Accounting and annual financial reporting in Latvia
Accounting records
According to laws, accounting records shall clearly display the transactions and financial results of a company, and it shall give a true and fair view of its financial position. The records shall be kept in such a manner as to enable any person who is qualified in accounting to clearly identify the financial position of a company as well as the business transactions made in a given period of time, and to enable the person to ascertain both the beginning and the sequence of each transaction. The accounting principles addressed in the law “On Accounting” are those of going concern, consistency, continuity, clarity, truthfulness, comprehensiveness, the accrual method of accounting, and the historic cost principle.
The measure of value must be a monetary unit of the Republic of Latvia (Latvian lat), and Latvian must be used as the language of accounting. If a partner in the economic entity is a foreign individual or a legal entity (registered company), a second language, which has been agreed upon by the parties and is acceptable to the auditors, may be used. All the codes, abbreviations, separate letters and symbols used in accounting records shall be explained. Usually double entry system should be used for companies.
The accounting records and all the confirming documentation shall be stored in Latvia. Each entry in the accounting ledger must be confirmed by a document justifying that entry. A justifying document shall contain: the name of the company; the number under which the company is registered with the registration authorities; the name, number and date of the document; the description and justification of the business transaction; the measures of the operation (quantity, sums) and signatures of persons responsible for the execution of the transaction and the correctness of the information presented. The additional requirements for specific documentation, such as the presence of the seal, etc. are provided by the Cabinet of Ministers.
The information and data which shall be included in an annual report are not classified as a commercial secret of the company. All the other information included in the accounting records is considered to be a commercial secret. Company’s secret information shall be disclosed to the auditors, to the tax administration reviewing the declared taxes, as well as to the other state institutions in accordance with the procedures provided for by the legislation.
The accounting period shall cover 12 months. Usually, the beginning and the end of an accounting period concurs with the calendar year, however this period could be different if the company’s charter so provides. The companies, which form part of a group, shall have the same accounting period.
The accounting period may be altered. The change shall be justified and explained in the notes to the annual report. A newly formed company may have a longer or a shorter accounting period for the first year, but it may not exceed 18 months. The accounting period shall not exceed 12 months if it is changed for an already existing company. The accounting period may also be shorter than 12 months where either a company terminates its activities or the beginning of the accounting period is changed.
Reporting requirements
An annual report, as a whole, consists of a balance sheet, a profit or loss statement, a cash flow statement, and statement on changes in equity, explanatory notes, and other relevant information, the management report and auditor’s report and should be in accordance to the law “On Accounting” and the law “On Annual Reports of Enterprises”. The annual report shall give a true and fair view of the company’s assets, and of its liabilities and financial results, and must be written in Latvian and the monetary unit of the Republic of Latvia shall be used as a measure of value.
All the items in the annual report shall be valued according to the following accounting principles:
- it shall be assumed that a company will continue to operate (going concern);
- the same valuation method as in the previous reporting year shall be used (consistency);
- the valuation shall be done carefully, considering the following conditions (prudence);
- the annual report shall include only the profit as of the date of drawing up the balance sheet;
- all provisions for the risk and losses incurred during the current or previous reporting years shall be taken into account, even if they have become known in the time period between the drawing up of the balance sheet and the annual report;
- all reductions in value and the amounts depreciated shall be taken into account regardless of whether the reporting year has ended in profit or loss.
- all income and charges related to the reporting year shall be considered regardless of the actual date of payment. Charges shall be co-coordinated with the income in the respective periods of the reporting year;
- the items of assets and liabilities shall be valued separately;
- the opening balance of each reporting year shall correspond to the closing balance of the previous year;
- all the items that significantly influence the valuation or the decision making of those who use annual accounts shall be shown. Items, which do, not significantly influence the annual report but which make it too detailed may be shown as one item on the balance sheet and on the profit and loss statement. In this case, the disclosure of the consolidated items and the details shall be disclosed in explanatory notes;
- the business transactions of a company shall be recorded and presented in the annual report, having regard not only to their legal form, but also to their “economic content and essence”.
These reporting conditions may be disregarded in exceptional cases. Any such deviation shall be explained in the notes, indicating its effect on the assets, liabilities and financial results of a company.
Consolidated reporting
Consolidated reporting is regulated by the law “On Consolidated Accounts”. Parent company has to prepare annual accounts of a group in the event if a group two years exceeds any two of the criteria below:
- total assets: 1 400 000 Euro;
- net turnover: 3 400 000 Euro;
- average number of employees in the reporting year: 250.
The preparation of the annual report of a group of companies requires the application of the same accounting principles in all companies of the group in order to reflect their business transactions in the same manner. If the accounting principles, which are applied in a subsidiary, differ from those applied by a parent company, corrections must be made to the subsidiary’s records when making the consolidated annual account. This will allow all the transactions to be reflected in the same conditions. If it is not possible to adjust the records, this shall be pointed out and explained in the consolidated annual report. Furthermore, the proportion of the subsidiaries applying different accounting principles in the consolidated annual account shall be indicated.
Statutory audit of financial statements
In the event that the company exceeds two of the criteria listed below, the annual reports shall be audited by a certified auditor:
- total assets: 400000 EUR;
- net turnover: 800000 EUR
- average number of employees in the reporting year: 25.
- a certified auditor shall submit a report on the audit results in writing. The auditor’s report shall specify in particular, the following:
- whether the annual report and the management report of the company or a group of companies have been prepared according the law;
- whether the annual report gives a true and fair view of the assets, liabilities and financial results of the respective company at the end of the reporting year, as well as of the profits and losses during the reporting year;
- whether the legal representatives of the company have given all the required information and explanations to the auditor.
A company shall submit a copy of the audited annual report, the management report, the auditor’s report and the copy of minutes of the meeting on which the annual report was approved by the shareholders, to the tax authority not later than a month after approval of the annual report, and not later than four months after the end of the reporting year. The time period between the submission of the above-mentioned documents, and the end of the reporting period shall not exceed seven months and applies both to the parent company of the group and to other companies in the group which exceeds two of the following criteria:
- total assets: 1 400 000 EUR
- net turnover: 3 400 000 EUR;
- average number of employees in the reporting year: 250.
Additionally, if either the distribution of the annual profit or the coverage of losses is not included in the annual account, a copy of the minutes of the shareholders’ meeting showing the distribution of these profits or losses must be given to the tax authority.
Publication of annual reports
The law “On Annual Reports of Enterprises” regulates the publication and storage of annual reports. All submitted annual reports have to be made publicly available to any person who has paid the due fee.
If it is intended to publish a complete annual account of the company or to publish an annual account of a group of companies, the documents shall be in the same form and wording as at the time of their auditing. Furthermore, the documents shall include the auditor’s report and notes, if there are any. If the auditor has had any complaints, or he has refused to prepare the auditor’s report, this shall be declared and an explanation given. The recommendations and decisions concerning the distribution of profit or the covering of losses shall be shown either under corresponding items in the balance sheet or they shall be published separately.
If the annual report and other auditing documents are not published in full, it shall be clearly stated that the publication is not complete and that the complete file of the annual report is available at the Enterprise Register of the Republic of Latvia. The auditor’s report shall be published in full, regardless of whether the annual report published is complete.
Companies and groups of companies shall publish their balance sheet and profit or loss statement in the publication indicated by the Enterprise Register of the Republic of Latvia if two of the following criteria are exceeded:
- total assets: 1 400 000 EUR;
- net turnover: 3 400 000 EUR;
- average number of employees in the reporting year: 250.
Eva Narovska, attorney at law of the Gencs Valters Law Firm in Riga.
Practising in fields of Finance Law in Latvia, Estonia, Lithuania.
T: +371 67 24 00 90
F: +371 67 24 00 91