Small companies granted relief on EU accounting rules

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Small companies will have to reveal less information in annual financial statements as a result of a red-tape cutting measure formally accepted by a vote in the European parliament in Strasbourg yesterday (12 June).

The new accounting directive (see background) permits small companies to prepare only abridged balance sheets and profit and loss accounts, although such enterprises remain entitled to provide more information if they wish.

The new rule affects companies 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, which are defined as small in the directive.

Micro-entities receive special treatment

Rules on micro-entities – companies 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 – have also been incorporated into the new directive.

Such smaller companies may prepare very simple balance sheets accounts with virtually no notes.

The new rules are at the discretion of member states, which may still impose heavier accounting standards on small companies within their jurisdictions if they wish.

More than 90% of EU companies will be in the small category for accounting purposes. This is more than today. As a result, many companies which are currently seen as large will see a reduction in the amount of information to be provided in their annual accounts.

“Financial reporting obligations have been modernised and costs reduced, in particular for SMEs,” said the commissioner for the internal market, Michel Barnier.

The European Small Business Alliance (ESBA) – a federation representing smaller companies – particularly welcomed the provision for micro-businesses.

Warning about information

“The new Accounting Directive is an important next step in the overall simplification process, which started with the exemption of micro-entities from certain burdensome obligations regarding annual accounts. It is now up to the member states to make the best possible use of this directive,” said Patrick Gibbels, of ESBA’s  Brussels office.

But Richard Martin, the head of corporate reporting at the Association of Chartered Certified Accountants, warned that the new rules “will lead to a substantial loss of information to users which might have helped SMEs access the finance that is so important to Europe’s economic recovery”.

Martin said that member states are still allowed to insist that small companies include details in their accounts covering important issues such as post-balance sheet events, related-party transactions and the movements on fixed assets.

He said member states should ensure such details are maintained in the accounts, adding:  “Without these, users need to beware that some small company accounts might be misleading.”

Background

The new directive merges and updates two existing accounting directives. Over the past 30 years, amendments to these existing directives added many new disclosures and valuation rules making them more complex and increasing the regulatory burden for companies.

Timeline

  • 2013-2015: New Accounting Directive to be transposed by member states into national laws

Further Reading

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