Annual report

What is an annual report?

In their annual reports, companies provide information once a year on their current financial situation and business performance during the previous fiscal year. The report is also used to explain the year-end balance sheet. It is the most important tool for capital market communication and is primarily prepared by corporations to keep investors informed about the company’s business situation. Accordingly, the annual report is of great importance for the financial communications of publicly traded companies. Only with the help of this report can investors make a realistic assessment of a company’s value. When preparing the report, companies should ensure that the financial data is well-structured and presented in an understandable manner so that investors can quickly grasp key financial metrics. Furthermore, it is important that the annual report be prepared and published in a timely manner to give investors sufficient time to evaluate it.  

‍What information must an annual report include?‍

There is no requirement to prepare an annual report under the German Commercial Code (HGB). Nor are there any uniform legal requirements regarding its content. Companies typically use the annual report to comply with statutory disclosure requirements. The mandatory sections under §§ 325–329 HGB that must be included for this purpose consist of the following parts:‍‍

1. Management Report

The management report is not part of the annual financial statements but rather a separate financial reporting instrument that, pursuant to Section 264(1), first sentence, of the German Commercial Code (HGB), exists alongside the annual financial statements. Unlike the annual financial statements, the management report is not explicitly based on the principles of proper accounting (GoB). The management report is mandatory for medium-sized and large corporations and is intended to provide as accurate a picture as possible of current and future developments within the company.

A management report covers not only financial aspects but also qualitative information and outlooks on the company’s future development. Because of its explanatory function, it provides a more comprehensive view of the company’s financial position and development than the annual financial statements alone. In practice, the management report serves as a fundamental means of communicating information to both company management and third parties.

The legal requirements for the management report are set forth in the German Commercial Code (HGB). For sole proprietorships, these are specified in § 289 HGB, and for corporate groups, in § 315 HGB. The preparation requirements are based on § 264 HGB and § 290 HGB, respectively. For medium-sized and large limited liability companies (GmbHs), the report must be prepared within the first three months of the fiscal year. For corporate groups, however, the deadline is five months. Capital market-oriented companies under Section 325(4) of the HGB have a shortened deadline of four months. Like the annual financial statements, the management report is also subject to mandatory statutory audit by certified public accountants.

2. Auditor's Report

In this report, the auditor confirms the accuracy of the management report, including the correct presentation of both past and projected performance.

3. Annual Financial Statements

The annual financial statements, which are prepared at the end of a fiscal year, show how the company performed over the preceding twelve months. They include the balance sheet, the income statement, the cash flow statement, and the statement of changes in equity.

4. Report of the Supervisory Board

In this section, the supervisory board reports on how, among other things, the management report and the annual financial statements were audited and confirms the results. In stock corporations, this section must be included in the annual report.‍

5. Declaration of Compliance with the Corporate Governance Code

This statement must describe compliance with the "German Corporate Governance Code," a set of guidelines for the management and supervisory boards of publicly traded companies.

In addition, most companies provide voluntary disclosures to ensure the greatest possible transparency for their shareholders. Examples of voluntary disclosures include the letter to shareholders, financial metrics, the social report, the environmental report, and segment reporting.

How to Create an Annual Report in Nine Easy Steps

Given its length, preparing an annual report can be a challenging task. However, if you have a clear idea of the end result and break the process down into many small steps, the task becomes much easier.

The steps necessary for a successful process are as follows:

 1. Create a detailed plan

A detailed plan is essential for preparing the annual report, with clear timelines and deadlines for the stakeholders involved. Assigning tasks to internal employees or external service providers ensures that the process runs smoothly.

2. Collect data

The foundation for a compelling annual report is the careful collection of relevant financial data, marketing analyses, and sales information. 

3. Analyze and organize data

Once the data has been collected, it should be organized and analyzed in detail. This is essential for gaining insights, presenting the results in a clear and understandable way, and providing a deeper understanding of the company’s performance.

4. Define the structure

Once the data has been processed, the report’s structure can be created. This is important to ensure compliance with all legal requirements and to provide the reader with the best possible overview of the company’s situation. 

5. Select a format

In addition to determining the structure, a decision should be made early on regarding the format in which the report will be published, so that its layout is suited to the chosen medium. Traditionally, annual reports are produced as printed publications. Depending on their target audience, companies today may also opt for a digital version or include it as a supplement to the printed version. 

6. Create design guidelines

Based on the document's structure and format, design guidelines can be developed that provide clear direction for page layout and ensure a cohesive overall look.

7. Content Creation

Once responsibilities and timelines have been clarified, data has been collected and analyzed, and the structure, format, and design guidelines have been established, work can begin on creating the actual content. In addition to presenting the data in tables, graphs, and charts, text must be written to explain the findings and bring the numbers to life. 

8. Editorial Revision

Next, the annual report must be reviewed to ensure that it is written in a clear, precise, and engaging manner. It must also be proofread for grammar and spelling.

9. Finalization and Publication

After final revisions and formatting, the report can be printed and/or published digitally. It can then be distributed, for example, via the company's website or by mail.