The economic life of a commercial company revolves around various legal and administrative processes that ensure its proper functioning and transparency for shareholders, investors, and other stakeholders. One of the key and mandatory processes for any company is the preparation and submission of its annual accounts. This article will analyse in detail what it means to draft and approve annual accounts, the differences between both concepts, the respective competences involved, and the legal time limits established under Spanish law for fulfilling these obligations.
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Before addressing the distinction between drafting and approval, it is important to understand what the annual accounts are and what their purpose is. The annual accounts are a set of financial documents that reflect the financial position, assets, and economic results of a company during a financial year.
Annual accounts are essential because they provide a true and fair view of the company’s performance, enabling shareholders to assess management’s work, potential investors to evaluate the viability of the business, and third parties — such as banks or suppliers — to make informed decisions. Furthermore, annual accounts are key to fulfilling tax and commercial obligations and to fostering transparency and trust in the company’s economic activity.
Drafting of the Annual Accounts
Drafting (or formulation) is the first stage in the process and consists of the preparation, writing, and presentation of the annual accounts by the company’s management body. In Spain, this duty lies exclusively with the directors, whether natural or legal persons appointed to manage the company. They must prepare the accounts in accordance with current accounting regulations, ensuring that they present a true and fair view of the company’s assets, financial position, and results.
This process involves analysing all financial and economic information generated throughout the financial year, properly classifying and accounting for it, and ultimately preparing the financial statements that comprise the annual accounts. Additionally, the directors must include the notes to the accounts, which provide relevant information such as accounting policies applied, subsequent events, or any other matters that may affect the interpretation of the accounts.
Article 253 of the Spanish Capital Companies Act (Texto Refundido de la Ley de Sociedades de Capital or LSC) provides that directors must draft the annual accounts within three months from the end of the financial year. For example, if the financial year ends on 31 December, the accounts must be drafted by 31 March of the following year.
Within this timeframe, the directors must complete all accounting work, make necessary corrections, and prepare a management report if the company is legally required to do so. In some cases, due to the complexity of the business, the requirement of external audit, or exceptional circumstances, extensions may be requested — but such extensions must be duly justified and comply with legal requirements.
Directors are under a legal and ethical duty to ensure that the annual accounts submitted reflect a faithful and transparent representation of the company’s economic situation. If the accounts contain serious errors, omissions, or misleading information, the directors may be civilly and criminally liable, and may be held accountable by the company or third parties for any resulting damage.
In larger companies, the drafting of annual accounts is often accompanied by an external audit, aimed at verifying that the accounts are free of material misstatements and that they comply with generally accepted accounting principles. This audit provides additional reliability and is mandatory for certain types of companies.
Approval of the Annual Accounts
Once the directors have drafted the annual accounts, the next step is to submit them for approval by the general meeting of shareholders. The meeting must review the accounts, analyse the results, and decide whether to approve or reject them.
Approval means that the shareholders formally acknowledge the financial position and economic results presented in the accounts and endorse the management carried out by the directors during the financial year. This is a binding legal act that may have significant consequences — for instance, enabling dividend distribution if the results are positive, or requiring corrective measures in the event of losses or financial difficulties.
Approval lies exclusively with the general meeting.
Article 164 of the Capital Companies Act (LSC) stipulates that the ordinary general meeting must be held within the first six months of each financial year in order to, where applicable, approve the management, the annual accounts for the previous year, and resolve on the allocation of the result. In other words, if the financial year ends on 31 December, the meeting must be held before 30 June of the following year.
Once the annual accounts are approved by the general meeting, the company must file them with the Companies Registry. This filing is a formal requirement that renders the accounts public documents, accessible to interested third parties.
The filing must be made within one month from the date on which the general meeting was held. For example, if the meeting takes place on 15 June, the accounts must be filed by 15 July.
Failure to approve the annual accounts and subsequently file them with the Commercial Registry on time will result in the company’s registration being closed, without prejudice to any other legal or reputational consequences.
Differences Between Drafting and Approval of Annual Accounts
Although both processes form part of the company’s annual accounting cycle, drafting and approval are distinct legal and technical acts, each fulfilling different functions within corporate governance.
Drafting is an internal technical and administrative act carried out by the directors. Its purpose is to prepare and present a technical document that reflects the company’s accounting and financial reality, in accordance with applicable accounting principles and regulations.
Approval, by contrast, is a sovereign legal act that belongs to the general meeting of shareholders, who are the ultimate owners of the share capital and who decide whether to accept and validate the document prepared by the directors. This approval gives the accounts their definitive and binding nature.
DRAFTING | APPROVAL | |
Concept | Preparation, drafting, and presentation of the annual accounts. | Review of the accounts, analysis of results, and decision on their approval. |
Competence | Management body | General Meeting of Shareholders |
Deadliness | 3 months from the end of the financial year | 6 months from the end of the financial year |
PROCEDURE | DEADLINESS |
Drafting of annual accounts | 3 months from the end of the financial year |
Approval of annual accounts | 6 months from the end of the financial year |
Filing with the Companies Registry | Within one month from the date of approval |
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