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Articles and news on audit, advisory and accounting

Planned changes in the preparation and submission of annual report

November 2009, Kaido Vetevoog

 

In 2010 is not enough if the companies submit the reports to the commercial register in pdf or word format. From next year all data in annual accounts shall be submitted to the commercial register electronically.  In electronic format should be submitted all data in annual accounts (main statements and notes on the accounts), management report, profit distribution proposal, etc. Besides the annual accounts, the auditor is also required to prepare his report (electronic auditor’s report) in the same commercial register system.

The changes in the procedure for submission of the annual report started in June 2008, when the Commercial Code was supplemented with a provision prescribing that the annual report, prepared for the reporting period starting on 1 January 2009 or later, shall be submitted to the Commercial Register in electronic format.

Approximately one and a half year ago the Government of the Republic established a working group to develop the format of electronic report , IT-system and preparation of draft legislation in order to organise the submission of reports by electronic format as provided by law.

The Draft Accounting Act Amendment Act completed by the working group in June this year is already in the legislative proceeding of the Riigikogu. According to information available about the legislative proceeding of the draft act in the Riigikogu, the draft act was scheduled to be sent to a first reading in late September and the motions to amend the draft act can be made until mid-October.

Changes in the Accounting Act establish a framework for preparation of the electronic annual report. Besides the Accounting Act the submission of report shall also be governed by the Government of the Republic Regulation and the Regulation of the Minister of Finance. These draft documents are still being prepared. Government of the Republic Regulation sets out the list of elements of electronic report (so-called taxonomy of xbrl elements), which describes the nature and format of information to be entered in new IT-system. As the person responsible for the field of accounting, the Minister of Finance will determine reporting forms, which will establish the output format for new IT-system or the design of the annual accounts.

For accountants and auditors, potential motions to amend mean significant changes in the submission of the annual report to the Commercial Register.  

In simplified terms, the process of preparation and submission of reports in the new IT system will be as follows:

  • Accountant or any other person authorised by the member of the management board will electronically enter the information presented in annual accounts. If no mistakes are detected in the accounts, they can be approved.
  • If audit is mandatory, the auditor can add his report to the annual accounts and sign it digitally.
  • After that it is possible to add other documents required by the Commercial Register (profit distribution proposal, information on sales revenue by areas of activity, etc.) and to submit the report to the Register.

Considering that this IT system is new and unfamiliar for users, the submission of the report will probably not go smoothly in the beginning. It is said that the devil is in the details. It takes time to get used to the new system and there might be some confusion in the first year, in other words – one has to learn what and when to do and in which order. New software solution may cause certain changes in customary methods for preparation and submission of reports.

In the long run, the submission of annual report by electronic means should be beneficial both for the people who submit the reports and the people using them:

1. In future the economic indicators of annual report submitted electronically by the undertakings whose financial year coincides with calendar year, shall be transferred to the EKOMAR report of the Statistics Estonia. This means that the information necessary for EKOMAR has been already filled out to great extent and the report to be submitted to the Statistics Estonia shall only be supplemented with the information that is not included in the annual accounts, but is required for Statistics Estonia to produce national statistics. The exchange of information between the reports submitted to commercial register and to EKOMAR should be complete within the two-year transition period.

2. Electronic reporting system will be subjected to controls in order to reduce occasional occurrence of inaccuracies in the reports. For example, the programme will check the arithmetical accuracy of statements and notes, the compliance of the amounts indicated in main statements with relevant amounts in the notes, the presence of notes on the main statements, if the preparation of such notes is required by the Good Accounting Practices. All in all the quality of reports and the information contained therein should improve.

3. Electronic database provides several further opportunities. The fact that information is provided on the basis of a single system allows submission of translated main statements (provided that these elements are already translated). This means that no further efforts are necessary to provide majority of corporate data in another language. Besides that more detailed presentation of information allows making more detailed enquiries from the system and result in comprehensive analyses.  

4. In terms of the commercial register new system should eliminate several months long time lag between the submission of reports and their publication, caused by scanning and entering of information by the registrar. Electronic presentation of reporting information makes it immediately available in the register. 

However, this system may also involve certain shortcomings. Standardized input and output of reporting format means that there is less room for creative approach to the preparation of report. For instance, the person preparing the report can no longer decide whether to give detailed information in main statements or to concentrate it in the notes. It is also impossible to use in the report specific entries based on particular area of activity, which would provide better understanding of the content of the entry. In addition to that new system will cause some damage to the design of the management report due to preferred submission of information in text form.

The aforesaid obligation of electronic submission of annual report shall not apply immediately to all reporting entities. Since 2010 the system will be applied to companies, foundations and non-profit associations, who prepare annual report on the basis of Estonian Good Accounting Practice. The companies who prepare consolidated report or report on the basis of international financial reporting standards are required to submit annual report electronically since 2012. The reason for introducing such exception in the act was the fact that during the first stage it is impossible to create the part of the IT-system that allows submission of consolidated reports or reports based on international financial reporting standards.

 

The submission of report may be subject to further exceptions, considering that not all members of the management board and supervisory board can sign documents electronically (this concerns mostly foreign nationals). This means that although the accountant submits reporting information by electronic means, it is also necessary to submit to the register signed report in pdf format.

Working group is currently discussing possible report components and reporting format for non-profit associations and foundations. Various parties (Tax and Customs Board, Ministry of Internal Affairs, etc.) have shown their interest in the information to be disclosed in the report, which may lead to a situation where it is necessary to supplement the Guideline no. 14 of the Accounting Standards Board “Non-profit Associations and Foundations”, which establishes additional requirements for the reports submitted by non-profit associations and foundations, and relevant reporting forms shall be altered in the information system of the Centre of Registers only next year.

Audit of annual report 2009 is also challenging for auditors. Auditors have to consider that the audit schedule may depend on how smoothly the reports are submitted and approved in the new information system of the Commercial Register. It is recommended to approve annual accounts submitted on paper (where applicable) and the report generated in pdf format by the Centre of Registers at the same time. Otherwise the report submitted on paper and the report in the Centre of Registers may differ due to significant events after the balance sheet date or the method of presenting main statements or notes on the accounts used in the IT system of the Centre of Registers.

In the course of time paper reports (prepared in Word) will most likely be discarded and the final annual report will be prepared in the information system of the Commercial Register.

From auditor’s point of view the new IT system should reduce routine verification of the technical accuracy of the report, because the system runs several routine checks and draws comparisons automatically. Besides that the standard template for auditor’s report will simplify the presentation of auditor’s report, depending on the type of the auditor’s report.

Both accountants and auditors should know that next year the management of the company has to provide the auditor with access rights to the annual report in entry stage. In principle this means authentication of the auditor in the system of Commercial Register. This provides auditor with access to the report in the information system of Commercial Register and allows approving and viewing the report being prepared. From there on the link between the company and its auditor shall be renewed/ altered only upon change of the auditor.

Information about new IT system will be made available in the user manual which should be completed by the time of disclosing the system in December. After final completion of the IT system, a training course will be organised to introduce the IT system to accountants, auditors, etc.

I recommend tracking the progress of the project at least once a month, in order to keep up with the developments of the new system. Further information about the project on submission of electronic annual report to the register is available at the homepage of the project at: http://ajaveeb.just.ee/e-aruandlus/.

Kaido Vetevoog,

The representative of the Estonian Board of Auditors in the working group of the Government of the Republic, partner in audit firm Baker Tilly Baltics

Article was published in journal "Raamatupidamisuudised" no 6. 2009 http://www.rup.ee/