The European Commission proposal to revise the 4th and 7th Directives on accounting by the European Union’s 7.5 million companies represents the first major revision of this legislation in over 30 years.
The proposal aims to simplify existing accounting requirements and to reduce the administrative burden on reporting companies, especially the 95 per cent of EU companies that are Small or Medium-sized Enterprises (SMEs).
Richard Martin, Head of Financial Reporting at ACCA says: 'ACCA shares the European Commission's aim to remove unnecessary red tape, especially on SMEs, and very much supports the 'Think Small First' approach adopted in the new proposal. We see this as an important and positive step for the future development of EU legislation.'
ACCA will be studying the proposals in more detail, but agrees that it is very important to ensure the protection of essential users: it therefore supports the retention of the basic requirements to prepare annual accounts on a standardised basis, the fundamental accounting principles, and the requirement for companies to file at least some information on the public record. The proposals will promote the cause of comparability by virtue of the reduction in member state options: greater comparability should contribute to the more efficient functioning of the single market.
ACCA also supports the principle of transparency in accounting as a major force for enhancing competition in the internal market, for SMEs as well as larger companies. Transparency in this area is vital for the success of a number of current EU initiatives including the Digital Single Market, which aims to remove barriers in the way of SMEs engaging in cross-border trade. ACCA welcomes the positive contributions to transparency in the proposal, such as those concerning the disclosure of related party transactions and the inclusion of the substance over form principle.
The Commission's proposal to give member states the right to exempt all undertakings from the obligation to publish their management report is less welcome.
'This suggests a lack of confidence in the content of the management report, which given the active international interest in developing narrative reporting - including CSR and corporate governance reports and the integrated reporting project - is disappointing. We argue that if a report is worth preparing in the first place, it must be worth publishing. Numerous studies show that publishing is a cost-free exercise, which is not by any standards a burden,' Richard Martin adds.
The proposal also recommends additional disclosure reductions for small companies. While this may be helpful to an extent by reducing costs to preparers, the proposed changes would also inevitably involve a reduction of the information that is available to users. On this point ACCA is disappointed that the Commission has not taken the opportunity to improve the quality of the financial information available to users by requiring small companies to file the full set of accounts, that need to be prepared in any case, rather than an abridged version of it.
'There is a balance to be struck here. We would urge EU decision makers to weigh carefully any drive to deregulate accounting against the wider social value of effective accounting and auditing, as stressed by instruments such as the OECD bribery convention and the Financial Action Task Force Recommendations,' Richard Martin stresses.
ACCA is also disappointed that that the Commission has not taken the chance to amend the detail of the directives to allow IFRS for SMEs to be used in the EU without amendment.
In parallel with these changes there is to be draft legislation for accounting by micro companies. It will be important that these two proposals are integrated properly to make a single coherent regime for growing companies.
Richard Martin concludes: 'ACCA looks forward to studying the proposals in more detail and engaging in a constructive dialogue with those who will now work on developing them further. We believe that work on this project needs to be taken forward in a way which is consistent with the broad range of current proposals which aim to strengthen the single market and encourage investment and growth, including the European Private Company Statute, the interconnection of national business registers throughout the EU and the Common Consolidated Corporate Tax Base (CCCTB). We call on EU decision makers to put in place a coherent strategy which sees effective accounting and transparent but proportionate disclosure as forming part of the process of promoting growth.'