Financial reporting obligations for limited liability companies (Accounting Directive) – frequently asked questions
European Commission - MEMO/13/540 12/06/2013
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Brussels, 12 June 2013
Financial reporting obligations for limited liability companies (Accounting Directive) – frequently asked questions
1. What does this new Directive cover?
As part of the Responsible Business package (see IP/11/1238), the Directive will reduce the administrative burden for small companies. To a certain extent, it will also improve the quality and comparability of the information disclosed.
2. What are the existing EU rules on accounting for limited liability companies?
A Directive for individual financial statements has been in place since 1978 (78/660/EEC), and one for consolidated financial statements since 1983 (83/349/EEC). These two Directives provide a complete set of rules for the preparation and content of statutory financial statements. They are often referred to as the "Accounting Directives". The new Directive merges and improves these two Directives. This change, together with the ”think small first” approach reflected in the Directive makes this EU legislation better adapted to the present and future needs of preparers and users of financial statements.
3. What are the main benefits of the new Directive?
Unnecessary and disproportionate administrative costs imposed on small companies hamper economic activity and impede growth and employment. The Directive simplifies the preparation of financial statements for small companies. It introduces the obligation for each Member State to distinguish small companies from larger ones. Small companies will be those with less than 50 employees, a turnover of not more than €8 million and/or a balance sheet total of not more than €4 million. Member States may alternatively use thresholds for turnover and balance sheet total up to €12 million and €6 million, respectively.
The Directive reduces and limits the amount of information to be provided by small companies in the notes to the financial statements. For small companies only a balance sheet, a profit and loss account and notes are to be prepared to satisfy regulatory requirements. Member States may also permit small companies to prepare only abridged balance sheets and profit and loss accounts. Any small company remains entitled to provide more information or statements on a voluntary basis.
The Directive requires that in cases where there is a single filing system, the information to be prepared by small companies be similar to the tax returns if a Member State so wishes.
There will be no EU requirement for small companies to have an audit. In case a Member State would nevertheless see the need for assurance, the new Directive will allow for a more proportionate approach.
4. Why now?
During the past 30 years, amendments to the Accounting Directives have added many requirements, such as new disclosures and valuation rules (including detailed provisions on fair value accounting). This has not only made the rules more complex and increased the regulatory burden for companies, but also sometimes made financial statements less comparable across the EU. The impact of these new requirements has been greatest on small and medium-sized companies, which are the backbone of the European economy and the main job creators in the EU.
5. What is the relationship of this new Directive with Directive 2012/6/EU on accounting requirements for micro-entities?
Directive 2012/6/EU on micro-entities has been faithfully incorporated into the new Directive. Micro undertakings are those with less than 10 employees, a turnover of not more than €0.7 million and/or a balance sheet total of not more than €0.35 million.
Micro undertakings will at least be protected against complexity as much as small companies are. In addition, the Directive permits a micro undertaking to prepare a very simple balance sheet and profit and loss account with virtually no notes, if a Member State wishes so.
6. How will companies benefit?
The "think small first" approach of this Directive will enable companies to prepare profit and loss accounts, balance sheets and notes that are more proportionate to their size and to the information needs of the users of their financial statements. This is made possible as more undertakings will be considered as small. In addition, the Directive encourages Member States to distinguish between micro- and medium-sized undertakings, with a view to ensuring that administrative costs are appropriate to their size.
More than 90% of EU companies will be in the small category for accounting purposes. This is more than today, but this better reflects the actual structure of businesses in Europe. As a result, many companies which are currently seen as large will observe a reduction in the amount of information to be provided by ways of notes when they fall in the small category. Notes will include between 8 and 13 items, compared to 14 to 24 items or plus today. Also, there will be no need to specify extraordinary items in the profit and loss, as a simple explanation where appropriate in the notes will suffice. Some companies may not observe such simplification, but will at least benefit from single filing systems. The degree of simplification will depend on the Member State in which a company is registered, and on the situation of each company.
7. In which Member States will the effects be most significant?
Companies will experience benefits in many Member States, including Belgium, Bulgaria, Cyprus, the Czech Republic, Estonia, Finland, France, Greece, Hungary, Ireland, Latvia, Lithuania, Malta, Poland, Portugal, Romania, Spain, Sweden and Slovakia.
In addition, as the net turnover and balance sheet total thresholds will also be increased in line with inflation (they were last increased in 2006), more companies will be categorised as small in all Member States, and some large companies that currently exceed the thresholds only marginally will be re-categorised as medium-sized in the Member States where this category has already been recognised in national law (Austria, Cyprus, Germany, Denmark, Spain, Ireland, Luxemburg, Malta, The Netherlands, Slovenia and the United Kingdom).
8. Why will small groups be exempted from preparing consolidated financial statements?
Requiring the parent company of a small group to prepare consolidated financial statements, in addition to its individual financial statements, adds a considerable administrative burden. This is especially the case when only a small number of users is interested in the performance and financial position of a small group.
In fact, most Member States have already adopted an option into their national legislation that exempts small groups from preparing consolidated financial statements. Only Estonia, Greece and Romania do not currently use this exemption.
9. Why merge the Directives on individual and consolidated financial statements?
There were many cross-references between the two old Directives, so merging them is a logical step. Furthermore, in the public consultation on the review of the Directives, there was strong support for such a measure on the grounds that it would provide clarity, consistency and coherence to the accounting framework for non-listed companies. The old Directives dated from 1978 and 1983 respectively and, in any event, needed to be modernised and simplified.
10. Is action at European level really necessary? After all most SMEs do not even operate cross-border.
It is true that most EU micro companies have limited cross-border activities. However as companies become larger, they are more likely to expand across borders. Having a more harmonised accounting regime within the EU facilitates that process.
11. Will this not lead to fragmentation of the Single Market?
On the contrary, this Directive strengthens the cohesiveness of the Single Market. By keeping financial statements comparable, clear and easy to understand, cross-border activities are facilitated. This allows companies to find further funding outside their home Member States. The simplified regime for the smallest companies (micro undertakings) is not expected to have much impact on the Single Market, given that these firms generally operate at a very local level.
12. How are IFRS and IFRS for SMEs linked to this Directive?
IFRS (the International Financial Reporting Standard) for small- and medium-sized enterprises was published by the International Accounting Standards Board1 in 2009 in order to meet the specific accounting needs of companies that are not publicly accountable (SMEs in IFRS terminology). When examining the various policy options available to replace the old Accounting Directives, the Commission examined and rejected the option to adopt the IFRS for SMEs at EU level. The Impact Assessment concluded that introducing the IFRS for SMEs would not appropriately serve the objectives of simplification and reduction of administrative burden. For instance, the Directive does not require preparation of a cash flow statement, whereas this is mandatory under the IFRS for SMEs.
Nevertheless, Member States are able to permit or require the IFRS for SMEs as their accounting standard for all or some of their unlisted companies provided that the Directive is fully implemented and the standard is modified to comply with any accounting requirement of the Directive that departs from the IFRS for SMEs. In order to comply with the simpler regime introduced by this Directive, IFRS for SMEs may be available only as a voluntary option for small companies in jurisdictions where the standard is used.
13. The Commission has brought forward a legislative initiative on a common consolidated corporate tax base (CCCTB). How does this new Directive fit with this initiative?
The CCCTB rules would not affect the preparation of individual or consolidated financial statements. The harmonisation proposed under the CCCTB (see IP/11/319) would only involve the computation of the tax base. Therefore, Member States would be able to maintain their national rules on financial reporting as derived from the Directive, and the CCCTB system would introduce autonomous rules for computing the tax base of companies.
14. Why would the proposal not introduce electronic filing tools such as XBRL?
When preparing the proposal, the Commission considered whether to mandate the preparation of financial statements under an electronic format such as XBRL2, for all EU limited liability companies. Whilst it is still worth considering a broader use of electronic solutions in the EU, it appeared neither necessary, nor proportionate at this stage to mandate the adoption of XBRL or similar formats for all EU companies.
However, for companies listed on a stock exchange, for their investors and competent authorities, a harmonised electronic format for reporting would be very beneficial, since it would make reporting easier and facilitate accessibility, analysis and comparability of annual financial reports. The European legislator has therefore agreed in the context of the Transparency Directive (see MEMO/13/544) to mandate that from 1 January 2020 all annual financial reports shall be prepared in a single electronic reporting format. The European Securities and Markets Authority (ESMA) should develop the necessary draft regulatory technical standards to specify the electronic reporting format, with due reference to current and future technological options and submit them to the Commission at the latest by 31 December 2016. It will carry out an adequate assessment of possible electronic reporting formats, conduct appropriate field tests and do a cost-benefit analysis.
15. Why prevent public interest entities (PIEs) from the benefits of any simplification?
PIEs (typically listed companies, banks and insurers) take money from the public at large, and there needs to be a high degree of transparency around their performance and financial position to allow fully informed decisions to be taken by members of the public before dealing with such an entity. Accordingly, the simplified and reduced accounting requirements for small and medium-sized privately-owned companies are considered inappropriate for PIEs.
16. What about "Banking" and "Insurance" Accounting Directives? Why are they not in the package?
The “Banking” and “Insurance” Accounting Directives build on the principles of the original Accounting Directives, introducing specific requirements for the financial statements of banks and insurance companies. Changes in the Accounting Directive have similar effects on the accounting formats used by banks and insurance companies. The new legislation includes a correlation table that allows users of the "Banking" and "Insurance" Accounting Directives to identify specific changes which would have consequential effects on these two Directives. This is also the case for other Directives that cross-refer to the original Accounting Directives.
See also MEMO/13/541 – New disclosure requirements for the extractive industry and loggers of primary forests in the Accounting and Transparency Directives (Country by Country Reporting)
See also MEMO/13/544– Transparency Directive
Based in London, the International Accounting Standards Board or IASB is an independent, not-for-profit private sector organisation working in the public interest. It is responsible for developing the International Financial Reporting Standards International Accounting Standards and promoting the use and application of these standards
XBRL stands for "extensible Business Reporting Language", a global standard for exchanging business information electronically.