What is the difference between an annual financial statement and a social report?

The difference between an annual report and a social report is mainly the subject of the reporting.

As we know, financial statements are documents in which an entity (private, public or nonprofit) reports the results achieved in the year just filed. They are therefore a valuable tool for reporting on its operations and for redefining its development strategy and activities from a forward perspective.

The distinction between the two types of report discussed above lies in the subject under examination. While the annual financial statement exclusively focuses on the economic and financial aspect, the social report also considers other social, environmental and governance aspects.

For a deeper understanding of the difference between these two types of financial statements, let us examine each in more detail.

Financial report

The annual financial statement comprises the set of accounting documents that the business is required to prepare each year in accordance with the law.

Parties required to prepare annual financial statements mostly operate in the private sector, namely:

• Limited liability companies;
• Joint-stock companies;
• Companies with unlimited responsibility;
• Cooperative companies;
• Foreign companies headquartered in Italy;
• EEIG (European Economic Interest Groupings);
• Consortia with and without “confidi” status;
• Business network contracts;
• Special companies and local authority institutions;
• Innovative startups.

The purely economic nature of the annual financial statements can also be guessed from the names of the documents of which they are composed: balance sheet, income statement, cash flow statement, and notes to the financial statements, although some entities are exempt from preparing the last two documents (e.g., micro enterprises).

Specifically, Article 2423 of the Italian Civil Code states: “The statement must be drawn up clearly and give a true and fair view of the company’s financial position and performance for the year.”

This illustrates the three cardinal principles that characterize the financial statement: clarity, truth and fairness. Adherence to these criteria is of paramount importance, because the reading and interpretation of the information transcribed in the financial statements decisively influence the behavior and choices of stakeholders toward the company.

Consider investors, for example. The tool for evaluating whether or not to invest in a particular company is the data reported in the annual financial statement. It is not only compiled in response to obligations under the Civil Code, but also to meet the demand for transparency from entities within and outside the company.

Customers, employees, suppliers, government agencies, and shareholders are just some of the parties entitled to know the company’s financial and economic situation.

Although the annual financial statement continues to be a crucial tool for the purpose of objectively assessing a company’s health, recently there has been a growing awareness that it is not enough to only examine economic data, since other aspects must also be analyzed.

This axiom is especially true for all entities which, unlike traditional companies, pursue purposes other than profit. These entities are required to prepare an additional type of report: the social report.

Social report

Unlike the annual financial statement report, the social report also reports on the organization’s non-financial aspects.

The parties required to prepare this type of financial statement are different from those mentioned above. The social report is a tool pertaining to entities belonging to the third sector, specifically Third Sector Entities (ETS) with revenues over €1 million, volunteer centers, social enterprises and social cooperatives.

A further distinction from the annual report concerns the structure of the document. The social report is a single document that compiles data of various kinds such as:

• structure, governance and administration of the organization;
• people who work within it;
• goals and activities;
• financial situation;
• methodology used to prepare the financial statement.

Although the obligation to provide clear, true and fair information is also reiterated here, given the special nature of these entities, the principles that distinguish the drafting of the social report are primarily neutrality and third-party autonomy.

In fact, ETSs engage in non-profit activities in the general interest; so their purpose is not profit, but generating a positive impact in a particular area of society (e.g., education, health, environment, etc.).

In addition to meeting legal obligations, the social report is also prepared with the aim of informing stakeholders about the activities performed, how resources are used and the effects generated. In this case, however, the common benefit purpose highlights the ability (and intention) of these entities also to generate an impact on parties that are not directly involved. This is why it was deemed necessary to establish a more detailed form of reporting than merely economic and financial reporting.

The extension of mandatory financial reporting to nonprofit entities has sparked multiple questions, including the one discussed here: how to prepare a social report and why it should be translated. Once the report has been properly prepared, a growing number of entities are considering whether it is worth translating it into another language.

There is no doubt that translating a report, whether financial or social, always brings benefits, because it demonstrates the good intentions of the company that prepared it, makes it easier for all stakeholders to read, and allows the company to also raise its profile outside its immediate network.

While translating the annual financial statement makes it possible to understand and analyze the economic and financial situation of a company or other entity, translating the social report opens up a world of insights into the deep-seated reasons why an organization engages in its activities and at the same time allows one to assess whether or not the impact generated is commensurate with the efforts made.

At Way2Global we have been involved in the translation of every form of reporting (financial and sustainability) for more than 30 years. Thanks to our international network of native-language translators specializing in the financial sector, we translate financial statements as well as social reports.

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