Although the management report is not an integral part of the annual accounts, it is a legally specific supplement to it. The Commercial Code only requires medium-sized and large accounting companies to prepare a management report. Although the law only formulates in general that the management report should give a picture corresponding to the actual circumstances. This picture should also reflect the opportunities and risks that the company encounters. However, there are also some specific requirements for the content of the management report. For example, it shall include some explanations on risk management related to price fluctuations, exposure defaults and other liquidity risks. Furthermore, information on the current state of play in the field of research and development should be given in the management report. In addition, the situation of possible establishments is also relevant for the management report.

1. The Management Report – Introduction

The annual financial statements of a company are classically divided into balance sheet, income statement and notes. What many seem to see as part of the annual accounts is the so-called management report. At least, the management report is usually called in the same breath with the other components of the annual financial statement. And then it is also clear that the management report must somehow be related to the annual accounts. However, the management report is only an addition to the annual accounts. It is therefore strictly speaking not part of the annual accounts.

So, having cleared up this widespread error, we have a detailed view of the management report. So now follow us into the secrets that otherwise wrap the management report. We lift the veil step by step.

2nd legal basis for the management report

The main point of reference for the legal instructions relating to the management report are in § 289 HGB. First, however, one should clarify which companies are subject to the obligation to produce a management report. For this purpose, we refer to § 264 (1) sentence 4 HGB. It states that small corporations within the meaning of § 267 (1) HGB do not have to draw up a management report. The obligation therefore exists only for medium-sized and large corporations as well as for corresponding partnerships in which a corporation is a subsidiary (within the meaning of § 264a (1) HGB).

In addition, there is also a whole series of other legal provisions that refer to the management report. Many are concerned with special rules, in other words, with extensions of the instructions tailored to corporations. However, this is only about the general provisions on the management report. Therefore, the provisions extending beyond the management report with regard to the special non-fiantial declaration (within the meaning of § 289b HGB) are also disregarded in this context.

third function of the management report

Before we look at the regulations of the management report in detail, let us briefly discuss its function. The function can be divided into two areas. On the one hand, the management report should report in a compact form on the situation of the company. On the other hand, the management report should also provide room for additional additions that round off the information already contained in the annual accounts.

3.1. Consolidation of information in the management report

One of the objectives of the management report is to provide management with information on how the company assesses its financial statements. It is therefore a question of self-assessment. For example, one can read from the data of the balance sheet and the profit and loss statement approximately the degree of company success in the specified period. However, without the information in the management report, it remains unclear whether this also corresponds to the plans and forecasts of the company management. In order to also offer an assessment of one’s own situation, this assessment is also included in the management report in a condensed form.

3.2. Further additions in the management report

Despite extensive mandatory disclosures, some information that may be relevant to the situation of a company is not included in the annual financial statements. The management report therefore provides an opportunity to go into these details. Additions can be distinguished from those in terms of time.

Substantive additions refer to circumstances that influence the development of the company. Very different factors can play a role, sometimes even of great importance. For example, an energy company that produces and markets electricity via wind farms can inform about this in the management report in a year in which there have been longer periods of exceptional shortfalls. This tells you why, for example, sales have declined. From the data of the annual accounts alone one would not find any explanation for the decline in turnover. In addition, one could also add reasons due to additional costs, for example, if a plant has to be expensively maintained, or, as in the case of the Ahr flood last year, because massive damage has occurred. Furthermore, the COVID 19 pandemic as a dramatic event should also serve as an example. For example, this has involved unforeseen restrictions for the retail sector, but it has presented opportunities for some pharmaceutical companies.

But even without these exceptional conditions, there may be a general need to explain why the situation of a company has developed in one direction or another. This can be accompanied, for example, by a change in customer behavior or other trends.

In terms of time, the management report supplements how management assesses the development in the short, medium and long term. In the short term, she indicates the annual result she expects for the coming financial year. This assessment can also be intertwined with factual aspects. In any case, the management report should also contain a forecast.

4th content of the management report

4.1. general legal instructions on the content of the management report

Let us now turn to the content of the management report in the individual aspects prescribed by law. First of all, § 289 HGB only gives very general instructions on the content of the management report. The aim is to provide the most accurate possible picture of the course of business in the period under consideration. Furthermore, the management report shall explain how the development of business has affected the financial performance and what consequences this has for the general situation of the company. This presentation must reflect the scale and complexity of the business activities. In particular, the law refers to the presentation of all opportunities and risks.

4.2 Mandatory performance indicators in the management report

In addition to these general regulations for the analysis of business activities, the law also requires that certain performance indicators are included in the self-analysis. Significant financial and other performance indicators should be important. However, medium-sized enterprises only need to address the financial performance indicators. Non-financial performance indicators to be taken into account by large enterprises include those related to the labour market, environmental and climate protection or the situation of workers. The decisive factor here is what seems necessary for understanding the course of business and the general situation.

4.3. Information on risk management in the management report

Another fixed component of the management report, specifically identified in the law, is the analysis of risk management. For this purpose, the management report should indicate which methods the company management tries to achieve which goals. In this context, measures used to hedge hedges subject to accounting requirements are of particular importance.

Similar information should be included in the management report on price change, default and liquidity risks, including those related to cash flow fluctuations. To this end, the management report should also refer to the use of financial instruments. However, the limitation applies here that this information is only necessary insofar as it is relevant for the assessment of the current situation and its further development. The management report shall also address the main financial performance indicators relating to the amounts and information presented in the annual accounts.

4.4. Information on research and development in the management report

Another aspect of the content of the management report, which the legislator specifically demands in the HGB, relates to research and development. However, the law in this respect remains entirely vague. Here, the company management has a certain room for manoeuvre to present the situation of his research and development work. It is also possible to distinguish between a factual and a temporal component.

4.5. Information on branches in management report

Similarly, the legal requirement to present the situation of branches of the accounting entity. Again, there are no further specifications regarding the scope of the representations in the law. However, one can assume that the same standards apply here, which one also applies in the management report for the company itself.

4.6. Additional information by certain capital market oriented corporations

For capital market-oriented corporations, as defined by § 264d HGB, the law stipulates that further information on the internal control and risk management system in relation to the accounting process is required.

A special regulation concerns public limited companies. If, pursuant to § 160 (1) no. 2 AktG, information on the acquisition of own shares also appears in the annex to the annual financial statements, this must be explicitly referred to in the management report.

Finally, another provision of § 289 HGB, which refers to companies which issue securities in Germany but are not a corporation within the meaning of § 327a HGB. Members of the institution entitled to represent shall make a separate declaration. In doing so, this declaration is intended to confirm that they reflect in the management report to the best of their knowledge and belief the course of business and the result of business as well as the situation, opportunities and risks according to the actual circumstances.

In addition, however, there are a whole series of other regulations that are addressed specifically to capital market-oriented corporations. For example, the management report provides information on the number and type of shares issued and further information (§ 289a HGB).

Final observations regarding the management report

So, as you can see, there is a whole series of very specific regulations regarding the management report. At the same time, it should also be borne in mind that other regulations, even without making specific specifications, determine the content of a management report. Therefore, one should rely on the experience of experts in this regard. In general, however, one can assume that the information that one would like to learn about other companies in business relationships is also relevant for one's own management report. But there can also be the risk that you provide the competition with important information about your own company. Therefore, one should always carefully consider how to present the information required by the law in the management report.