Accounting and audit

The annual report

Size of the company

For all companies, except those applying the International Financial Reporting Standards as endorsed by the EU (IFRS-EU) in the preparation of their financial statements, the requirements to prepare and file annual reports and the necessity of an audit are determined, among other things, by the size of that company. Companies are classified as ‘micro’, ‘small’, ‘medium’ or ‘large’ on the basis of three criteria, being total assets, net turnover and the average number of employees during the financial year. These criteria are evaluated on a consolidated basis, unless the company qualifies for a consolidation exemption (further details provided further on). The current criteria are listed in the table below.

The European Commission recently decided to increase the thresholds (or ‘size criteria’) in relation to the reporting requirements for micro-, small, medium-sized and large entities in the EU for the first time since 2013, also following the rising inflation in the last few years. At the moment of writing (mid-December 2023), the amendment of the thresholds is still to be adopted in Dutch law (Title 9, Book 2 DCC) and is applicable for financial years commencing as of 1 January 2024. The legislator can opt to allow early application but not before 1 January 2023. The thresholds are maximum thresholds, and may be set lower, but not higher. In the past, the Dutch legislator has adopted the maximum thresholds. The application, effective date and transitional provisions of the new size criteria in the Netherlands are yet to be determined. 

A company will be classified as micro-, small-, medium- or large-sized when it satisfies at least two out of the three criteria for that size for two consecutive years (or the first year for newly formed companies). 

The table below gives an overview of main differences between different size entities. Details of this table are discussed in the next sections. 

_{¹The financial statement disclosure requirements under Dutch GAAP are less extensive for a medium-sized company compared to a large-sized company.
²GAAP: generally accepted accounting principles}

Please note that the reliefs of the micro-, small- and medium-sized regimes cannot be used by companies applying IFRS-EU in the preparation of their financial statements, as these automatically fall under the large company regime.

Content of the annual report

In general, the annual report of medium- and large-sized companies contains the following documents:

• A directors’ report presenting a fair view of, among other things, the financial position, results, risks, sustainability aspect and future plans of the company.

• Financial statements comprising (I) a balance sheet, (II) a profit and loss account, (III) a cash flow statement, and (IV) notes to the balance sheet and profit and loss account.

• Other information, including the auditor’s report.

The auditor’s report must include, among other things, the following points: (a) whether the financial statements have been prepared, in all material respects, in accordance with the applicable accounting principles and provide a true and fair view of the financial position and result for the year, and (b) whether the directors’ report and other information meet the legal requirements, is consistent with the financial statements and does not contain material misstatements. In the auditor’s report for so-called OOBs (Public Interest Entities), the auditor also needs to include information on materiality, group scoping and key audit matters in the opinion for these companies.

Micro-sized and small companies do not have to include a directors’ report and have no audit requirement. They may file an abbreviated balance sheet and, for small companies only, explanatory notes with the Chamber of Commerce. Notwithstanding the general requirements, a micro- or small-sized company may at its discretion prepare financial statements based on tax accounting principles. As a result, the equity and the profit according to the financial statements are equal to the equity and profit according to the corporate tax return. This facility was introduced in Dutch law in order to reduce the administrative burden for small entities.

A medium-sized company must be audited but is permitted to file an abbreviated profit and loss account as part of the financial statements and is exempted from including certain disclosure requirements to the balance sheet.

Basis of preparation of the financial statements

The principal requirement for financial statements is that they must be prepared in accordance with generally accepted accounting principles (GAAP) and provide a true and fair view enabling a well-founded opinion of the entity’s assets, liabilities and results and, insofar possible, of its solvency and liquidity.

The financial statements can be prepared either under Dutch GAAP or IFRS-EU. IFRS-EU is required for the consolidated financial statements of listed companies. In the past the Dutch Accounting Standards Board (DASB) amended and updated many of its Dutch Accounting Standards to align them to IFRS. However, many differences remain between Dutch GAAP and IFRS. A standard in which IFRS fundamentally differs from Dutch GAAP is, for example, employee benefits. To overcome the major differences, the DASB has allowed the use of standards from other GAAPs in Dutch GAAP financial statements. Such facilities exist for:

• IFRS 9 ‘Financial instruments’ in respect of the expected credit loss model for impairment of financial assets;

• IFRS 15 ‘Revenue from contracts with customers’ in respect of revenue accounting;

• IFRS 16 ‘Leases’ in respect of lease accounting;

• IAS 19 ‘Employee benefits’ in respect of pension accounting (instead of DAS 271.3); and

• US GAAP topics and subtopics dealing with pension accounting (instead of DAS 271.3).

Consolidation

The important issue of group financial statements is one that affects most foreign investors in the Netherlands, particularly in cases where a Dutch company is being used as an intermediate holding company in the group structure. While, as a general rule, a company with subsidiaries must prepare consolidated financial statements, there are significant exemptions available.

Small and micro-sized companies in the Netherlands are exempted from preparing and filing consolidated financial statements. If the (intermediate) holding company meets the small company criteria on a consolidated basis, there is no need to prepare and file consolidated accounts (Article 2:407 section 2 of the Dutch Civil Code). Moreover, intermediate holding companies that do not meet the small company criteria on a consolidated basis, may be exempted from preparing consolidated financial statements when applying Article 2:408 of the Dutch Civil Code (DCC). When applying this exemption, the company can apply the size criteria only to its company accounts, due to which it will in many cases fall under the regime for small companies.

It is very important that the intermediate holding meets all the conditions stipulated in Article 2:408 of DCC in order to be able to use this exemption. Some of these conditions are that the financial information which the company should otherwise consolidate has been included in the financial statements of its (ultimate) parent company and that these financial statements have been prepared in accordance with the provisions of EU legislation or on a similar basis, and have been filed with the Chamber of Commerce within the allowed timeframe, accompanied by a directors’ report and auditor’s report.

CSRD sustainability reporting requirements

In November 2022, the European commission agreed to implement the Corporate Sustainability Reporting Directive. The goal thereof is that the reporting of sustainability information will become as important in the EU as traditional financial reporting and should be of the same quality level. The requirements are applicable for (amongst others) large listed companies with more than 500 employees as from book year 2024, thereafter this will apply for all large companies in the EU as well (and it will affect more companies at a later stage). The sustainability information needs to be included in a separate part of the Directors’ report. An external auditor needs to give limited assurance on this information. At a later stage, reasonable assurance is required. 

Timetable

The timetable below shows the timeframes and possible extensions relating to the financial statements process. Please note that this does not apply to listed companies. For those companies, the financial statements must be prepared and made generally available within four months after year-end. They must be adopted within six months after year-end. 

_{³If all shareholders are also directors of the company, then the sign-off of the annual report automatically leads to an adoption of the annual report. In this case, the max. 2 months adoption period is not applicable anymore.}

Penalties for non-compliance

In the event that the statutory requirements for preparing and filing financial statements have not been met, this will constitute an economic offence on the part of the directors. 

Non-compliance with the statutory requirements could have significant repercussions if the company goes bankrupt. Where the statutory requirements for preparing and filing financial statements have not been met, and the company goes into liquidation, the directors will be deemed not to have properly fulfilled their fiduciary duties and could be held personally liable for any deficit upon liquidation.