Approval of the financial statements

What it means

Approval is the decision of the competent body that the statements as drawn up are accepted as the binding picture of the year. In a limited liability company and in a joint-stock company it is the general meeting that decides, not the director who signed them.

Preparation, filing and approval are three separate acts, each with its own deadline. The statements go into the register whether or not anyone has approved them, and approval must happen within one year of the end of the accounting period.

Approval is not the same thing as an audit. The auditor judges whether the statements give a true picture, while the general meeting decides as the owner. Approval corrects no errors, and a refusal does not in itself change the books: unapproved statements remain prepared statements that the statutory body has to put right and present again.

How it works in practice

Where unapproved statements were filed in the register of financial statements, the approved version or a notice of the approval date has to follow. The deadline for that filing is a short one and runs from the day of approval, not from the end of the accounting period.

Only approved statements support a profit distribution. What happens to the profit or loss for the period is decided by the same body, usually at the same meeting, and the minutes are the document behind the posting within equity.

In a single-member s. r. o. no general meeting is called: its powers are exercised by the sole shareholder, who records the approval in a written decision with a date and signature. We draft it for the client together with the statements, so that the approval date and the allocation of profit match what is later added to the register.

What to watch out for

File the statements and forget the approval, and the register keeps a version flagged as unapproved for good, which is exactly what a bank reads before a loan and a contracting authority reads in a tender. On top of that, breaching the Accounting Act is an administrative offence the tax office fines.

Paying out a profit share before anyone has approved the statements is a payment without legal title: the shareholder must return it and the director who authorised it is answerable for it. An audit then also has to settle how such a payment is taxed, because formally it is not a dividend, and the treatment it gets can be worse for the shareholder.