The European Commission has unleashed a package of business administration and financial reporting reforms.
The responsibile busines project aims to unify the fourth (78/660/EEC) and seventh (83/349/EEC) European accounting directives into a single framework, accompanied by proposals to introduce country-by-country reporting for extractive industries. More corporate responsibility reporting is on the cards as part of the commission’s related “social business initiative”.
Introducing the package, the commission said it had adopted “small first” as a guiding principle to lessen the administrative burden on European businesses. The proposed “mini-regime” would allow small firms to fulfil their statutory accounting requirements with a simpler profit and loss account, balance sheet and a limited number of accompanying notes. There would also no longer be an EU requirement for small companies to have an audit. The UK government has already signalled its intention to enact the reforms in this country.
“Simplifying the preparation of financial statements would also make these more comparable, clearer and easier to understand. It would also allow users of financial statements such as shareholders, banks and suppliers to gain a better understanding of a company's performance and financial position. Potential cost savings for SMEs are estimated at €1.7bn per year,” the commission claimed.
Under the proposed reforms, the increased disclosure requirements for medium-sized and larger companies would come into play more gradually to lessen their compliance burden. The company size thresholds used to grade small and medium-sized companies will be increased and harmonised across Europe.
The 30-year-old accounting directives have been due for reform for some time, particularly since elements of the IFRS for Small and Medium Enterprises (on which the UK’s FRSME is based) conflict with requirements in the existing directives in certain areas. For example, there is no requirement for a cash flow statement in the EU directives, while the statement is mandatory under the IFRS for SMEs and FRSME.
The commission decided against requiring the use of IFRS in its amended accounting directives, but left it to member states to determine how they would adopt IFRS for SMEs, once the new accounting directive has been amended to minimise any discrepancies.
Alongside these fundamental financial reporting reforms, the EU package includes:
- Country-by-country reporting required for listed and privately owned large companies active witin Europe in the oil, gas, mining or logging industries.
- Revision of the transparency directive to prevent investors from secretly building up a controlling stake in listed companies. Under the commission's proposal, investors would need to notify all financial instruments that have the same economic effect as holdings of shares.
- A communication on corporate social responsibility (CSR) setting out an internationally recognised definition of the concept and reporting guidelines.
- A Social Business Initiative to improve access to funding through EU structural funds and other sources of finance.
While some of the reforms are linked to Europe’s new Single Market Act, revisions to the accounting and transparency directives have been referred to the European parliament and Council of Ministers. The other ingredients of the commission’s reform package will rolled out over the next two years.
When the UK government first highlighted the proposals back in June, AccountingWEB members gave them a hostile response - particularly in view of the additional requirement HMRC introduced this year to file electronic statutory accounts in iXBRL format alongside Corporation Tax returns.
“No sooner have we tooled up for iXBRL than they abolish it,” quipped AccountingWEB member Carnmores, while laronde123 added: “Most micro business do not keep proper accounts and therefore without the assistance and overview of an accountant would not be able to produce accurate accounts.”
