Types of financial statements

Annual Report

An annual report is prepared in accordance with the Danish Financial Statements Act (årsregnskabsloven). It is subject to a range of requirements concerning the recognition of income, expenses, assets, and liabilities. Additionally, the annual report must be presented in a standardized format to ensure a reasonably uniform and comparable structure, regardless of the auditing firm assisting with its preparation.

An internal annual report functions as a management tool for the company’s management and/or ownership. Its purpose is to provide a true and fair, sufficiently detailed (but not overly detailed) overview of the company’s performance, development, and financial position. Internal annual reports are also commonly requested by creditors and other stakeholders.

An external annual report is generally prepared only for companies and is publicly disclosed, accessible to anyone. For smaller companies, there is often a competitive interest in minimizing the information disclosed in the external annual report, while still complying with the minimum requirements set by the Danish Financial Statements Act.

Companies typically benefit from preparing both an internal and an external annual report. The external report is required to avoid compulsory dissolution, while the internal report serves as an effective management tool.

Very small companies may only prepare an external annual report.

Personally owned businesses typically prepare only an internal annual report, as there is no requirement to publish an external report.

Tax Account

All businesses must determine their taxable income, unless they are exempt, such as certain associations. Taxable income is calculated under tax law, which does not align with the recognition principles of the Financial Statements Act. For example, service revenues may be recognized differently for tax purposes, and depreciation, capital improvements versus operating expenses, and debt items are all treated differently under an annual report compared to a tax account.

A tax account is indispensable. Companies must therefore prepare both an external annual report and a tax account/taxable income statement. They may additionally choose to prepare an internal annual report.

Sole proprietorships often face more complex tax issues than smaller companies, and consequently the tax account typically plays a greater role in their overall reporting.

For very small sole proprietorships, however, a tax account will often suffice to meet regulatory requirements and provide the owner with the necessary overview, for example, businesses with annual service revenues of only a few hundred thousand DKK, or parent-purchase arrangements (forældrekøb).

VAT Account

For VAT-liable businesses, the VAT base must be calculated in accordance with VAT regulations, which differ from both the Danish Financial Statements Act and the rules for recognizing revenue and expenses under income tax law.

For example, the sale of services around the turn of the year can be measured in three different ways. Improvements to real property and the purchase of company cars are also subject to differing regulations under the Danish Financial Statements Act, tax law, and VAT rules.

At PrivatRevision, we ensure that you receive the package of accounting products your business requires. In practice, this often consists of bookkeeping, quarterly or semi-annual VAT returns, and a consolidated annual report covering accounting, tax, and VAT reconciliation.

Please contact us to learn more about our complete solutions for financial reporting for smaller businesses and companies.