Accounting

A reference for preparing annual reports

Kristiine Villemi Kristiine Villemi

It’s again time to prepare for filing companies’ annual reports. Below, I have summarised the process of preparing annual reports. I give an overview of what information to send to your accountant timely so that the process of preparing and submitting annual reports would go smoothly and in time.

Provided that the financial year runs from 1 January to 31 December 2019, the annual report must be filed to the Commercial Register by 30 June 2020.

The stages in the process of preparing and filing an annual report

Preparation of the annual report is something best not left to the last minute. We suggest sitting down with your accountant to agree a schedule for preparing the financial statements so that all the necessary activities and control procedures would be completed on time.

Preparing and filing the annual report covers the following activities:

  • preparation of the financial statements
  • preparation of the management report (if required)
  • approval of the annual report
  • audit (if required by law or desired by the management)
  • in the case of companies, preparation of proposal for distribution of profits or cover losses for the financial year
  • submission of the annual report for approval

The requirements applicable to the annual report depend on the size of the company

Pursuant to the Accounting Act, companies fall into different categories on the basis of results on the balance sheet date and level of public interest: micro-enterprise, small enterprise, medium-sized enterprise and large company (consolidation groups also fall into small, medium-sized and large consolidation groups). Based on these categories, the Estonian financial reporting standards establishes different requirements for the annual report (for more on these, see RTJ 15).

It is important to bear in mind that only if a company ceases to meet the criteria set for a given group of companies on two consecutive balance sheet dates does this influence the application of special provisions governing preparation of the annual report.

Conditions for preparation of reports by category

Category of enterprise

Preparing the annual report

Micro-enterprise

Balance sheet
Income statement
+ up to three notes

Small consolidation group

No obligation to prepare and publicly release consolidated annual report

Small business

Micro-enterprise that uses the small business report format

Balance sheet
Income statement
+ up to nine notes
+ management report

Medium-sized enterprise

Large company

Medium-sized consolidation group

Large consolidation group

Balance sheet
Income statement
+ four main statements
+ about 15 notes
+ management report

Preparation of a full-scale annual report is obligatory for non-profit associations and foundations as well.

* An enterprise in a smaller category can always organise its accounting and file its annual report pursuant to the requirements applicable for a larger company.

What information does an accountant expect for preparing the annual report?

Management report

The members of the company’s management board (other than a microenterprise) are obliged to prepare a management report as one part of the annual report. The management report provides an overview of the company’s activity and circumstances that are of determining importance to evaluating the company’s financial position and economic activity, key events in the financial year and forecasted development trends in the next financial year.

Preparation of the management report is always the duty of the management board, not the accountant.

What should be described in the management report?

  • primary areas of activity and product and service groups
  • the most important investments that have taken place during the financial year or are planned for the near future
  • significant research and development projects and related expenditures during the reporting years and the subsequent years
  • significant events taking place during the annual report preparation period that are not documented in the financial statements but have or may have a material impact on the results for the next financial years

The company being audited is also obliged to describe the following aspects:

  • the general development of the operating environment and its impact on the economic results
  • the seasonality or cyclical nature of economic activity
  • significant environmental or social impacts related to operations
  • risks related to currency exchange rate, interest rate or stock exchange rate changes in the financial year and the report preparation period
  • the main financial ratios in the relevant and preceding financial year and methodology for calculating them

Owner’s equity

Before preparing the annual report, make sure the company’s equity meets the requirements set out in the Commercial Code and that it is not negative. If the equity of an incorporated accounting entity does not meet the requirements of the Commercial Code as of the balance sheet date, the management report must detail the activities planned to restore the equity.

Cash and bank accounts

Both cash in hand and bank account balances must be inventoried as of the balance sheet date. If the company is subject to audit requirements, statements of balances must be ordered timely from banks. If there is cash on hand, it must be inventoried and documented.

Accounts receivable

Balance confirmation letters should be issued to customers well ahead of time. The likelihood of receiving outstanding amounts should also be assessed. If necessary, the management board will have to prepare resolutions on assessing these accounts receivable as doubtful.

Inventories

Stock should be taken as at the balance sheet date or a date as close to the balance sheet date as possible, and an inventory report should be drawn. In the course of the stock-taking, goods unfit for use must be written off and the necessary discounts made regarding articles whose book value is less than the net realisation value.

Tangible and intangible fixed assets

Conduct the inventory of fixed assets as of the balance sheet date and draw up an inventory report. During the inventory, the use of the assets must definitely be evaluated, depreciation rates reviewed and necessary write-offs of fixed assets conducted.

Investments into subsidiaries and associated companies

Review the list of investments and submit the annual reports of the subsidiaries and associated companies to the accountant. In the case of investments recognized at acquisition cost, the adequacy of their value in the balance sheet should be reviewed.

Investment property

For investment property recognized at fair value, submit to the accountant the estimate of fair value.

For investment property recognized at acquisition cost, review the values and useful lives of the assets, similarly to fixed assets.

Loans

The balances of loans granted and received should be inventoried to make sure that the interest is correctly recognized pursuant to the contracts. In the case of loans issued, the adequacy of the net book value should likewise be evaluated. Make sure you have presented the loan agreements to the accountant.

Liabilities

For liabilities, it is important first and foremost to make sure there are no liabilities that have not been recognized. If necessary, the balances should also be confirmed by the suppliers (e.g. if the counterparty has not sent you a balance confirmation).

Assess the need to make provisions as of the balance sheet date – for example, guarantee provisions, layoff compensation, bonuses for management board or employees for work done in the financial year, provisions for contracts deleterious for the company or with regard to court disputes, etc. If there is a need to form provisions, draw up a written management board resolution to that effect.

Off-balance-sheet assets and liabilities

It is important to notify the accountant of all potential assets/liabilities that, although they are not shown in the balance sheet, should be disclosed in the financial statements (judicial processes pending, compensation related to termination of contract with management board member, etc.).

Transactions with related parties

As the notes to the financial statements should publicly disclose information on related parties and transactions with them, the accountant should be given a list of related parties and an overview of the transactions executed with them.

Events occurring after the balance sheet date

It is important to notify the accountant of all material events after the balance sheet date which exert an influence on the information presented in the financial statements. For example, these could be court disputes, disputes with clients suppliers over material income and expenses, plans for merger and division, significant fraud or violations of law that have become evident, and minutes of supervisory board and shareholders’ meetings that resulted in material decisions.