Comments from ACCA
This paper sets out the position of the Association of Chartered Certified Accountants (ACCA) on the ideas set out in the Commission's consultation paper on the review of the accounting Directives.
ACCA is a professional accountancy body which is based in the UK but operates internationally, We currently have over 130,000 qualified members in more than 100 countries around the world. A high proportion of our members, particularly those in the UK, work in the SME sector, either as accountants and managers in businesses or as accountants in public practice providing services to SMEs. Consequently, ACCA has a particular interest in, and experience of, the application of accounting rules and practices to SMEs.
Our responses to the specific consultation questions posed in the paper are set out later on. But we begin by summarising our position on the consultation issues and making some general points about the review.
Summary of ACCA's position
- There are good reasons why a review of the Directives should take place. But the effectiveness of the review should not be limited in advance by self-imposed time and scope constraints. It should be borne in mind that any regulatory changes, however minor, can impose compliance costs on businesses. With this in mind, unless it can be reasonably concluded that meaningful progress in favour of companies is possible on the terms of the present review, the exercise should be deferred until a later time when it can be given a wider scope and more time.
- The review needs to acknowledge the implications for EU law of developments in international accounting practice, in particular the standards issued by the International Accounting Standards Board (IASB). It is desirable, in our view, that the Directives are not inconsistent, in technical respects, with the provisions of international financial reporting standards (IFRS). A thorough review of the Directives should also consider the potential for simplification of adopting IASB's standard for NPAEs as the future legal benchmark for SMEs in the EU.
- The test for deciding whether changes to the Directives should be made on this occasion should be whether they have real potential for reducing the administrative ‘burden' on companies themselves. Simply amending the way the legislation is presented, without achieving any reduction of actual ‘burden', would be ineffectual.
Scope of the consultation
We would agree that, given the age of the Directives, the many amendments that have been made to them, and the various non-statutory developments in company reporting that are currently taking place, it is reasonable to discuss whether the text of the Directives needs to be amended and updated.
But as the Commission itself admits, the consultation on this issue is being conducted on a rushed basis and its scope is restricted because of self-imposed time constraints. As a result, the review process is limited to discussing questions of detail rather then the wider picture and underlying legislative principles. We do not consider that this is an appropriate way to conduct the reform of legislation since it can only result in short-term changes which will not affect the wider reservations expressed in the consultation document about the continuing fitness for purpose of the Directives. Further, it will not defer the need for a real discussion about these matters in the future. If there is indeed a genuine concern within the Commission and the Parliament about the current state of the Directives, then there needs to be a through review, conducted in accordance with the standard rules of procedure, in which all matters of principle and detail can be discussed. In our opinion, such a review should consider the application of accounting and reporting rules to all companies that are currently subject to the Directives, including the proposed new category of ‘micro' company.
The scale of the burden of the accounting Directives
The consultation paper repeats the claim made by both the Commission and the European Parliament that the accounting Directives are ‘often very burdensome for small and medium sized companies, and in particular for micro entities.' We dispute that the compliance ‘burden' in this area is a material one, and one which causes serious difficulties in practice. The derogations available to SMEs under the Directives mean that the compliance and disclosure requirements are already modest. Further, research studies regularly show that SMEs face many other legal requirements, both stemming from EU and national law, which are considered by them to impose a much more substantial burden then the 4 th and 7 th Directives. Evidence suggests therefore that the current accounting and disclosure rules are seen by SMEs as a reasonable price to pay for the privilege of limited liability.
In this connection it should also be borne in mind that the choice as to whether to operate as a limited company or as an unincorporated business always rests with the business concerned. If any small business considered the accounting and reporting requirements in the accounting Directives to be too high a price to pay for limited liability it could always opt to trade as an unincorporated business, and then be free of all company law obligations.
In this connection we would point out that, in a survey of ACCA members in the UK, conducted in March 2009, 59% of members said that the options for the reform of the structure of accounts, as outlined in the consultation paper, would bring no benefits to them and their businesses/clients. A summary of the results of this survey is set out as an appendix to this letter.
The purpose of the rules on accounting and reporting
There is a suggestion running through the Commission's thinking on this issue that the compliance burden for the reporting company is the principal factor that should be taken into account in deciding which of the current rules should be removed. This has been the key consideration in the adoption of the Commission's policy with regard to ‘micro' companies.
We feel it needs to be reiterated that the purpose of having rules on accounting and reporting for limited liability enterprises is not to impose a regulatory burden on companies for its own sake but to provide a degree of protection for those shareholders and third parties (and prospective shareholders and third parties) who take the risk of becoming involved with a limited company. Providing this protection is important because those who trade under the protection of limited liability will invariably not be financially responsible on a personal basis for the debts of their businesses: accordingly, a degree of accountability and disclosure helps compensate third parties for the risk of investing in or trading with limited companies. This principle is acknowledged in the first recital to the current Fourth Directive and in article 44 of the Treaty of Rome itself. In fact, both those provisions speak not only of the importance of protecting shareholders and third parties – especially creditors - but of co-ordinating national provisions on this matter. We believe this rationale needs to be retained and re-iterated in any revision of the Directives. The creation of the European Private Company (SPE), and the draft SPE Directive's referral to national law on the subject of accounting, makes it especially desirable that there remains a high level of pan-EU co-ordination as regards accounting rules (for companies above the ‘micro' size category at least).
Thus, the reform process needs to consider not just what would serve the administrative and commercial interests of reporting companies but what changes might be possible which would make the reporting of financial information more useful to shareholders and third parties (and also, perhaps, to the reporting company itself). And in looking for ways to help SMEs become ‘more competitive', it should be borne in mind that a company which is financially well managed, and can demonstrate that via its published accounts, is likely to be in a better position to retain customers and attract new ones than one which is not.
The proposals for modernisation
Qualitative characteristics (para 4.1)
Q1 - We agree that the recognition and measurement principles referred to in paragraph 4.1 of the paper should be retained. The proposal to group them together in one place seems sound. But it needs to be acknowledged that taking this step would serve only the interests of simplifying the presentation of the legislation – it would have no practical impact on companies themselves.
(ii) ‘Think Small First' (para 4.2)
Q3 - We agree with the logic of the Think Small First approach, and there may be some merit in incorporating a provision in the revised Directive to encourage member states to adopt this approach in their national law (and also to adopt the current member state options as far as they feel it right to do so).
But we do not see that re-structuring the disclosure rules in the Directive in line with the Think Small First principle would make any significant difference unless those derogations which are currently optional for member states and companies were made compulsory. The rules in the Directive after all are not directly applicable but need to be transposed into the laws of the various member states. It is currently perfectly possible for member states to set out in their own legislation accounts formats for small and medium sized companies which incorporate the exemptions which have been adopted in their country for those types of company. We think it is a good idea for member states to do this but it is not something that they cannot do already, as the UK and Denmark have shown.
(iii) Member state options (para 4.3)
Q5 – The answer to this question is best provided by individual member states.
Q6 - The results of the research cited by the Commission in the consultation paper appear to demonstrate that significant cost savings could be made by companies within the existing framework of the Directive, i.e. without the EU making any new reforms at all. We would support the idea of encouraging member states to consider taking advantage of the various options but do not think that it should be made compulsory for them to do so. In particular, we do not see it as being reasonable for the EU to insist that no ‘small' company should be required by national law to have its accounts subjected to external audit. We reiterate that reducing reporting costs for companies should not be seen as necessarily more important in this exercise than meeting the legitimate information needs of shareholders and third parties. If member states consider that those information needs outweigh potential cost savings to reporting companies, that view should be respected.
Criteria and threshold levels (para 4.4.1)
Q7 - Subject to a comment below about medium-sized companies, we do not see any advantage in changing the current company band criteria and threshold levels. In our experience the ‘ 2 out of 3' approach has worked reasonably well and we see no need for it to be dispensed with.
Number of company categories (para 4.4.2)
Q9 - The proposed addition of the ‘micro' company category would add a fourth band of company to the small, medium-sized and large categories that currently exist. We think this would be a suitable time to consider the position of the ‘medium-sized' category.
We do not think it would be appropriate to merge the medium-sized category with the ‘small' category'. The regulation of the latter group needs to remain focused and in proportion to small companies' size and likely level of stakeholder engagement, and it would definitely not be appropriate to allow limited companies with turnover of up to 35 million euros to operate without an independent audit.
Abolishing the medium-sized category and merging the companies within that band with the ‘large' category would be a better option. It would not, in our view, impose a material amount of new burdens on the companies affected. The principal derogations currently available (to member states) in respect of medium sized companies are as follows :
- they can avoid disclosing a figure for net turnover.
- they do not have to disclose information, in the notes to their accounts, on turnover grouped by segment, on related party transactions, and on off-balance sheet transactions.
- (In some circumstances) they do not have to disclose details of fees paid to their auditor for non-audit services
- they do not have to disclose information relating to non-financial KPIs in their business review.
- they can deliver slightly abridged versions of their accounts for publication purposes.
- medium-sized groups may be exempted from the requirement to prepare consolidated accounts (this is, arguably, the most significant of the derogations available to companies in this band).
We would take the view that the succession of upgrades of the size thresholds in recent years has led to a situation where many companies which fall into this category are of a very material size. As a consequence of this there is a strong argument that the information requirements which currently apply to larger companies should apply to ‘medium-sized' companies as well. In respect of the version of the accounts that is published, disclosing the additional information would not constitute a burden on reporting companies since that information will have been compiled and disclosed in their ‘full' accounts anyway.
We would therefore suggest eliminating the medium-sized category and including the 3% of companies that currently fall within its size thresholds within the category of ‘large' companies.
Elements of annual accounts (para 4.5)
Q11 - Given that small companies can already be exempted by member states from four of the six types of statement provided for in the Directive, there would not appear to be much scope for the further scaling down of the requirements for such companies. If there is one document which is of least importance to users of accounts it is perhaps the annual report, which very often, in the case of smaller companies, contains a small amount of standard, ‘boiler plate' information which remains static from year to year. While the names of the directors should still be disclosed in the financial statements, it is worth considering whether this report might be eliminated altogether for small companies.
In the ACCA survey already referred to, there was strong support for the retention of the status quo as regards the two primary financial statements but also significant support for change in other areas, as follows:
- 70% said there should be no change in the structure of the balance sheet
- 64% said there should be no change in the structure of the profit and loss account
- 62% said there should be a reduction in the amount of information disclosed in the notes
- 51% said there should be a reduction in the amount of information disclosed in the annual report.
Q12 - With regard to the idea of requiring a cash flow statement, we think that that is an interesting idea since it would ensure that information produced for the annual statutory accounts was of demonstrable practical use within the business, would be clearly understandable to business owner-managers and would have the additional virtue of meeting the likely information needs of third parties such as prospective lenders of finance. Widely-used accounting software makes preparing cash flow statements simple and straightforward. But if the object of the current exercise is officially restricted to reducing existing ‘burdens' and simplifying existing legislation, it would not seem logical to think about introducing a new reporting requirement . This is in fact a good reason why a wider re-think about the accounting and reporting rules is called for.
Q13 We would prefer that the Directives did not specify formats for the cash flow statement in any more detail than the three headings suggested in the consultation paper. Even these may be superseded in international standards if the proposals contained in the IASB/FASB discussion paper 'Presentation of financial statements' were to be enacted.
Publication requirements (para 4.6)
Q17 - There would be no regulatory benefit to companies from removing the current requirement for accounts to be published. The primary cost of annual accounts is related to their preparation, and any additional cost relating to their publication is likely to be negligible. Where additional publication costs are imposed then those will be imposed at the behest of the national government concerned and will not be the responsibility of the EU. Requiring companies to publish their accounts also acts, in our view, as a very significant regulatory incentive to companies to ensure that they fulfil their obligation to prepare their accounts in the first place. We consider that the very fact that a company has published its accounts, and within the time allowed for doing this, is a prima facie indicator of good financial management practice; conversely, if a company has not published its accounts, or is late in doing so, that fact may serve to indicate to third parties that the company concerned has problems. Thus the consequences of not requiring companies to publish their accounts would be to deprive stakeholders of potentially useful information about the affairs of limited companies and, potentially, to undermine standards of financial management in smaller companies.
Q18 - It is true that the current option for small companies to publish not their ‘full' accounts but ‘abridged' accounts means more work (and cost) for those companies that choose to take advantage of that option. But the answer for companies that do not wish to assume any of those extra costs is already available to them – they can decide simply to file their full accounts, rather than a separate set of abridged accounts which have been prepared specially for the purpose of filing. To approach this ‘problem' from the other side would reduce still further the information that small companies are required to disclose in their full accounts.
Q19 – There is no separate cost to companies for publishing their accounts (other than those that may be imposed at the national level).
Q20 – We support the concept of one report to government, filed electronically, which could be used for multiple administrative purposes. XBRL and similar systems are designed to enable this.
Q21 - There is little point in creating an XBRL taxonomy at the EU level because member states add many further requirements and there are many options in the Directives that the taxonomy would have to allow for, not all of which a company could use because they had not been taken up in its member state.
Layout requirements (para 4.7)
Q22 – The argument for retaining prescriptive formats is that they facilitate the co-ordination of disclosures across national borders. We believe the Directives should contain such formats. That being said they do present a potential problem with respect to compliance with IFRS. The current formats might, in particular, become incompatible with, say IFRS for non-publicly accountable entities (NPAEs) at some point in the future, if the plans in the IASB/FASB discussion paper 'Presentation of financial statements' are enacted. With this prospect in mind, we consider that the EU should look to the long term and consider making provision for companies to follow the presentation rules in IFRS instead of those in any amended version of the Fourth Directive.
Q23 - We do not see that the reduction of the number of accounts formats would bring any benefit or burden reduction to companies themselves.
Q26 – The advantage of having the financial statements in their traditional format is that they set out financial information in a logical and continuous pattern, which makes the statements as whole much easier to understand, for accountants and other users alike. Further, the essential character of financial statements in their traditional formats is their ‘completeness' – a list of key figures, on the lines proposed in the paper, may not cause companies to disclose significant ‘other items'. Key figures would, moreover, achieve no reduction in the administrative burden since, to disclose them, it would first be necessary to prepare the full accounts anyway. The ACCA survey of members in the UK found 86% of respondents preferred the formats as they are.
Q27 – We support the removal of the lines for extraordinary items as this is a term that should not be used under IFRS. There is sufficient flexibility in the formats in the Directives to allow companies to add line items to show unusual or infrequently recurring items of income or expenditure.
(ix) Notes to the accounts (para 4.8)
Q29 – We agree that the current list of disclosures in the notes should be looked at with a view to shortening it, at least with regard to small companies, and a suitable list of essential disclosures in the notes for such companies should be created. NB the suggested list under para 4.8 contains provisions (e.g. on disclosure of non-audit fees) which go beyond current requirements. With respect to large companies, however, reducing required disclosures would be inconsistent with demands that have been made in the wake of the banking crisis for more disclosure, not less.
(x) Valuation issues (para 4.9)
Q32 – We consider that the current provisions are reasonable and serve the interests of smaller companies.
Creating one Directive
Q34 - Merging the Fourth and Seventh Directives would serve the interests of EU simplification although by itself it would have no substantial effect on the rules as they apply to individual companies.
Future role of the accounting Directives
We consider that a full discussion of the future role of the accounting Directives should address two points in particular.
Firstly, the Directives as they are currently framed focus solely on the form and content of companies' annual financial statements. There is no requirement for companies to keep underlying accounting records or to put in place adequate financial controls (matters which EU countries are obliged to address by international agreements such as the OECD Convention on Bribery). Nor is there any attention to the management and disclosure of business cash flow – in practical terms a highly significant indicator of a company's financial well-being. Potentially, therefore, the Directives could be re-drafted so as to provide a more comprehensive framework of regulatory rules on the way that company financial affairs are managed.
Secondly, international accounting practice continues to be harmonised around the standards issued by IASB. At the listed company level, companies in the EU are already required to comply with IFRS (as endorsed for EU purposes) under the IAS Regulation. Significant developments are taking place in many countries to acknowledge IFRS as the global benchmark of financial reporting. In the near future, IASB will publish a new document which will set out accounting and reporting standards for the world's non-listed companies (of which the vast majority will be SMEs). Given the increasing harmonisation of practice at the international level – as opposed to a national or regional level – it seems sensible to consider the possibility that the new IASB standard could be recognised for the purpose of establishing legal disclosure requirements for EU companies. We would still expect EU legislation to identify the fundamental principles which company accounts should reflect (including the requirement for accounts to give a true and fair view) but thereafter companies could simply be expected to comply with the detailed provisions of the IASB standard.
Appendix – principal results of ACCA survey, March 2009
The survey took the form of a questionnaire sent to all ACCA members based in the UK (c30,000). Thus the sample included members both in public practice and in business, and members in practising firms and businesses of all sizes. The questions asked were based on the consultation questions posed in the consultation paper.
- 12% of the responses were from members in listed companies; 88% were from non-listed companies.
- 48% of respondents were from businesses with turnover of 1 million euros or less (the proposed turnover range for micro companies), 19% were from ‘small' businesses above the ‘micro' threshold, 13% were from medium sized businesses and 20% were from large businesses.
- 39% of respondents were from businesses with 10 or fewer employees; 18% had over 250.
The turnover thresholds for the different company categories
- when asked what should be the appropriate turnover threshold for the micro company, if introduced, 45% said that 1 million euros was appropriate.
- When asked about the current small company threshold, 64% said it was appropriate.
- When asked about the current medium-sized company threshold, 65% thought it was appropriate.
- 67% thought that the current balance sheet threshold figures were appropriate.
Member state exemptions
63% of respondents felt that the current approach, of including the various member state exemptions in the Directive, should continue.
Publication of annual accounts
80% of respondents thought that micro companies, if introduced, should be required to publish annual accounts.
88% thought that both micro and ‘small' companies should be required to publish annual accounts.
Structure of annual accounts
- 60% of respondents felt that businesses would not benefit from any change to the current structure of annual accounts as set out in the Directives; 22% thought they would.
- When asked what they would prefer to see happen as a result of the current review, 70% preferred to see ‘no change' in the balance sheet, 64% preferred to see ‘no change' in the profit & loss account, 55% preferred to see ‘no change in the consolidated accounts
- requirements. On the other hand, 62% said they would like to see reduced reporting requirements in the notes to the accounts and 51% said they would like to see reduced reporting requirements in the annual report.
On the matter of a minimum structure for accounting information, 86% opposed the proposal.
Cash flow statement
When asked about the idea of being required to prepare a cash flow statement, 49% said that it would not be a burden, while 46% said it would be a significant burden.