EU proposal for new Accounting Directive
The European Commission recently announced a package of measures to support entrepreneurship and responsible business, part of the EU’s rolling simplification programme to reduce administrative burdens on business
EU proposal for new Accounting Directive
The European Commission recently announced a package of measures to support entrepreneurship and responsible business. The package includes proposals to repeal the Fourth Council Directive (78/660/EEC) of 25 July 1978 on the annual accounts of certain types of companies and the Seventh Council Directive (83/349/EEC) of 13 June 1983 on consolidated accounts (together referred to as “Fourth and Seventh Company Law Directives”) replacing them with a single new directive.
The proposed Directive forms part of the EU’s rolling simplification programme to reduce administrative burdens and its commitment to ensure the relevance, effectiveness and proportionality of its legislation. With a view to the achievement of that objective, the proposed Directive
• harmonises the thresholds for small and medium–sized companies, removing the Member State option to recognise different sizes of undertaking and, within limits, to fix applicable thresholds; and
• creates a new “mini- regime” applicable to small companies, involving reduced reporting requirements, further relaxation of audit requirements and the exemption of small groups from the requirement to prepare consolidated accounts.
Key Points
The Directive introduces a number of new requirements, some of which are applicable to small companies
• a requirement that large companies and “public interest entities engaged in the extraction of minerals, oil and natural gas deposits (together “Extractive Industry”) or in the logging of primary forests disclose material payments to Governments in each country where they operate;
• a requirement that large and medium-sized companies apply the “materiality” and “substance over form” accounting principles;
• a requirement that large and medium-sized companies prepare consolidated accounts in circumstances where one undertaking exercises a dominant influence over another or where the undertakings are managed on a unified basis;
• a requirement that all companies make provision in accounts based on their “best estimate” of future expenditure; and
• a requirement that all companies disclose guarantees, commitments, post-balance sheet events not recognised in the balance sheet and related party transactions.
The proposal removes the following Member State options:
• the number of permissible balance sheet layouts is reduced from two to one;
• the number of permissible profit and loss account layouts is reduced from four to two;
• the Member State option relating to “replacement cost” and “inflation” accounting for fixed assets is removed;
• the Member State option relating to the “last in first out” method of valuation of stock and fungible items is removed; and
• the Member State option to permit merger accounting and the immediate write off of goodwill to reserves is removed.
The main objectives of the proposal are:
• simplify accounting requirements and reduce the associated administrative burden (with particular emphasis on small companies);
• increase the clarity and comparability of financial statements of companies within the EU with a view to contributing to the better functioning of the single market, increased access to finance, reductions in the cost of capital and increased levels of cross-border trade and merger and acquisition activity;
• protect essential user needs by retaining necessary accounting information for users; and
• increase the transparency of payments made to governments by large companies and public interest entities engaged in Extractive Industry and the logging of primary forests.
Much of the proposed Directive remains the same in substance as the Accounting Directives. The most significant differences between the proposed Directive and the Accounting Directives are those identified in key points above.
Full details of new Directive can be viewed at the Commission’s website. Please see following link: http://ec.europa.eu/commission_2010-2014/barnier/headlines/news/2011/10/20111025_en.htm
This proposal is relevant to UK companies, their directors, shareholders, company secretaries, regulators, standard setters and advisors. We would welcome views on the proposal from all individuals and organisations with an interest in company financial reporting. Please send your comments at the earliest opportunity to Angela.Rabess@bis.gsi.gov.uk
