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The European Commission last week announced a new proposal that would allow member states to abolish financial-reporting obligations for the EU's smallest companies. In a deteriorating economic climate, the new rules are designed to alleviate the regulatory burden on micro-entities. The aggregate administrative burden reduction potential is an estimated â‚¬6.3 billion. The proposal, which was flagged in the European Economic Recovery Plan in November 2008, will now be considered by the European Parliament and the Council of Ministers.
The purpose of the proposed amendment to the Fourth Council Directive (annual accounts of certain types of companies) is to allow member states to relieve the EU's smallest companies (commonly referred to as micro-entities) from the requirements of this directive. Rough estimates show that if member states implement this exemption, the savings potential for micro-entities could amount to an average of â‚¬1,200 per year.
What are micro-entities?
Micro-entities are defined as those companies that on their balance sheet dates do not exceed the limits of two of the three following criteria: balance sheet total of â‚¬500,000; net turnover of â‚¬1 million; an average of 10 employees during the financial year.
Micro-entities are mostly engaged in business at local or regional level with no or limited cross-border activity. At the same time, micro-entities are often subject to the same reporting rules as larger companies. This creates a disproportionate burden on these companies: They have a key role in creating new jobs and economic activities, but they also have limited resources to comply with demanding regulatory requirements.
The financial-reporting environment in the EU changed in 2005 when international standards in the field of accounting were made mandatory for listed companies and those with listed debt securities. The changes to the accounting directives mainly followed a principles-based approach, but also provided for detailed rules in many accounting areas.
Comparing financial statements
The new rules represent "minimum harmonization" beyond which member states can develop additional requirements. The many amendments and the addition of new requirements have made the accounting directives unwieldy and difficult to read. They are also criticized for not providing the same level of detail concerning different accounting areas. The many options make comparisons of national financial statements from different member states difficult. Many users believe that comparability at EU level needs to be improved. Constituents have also expressed that terminology as a whole may need to be updated and streamlined.
The new proposal addresses issues relating to the modernization and simplification of the accounting directives. Positive effects of the review might include a reduction of burden mainly for small enterprises ("think small first") as well as qualitative improvements for all enterprises in the scope of the directives. An additional objective, the Commission aims to achieve, is to increase the clarity of the text for lawmakers and users in general.
If the focus would change to more investor-oriented accounting, this would most likely have consequences for the fundamental principles of the accounting directives. For example, the prudence principle may become less accentuated. This could also have a number of consequences for other elements of the EU regulatory framework. For example, directives that deal with the accounting for bank and insurance undertakings, or capital maintenance, might be affected by substantial changes to concepts as defined in other directives.
Ari Syrquin is the head of GSCB Law Firm's international department.
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