Annual reports in Estonia

Annual reports

The length of a financial year is estimated to twelve months (one calendar year, unless provided otherwise). There are several cases where the financial year may be shorter or longer than the previously mentioned term, yet it shall not exceed eighteen month.

At the end of each financial year an accounting entity is required to prepare an annual report that consists of the annual accounts and the management report. To the annual report shall also be annexed the auditor’s report and, in the case of a company, the profit distribution proposal for the financial year at hand. Still if there is no auditing requirement, adding the auditor’s report is not compulsory.

Preparation and submission of annual reports includes following aspects:

• Preparation of annual accounts;
• Preparation of management report;
• Approval of the annual report
• Auditing (in case provided by law);
• Preparation of the profit distribution proposal for the financial year (in case of a company);
• Submission of the annual report for approval.

Following is the list of important criteria for an accounting entity to be audited:

• Audit of the annual accounts is compulsory for accounting entities within the meaning of the Accounting Act if following indicators are fulfilled at least by two thirds. 

1. Sales revenue or income 2 000 000 EUR;

2. Total assets as of the balance sheet date 1 000 000 EUR;
3. Average number of employees 15 people.

• A review is compulsory in whose annual accounts at least one of the indicators of the financial year exceeds the following conditions:

1. Sales revenue or income 1 000 000 EUR;

2. Total assets as of the balance sheet date 500 000 EUR;
3. Average number of employees 15 people.

• A private limited liability company shall have an auditor if auditing is prescribed by law or the articles of association;
• The law prescribes the obligation for public limited liability company to be audited whereas the number of auditors and their appointment lies on the shoulders of general meeting;

In order to give a true and fair view of the financial situation, economic performance and cash flows of the accounting entity the annual accounts shall be prepared. Following statements shall be comprised:

• Balance sheet;
• Income;
• Cash flow;
• Changes in the owners’ equity.

The annual accounts shall be prepared on the basis of the business transactions and adjusting entries recorded in the journals and ledgers during the financial year. For the purpose of preparation physical inventory shall be taken of the balances of the assets and liabilities of the accounting entity. The value of the assets and liabilities shall furthermore be assessed to verify the conformity with previous recordings of entries.

The accounting policies and presentation formats used in the accounting of the entity at hand are required to conform to the international reporting standards and principles generally accepted in Estonia. It is also important to notice that the annual accounts shall be prepared in Estonian using the currency officially applicable in Estonia.

There is a written management’s declaration that shall be submitted together with the annual accounts and signed and dated by the entire management of the accounting entity declaring their liability for the preparation of the annual accounts. Management shall also prepare an overview of the following aspects of the entities’ annual activity:

• The main areas of activity, product and service groups;
• Significant investments;
• Significant projects in the field of research and development;
• Significant events during the preparation of annual accounts.

It is important to observe that there are some specific requirements considering content of the management report if an accounting entity is audited or if the shares of the company are registered for trading on a stock market.  The annual report of an accounting entity shall be signed and dated by the members of the management and the members of the highest supervisory body (if that body exists) immediately after the relevant body has approved the report. The final signed annual report shall be submitted by the 30^th of June of the following year.

Annual Reports of Consolidation Groups

Estonian legislation defines consolidating entity as a parent undertaking or any other accounting entity exercising dominant influence over another accounting entity (consolidated entity). Following are examples of often occurring dominant influence:

• A holding of more than 50% of the voting rights belonging to the consolidated entity;
• A direct or indirect right arising from law or a contract to appoint or remove a majority

Thus consolidation means joining of the financial statements of different accounting entities in order to provide a united annual report as if companies in question were one single entity.  The accounting of consolidation groups generally follows the traditional accounting lead as the provisions of the legislation have only a few minor differences. Yet what should be mentioned are situations where consolidating entities are not required to prepare an annual report of the consolidation group:

• A company where at least 90% of the votes represented by shares belong to a consolidating entity which is registered in Estonia and has the obligation to prepare and disclose the audited annual report of the consolidation group;
• A company where at least 90% of the votes represented by shares belong to a consolidating entity which is registered in a Contracting State and has the obligation to prepare and disclose the audited annual report of the consolidation group under the law of its home state;
• A consolidating entity if at the balance sheet date of the accounting year, the entity does not exceed the limits of two of the three following consolidated criteria:

1. Sales revenue or income 1 000 000 EUR;

2. Total assets as of the balance sheet date 500 000 EUR;
3. Average number of employees 15 people.

• A consolidating entity if the total amount of the balance sheet totals of each of the consolidated entities added together does not exceed 5% of the balance sheet total of the consolidating entity and if its sales revenue does not exceed 5 per cent of the sales revenue of the consolidating entity;

Kati Kruut, lawyer of the Gencs Valters Law Firm in Tallinn.

Practising in fields of Asset protection Law .

T: +372 61 91 000 

F: +372 61 91 007

kati.kruut@gencs.eu