Annual financial statements according to HGB

Definition of  

The annual financial statements in accordance with the German Commercial Code (HGB) are used to close the accounts for the respective commercial financial year. It is an important obligation for companies in Germany.  

Relevance of the annual financial statements  

The annual financial statements provide relevant stakeholders, such as creditors and shareholders, with a clear picture of a company’s business results and operating assets, and form the basis for financial reporting for the past period. Furthermore, they serve as the basis for taxation and for distributions to shareholders, such as dividends. They also serve to systematically document the business transactions recorded in the accounting records, as well as financial and operational matters. The annual financial statements form the basis for corporate planning and decision-making, as well as for evaluation by financiers and investors in the context of financial transactions such as loans and acquisitions. If annual financial statements exhibit glaring deficiencies or are missing entirely, the accounting records under the German Commercial Code (HGB) are considered improper, and legal consequences may ensue.  

To determine the legal consequences, the severity of the error must be assessed on a case-by-case basis. For example, if a corporation violates statutory provisions intended to protect the company’s creditors, the financial statements are void pursuant to Section 256(1), first sentence, of the German Stock Corporation Act (AktG). If the violations are obvious and therefore inexcusable, fines or prison sentences may be imposed pursuant to Section 331 of the German Commercial Code (HGB) and Section 283b of the German Criminal Code (StGB).

Difference to annual financial statements according to IFRS  

Capital market-oriented corporations subject to consolidated financial reporting requirements must, pursuant to Section 315e of the German Commercial Code (HGB), prepare not only annual financial statements in accordance with the HGB but also financial statements that comply with the provisions of the “International Financial Reporting Standards” (IFRS).  Although these standards are generally not legally binding, they are a prerequisite for admission to segments of the regulated market such as the Prime or General Standard. In contrast to the HGB, whose provisions are primarily intended to protect creditors of insolvent companies, the IFRS focus on ensuring fair comparability of the profitability of globally active companies.  

Who has to prepare annual financial statements?  

Under Section 242 of the German Commercial Code (HGB), merchants and companies that are required to use double-entry bookkeeping under Section 238 HGB are generally obligated to prepare annual financial statements. Businesses are defined as companies that engage in commercial activities. This includes partnerships (OHG, KG, GbR), corporations (GmbH, AG, UG), and all organizations that are a “corporation & Co.” (GmbH & Co. KG, AG & Co. KG, UG & Co. KG). Sole proprietors are only required to prepare annual financial statements if, in two consecutive fiscal years, they have annual revenue exceeding 600,000 euros, a balance sheet total exceeding 350,000 euros, or employ more than ten employees. If they fall below these thresholds, they are only required to prepare a cash-basis income statement (EÜR). This also applies to freelancers and small business owners, who are not required to prepare annual financial statements. Cooperatives, foundations, and associations are only required to prepare financial statements for the fiscal year under certain conditions.

What are the components of annual financial statements according to HGB?  

Financial statements prepared in accordance with the German Commercial Code (HGB) consist of at least two parts: the balance sheet and the income statement. Depending on the company’s legal form, additional components may be included.

For sole proprietors and partnerships, the annual financial statements consist of the two parts mentioned above.

In addition to the balance sheet and the income statement, corporations must include notes to the financial statements and, in some cases, a management report. The notes to the financial statements provide additional information on the items in the income statement and the balance sheet. Their purpose is to present a company’s actual financial position in order to make the contents of the annual financial statements more transparent. In addition, the notes to the financial statements allow third parties to assess the significance of the figures in the balance sheet and income statement. The management report describes the company’s current situation. It includes an analysis of business performance during the fiscal year as well as forecasts for the future.

For capital market-oriented corporations, in addition to the notes to the financial statements and the management report, a cash flow statement must also be included. This statement presents cash flows—that is, both the sources and uses of cash. In addition, they must include a statement of changes in equity with the annual financial statements. This statement shows changes in equity during the fiscal year.

Under the German Commercial Code (HGB), the statement of cash flows is generally not a required component. However, the annual financial statements prepared in accordance with commercial law for capital market-oriented corporations not subject to consolidated financial reporting requirements are an exception to this rule. The inclusion of a segment report, on the other hand, is voluntary for capital market-oriented corporations. The segment report provides insight into the company’s financial performance, broken down by its individual segments, i.e., business units. Segmentation is based, for example, on geographic markets, areas of activity, or target groups. The purpose of the report is to provide potential investors with greater transparency regarding the company’s opportunities and risks.

What are the deadlines for the annual financial statements?  

The deadlines for submitting the annual financial statements to the responsible tax office vary depending on the legal form and, in the case of corporations, also depending on the size of the company. The regulations stipulated by the legislator in Section 243 (3) HGB for all merchants, which apply to individual financial statements, are decisive. These also apply to consolidated financial statements, provided that the principles of proper accounting are observed and clarity and transparency are ensured in accordance with Section 297 (2) sentences 1 and 2 HGB. For corporations, Section 243 (3) HGB is specified in Section 264 (1) HGB.  

For sole proprietorships and partnerships, the standard filing deadline is six to nine months. This means they must file their annual financial statements no later than nine months after the end of the respective fiscal year.  

Depending on their size, corporations must prepare financial statements for the previous fiscal year by different deadlines. Size is determined by three parameters—total assets, revenue, and number of employees—and the specified threshold must not be exceeded for at least two of these three parameters.

Micro-capital companies are defined as such if they meet two of the following three criteria: total assets of less than 350,000 euros, revenue of less than 700,000 euros, and fewer than ten employees. Companies that meet this definition have a six-month grace period.  

Small corporations must have either total assets of between 350,000 and six million euros and/or revenue of between 700,000 and twelve million euros and/or ten to 50 employees to be classified as such. A six-month deadline applies here as well.  

Medium-sized corporations must have either total assets of 6 to 20 million euros and/or revenue of 12 to 40 million euros and/or 50 to 250 employees to qualify as such, and are then given a three-month deadline.  

Large corporations also have a three-month deadline. These are defined by total assets exceeding 20 million euros and/or revenue exceeding 40 million euros and/or more than 250 employees.  

If the financial year corresponds to the calendar year, the annual financial statements for large corporations, for example, must be submitted by March 31 of the following year. However, an application for an extension of the deadline is possible in many cases.  

Who has to publish the annual financial statements?  

Pursuant to Section 325 of the German Commercial Code (HGB), corporations are required to publish their annual financial statements in the Federal Gazette. This includes UGs, AGs, GmbHs, SEs, limited partnerships, and commercial partnerships, as well as partnerships in which no natural person is a general partner. The deadline for publication is twelve months after the end of the respective fiscal year. The specific disclosure requirements for the various legal forms are set forth in Sections 325 through 329 of the German Commercial Code (HGB). Failure to disclose the financial statements by the deadline constitutes a violation of the law subject to penalties, and the Federal Office of Justice is authorized to impose an administrative fine.  

To what extent must the annual financial statements be published?

‍To determine the scope of a company’s disclosure requirements, the same size classification used to determine the deadline for filing annual financial statements is applied.

Large corporations are required to disclose all documents specified in Section 325(1) of the German Commercial Code (HGB). In addition to the annual financial statements, these include, among other things, the management report and the supervisory board’s report. The same applies to medium-sized corporations. However, pursuant to § 327 of the German Commercial Code (HGB), medium-sized corporations are subject to reduced disclosure requirements, which, among other things, limit the scope of the notes to the financial statements.

The same applies to small corporations pursuant to Section 326 of the German Commercial Code (HGB). They are only required to publish their balance sheet and notes to the financial statements. The income statement does not have to be disclosed. For micro-corporations, disclosure of the notes to the financial statements is not required pursuant to Section 326 of the German Commercial Code (HGB).

How are annual financial statements prepared?  

At most companies, the annual financial statements are prepared by the internal accounting department. If the company does not have such a department, the necessary tasks are outsourced to a certified public accountant or tax advisor. To prepare the financial statements, the company’s bookkeeping and inventory must first be finalized. Based on this, the balance sheet, income statement, and notes to the financial statements can then be prepared.  

If the company is not legally required to undergo an audit, a voluntary audit may be conducted by a certified public accountant.

Once finalized, the annual financial statements are signed by the managing director and, if necessary, certified by a certified public accountant or a tax advisor. The documents must then be filed with the appropriate registry court and published, in accordance with legal requirements.

What is the statutory audit requirement, and to whom does it apply?

An audit requirement exists when a company is legally obligated to have its financial statements audited by a certified public accountant. The purpose of this requirement is to ensure that the financial statements comply with legal provisions and accurately reflect the company’s actual financial condition. In addition to the accounting records, the audit also verifies the completeness of all other required components, such as the balance sheet, income statement, management report, and notes to the financial statements.  

Following the audit, the auditor documents the findings and the course of the audit in writing in an audit report. If the financial statements meet all requirements, the auditor issues an unqualified audit opinion. If it is not possible to form a sufficiently reliable opinion or if there are objections, the auditor issues a qualified audit opinion or an adverse opinion instead.

Whether an audit is required depends on the size of the corporation. This requirement applies to both medium-sized and large corporations. Small businesses are exempt from this requirement.

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