The Annual Report comprises the company's financial statements regarding the reported year and the management report which predominantly addresses strategy, corporate social responsibility, risk management and corporate governance. The annual report needs to be made public and accessible to shareholders and other stakeholders prior to the Annual General Meeting (AGM).
Requirements of the annual report
The management report is prepared by the directors of the company and gives a true and fair view of the current state of affairs. Details provided in the report are of use to investors to (better) understand the company's financial position and future direction. Listed companies are required to prepare and disclose an Annual Report. There are legal requirements for the Annual Report in the Civil Code (Burgerlijk Wetboek 2), as well as recommendations compiled by the Council of Annual Reporting (de Richtlijnen voor de jaarverslaggeving).
Annual report content
The Annual Report typically consists of two parts: the financial statements (including the balance sheet, cash flow statement, profit and loss account, and notes to the financial statements) and the management report. The financial statements are mainly dictated by international accounting standards, and are usually compiled in compliance with IFRS and/or US GAAP.
The management report, on the other hand, gives directors room to ‘tell their equity story’. Companies can give their own interpretation on how to report about their investment case, their activities and operations, and risks involved in their operations, but most often the management report includes the following sections: Letter to Shareholders, Management Board report (or Review from the CEO in a one tier board structure), Divisional overview (if relevant to the business), Risk management, Governance, Auditor’s report, Shareholder information.
Other information deemed relevant may also be included in the management report, such as corporate social responsibility (CSR) reports. Some companies produce a CSR report alongside the annual report, but more and more companies have integrated their CSR reporting in the annual report (i.e. being in line with the GRI guidelines).In December 2013 the International Integrated Reporting Council (IIRC) introduced the International Framework for integrated reporting. This framework provides guidelines based on principles rather than detailed regulations.
Risk management information
In the past years the risk management section became more and more important: where it used to be part of the governance section, nowadays companies include risk management in their annual report as a separate section.
Usually this section includes a general introduction, a section explaining how the company manages its risks (organization, what framework, what control systems are put in place etc.), a list of main risks and how the company is mitigating these main risks. The risks are typically categorized by strategic, operational, financial and compliance risks.