Requirements for approval of the annual report for the company
Key points:
According to the legislation in force in Estonia, all Estonian accounting entities are required to submit an annual financial statement that complies with the prescribed format. The financial year spans 12 months, typically aligning with the calendar year from January 1st to December 31st.
Activities related to the annual financial report can be divided into two main phases:
- Preparation of the annual report, including approval by the board and approval by the general meeting of partners or shareholders.
- Submission of the annual report to the registrar.
The management board prepares and signs the annual report, while approval of the annual report is decided by the shareholders. The management board is responsible for preparing and signing the annual report; the shareholders are responsible for approving it. However, it is important to remember that for the sake of clarity and to avoid potential conflicts between board members, it is reasonable to formalize the board’s decision on the approval of the annual report in written form. If necessary, the board can also present a proposal for profit distribution or loss coverage to shareholders or the general meeting of shareholders in the same decision.
Where required, an independent audit or review of the annual financial statements must be completed before the shareholders approve the annual report. For reporting periods beginning on or after 1 January 2024, an audit or review is mandatory if at least two of the following three indicators exceed the thresholds in the relevant column:
| Indicator | Mandatory audit: threshold to exceed | Mandatory review: threshold to exceed |
| Annual sales revenue or income | EUR 5,000,000 | EUR 2,000,000 |
| Total assets at the balance sheet date | EUR 2,500,000 | EUR 1,000,000 |
| Average number of employees during the financial year | 50 | 24 |
An indicator must exceed the threshold; merely reaching it is not sufficient. Where an audit is mandatory, a review cannot replace it.
For reporting periods beginning on or after 1 January 2024, an audit or review is also mandatory if at least one of the following indicators exceeds the threshold in the relevant column:
| Indicator | Mandatory audit: threshold to exceed | Mandatory review: threshold to exceed |
| Annual sales revenue or income | EUR 15,000,000 | EUR 6,000,000 |
| Total assets at the balance sheet date | EUR 7,500,000 | EUR 3,000,000 |
| Average number of employees during the financial year | 180 | 72 |
Both tables must be considered when assessing the company’s obligations. If either test establishes an audit obligation, a review alone is not sufficient.
A mandatory review may be replaced by an audit, but a mandatory audit cannot be replaced by a review. Under the Auditors Activities Act, an audit of the annual financial statements is mandatory for the following entities regardless of the thresholds above:
- A public limited company (AS) with more than two shareholders. An AS with one or two shareholders must assess its audit or review obligation against the applicable thresholds and any other statutory requirements.
- A state accounting entity.
- A local government unit.
- A public legal entity.
- A political party receiving state budget funding.
- A company in which the state has decision-making rights within the meaning of the State Assets Act.
A company may arrange a voluntary audit or review even when neither is required by law. Such an engagement may be commissioned following a duly adopted shareholder resolution or a decision by another authorised company body. A request from an individual shareholder does not, by itself, make an audit or review of the annual financial statements mandatory.
The approval of the annual report is decided by the company’s shareholders or the general meeting of shareholders. Then the management board submits the approved annual report to the Commercial Register within six months after the end of the financial year.
In accordance with the accounting law, the executive management, shareholders or sole proprietor confirm the correctness and completeness of the data presented in the annual financial report, including that the annual financial report was prepared in accordance with the financial reporting standard and that it reflects relevant and truthful information about the financial position and performance and cash flow of the accounting entity.
It is also worth noting that the distribution of profit or the covering of losses is done only on the basis of the approved annual report. The meeting of shareholders or the general meeting of shareholders may decide to approve the annual report and distribute the dividend at the same time or decide to pay the dividend later.
The partners or shareholders have the competence to decide on the approval of the annual financial report. In a situation where the financial year report is not approved and not submitted to the registry, the company violates the obligation to submit data to the registry. In the worst case, violation of the obligation may even lead to the deletion of the company from the business register.
As of February 1, 2023, amendments to the Commercial Code and the Commercial Register Act have entered into force, allowing the registry keeper to delete legal entities more easily if they fail to submit the annual financial statement on time.
Consequently, the commercial register portal now allows for the submission of an annual financial statement that has not been approved by the shareholders’ meeting. In such cases, a public note is added to the annual financial statement indicating that it has not been approved, but the submission of the statement is still considered fulfilled. If the shareholders’ meeting or general meeting of shareholders decides to approve the statement after this note, the management must submit a new statement to the registry keeper, signed by the management board.
Failure to submit the annual financial statement can jeopardize the existence of the company. Therefore, it is crucial to comply with the requirements for approval and submission of the annual financial statement in a timely and accurate manner.