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Jitka Pešičková | June 13, 2023

What is an annual financial report and how is it different from an annual report?

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In this article we would like to summarize the basic information regarding the annual financial report, i.e. who prepares the report and how it differs from the annual report, which is normally prepared by entrepreneurs as an integral part of the financial statements.

Annual report

The annual report is prepared by entities that are required to have their financial statements audited. The purpose of the annual report is to provide comprehensive, balanced and integrated information on the development of their performance, activities and current economic situation. 

According to Section 21 (2) of Act No. 563/1991 Coll., on Accounting:

“In addition to the information necessary to fulfil the purpose of the annual report, the annual report shall contain at minimum financial and non-financial information about

(a) facts occurring after the balance sheet date that are material to the purpose of the annual report referred to in paragraph 1,

(b) the expected development of the operations of the entity,

(c) research and development activities,

(d) the acquisition of own shares or own ownership interests,

(e) environmental and labour relations activities,

(f) whether or not the entity has a branch or another part of a business establishment abroad,

(g) required under special legislation.”

Annual financial report

Issuers, whose securities have been admitted to trading on a regulated market, prepare an annual financial report. This new concept was introduced by an amendment to Section 118 of Act No. 256/2004 Coll., on Capital Market Business in 2022. The issuer must publish the annual financial report no later than 4 months after the end of the financial year.

The annual financial report includes:

  • audited financial statements,
  • consolidated audited financial statements, if the issuer is required to prepare them,
  • an annual report in accordance with the law governing accounting or a consolidated annual report in accordance with the law governing accounting,
  • a statement by the issuer’s responsible persons,
  • corporate governance statement.

When comparing the contents of the annual report and the annual financial report, the issuers’ annual financial report additionally includes a statement by the issuer’s responsible persons and a corporate governance statement.

The Corporate Governance Statement is very comprehensive, the specific requirements are also set out in Section 118 of Act No. 256/2004 Coll. and we will list them below.

The Corporate Governance Statement includes:

(a) information on corporate governance codes that

    1. are binding for the company, and information on where the Code may be consulted; and
    2. it voluntarily complies with, and information on where the Code can be consulted,

(b) information on the corporate governance practices used by the company over and above the requirements of this Act and a detailed description thereof, if used,

(c) in lieu of the information referred to in paragraphs (a) and (b), information that it does not comply with any provision of the Corporate Governance Code or that it does not comply with any Code, including the reasons, why it does not comply with that provision or any Code,

(d) a description of the main parameters of the internal control and risk management systems in relation to the financial reporting process,

(e) a description of the rights attached to the relevant type of share or similar security representing an interest in the issuer, at least by reference to

    1. the law governing the legal relations of companies and cooperatives and the articles of association of the issuer, if it is a type of share, or
    2. comparable foreign law and a document similar to the issuer’s articles of incorporation, if it is a type of similar security representing an interest in the issuer,

(f) a description of the composition and decision-making procedures of the issuer’s governing body and its committees, if any,

(g) a description of the decision-making procedures and the basic scope of the powers of the issuer’s general meeting or similar meeting of holders of securities representing an interest in the issuer,

(h) in the case of an issuer that exceeds at least 2 thresholds under section 1b(3) of the Accounting Act at the balance sheet date, a description of the diversity policy applied to the issuer’s management body, taking into account, for example, criteria such as age, gender or education and expertise and experience, including information on

    1. the objectives of the policy,
    2. the methods of its application; and
    3. the results of its application in the relevant accounting period; and

(i) instead of the information referred to in point (h), information that the issuer does not have a diversity policy as referred to in point (h), including a justification for not having such a policy.

In addition, for issuers of shares or a similar security representing an interest in that issuer, if that security is admitted to trading on a European regulated market and if that issuer has its registered office in the Czech Republic or in a country that is not a member state of the European Union, if that issuer has chosen the Czech Republic as the reference state, the corporate governance statement shall also include figures and information on:

(a) the structure of the issuer’s equity capital, including securities not admitted to trading on a European regulated market and including, where applicable, the identification of the different classes of shares or similar securities representing an interest in the issuer and the proportion of the registered capital of each class of shares or similar securities representing an interest in the issuer, together with an indication of the rights and obligations attaching to such securities and the percentage of the total share capital, which they represent,

(b) restrictions on the transferability of securities,

(c) significant direct and indirect holdings in the voting rights of the issuer,

(d) holders of securities with special rights, including a description of those rights,

(e) restriction of voting rights,

(f) agreements between shareholders or similar holders of securities representing an interest in the issuer which, if known to the issuer, may have the effect of impairing the transferability of shares or similar securities representing an interest in the issuer or voting rights,

(g) specific rules governing the election and removal of members of the issuer’s management body and the amendment of the issuer’s articles of association or similar document,

(h) the specific powers of the issuer’s governing body,

(i) material contracts, to which the issuer is a party and which will take effect, change or terminate in the event of a change of control under the Corporations Act of the issuer as a result of a takeover bid, and the effects thereof, except for such contracts, the disclosure of which would be seriously prejudicial to the issuer; this is without prejudice to any other obligation to disclose such information under this Act or other legislation,

(j) contracts between the issuer and members of its management body or employees, by which the issuer is obliged to perform in the event of termination of their office or employment in connection with the takeover bid; and

(k) the system of control of the scheme, under which members of the management body or employees of the issuer acquire participating securities of the company, options over those securities or other rights over them if they do not exercise those rights themselves.

In addition to this information, issuers are required to prepare and publish their annual financial report in the European Single Electronic Format (ESEF), i.e. in XHTML format.  Issuers that also prepare consolidated financial statements under International Financial Reporting Standards (IFRS) additionally tag the annual financial report using the XBRL taxonomy. If you want to learn more about ESEF or XBRL, we recommend our portfolio article “Jiri Köhler presents ESEF reporting” or the podcast “ESEF with Klára Honzíková and Jiří Köhler.

With the introduction of the obligation to prepare an annual financial report, there is an increase in the documentation requirements for the preparation of financial statements by statutory entities.

If you are currently compiling or will be compiling this report in the near future and are unsure of what information to include, to what extent/division, please do not hesitate to contact us. We will be happy to help you with this issue.

Author: Jitka Pešičková