Brussels, 14 December 2011
Financial Reporting: burden reduction for micro-entities - Frequently Asked Questions
1. What is a micro-entity?
A micro-entity is a company which does not exceed at least two of the following three criteria: total assets of up to €350,000; net turnover of up to €700,000; and a maximum of 10 employees. These are companies included in the scope of the Fourth Directive (see question 2), typically companies with limited liability towards third parties. Approximately 75% of EU companies meet these criteria.
2. What are the existing EU rules on accounting for limited liability companies?
There have been Accounting Directives in place since 1978 for individual financial statements (78/660/EEC, often referred to as the "Fourth Directive"), and since 1983 for consolidated financial statements (83/349/EEC, often referred to as the "Seventh Directive"). These Accounting Directives provide a complete set of rules for the preparation and content of statutory financial statements by companies.
The European Commission decided that these rules needed to be revised because the Fourth Directive was too demanding for micro-entities, and the Commission made a proposal to amend it in 2009.
3. Why are micro entities dealt with separately from other companies within the scope of the Fourth Directive?
The reporting needs of micro companies are fundamentally different from those of larger companies. The users of these companies' financial statements typically do not need sophisticated accounting and extensive disclosures. Yet, and even though the Fourth Directive contains exemptions for small and medium-sized companies from certain requirements, micro-entities were until now still subject to basically the same rules as larger companies.
Complexity and the wide scope of the extant Accounting Directives' requirements have resulted in unnecessary costs and diverted resources from the core business activities of micro-entities. Consequently, the administrative burden on the very smallest enterprises has until now been disproportionate in comparison to larger enterprises.
4. What is to change under the revised Directive?
The revised Directive treats micro-entities as a separate category of company for the first time. Member States will be able to exempt them from certain accounting requirements, and therefore make their financial reporting simpler.
5. How is the administrative burden to be reduced?
A number of exemptions and simplifications will be available:
Member States will be free to allow micro-entities to draw up a very simplified balance sheet and profit and loss account along the lines specified in the Directive. It will be possible to reduce the information given in the balance sheet to the following items: subscribed capital unpaid, formation expenses, fixed assets, current assets, capital and reserves, profit or loss for the financial year, provisions, and creditors. It will be possible to reduce the information given in the profit and loss account to net turnover, other income, cost of raw materials and consumables, staff costs, value adjustments, other charges, tax, and profit or loss. Micro-entities will no longer have to provide a detailed breakdown of these items in the balance sheet.
Member States need only require very limited disclosure by way of notes to the financial statements by micro-entities as opposed to much more detailed disclosure today. Disclosures that will be required are now limited to (and only where relevant) own shares held, financial commitments and advances to directors.
Member States will be able, in addition, to relieve micro-entities from the obligation to calculate year-end accruals and prepayments in respect of certain types of expenses. To provide certainty and ensure greater comparability between micro-entity accounts, fair value accounting1 will be prohibited when micro-entities make use of the simplified regime.
Member States will also have the option to replace the current publication regime by a simple obligation for micro-entities to file the balance sheet information. Today, in many countries, micro entities have to send their balance sheet information to various bodies including the tax administration, the company register and statistical authority, in addition to publishing the information in a national gazette. Under the revised Directive, a single competent authority in the Member State can receive this information and act as a "one-stop-shop".
The simplified regime will not be available to micro-entities whose securities are admitted to trading on a regulated market, as shareholders in listed companies typically have sophisticated information needs.
6. Are the requirements in the new Directive compulsory?
The simplifications proposed by the new Directive are only optional. It will be up to each Member State to decide the extent to which they make use of the new possibilities offered.
It means that the Member States can decide to keep in full the current requirements of the Accounting Directives, or exempt micro-entities where that possibility now exists.
The Commission hopes that most Member States will see this as an opportunity to reduce the burden on the smallest companies within their jurisdiction. By aligning the micro entities' financial reporting requirements with other reporting requirements (such as tax reporting, for example) they can create a one-stop-shop and substantially reduce the reporting burden.
The Commission will monitor the changes made at Member State level, and will report on the effectiveness of the changes and the reductions in administrative burden before 2017.
7. How will companies benefit?
In the original Commission proposal for an outright exemption for micro-entities from all EU accounting requirements, the potential saving was estimated at around €6.3 billion (with a range from €5.9 billion to €6.9 billion). The amendments by Parliament and Council keep minimal accounting requirements for micro-entities and affect fewer companies than originally anticipated. Hence, savings will be a little lower than initially estimated.
8. Is bookkeeping abolished for micro companies?
No. Even though reporting obligations are considerably simplified, micro-entities will still need to keep the necessary books and records to prepare annual financial statements.
9. Will the accountancy profession lose out from these changes?
Simplifications will result in cost savings for micro-entities with, for example, less accountancy work. This may affect the revenues of accounting firms. However, there will be an opportunity for accountants and auditors to expand the other services they offer to these very small businesses.
10. What is the relationship of this Directive with the Commission's proposal in October 2011 to further revise the Accounting Directives?
This new Directive and the 2011 proposal are complementary. The 2011 proposal to further review the Accounting Directives aims, in particular, to create a new simple and harmonised regime for small companies (IP/11/1238). Such a regime would benefit not only small companies but also micro-entities. But this proposed regime, simplified as it is, would still be more demanding than the regime now envisaged for micro-entities in terms of the amount of information to be produced in the balance sheet, profit and loss account and notes, as well as in terms of publication requirements. With this new Directive on micro-entities, the Member States will be able to go further down the road of simplification for micro-entities if they so desire.
The rules on the financial statements of micro-entities will have to be integrated into the Commission proposal of 2011. The Commission antiticipates that this will be done during the inter-institutional negotiations on the 2011 proposal.
11. What are the next steps?
After formal approval by the Council, the Directive will enter into force following publication in the Official Journal, which is expected in early 2012. As the simplifications under the new Directive are only optional, no transposition period for Member States to implement it in their national legislation is required.
See also MEMO/11/912
Fair value accounting is a system whereby assets are typically shown at their market value in financial statements.