Process of approval of a financial statement
- Jitka Pešičková
- Ivana Kůtová
For a number of companies that use an accounting period identical with the calendar year (i.e. from 1 January to 31 December), the utmost deadline for publishing the financial statement for the year 2019 expired at the end of the year 2020. While it may seem that the compilation and approval of the financial statement and its publication is an annual process, errors often appear in this area, arising mainly from insufficient knowledge of the legislation.
The aim of this article is to summarise the basic rules relating to the process of approval of the financial statement for limited liability companies and joint stock companies.
The legislation that approval of a financial statement is based on:
- Act no. 563/1991 Coll., on Accounting (AA)
- article 21a – Forms of Publication
- Act no. 93/2009 Coll., on Auditors
- Act no. 90/2012 on Business Corporations and Cooperatives (ZOK)
- article 190 and article 421 – Powers of a general meeting
The financial statement represents a set of financial reports, which an accounting entity compiles for the accounting period, as of balance sheet date. According to article 18 paragraph 1 of the AA, the financial statement consists of the balance sheet, the profit and loss statement (income statement) and notes, which explain and complement the information contained in the balance sheet and the profit and loss statement. In some cases, the accounting entity is obliged to include the cash flow statement and statement of changes in equity in the financial statement, according to the above-mentioned paragraph 2.
The Business Corporations Act stipulates that within six months from the last day of the previous accounting period at the latest, a regular financial statement of a company needs to be discussed at a general meeting/by a sole partner. Most companies, excepting those, which use a fiscal year, thus need to hold a general meeting by 30 June of the following year. The discussion also includes a decision on settling the achieved profit/loss or payment of profit sharing. An extraordinary, interim or consolidated financial statement, i.e. the individual financial statements approved by the accounting entity, are also approved at a general meeting/by a sole partner.
According to article 189 paragraph 1 of the TCA, minutes from a general meeting of a limited liability company, not only during the approval of a financial statement, need to contain:
- name and registered office of the company,
- location and time of the general meeting,
- name of the chairperson or the convenor and the minutes-taker,
- decision of the general meeting stating the voting results,
- potential rejections of the executive head to provide information under article 156 and
- content of a protest of a partner, executive or a member of the supervisory board, if established, relating to the decision of the general meeting, if the protesting person requests this at the general meeting.
In a joint stock company, the contents of the minutes are similar and the precise list is stated in article 423 paragraph 2 of the TCA.
Profit/ loss and the proposal for division of profit or settlement of loss
After the financial statement has been approved at a general meeting/ by a sole partner, it is possible to proceed to settlement of the achieved profit/loss.
The profit/loss as the result between the revenues and the costs posted by the company for the given accounting period can be expressed either by profit or by loss. It is necessary for the company to deal with the economic results in one of the ways permitted by law.
Profit may first be used for payment of losses from prior years (if posted). Further it is possible to pay profit to owners (on the condition that the individual tests for payment of profit sharing are passed), or it can be transferred to the account of retained profit from prior years. There is also the option of deciding on allocation to funds, which the company has established.
Loss can then be paid from undivided profit from previous years (if recorded), or transferred to the account of unpaid loss from previous years.
Publication in the Collection of Documents
The ways for publishing approved financial statements are stated in article 21a of the AA. If companies meet the statutory criteria stated in article 20 paragraph 1 of the AA, they need to have their financial statement verified by an auditor. These companies also compile an annual report as part of their financial statement, among other things.
Audited accounting entities publish their financial statement, compiled in full extent, along with their annual report including the report on relations, if the company compiles it, and the audit report. The companies should do so within 30 days from the verification by the auditor and approval by the respective body (general meeting/sole partner). Unaudited accounting entities publish such documents in the Collection of Documents as they are obliged to compile according to accounting regulations (the main criterion is the category of the accounting entity).
The financial statement must be stored in the Collection of Documents, regardless of the obligation of audit, by the end of the immediately following accounting period at the latest. With this step, the accounting for the given accounting period is considered complete.
The process of approving the financial statement may be a unique topic for every accounting entity. If you have any questions regarding this topic or you are currently trying to resolve the correct procedure, we are prepared to help you in this matter, therefore, please, do not hesitate to contact us.