The appendix to the financial statements is an important source of information on the financial and economic situation of a company. It contains a lot of information, most of which comes from legal regulations. For example, the notes to the annual financial statements shall include a table of investments and liabilities. In addition, the notes to the financial statements provide guidance on the methods used for accounting and profit and loss. Only by specifying these and many other conditions can the figures be classified in the balance sheet and the profit and loss statement. However, other particulars may be included in the Annex. Voluntary disclosures include those that meet certain accounting standards or are of a completely different nature. Finally, with the appendix to the annual financial statement, you can draw a certain picture of your own company (mostly a positive one) beyond the legal obligation to provide information. However, caution is also advised, as this information can also be useful to the competition.

1. Annex to the Annual Report – Introduction

The main focus in the analysis of financial statements is mostly on the balance sheet. There we find all the hard facts in the form of numbers and balances. In addition to the balance sheet and the management report, the annual accounts also include the so-called annex. This is an addition required by the Commercial Code (HGB) as a supplement to the balance sheet and to the profit and loss account. The annex to the financial statements contains data which are thus intended to put the figures in the balance sheet in a specific light. And since this light has to shine according to legal requirements on balance sheets and profit and loss statements, it should fulfill certain functions. But what exactly does the appendix contain and what purpose does it serve? We are now addressing this issue with the aim of underlining the importance of the annex.

2nd annex to the annual accounts: statutory provisions

As so often at this point, the introduction should first be followed by a look at the legal regulations. Finally, the HGB is of considerable importance in this respect, because it regulates what should be in the appendix to the annual accounts. In addition, the HGB also provides a certain structure, according to which one should create an appendix to the annual accounts. For the content of the annex we refer to § 284 HGB. Here are the general rules on the content of the annex to the annual accounts. Special provisions to the annex are in § 285 HGB. This is other mandatory information, as the same heading of the paragraph informs us. But also in many other legal norms we find provisions that affect the annex to the annual accounts, for example in §§ 264, 264c and 268 HGB as well as in § 160 AktG and § 42 GmbHG.

Interesting, perhaps also rather curious, may be in this context the provision § 286 paragraph 1 HGB. It states that no information may be given if the withholding of the information serves the welfare of the Federal Republic of Germany or its countries.

Much more important, however, is that micro-corporations and certain partnerships which are legally equivalent to them are not obliged to draw up a note. However, they must then instead include in the balance sheet information according to § 268 paragraph 7 HGB, § 285 number 9 letter c HGB and, if applicable, § 160 AktG. Furthermore, small corporations may not mention certain information (§ 288 (1) HGB). Similar relief is provided for medium-sized corporations and partnerships comparable in size with them, where there is a limitation of liability of the general managers (§ 288 paragraph 2 HGB). The classification into the different size classes takes place on the basis of §§ 267 and 267a HGB.

layout of the notes to the financial statements

First of all, the notes to the financial statements can be divided into two higher-level units. On the one hand, the first unit comprises the statutory mandatory and compulsory election information. On the other hand, the HGB also knows information based on recommendations. In addition to these two units, however, it is also possible to provide further information on a voluntary basis beyond the aforementioned scope.

3.1. Mandatory and elective information

The mandatory and optional information required by law includes information that is either to be listed in a specific place in the annex (mandatory information) or that may optionally appear elsewhere (mandatory election information), sometimes even in the management report. In both cases, there is a general obligation to provide this information in the notes to the financial statements. You can further subdivide the statutory mandatory and compulsory election information.

3.1.1. Information on the content and structure of financial statements

The first item contains information on the content and structure of the financial statements. Since these aspects are regulated by law, you will find at this point a number of laws to which you have to refer. This also includes the indication that the annual accounts were prepared in accordance with the regulations of the HGB.

3.1.2 Disclosure of recognition and measurement principles

The second point is already a bit more varied and informative. This is also about aspects that are subject to legal provisions. This includes that the recognition of assets has been determined on the basis of their acquisition or production costs and depreciation has been made on the basis of them. However, it is sometimes important to inform about the election made in the case of existing electoral rights. For example, you can report here with which period of use you have set the depreciation of certain assets. After all, a period of use must be determined after a careful commercial assessment. In addition, it is necessary to indicate whether production costs have been set at the lower or upper limit of production costs. This also includes mentioning whether borrowing interest has been included in the manufacturing costs.

In addition, § 284 paragraph 2 no. 2 HGB requires that in the event of deviations from accounting or valuation procedures, the impact on the financial and economic situation of the company be addressed. In addition, where assets or liabilities are accounted for in foreign currencies, the exchange rates for these assets or liabilities are also disclosed in the notes to the financial statements.

3.1.3. Explanatory notes for individual items of the balance sheet

To explain the individual items in the balance sheet, add an investment mirror and a liability mirror. So you break down what you've summarized in the balance sheet. In this way, the notes to the financial statements provide detailed information on the company’s financial position.

As in the investment mirror, in the liabilities mirror the information is broken down according to the model of the balance sheet so that the different types of liabilities are listed separately (for example, liabilities arising from delivery and performance, liabilities to banks, liabilities to affiliates). However, further information on liabilities must be provided. This concerns the remaining maturity of the respective liabilities. A distinction is made between short-term (remaining term less than one year) and medium-term (remaining term between one and five years) and long-term liabilities (remaining term longer than five years). The breakdown of short- and medium-term liabilities is voluntary, provided that no liens have been granted. Otherwise, one is obliged to indicate the securities offered.

3.1.4. Explanatory notes for individual profit and loss items

This heading includes, inter alia, information showing the location of turnover by region, activity or market. This item also includes information on the discounting of provisions. If the cost of sales method has been used in the profit and loss account, this indicates the material and personnel costs used for the calculation.

3.1.5. Other mandatory information

This is a particularly interesting aspect because there is a wealth of regulations for this. There are already 34 individual requirements, all of which come from § 285 HGB. For example, this involves the presentation of future risks or foreseeable obligations that could not be mentioned in the balance sheet or in the profit and loss statement. Also the already decided inclusion of liabilities that fall in a future accounting period, must be mentioned there.

Furthermore, it indicates how many employees the company employed in the financial year. In this case, a subdivision into groups should take place, but without the HGB stipulating the type of groups; So here you are free. In addition, there are certain details of persons who are or have been active in the organs of a company or corporation and who have left during the financial year.

In addition, in the appendix to the annual financial statements for a general shareholder GmbH, you have to specify which companies it appears as general shareholder.

This and many other information are mandatory information that must be taken into account in the appendix to the annual accounts. In fact, the legislator is constantly developing these regulations, adapting them to new situations and, if necessary, supplementing them. Thus, the last two numbers in § 285 HGB were added in the course of the Corona pandemic. In general terms, we are talking about events of particular importance which occur after the end of the financial year and which may have an impact on the financial situation.

3.2. Information based on recommendations

The information based on recommendations in the annex to the financial statements can also be divided. The German Accounting Standard (DRS) and the German Corporate Governance Code (DCGK) play a role here. Their recommendations are voluntary. While they can help to further elucidate the image of the company concerned, this may also provide additional information to the competition. Therefore, you should always weigh whether you want to respond to the recommendations according to DRS and DCGK or rather avoid them.

3.3. Voluntary information

The other voluntary information that can be provided in the appendix to the financial statements goes in a similar direction. They may specify specific circumstances, address intentions or announce developments that may be of interest without meeting any of the criteria on mandatory disclosure.

4. The Appendix to the Annual Report – Final Considerations

4.1. Information requirements for the notes to the annual accounts

The notes to the financial statements constitute an important source of information on the financial and economic situation of an entity at the end of the reporting period. Without the additions to the Annex, it may not be possible to obtain a complete picture of either the balance sheet or the profit and loss account. At the very least, the appendix to the annual financial statements provides information needed when comparing companies to understand the methods used to recognise and measure them in the balance sheet. Also with regard to the profit and loss account, where one can choose between the total cost method and the cost of sales method, one needs additional information for understanding the data. In addition, there are many individual items of information for which there is also an obligation to provide information. Without the liabilities level, for example, it would be difficult to conclude on the financial strength and liquidity of a company.

It is important to remember that for corporations and certain partnerships there are certain facilitations in relation to the notes to the annual financial statements. For example, micro-corporations and partnerships of the same kind are exempted from drawing up an annex. Furthermore, there are reliefs for small corporations and their equivalent partnerships in terms of the extent to which a note to the annual financial statements should have.

4.2. The handling of information in the notes to the financial statements

In addition, the appendix to the financial statements can reveal many more details about the financial and economic strength of a company. Or you can hide it from the competition, if there is no obligation to provide this information. In dealing with this data, one must also proceed strategically.

If, for example, a startup strives for a new financing round, the appendix to the annual accounts can serve as a positive external presentation. In this serious way you can promote investments in the company. But you can also impress the competition and thus put it under pressure if you show in the appendix to the annual report how potent your own company is currently positioned. Perhaps the comparative analysis of the competitors' financial statements will also provide an opportunity to take over a competitor.

In addition, potential business partners who have the choice between their own and their competitors in future transactions are more likely to choose the side that shows more transparency. But you should also be well informed about the peculiarities of the potential business partner in this regard. If you know, for example, how much the management of such a potential partner appreciates transparency, then you should take this into account when preparing the annual accounts. This also fits the consideration of whether you follow the recommendations according to DRS or DCGK and include corresponding information in the appendix to the annual accounts.