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Reporting of investments in the annual report of a micro-entrepreneur

There are specific rules for recording investments in the company’s accounts. They are mostly written in the Accounting Act and the guidelines of the Accounting Committee. Which methods must be used and what an annual report must contain depends on the size of the company.

Is the entrepreneur a micro-entrepreneur?

A micro-entrepreneur meets all four conditions:

  • total assets up to 175,000 euros
  • the sales revenue is up to 50,000 euros in the reporting year
  • liabilities are not greater than equity
  • the company has one shareholder who is also a member of the board

If the company meets all four conditions as of the reporting date, it has the right and possibility to use the abbreviated format for the annual financial statements.

Simplified reporting for micro-entrepreneurs

As a micro-enterprise, it is sufficient to submit the balance sheet and income statement and at least three additional documents about the company. Unlike small businesses, micro-enterprises are not required to submit an operational review. Micro-enterprises are not obligated to prepare cash flow statements and statements of changes in equity, which are required for medium and large enterprises annual reports.

Although micro-enterprises may provide more information, they are not obligated to do so. More comprehensive annual reports should be considered, if stakeholders such as lenders and banks seek for more detailed information about the company’s operations and financial condition.

Special Considerations for Investment Accounting

When investing as a micro-enterprise, it’s important to remember the significant difference in investment accounting. According to the guidelines of the Accounting Standards Board, micro-enterprises must reflect all financial assets in their acquisition cost in the annual report.

This means that if you purchase 10 shares through the company at 100 euros each in total worth of 1000 euros and by the reporting date the share price has risen to 125 euros (market value 10 x 125 = 1250 euros). In the balance sheet they need to be reported at their acquisition cost i.e. 100 euros per share and 1000 euros in total.

However, there is an exception to the principle of acquisition cost regarding price declines and discounts must be considered. For example, if the share price drops to 80 euros, the financial asset must be recorded in the balance sheet at the adjusted acquisition cost i.e.10 x 80 = 800 euros.

Examples of using the acquisition cost principle

Variant

Price Increase

 Variant

Price Decrease

 Variant

Price Movement
Purchase price of financial asset 100 EUR, end of year price 120 EUR Purchase price of financial asset 100 EUR, end of year price 80 EUR Purchase price of financial asset 100 EUR, end of year price 80 EUR, by the reporting time already 105 EUR
The asset remains on the books at 100 EUR. The asset needs to be impaired, recorded on the books at 80 EUR. The asset remains on the books at the purchase price of 100 EUR.

Important nuance is that if the price was 80 euros as of December 31, but by the date of the report (for example, March 30) the price of the share has risen again to the acquisition value or even above it, then there is no need to make a discount. The law clearly states that when assessing the decrease in the financial asset’s value, all information known by the time of preparing the report must be considered, including information received after the reporting date that may affect the financial asset’s value.