How to write an effective activity report? An important step for Estonian companies at the end of the financial year.

The deadline for submitting the annual report for most Estonian companies is June 30. The company’s accountants handle most of the work, but the report also requires input from the company’s management. Particularly for the activity report.

What is activity report and why is it important to pay attention to it?

The activity report provides external parties with a quick overview of the company’s activities, results and key events from the past year and introduces the future plans. It is crucial for the report to be comprehensive and informative. While the Accounting Act regulates the minimum content, additional details can offer a clearer and more complete picture of the company.

• 24 of the Accounting Act outlines the minimum requirements that must be described in the activity report:

• The board must provide an overview of the company’s activities, important events and development trends.
• Information about branches located in foreign countries must be made public.
• The company’s main areas of activity and product and service groups must be described.
• Investments and research and development projects undertaken during the financial year or planned for the future must be described. The nature of these projects should be outlined, along with the associated and anticipated costs.
• Events not included in the annual accounts but potentially impacting future results must be highlighted. Examples include the effects of global pandemics, military conflicts, and similar events on the company’s operations and outcomes.
• If the company’s net assets fall short of the Commercial Code’s requirements at the end of financial year, plans to restore them must be detailed.
• If the company has bought or taken its shares or parts as collateral, the information related to these transactions must also be disclosed, including the nominal value of the shares/parts, the fee paid for them and the reason why such a transaction was carried out.

An important requirement, also typically verified by the commercial register, is ensuring that the company’s equity, or net assets, complies with the Commercial Code. Net assets represent all assets that would remain for owners after settling all liabilities upon the company’s termination. This encompasses part or share capital, premiums, formed reserves, and retained earnings. According to the Commercial Code, net assets must be at least half of the share capital, with possible stricter restrictions in the articles of association.

Net assets may fall below these requirements, particularly if the company is unprofitable and lacks sufficient undistributed profits from previous years to offset losses. If net assets dip below legal thresholds, the activity report must outline the company’s plans for restoration. For instance, owners might opt to increase share or share capital or make additional contributions. Alternatively, a one-time or temporary loss might occur, and positive results in the subsequent financial year could potentially cover the previous year’s losses.

If the company’s activity volumes are large enough, and it is necessary to audit the annual report or carry out an inspection, there are also additional requirements for the activity report.

• In addition to the above minimum requirements, the company must describe the general macroeconomic development of its operating environment and the impact on its profit and loss statement.
• The seasonality or cyclicality of the company’s business operations and the significant social and environmental impacts of its operations must also be described.
• It is necessary to provide an overview of how the company manages financial risks related to its receivables, liabilities and investments, and to describe which risks have occurred in connection with changes in exchange rates, interest rates and stock exchange rates. It is also worth noting that important information about both the completed financial year and the current period must be disclosed, in case significant risks have emerged after the end of the financial year.
• The main financial ratios and their calculation formulas for at least the last two financial years must be stated.

The use of ratios must be based on the specifics of the company’s activities. Ratios must be important from the point of view of the company’s operations and make the report comparable with other similar companies operating in the same field of activity.

Examples of the most common ratios disclosed in financial statements

Source: BDO Estonia

Additional requirements have been established for large public interest entities with more than 500 employees. More detailed requirements have also been established for companies trading on the stock exchange.