneration Report:   Again, this report is normally only required by listed companies. This report sets out elements of the company’s directors’ remuneration policy, the key factors that were taken into account in setting the policy and reported on how the policy has been implemented. It also discloses the directors’ remuneration and provides details on the link between the entity’s performance and directors’ remuneration.

Best Practices for Preparing Annual Reports

1. Consider the needs of shareholders and materiality The annual report should contain information that is material and relevant to shareholders. Companies should consider and assess the needs of all significant shareholder groups when determining whether a matter is material. A matter might be material quantitatively or qualitatively if the fact or circumstance would affect the ability of the entity to generate or preserve value over the long term.

2. Start Early Begin the preparation process well in advance of the filing deadline. This allows ample time for gathering data, drafting content, refining and reviewing the report.

3. Engage Stakeholders Involve key stakeholders, including the finance team, legal advisors, and external auditors, in the preparation process. Their input and expertise are invaluable for ensuring the report’s accuracy and completeness.

4. Ensure the Strategic Report is fair and balanced The Companies Act requires that the Strategic Report covers both positive and negative elements of the company’s performance, position and future development without bias.

5. Ensure the annual report is understandable Use clear, plain and concise language to convey information. Where possible avoid excessive use of jargon and technical terms that may confuse readers. Visual aids, such as charts and graphs, can help illustrate key points.

6. Avoid “boilerplate” disclosures Ensure disclosures and information presented in the Annual Report are relevant, entity specific and avoid generic or template disclosures.

7. Explain “linkages” within the Annual Report Linkages are the relationships between information disclosed in different elements of the annual report. Cross references and explanatory text can be used with these connections to make the annual report more effective.

8. Ensure Accuracy Double-check all financial data, ensure consistency across sections of the Annual Report and other publications made by the company, and verify that all information is up-to-date and correct.

9. Review and Revise Conduct thorough reviews and revisions of the draft report. Seek feedback from multiple stakeholders to ensure the report is comprehensive and accurate.

Filing the Annual Report

Once the annual report is prepared, it must be filed with the relevant regulatory authorities. In the UK, all companies are required to file their annual reports with Companies House while listed companies must publish and file their annual reports in line with the relevant market regulations. Ensure that the report is filed by the specified deadline to avoid penalties and maintain compliance.

Conclusion

Annual reports are a vital tool for maintaining transparency, compliance, and investor confidence. By understanding the key components and following best practices for preparation and filing, company directors can ensure that their annual reports effectively communicate the company’s performance, governance and strategic direction.

If you need support with your Annual Report, reach out to Katie Holden, Head of Company Secretarial.