For whom is it compulsory to prepare consolidated annual report?

According to Estonian Accounting Act an undertaking that has minimum one subsidiary undertaking, must prepare the annual report of the consolidation group. Consolidation group consists of the consolidating entity (parent undertaking) and consolidated entities (subsidiary undertakings).

According to the Accounting Act amendment that came into force on 1 January 2016, it is not compulsory for small consolidation groups to submit a consolidated report.  The definition of a small consolidation group is provided in § 3 (see clauses 18 and 15), exceptions to consolidation are provided in § 29.

Small consolidation group is a consolidation group where not more than one of its consolidated indicators as of the balance sheet date of an accounting year exceeds the terms and conditions specified for a small undertaking:

• assets 4 million euros
• sales revenue 8 million euros
• number of employees 50.

In addition, the following entities shall be exempt from the obligation to prepare an annual report of the consolidation group:

• a consolidating entity in which case its consolidated indicators without the deduction of mutual transactions do not exceed the small consolidation group’s balance sheet total and net turnover indicators plus 20%;
• a consolidating entity in which case the total amount of the balance sheet totals of the consolidated entities does not exceed 5% of the consolidating entity’s balance sheet total and their sales revenue does not exceed 5% of the consolidating entity’s sales revenue;
• a company in which case all or at least 90% of its shares belong to a consolidating entity that is registered in the European Union and has the obligation to prepare and disclose the audited annual report of the consolidation group.

It is allowed with the Accounting Act to leave a subsidiary undertaking unconsolidated if:

• the information necessary for the preparation of the report cannot be obtained with reasonable costs or without unreasonable delays;
• the consolidating entity was unable to exercise dominant influence over the consolidated entity during the accounting period;
• the shares of the consolidated entity are held exclusively for their subsequent resale.

Information about not consolidating a certain subsidiary undertaking is subject to disclosure in the annual report together with proper reasons.

Examples. Is consolidation required?

Example 1. The parent undertaking is undertaking A that is owned by Estonian private persons and that owns subsidiary B. Financial indicators of undertakings A and B are the following:

According to the exception described in § 29 (1) of the Accounting Act, the indicators of the parent and the subsidiary are added together (without eliminating the mutual transactions). As a result, A+B:

• assets 4,5 million euros
• sales revenue 8,5 million euros
• number of employees 23.

These indicators shall be compared to the indicators of a small consolidation group plus 20%:

• assets 4,8 million euros
• sales revenue 9,6 million euros.

Based on these calculations it is not compulsory for such consolidation group to submit the consolidated report, as the indicators of both assets and sales revenue remain below the limit of indicators of a small consolidation group plus 20%.

Example 2. The parent undertaking is undertaking A that is owned by Estonian private persons and that owns subsidiary B and subsidiary C. Financial indicators of undertakings A, B and C are the following:

According to § 29 (4) of the Accounting Act, a parent undertaking is exempt from the obligation to prepare an annual report of the consolidation group, if the total amount of the balance sheet totals of its subsidiaries does not exceed 5% of the parent undertaking’s balance sheet total and their total sales revenue does not exceed 5% of the parent undertaking’s sales revenue.

Let’s add together the financial indicators of subsidiary undertakings B and C:

• assets 170 th euros (4,25% of A’s assets)
• sales revenue 130 th euros (4,33% of A’s sales revenue).

Based on the calculations provided above there is no obligation to prepare the consolidated report, as the total sum of the financial indicators of the subsidiary undertakings is less than 5% of the parent undertaking’s financial indicators.

Example 3. The parent undertaking is undertaking A that is owned by Estonian private persons and that owns subsidiary B and subsidiary C. Financial indicators of undertakings A, B and C are the following:

The company has prepared a consolidated balance sheet and income statement and eliminated mutual balances and turnovers. Financial indicators of A’s consolidation group are the following:

• assets 5,4 million euros
• sales revenue 6 million euros
• number of employees 51.

When the results are compared with the requirements of a small consolidation group (assets 4 million euros, sales revenue 8 million euros, number of employees 50) it becomes clear that two of the company’s consolidated indicators exceed the set limits.
Based on the above provided information, it is compulsory to prepare a consolidated annual report in case of Example 3.