Denmark's new accounting law brings significant changes for businesses

The new Danish Accounting Act introduces some very significant changes that will significantly affect how accounting will be done in the future. One of the most significant changes included in the law is the requirement to keep accounting records digitally rather than traditionally, using a suitable, trusted system. The reason why companies registered in Denmark are required to keep accounting records in electronic form is that such a solution ensures much greater accuracy and avoids many mistakes - and even if any irregularity occurs, it is immediately caught and can be corrected. In addition, Danish companies must now also keep the original accounting documents for up to five years after the end of a given financial year.

Another important change that should not be forgotten is the introduction of completely new rules for simplified accounting. The new law allows small Danish companies to use the simplified accounting method if they meet certain criteria, of course. These criteria include having a turnover of less than DKK 50 million and fewer than 10 employees. This change will not only make accounting easier for small businesses, but will also reduce their administrative burden and costs.

The new law also strengthens the independence requirements for auditors who operate in Denmark. Auditors are now absolutely prohibited from owning any shares in the companies they choose to audit. This requirement is primarily aimed at eliminating any conflicts of interest that might arise and maintaining auditor independence, which is extremely important.

The Danish government has recently made some pretty big changes when it comes to tax accounting, made possible by a new law. From now on, all companies in Denmark have to share much more different kinds of information about their taxes, such as, for example, their tax identification numbers and where they pay their taxes. This is mainly to make it more difficult for companies to cheat on their taxes and to increase general honesty and openness.

Preparation and execution of accounting records

The entire process of what accounting records should look like for Danish companies is covered in detail in the latest Accounting Act. It covers very different aspects, such as definitions and general requirements, as well as the exact rules related to recording business transactions and retaining all accounting evidence. This article provides a detailed overview of the latest key changes to this law.

Special considerations for small enterprises and electronic bookkeeping mandates
The Danish Bookkeeping Act applies to all types of businesses operating in Denmark, regardless of their ownership or liabilities. Some new provisions, however, may not apply to small businesses that are not required to present an annual report according to reporting classes B-D and have a net revenue of DKK 300,000 or less for two consecutive years. Net revenue is defined the same way as in the Danish Financial Statements Act. The new provisions mostly relate to digital accounting requirements.

Extent and explanations of terms

The rules about what counts as accounting records have been expanded. According to the Danish Bookkeeping Act, accounting records are documents that support the information found in the Financial Statements. For example, if a note in the Financial Statements says how many employees a company has on average, there must be documentation supporting that number. Other disclosures in the notes also need supporting documentation, which counts as accounting records. For instance, if the company needs to calculate the fair value of assets listed in the balance sheet, that calculation needs documentation and must be stored for five years.

The Management Commentary and estimates made during the preparation of the annual report also count as accounting records. When companies prepare their annual reports, they make estimates and assessments, such as determining how much money they might not collect from customers who owe them. Documentation of these estimates and assessments also counts as accounting records under the Danish Bookkeeping Act. The same applies to information found in the Management Commentary, like future plans or expected expenses. The documentation should be good enough to let someone recreate or recalculate the information if needed.

Explanations of procedures and methods

In the old bookkeeping law, companies were required to describe their systems and processes for bookkeeping. But, this requirement has been changed a lot in the new Danish Bookkeeping Act.

Under the new Bookkeeping Act, companies need to describe the following:
How they make sure that all transactions are recorded continuously.
How they make sure that accounting records are stored properly.
Which employees are responsible for these procedures.
This description is also considered a part of the accounting records and falls under the Danish Bookkeeping Act.

However, small businesses with an annual net revenue of DKK 300,000 or less and not subject to reporting class B - D (for example, reporting class A) do not need to prepare this description.

Keeping track of financial activities and verifying their accuracy

The Danish Bookkeeping Act requires companies to record all their financial transactions accurately and as soon as possible after the transactions occur. The frequency of recording depends on the size and complexity of the company and the number and value of its transactions.

The Act now also requires companies to reconcile their accounts regularly. This means making sure that all the financial information in the accounts is up-to-date and accurate so that the company can use it for things like tax reporting, VAT reporting, and financial statements.

Reconciliation means checking that the money in the company's bank accounts, accounts receivable (money that is owed to the company), accounts payable (money that the company owes to others), and other relevant financial information is all correct. However, it is not usually necessary to reconcile things like the value of the company's stock or investments for VAT reporting.

The act of keeping financial records

In Denmark, entrepreneurs are still required to keep the necessary accounting records from their company's operations for five years. In the past, there were also detailed regulations on how these documents should be stored, including the possibility of storing them electronically as well, and a specific place to store them. The new Danish Accounting Act, however, is much less detailed and simply requires companies to store accounting records as securely as possible and prevent their destruction, loss or misuse.

Due to the recently introduced new digital accounting regulations, Danish entrepreneurs must from now on keep records of all transactions and vouchers in digital-only form in their accounting system. Other accounting records can be stored digitally or in another form, at the entrepreneur's discretion. In addition, businesses must keep a backup copy of their digital accounting system with an external provider or third party.

Date of implementation

All the rules mentioned previously, as well as any new rules, will become effective on July 1st, 2022. However, this does not apply to the digital accounting rules mentioned in paragraph 2.

Necessities for electronic bookkeeping

Denmark's new Accounting Act, which came into effect only recently, has introduced a brand new measure that requires all companies registered in Denmark to completely digitize their business-related accounting. In practice, this means that Danish companies are from now on required to keep primarily digital records of their transactions and store them electronically, along with receipts and other important documents - meaning that physical, paper records are no longer required to be kept. In addition, the law requires Danish companies to use an appropriate, registered and approved digital accounting system to manage their finances.

Electronic bookkeeping system

Under the new Danish Bookkeeping Act, enterprises are now required to use a digital accounting system in the form of a digital service or software (a bookkeeping program) that meets specific requirements outlined in the Act and related executive orders. This accounting system should only include the accounting system and not other systems used by the enterprise, such as an inventory module or a staff and payroll system.

Providers of digital accounting systems must ensure that their systems meet the requirements outlined in the legislation and are approved and registered by the Danish Business Authority. Existing providers must meet the new requirements and be registered by 1 July 2023.

Enterprises can also develop their own accounting system or use one developed by a group they belong to, such as a foreign parent company. However, such systems must also comply with the requirements of the Danish Bookkeeping Act for a digital accounting system, and enterprises are responsible for ensuring their own systems meet these requirements.

Digital accounting

According to the latest Accounting Act, Danish companies are now required to keep primarily digital records of all business transactions carried out and store them in a suitable, trusted digital accounting system. This means that all companies registered in Denmark should have access to an accounting system that has been previously approved by the Danish Enterprise Authority or meets all the requirements that are listed in the latest Accounting Act.

The records and vouchers can be stored on a server within the business or with an external provider. However, it is mandatory to have at least one complete backup copy of the records and vouchers stored externally on a server with a provider or a third party.

When filing their annual report with the Danish Enterprise Authority, businesses must provide information such as the name and CVR number of the provider of the digital accounting system they use. If a particular business uses a system that is not registered with the Danish Enterprise Authority, it must necessarily report this fact to the authority.

The Danish Accounting Act now makes it mandatory for businesses to use a primarily digital accounting system to record and securely store all their transactions. Entrepreneurs must carefully ensure that the system they use has been approved by the Danish Business Authority or meets all the requirements of the Act, and they must have at least one full backup copy of all their records and vouchers stored at an off-site location.

Small businesses that are not obligated to maintain financial records

Small businesses that fall under reporting class A, with an annual net revenue of DKK 300,000 or less, and have remained in that category for two years in a row, are not required to apply a digital accounting system or keep digital records of transactions and vouchers.

However, if a business exceeds a net revenue of DKK 300,000 in two consecutive years, they will be required to follow the rules of the Danish Bookkeeping Act and apply a digital accounting system in the following year.

It is important to note that the limit of DKK 300,000 may be subject to change through political negotiations in the future.

Issuing electronic invoices

In the future, it is envisioned that Danish companies may be forced to use e-invoicing for purchases and sales as well. The Danish Accounting Act has been updated to, among other things, allow the Minister of Business and Industry and the Minister of Taxation to create appropriate regulations to make e-invoicing mandatory for companies. But for the time being, it is not yet absolutely mandatory. However, the law already requires digital accounting systems to support e-invoicing.

The delegation of accounting tasks to an external company
If a company also does accounting for other companies (such as an accounting agency or auditing firm), it must also follow exactly the same rules for using approved digital accounting systems. This includes recording transactions digitally and storing records and receipts digitally. These rules apply even if they are doing accounting for someone else's company.

Date of entry into force

Official requirements for the use of various types of digital accounting systems, which involve, among other things, recording transactions carried out by a company and storing all records in digital form, apply to different types of companies at different times. The start date of these requirements depends primarily on the type of business. For companies that only need to provide annual reports, such as limited liability companies, partnerships and limited partnerships, the regulations can be expected to take effect no earlier than July 1, 2024.

For businesses that don't have to keep books because their net revenue in two consecutive years is less than DKK 300,000, the rules will take effect no earlier than July 1, 2026. However, there may be different start dates depending on the revenue limit, and this will be determined through political negotiations. Businesses that don't have to keep books are usually those that don't have to present an annual report under the rules of reporting class B-D. These are usually businesses in reporting class A.

Other regulations

The Danish Business Authority has been given more power to monitor and regulate businesses' accounting systems and records with the new Danish Bookkeeping Act. If a business fails to provide their accounting records for inspection, the Danish Business Authority can now conduct a review even if the business has not submitted their first annual report.

Under the new Act, the Danish Business Authority can also inspect the digital accounting systems used by businesses, including systems that are not registered with them. The providers of digital accounting systems can also be inspected by the authority.

Businesses that do not comply with the new Act will face harsher penalties, including mandatory dissolution and higher fines.