How to do the annual report and the relationship report?

Who compiles the annual report?

The obligation to write an annual report applies to entities (companies, cooperatives, associations, etc.) that are required to do so by the Accounting Act. The law specifically mentions as mandatory those entities that are obliged to have their financial statements audited by an auditor. This depends on the total assets, the annual aggregate net turnover and the average number of employees during the accounting period.

Political parties, foundations, public and private universities and health insurance companies are also obliged to prepare an annual report.

Content of the annual report

The annual report should first of all comply with the requirements imposed by law. At the same time, it can be a valuable PR and marketing tool for a company to present its current achievements as well as its vision and plans. With the help of custom-designed graphics and well-chosen photographs, the result can do a lot of work when negotiating with investors, future partners, as well as customers looking for detailed information.

Some creations go beyond the boundaries of conventional marketing materials. Austria Solar’s annual report was notable in this respect; below, information regarding the company’s annual activity was only thematically displayed when the sun’s rays hit the report’s pages. The text of a certain food company’s annual report, on the other hand, appeared only after it had been “baked” in the oven.

But let’s go back to the information required to be disclosed by the Accounting Act. These are mainly:

• comprehensive information on the development of the company’s performance, activities and current economic position,
• information on events that have occurred after the balance sheet date and up to the date of the annual report and are significant,
• the plans and expected development of the company,
• research and development activities,
• environmental interventions and labour relations,
• foreign operations; and
• information required under specific legislation (e.g. on the company’s business activities, the state of its assets).

The annual report includes the financial statements and the auditor’s report on the audit of the financial statements.

Public interest entities, such as banks, insurance companies and pension companies, also include so-called non-financial information in their annual reports, for example on environmental, social, employment and human rights issues.

How and where is the annual report published?

Companies are obliged under the Accounting Act to publish the annual report by depositing it in the collection of documents of the Commercial Register within 30 days of its approval by the statutory body and verification by the auditor.

Apart from the legal obligation, it is of course up to the companies themselves how and where they want to use their reports. Publication on the company’s website is the standard, while paper is on the way out for many environmentally conscious companies.

The last date for preparing the annual report is twelve months after the balance sheet date at which the financial statements are prepared. Failure to publish the financial statements and the annual report within this period may result in a fine of up to 3 % of the value of the assets.

Relationship report

If your company is part of a business group (i.e. it is controlled by another person, or is included in a group of companies or a concern), then it is also required to prepare a report on the relationship between related parties (i.e. the controlling and controlled person), which is usually included in the annual report.

Acontrolling person means a person who can exercise, directly or indirectly, decisive influence in a business corporation. The controlled person is the business corporation controlled by the controlling person. Through the relationship report, you should provide the public and government authorities with information on the structure of the relationships between controlling and controlled persons, as well as the possible influence of specific relationships, possible advantages and disadvantages of integration into the structure, etc.

The following information is required to be provided in the Relationship Report under the Corporations Act:

• the structure of the relationship between the controlling and controlled person,
• the role of the controlled person in the financial year,
• the manner and means of control,
• a summary of actions taken in the last financial year which were taken at the instigation of or in the interests of the controlling person or persons controlled by it, if such actions concerned assets exceeding 10% of the equity of the controlled person as determined by the latest financial statements,
• a summary of reciprocal contracts between the controlled person and the controlling person or between the controlled persons and
• an assessment of whether the controlled person has suffered a detriment and an assessment of its compensation.

Many companies do not go into too much detail at this point (rather erroneously) and, for example, only list contracts or mention the controlling person but not other companies belonging to the corporate structure.

However, in order to fulfil the purpose of the law, the entire structure should be described comprehensively, i.e. not only its vertical relationships, but also, for example, its horizontal and diagonal relationships. Similarly, the information provided on contracts should go into at least such detail as to make it possible to know with whom the contract was concluded, its subject matter, what performance the parties provided to each other under the contract and, where applicable, other contractual arrangements. The Supreme Court has also commented on the relationship report in one of its judgments to this effect.

Therelationship report is usually part of the annual report and is drawn up by the statutory body of the controlled person within three months of the end of the financial year. If the corporation has a controlling body (e.g. a supervisory board), this body reviews the relationship report and then informs the general meeting of the results. If the controlling person is the sole shareholder, no review is required. If the supervisory body finds defects in the report, it shall invite the statutory body to remedy them.

It shall then be deposited in the collection of documents of the competent court of registration. In the event of non-compliance with the obligation to draw up a report on relations, the company is liable to a fine of up to CZK 100,000. A fine of 3% of the value of the assets of the controlled person cannot be excluded.