This article was first published in the March 2012 UK edition of Accounting and Business magazine
Four years after the idea was first proposed by the European Commission, the EU has finally agreed to introduce new, slimmed-down accounting rules for Europe’s ‘micro’ companies.
Under a compromise agreement between the European Parliament and member states, disclosure relaxations for the estimated 19 million such companies in the EU are set to come into effect over the next two years.
Since 1978, all limited liability companies in the EU have had to comply with the requirements in the EU’s Fourth Company Law Directive on the form, content and publication of annual accounts. All national laws governing these matters derive from the requirements of the directive. There have for many years been derogations from the standard rules for small and medium-sized enterprises (SMEs), but no further special treatment beyond this for very small entities.
With the new agreement, which technically amends the Fourth Directive, member states can provide for additional exemptions for companies that meet two out of the following three criteria on their balance sheet dates:
- turnover not exceeding €700,000
- balance sheet total not exceeding €350,000
- average number of employees in the financial year not exceeding 10.
Member states will be able to choose to exempt micro companies in their jurisdictions from a number of current provisions, including:
- the requirement to include in their balance sheets ‘prepayments and accrued income’ and ‘accruals and deferred income’
- the requirement to prepare notes to the accounts, provided that information on guarantee commitments, loans to directors and acquisition of own shares (in all cases if appropriate) is included at the foot of the balance sheet
- the requirement to prepare a directors’ report.
They will also be able to permit micro companies to adopt streamlined formats for their balance sheets and profit and loss accounts, showing, in the latter, only figures for turnover, other income, cost of raw materials and consumables, staff costs, value adjustments, other charges, tax and profit or loss. The amended directive states expressly that a set of accounts drawn up on this basis will be regarded as meeting the core test of giving a true and fair view.
Arguably the most interesting of the exemptions is the option to exempt micro companies from the obligation to publish annual accounts. Strong political pressure had been exerted, primarily by Germany, to spare micro companies what was presented as the ‘burden’ of publication. Under the amendment, member states may exempt micros from the existing publication requirement. But this must be on condition that the company’s balance sheet, complete with any required supplementary information, is filed – ie. not necessarily published – either with the country’s designated companies register or else with an alternative official authority designated by the country concerned (which could conceivably be the national tax authority). If the member state chooses to require filing with an alternative authority, then that authority will be required to ‘provide’ the register with the information filed.
This form of words opens up the possibility that the information filed by individual micro companies will not routinely be placed on the public record. Companies registers will need to record the information filed or otherwise provided but will not be obliged to then make it available for public inspection, as is the case at present. The alternatives open to member states are therefore either to choose to retain the existing practice of publishing micro-company accounts and making them available for public inspection, or to require registries to make micro-company accounting information available only on request.
The impact of the new amendment will be less than it would have been under earlier proposals from the Parliament, which would have exempted micro entities from reporting obligations altogether. Under the compromise, micro companies will still be required to prepare accruals-based annual accounts which give a true and fair view, and while it may become more difficult for searchers to access accounting information on very small companies, especially if they want to do this on a cross-border basis, they should still be able to do so.
The agreement having been made, the ball is now in the court of the 27 member states. Each will decide whether they want to take advantage of the new exemptions at all and, if they do, which they wish to take up.
Throughout the process of consultation and debate on this issue ACCA has queried whether any tangible benefits would actually ensue from stripping down disclosure rules in the way proposed. In the current economic climate, however, it seems likely that most EU states will see this as an opportunity to show their domestic SME sectors that they are serious in tackling business burdens.
John Davies is ACCA’s head of technical