Annual Financial Statement according to HGB

What is the annual financial statement under the HGB?

Annual financial statement under the HGB (German: Jahresabschluss nach HGB) refers to the set of figures that a merchant (Kaufmann) prepares for each financial year under the provisions of the German Commercial Code (Handelsgesetzbuch, HGB). It is also called an HGB financial statement or, in English, annual financial statements. A merchant in this sense includes, among others, every GmbH (German limited liability company). The statement consists of the balance sheet, a statement of assets and liabilities at the end of the financial year, and the income statement, which sets the income and expenses of the year against each other. Capital companies (Kapitalgesellschaften) extend it by notes to the financial statements (Anhang), a text section that explains the figures and forms a single unit with both.

The general provisions for all merchants are in Sections 242 et seq. HGB, the supplementary provisions for capital companies in Sections 264 et seq. HGB. They also apply to commercial partnerships without a natural person as personally liable partner, typically the GmbH & Co. KG. The statement serves accountability towards shareholders and creditors, limits distributions to shareholders and is the starting point of the tax determination of profit. In funding rounds and company sales, it forms the reliable numerical basis on which due diligence, warranties and purchase price mechanics are built.

Components of the annual financial statement by legal form and size

The components depend on legal form, size and capital market involvement:

• Sole traders and commercial partnerships with a natural person as fully liable partner: balance sheet and income statement; small sole traders are fully exempt under Section 241a HGB.
• Micro capital companies (Kleinstkapitalgesellschaften): abridged balance sheet and income statement. The notes are omitted if certain information is given beneath the balance sheet.
• Small capital companies: balance sheet, income statement and notes with size-dependent relief, no management report.
• Medium-sized and large capital companies: balance sheet, income statement and notes, plus a management report (Lagebericht) in which the management describes the course of business, the position and the expected development. Legally it is not part of the annual financial statement but is prepared, audited and disclosed together with it.
• Capital-market-oriented capital companies not required to prepare consolidated financial statements: in addition a cash flow statement and a statement of changes in equity, which shows the change in equity during the year.

The size classes derive from Section 267 HGB, the micro capital company from Section 267a HGB. Three criteria matter: balance sheet total, revenue and average number of employees. The thresholds were raised in 2024 and apply to financial years beginning after 31 December 2023. A company belongs to the smallest class in which it exceeds at most one of the three limits. As at 2026, the limits are:

• Micro capital company: EUR 450,000 balance sheet total, EUR 900,000 revenue, 10 employees.
• Small capital company: EUR 7.5 million balance sheet total, EUR 15 million revenue, 50 employees.
• Medium-sized capital company: EUR 25 million balance sheet total, EUR 50 million revenue, 250 employees.
• Large capital company: exceeds at least two of the limits for medium-sized companies. A capital-market-oriented capital company is always deemed large.

The number of employees is an annual average excluding trainees. A change of class occurs only when the limits are exceeded or not reached on two consecutive balance sheet dates; a single strong year therefore changes nothing yet. Level of detail in the layout, disclosures in the notes, management report, audit requirement and scope of disclosure depend on the size class.

Principles of preparation

The annual financial statement must be prepared in accordance with the principles of proper accounting (Grundsätze ordnungsmäßiger Buchführung; Section 243(1) HGB), the recognised rules for complete, correct and verifiable bookkeeping. For capital companies, Section 264(2) HGB additionally requires a true and fair view of the net assets, financial position and results of operations. Valuation follows the principles of Section 252 HGB: the going concern assumption, individual valuation at the balance sheet date, prudence and consistency of methods.

The prudence principle has two sides. Profits are recognised only once they are realised; foreseeable risks and losses, by contrast, are taken into account before they occur. Assets may be recognised at no more than their acquisition or production cost (Section 253(1) HGB). Higher market values remain invisible as hidden reserves. An office building bought 20 years ago therefore stands in the balance sheet at no more than the purchase price of that time less depreciation, even if it is worth more today. Self-created brands and customer bases may not be included in the balance sheet at all (capitalised), and there is an option for development costs. An HGB statement therefore shows book values, not a company value.

From preparation to disclosure

Preparation and audit

The management prepares the annual financial statement within the first three months of the following financial year (Section 264(1) HGB). Small capital companies may take up to six months if this corresponds to proper business practice. Medium-sized and large companies then have it audited by an auditor; without this audit, the statement cannot be adopted (Section 316(1) HGB).

Adoption and appropriation of profit

In a GmbH, the shareholders adopt the annual financial statement by resolution and decide on the appropriation of the result (Section 46 no. 1 of the German Limited Liability Companies Act, GmbHG). The deadline for this is eight months after the end of the financial year, or eleven months for small companies (Section 42a(2) GmbHG). Only with adoption does the statement become binding; it is then the basis for profit distributions and is usually combined with the discharge of the management.

Disclosure

Capital companies transmit their accounting documents to the Company Register (Unternehmensregister), at the latest 12 months after the balance sheet date (Section 325(1a) HGB). The scope is graduated: small companies disclose only the balance sheet and notes, micro capital companies can merely deposit their balance sheet, and medium-sized companies use relief in the layout.

Annual financial statement and tax law: commercial and tax balance sheet

Under the authoritativeness principle (Maßgeblichkeitsgrundsatz) of Section 5(1) of the German Income Tax Act (Einkommensteuergesetz, EStG), the commercial balance sheet is the starting point for the tax determination of profit. Numerous special tax provisions, however, lead to deviations. Capitalised development costs cannot be recognised for tax purposes, provisions for anticipated losses from pending transactions are not permitted for tax purposes, and pension provisions are valued under their own rules. The differences are recorded in a reconciliation or a separate tax balance sheet and transmitted electronically to the tax office with the e-balance sheet (E-Bilanz). If such differences result overall in a future tax burden, medium-sized and large capital companies show it as deferred tax liabilities (Section 274 HGB). For a future relief, they have an option, and small companies are exempt from the provision.

Significance in a funding round and a company sale

Investors and buyers generally request the adopted financial statements of the last two to three years, for audited companies together with the audit reports. In the participation agreement, they secure through information rights the delivery of future financial statements within certain deadlines. In the company purchase agreement, the seller regularly warrants that the financial statements were prepared in compliance with the principles of proper accounting and give a true and fair view of the position (balance sheet warranty).

The purchase price mechanics also tie in with the financial statements. Under the locked box mechanism, the purchase price is fixed on the basis of an earlier balance sheet at a reference date, often the last audited annual financial statement; from that date, no value may leak to the sellers. Under the method with a closing-date balance sheet (completion accounts), a separate settlement balance sheet is prepared at completion, for which the accounting principles of the last annual financial statement are laid down. A late statement, or one with a qualified audit opinion, therefore also delays the purchase price negotiation.

Practical example: annual financial statement of a GmbH before the funding round

A medium-sized software GmbH whose financial year is the calendar year wants to start a funding round in April 2027. For the 2026 financial statement, the law sets the following framework:

• 31 December 2026: balance sheet date, followed by stocktaking, balance confirmations and closing entries
• by 31 March 2027: preparation of the annual financial statement and management report by the management
• thereafter: audit and issue of the audit opinion (Bestätigungsvermerk), that is, the auditor's judgement
• by 31 August 2027: adoption by the shareholders' meeting and resolution on the appropriation of the result
• by 31 December 2027: disclosure in the Company Register

This framework is not sufficient for the financing process. Investors expect the audited 2026 statement at the latest in due diligence, that is, in the first months of the process. The company therefore plans more tightly: preliminary audit in November 2026, preparation by mid-February 2027, main audit by the end of March, adoption at the beginning of April before the start.

Distinction: annual report, consolidated financial statements and monthly closing

• Annual report: a designed overall document comprising the annual financial statement, management report and voluntary information. Unlike the annual financial statement, it is not regulated by law.
• Consolidated financial statements: combine parent and subsidiary companies as if they were a single company.
• Monthly closing: an internal, unaudited interim account for management. It delivers current figures but does not have the binding force of the adopted annual financial statement.

Common mistakes

• Overlooking the deadlines of the process. Anyone who uses up the statutory deadlines presents investors in the autumn with a statement that is almost a year old.
• Underestimating closing entries. Missing provisions for holiday, bonuses, warranties or litigation lead to corrections that stand out in due diligence as a reduction in earnings.
• Forgetting adoption. Without a shareholders' resolution, the statement is not binding; distributions and discharge then rest on an uncertain basis.
• Missing disclosure. In addition to the administrative fine, the gap in the Company Register is noticed by banks, suppliers and buyers.
• Confusing book value with company value. A low equity under the HGB says little about the value of a software company whose main assets are not on the balance sheet.

Frequently asked questions

What is the difference between preparation and adoption?

Preparation is the drawing up of the statement by the management; adoption is its binding approval by the shareholders. Only the adopted statement is the basis for the appropriation of the result.

Who must sign the annual financial statement?

In a GmbH, all managing directors, stating the date and irrespective of the internal allocation of responsibilities (Section 245 HGB).

What happens if the annual financial statement is not disclosed on time?

The Federal Office of Justice (Bundesamt für Justiz) initiates administrative fine proceedings under Section 335 HGB, which may be directed against the company or its managing directors. It threatens a fine and sets a grace period; if that passes, the fine is imposed, and the procedure can be repeated.

What is the difference between an annual financial statement under the HGB and under IFRS?

The HGB statement serves above all creditor protection and the measurement of distributions, a statement under IFRS (International Financial Reporting Standards) the information of capital providers. The HGB therefore follows the prudence principle strictly and is the starting point of taxation, while IFRS in certain cases apply fair value. IFRS are mandatory mainly for the consolidated financial statements of capital-market-oriented parent companies; the single-entity statement of a GmbH continues to be governed by the HGB. International investors are familiar with IFRS but expect a reconciliation of the most important key figures, for example for leases and goodwill.

Can a small GmbH have its financial statement audited voluntarily?

Yes. A voluntary audit is possible at any time and is often commissioned before larger funding rounds or at a bank's request. If it corresponds in kind and scope to a statutory audit, the auditor can issue an audit opinion.

The Roemer Capital view

Before a process begins, we clarify with the management and the tax adviser when the last financial statement will have been prepared, audited and adopted. We then align the timetable of the funding round or the sale accordingly. A statement that is finished in the middle of due diligence and deviates from the figures shown so far costs more time than postponing the start by a few weeks.

In the data room, we place the financial statements of the last three years alongside the monthly figures of the current year and explain every material reconciliation. The preparation and audit of the statement itself lie with the tax adviser and the auditor.