The European Parliament has recently adopted two Directives of interest for the accountancy profession and for the business environment, namely the Accounting Directive and the Transparency Directive. The aim of the two directives is to reduce administrative costs for small entities, to increase transparency of contributions to national administrations and the development of a reporting requirement for each member state. This article shall present the main changes projected by the new Directives. Our aim is to stimulate debate within the Romanian business and professional environment regarding the optimal approach for implementing these directives into the national legislation.
In the view of simplifying reporting requirements for SMEs, the European Commission has initiated a reviewing process of the European Accounting Directives (Directive IV and VII) in order to replace them with a newly adopted Directive. According to the arguments presented in front of the proposal, the main objectives set up have been reduced reporting administrative costs – particularly for SMEs, increased comparability of financial statements of entities with foreign operations and a larger number of external users, protecting investors’ interests by selecting information that is essential to them as well as increased transparency of payments to governments made by entities operating in the extractive industry and loggers of primary forests. The Directive shall comprise nine chapters dealing with: scope, entities definitions and classes, the balance sheet and the loss and profit account, notes to financial statements, consolidated financial statements, disclosure requirements, audit issues, audit-related exemptions and restrictions, reporting payments to governments.
One objective of the Directive is the harmonization of the size criteria at the European Union level, as the current size thresholds used by Member States are different.
The new Directive stipulates four categories of undertakings, rated by size: micro-undertakings, small undertakings, medium-sizes undertakings and large groups.
Accordingly, micro-undertakings are defined as undertakings that do not exceed the limits of at least two of the three following criteria:
- Balance sheet total: EUR 350,000;
- Net turn over: EUR 700,000;
- Average number of employees during the financial year: 10
In this sense, several exemptions have been stipulated that can be optional for Member States.
Micro-undertakings under the scope of the Directive cover undertakings that can opt for the simplified accounting treatment according to the national legislation and some of the entities preparing condensed financial statements according to OMFP 3.055/2009. Undertakings opting for the simplified treatment shall disclose financial statements comprising the balance sheet and the profit and loss account, whereas those applying OMFP 3.055/2009 shall disclose a condensed balance sheet, the profit and loss account and explanatory notes.
Small undertakings shall be those which, at their balance sheet date, do not exceed the limits of at least two of the following criteria: balance sheet total 4,000,000 euro (Member States can opt to raise this threshold up to 6 million euro, net turnover 8,000,000 euro (Member States can opt to raise this threshold up to 12 million euro, average number of employees during the financial year: 50.
According to this Directive, financial statements shall cover at least the balance sheet, the profit and loss account as well as the explanatory notes to the financial statements. Other elements can be included but only for large and medium-sized undertakings.
For Romania, these provisions imply eliminating the requirement to disclose the cash flows statements and the equity flow statement for several entities which exceed the limits of national thresholds for preparing a complete set of financial statements, but which do not exceed the limits of the criteria set up by this Directive for medium-sized undertakings.
For comparative purposes, according to national regulations, undertakings shall prepare a complete set of financial statements if they do not exceed at least two of the following three criteria:
- Balance sheet total: 3,650,000 euro;
- Net turnover: 7,300,000 euro;
- Average number of employees during the financial year: 50
Member States can permit small undertakings to prepare a condensed balance sheet and to small and medium enterprises to prepare a condensed profit and loss account.
This Directive prescribes a minimum requirement for explanatory notes that should contain information mandatory for all undertakings, complemented by supplementary information required for larger entities.
There is maximum flexibility in establishing the permitted disclosure and simplification requirements because, if the Directive permits Member States to prescribe additional requirements, for example for small undertakings, this means that Member States can use wholly or partially this option, requiring less than the option permits. Similarly, if the Directive permits Member States to use the prescribed exemption, for example for small undertakings, then Member States can exempt these undertakings, wholly or partially.
Medium-sized undertakings shall be undertakings which, at the date of their balance sheet date, do not exceed the limits of at least two of the three following criteria: balance sheet total 20,000,000 euro, net turnover 40,000,000 euro, average number of employees during the financial year: 250. Large undertakings shall be undertakings which, on their balance sheet dates, exceed at least two of the three following criteria: balance sheet total 20,000,000 euro, net turnover 40,000,000 euro and average number of employees during the financial year: 250.
Member States are not required to set up separate categories for large and medium-sized undertakings if the same requirements apply as for large undertakings.
The Directive also prescribes size criteria for groups of undertakings:
|
Consolidated amounts |
Small groups |
Medium-sized groups |
Large groups |
|
Balance Sheet Total |
<4.000.000 euro (Member States shall not exceed the threshold of 6,000,000) |
<20,000,000 euro |
>20,000,000 euro |
|
Net Turnover |
<8.000.000 euro (Member States shall not exceed the threshold of 12.000.000) |
<40,000,000 euro |
>40,000.,000 euro |
|
Average number of employees |
<50 |
<250 |
>250 |
According to the Directive, small groups are exempted from the prescription to prepare consolidated financial statements and a consolidated trustees report, unless one of the related undertakings is a public interest entity. Member State can exempt medium-sized groups from preparing consolidated financial statements and a consolidated trustees report, unless one of the related undertakings is a public interest entity. In Romania, small groups and a large number of medium-sized groups are already exempted from preparing consolidated financial statements because, according to the national legislation, a parent company is exempted from preparing annual consolidated financial statements if, on their consolidated balance sheet date, commercial companies that are to be consolidated do not exceed at least two of the following three criteria, based on their most recent annual financial statements:
- Balance sheet total: 17.520.000 euro;
- Net turnover: 35.040.000 euro;
- Average number of employees during the financial year: 250
Accounting principles enounced in the Directive are the following: the going concern principle, consistency of treatment, a prudent basis, accrual accounting principle, no set-off between asset and liability items or between income and expenditures, separate measurement of asset and liability items, the substance-over-form principle, the historical cost principle and the principle of the intangible opening balance sheet. The Directive prescribes the possibility to exceed the limits of its provisions regarding recognition, measurement, disclosure, presentation and consolidation when the effects of compliance are not significant, while permitting Member States to limit the scope of this provision to presentation and disclosure requirements.
Member States can exempt undertakings from applying the substance over form principle. However, we consider that the use of this option would impair the quality of the reported information and would disagree with the purpose of the federated purpose of fair presentation. One may note the importance attached to the prudence principle. The Directive prescribes that Member States can permit the recognition of foreseeable liabilities and of potential losses. The principle of intangibility requires that the opening balance sheet correspond to the closing balance sheet. However, member states can require that the balance sheet of the previous financial year be adjusted of the amounts disclosed in the financial statements are not comparable. If the related amounts are not comparable or are adjusted, this shall be disclosed in the notes to the financial statements, together with the respective explanatory notes.
Fair value treatment
As an exception from the historical cost principle, Member States can permit or require fair value measurement of intangible assets. Fair value treatment for property plant and equipment is already permitted by national regulations.
Member States can permit or require all undertakings or any entity to measure at fair value financial instruments, including derivatives, or to measure at fair value certain classes of assets other than financial instruments. Member States’ option to permit or to require fair value measurement can be used for separate or consolidated financial statements. Member States can permit or require the recognition, measurement and disclosure of financial instrument according to IFRSs.
Equity Method for Separate Financial Statements
According to Art.9, paragraph 7 (a-c), “Member States may permit or require participating interests to be accounted for using the equity method in separate financial statements, taking into account the essential adjustments resulting from the particular characteristics of these statements. Consequently, the proportion of the profit or loss attributable to the participating interest can be recognised in the profit and loss account only to the extent of the amount corresponding to dividends already received or the payment of which can be claimed. Where the profit attributable to the participating interest and recognised in the profit and loss account exceeds the amount of dividends already received or the payment of which can be claimed, the amount of the difference shall be placed in a reserve which cannot be distributed to shareholders”.
Capitalization of Borrowing Costs
Member States can permit or require the capitalization of interests related to loans granted for financing fixed or current assets production. This must be disclosed in the notes to the financial statements. Romanian regulations permit the capitalization of borrowing costs.
“First in, first out” method for stocks and investments
Member States may permit the purchase price or production cost of stocks of goods of the same category and items such as investments to be calculated either on the basis of FIFO/LIFO method, or on the basis of weighted average prices. These methods shall be used according to national regulations.
Goodwill and development expenses written off during the useful life established by member states (5 to 10 years)
Intangible assets shall be written off over their useful economic life. In exceptional cases where the useful life of goodwill and development costs cannot be reliably estimated, such assets shall be written off within a maximum period set by the Member State. That maximum period shall not be shorter than five years and shall not exceed 10 years. An explanation of the period over which goodwill is written off shall be provided within the notes to the financial statements.
Member states shall allow the distribution restriction to continue for amounts that do not exceed the costs of development or the amount of the formation expenses which have not been written off. This restriction is covered by OMFP no.3055/2009.
Using the pooling of interests method of accounting for business combinations of a Group (combinations under common control)
Member states can allow or require that book values of shares held in an undertaking included in a consolidation to be set off only against the corresponding percentage of capital, unless the undertakings in the business combination are not controlled by the same party and this control is not transitory. Any resulting difference shall be added to the consolidated reserves or shall be deducted, as the case may be. Resulting movements within the reserves as well as the names of the related headquarters shall be disclosed in the notes to the consolidated financial statements.
Financial statements disclosure
Member States can require, for the balance sheet presentation, the horizontal layout, the vertical layout or they can allow entities to choose one of the presentation layout. Member states can permit or require the classification of asset and liability items into current and non-current subject to the inclusion of all required items in the layouts prescribed by the Directive.
For profit or loss account presentation, Member States can prescribe one of the layouts required by the Directive (where expenses shall be classified by function or by nature) or the choice of one of the layouts. The profit or loss account layouts do not imply the separate disclosure of extraordinary items (they shall be disclosed in the explanatory notes). Member States can permit or require all entities or certain classes of undertakings to present a situation of their performance (statement of comprehensive income) subject to the disclosure of information included in the layouts prescribed by the Directive. Member States can permit or require the balance sheet or the profit or loss account structures to be adjusted to include the distribution of profit or the cover of loss.
Notes to the financial statements (minimum requirements)
The notes shall be presented according to the order of the balance sheet and the profit or loss account items.
All undertakings shall disclose in their notes, not only the information required by the Directive but also:
- Adopted accounting policies;
- If fixed assets are measured at restated amounts, a table comprising:
- The revaluation reserve movements over the financial year, with details on the fiscal treatment of its items, and
- The balance sheet book value disclosed in the balance sheet that would be recognized if fixed assets were restated;
- Information on financial instruments and/or other assets restated at fair value;
- The total amount of any financial commitments, guarantees or contingencies that are not included in the balance sheet, and an indication of the nature and form of any valuable security which has been provided; any commitments concerning pensions and affiliated or associated under takings shall be disclosed separately;
- The amount of advances and credits granted to members of the administrative, managerial and supervisory bodies, with indications of the interest rates, main conditions and any amounts repaid or written off or waived, as well as commitments entered into on their behalf by way of guarantees of any kind, with an indication of the total for each category (less relevant for Romania taking into account the fact the restrictions set up by the Law on Commercial Entities);
- The amount and nature of individual items of income or expenditure which are of exceptional size or incidence;
- Amounts owed by the undertaking becoming due and payable after more than five years, as well as the under taking’s entire debts covered by valuable security furnished by the undertaking, with an indication of the nature and form of the security; and
- The average number of employees during the financial year.
Member States can also require small undertakings the following disclosures:
- Information on intangible assets (acquisition price, production costs or fair value at the opening of the financial year, increments, disposals and transactions over the financial year, accumulated value adjustments at the beginning and at the end of the financial year, movements of value adjustments and capitalized interest amount),
- Name and headquarters of the undertaking that prepares consolidated financial statements for the smallest group of undertakings comprising the related undertaking as subsidiary,
- Commercial nature and purpose of the entity’s arrangements which are not included in the balance sheet,
- Financial nature and effects of significant events after the balance sheet date which are not reflected in the profit or loss account or in the balance sheet; and
- Related-parties transactions for disclosing transactions with: owners of interests in an entity; entities in which the undertaking itself owns an interest; and members of the entity’s managing, administrative or oversight body.
For medium or large undertakings as well as for public interest entities, supplementary requirements are required. Disclosures on associates and related-parties transactions can be simplified according to the provisions of this Directive.
Additional information on the distribution of the net turnover, on business segments and geographical markets, as well as those on the auditors’ fees shall be required for large undertakings and for public interest entities.
This Directive prescribes the structure of the trustees’ report. Member States can exempt small entities from preparing the trustees’ report subject to the disclosure of information related to transactions with own shares in the notes to the financial statements. Member states can exempt small and medium undertakings from non-financial disclosures. For listed entities, disclosing the statement on corporate governance shall still be required. This Directive gives greater weight to this statement as it prescribes the management’s responsibility for this disclosure and the auditor assesses whether the items required in the statement are disclosed.
Exemptions for micro-undertakings
Member States can exempt micro-undertakings from all or some of the following obligations:
- Disclosing expenses and income accounted for in advance, as well as receivables and payables. In this situation, Member States can exempt entities from applying accrual accounting to other expenses.
- preparing notes to financial statements. Even if this treatment is used, the Directive requires the disclosure, at the end of the balance sheet, of the total amount of any financial arrangements, guarantees or assets and contingent liabilities excluded from the balance sheet, that disclose the nature and form of any collateral awarded and the disclosures required by the Directive 2012/30/UE on transactions with own shares.
- preparing a trustees’ report subject to the disclosure of the information required by the Directive 2012/30/UE on transactions with own shares at the end of the balance sheet.
- publishing annual financial statements subject to the filing of the balance sheet with at least one competent authority designated by the related Member State. If the competent authority is not the central register office, the trade register or the companies’ ledger, the competent authority must communicate the related information to the register.
Member States can permit micro-undertakings:
- To prepare a simplified balance sheet,
- To prepare only a simplified profit or loss account including a list of minimum items, according to this Directive,
When using this treatment, Member States cannot require or permit the use of fair value for financial instruments and other assets. These exemptions shall not be allowed for investment entities or financial holdings.
Simplified treatment for small and medium entities
Member States can permit small undertakings to prepare a simplified balance sheet.
Member States can permit small and medium entities to prepare a simplified profit or loss account.
Reporting on payments to governments
In order to provide for enhanced transparency of payments made to governments, large undertakings and public-interest entities which are active in the extractive industry or logging of primary forests should disclose material payments made to governments in the countries in which they operate in a separate report, on an annual basis.
Payment, whether made as a single payment or as a series of related payments, need not be taken into account in the report if it is below EUR 100 000 within a financial year. Member States shall require large undertakings and all public-interest entities active in the extractive industry or the logging of primary forests, governed by its national law, to draw up a consolidated report on payments to governments if that parent under taking is under the obligation to prepare consolidated financial statements.
The Member States are strongly encouraged to develop electronic publication systems that allow undertakings to file accounting data, including statutory financial statements, only once and in a form that allows multiple users to access and use the data easily. With regard to the reporting of financial statements, the Commission is encouraged to explore means for a harmonised electronic format. Such systems should, however, not be burdensome to small and medium-sized undertakings.
In 2011, the European Commission issued a draft Directive that amended the Directive 2004/109/CE on the harmonisation of information duties of issuers, whose securities are listed at a regulated market (the Transparency Directive), of the Directive 2003/71/CE on the prospectus to be published when securities are offered to the public or admitted to trading and of the Directive 2007/14/CE. The draft directive was approved by the Parliament and by the European Council on June 12, 2013 being published in the Official Journal in July. The following are a summary of the main prefigured amendments:
- choosing the Member State of origin for issuers of a third country (guaranteeing the compliance of the Directive 2004/109/CE with the Directive 2003/71/CE concerning the definition of the member state of origin),
- eliminating the obligation to publish quarterly reports,
- broadening the definition of financial instruments subject to the disclosure requirement,
- harmonizing the disclosure requirement for significant holdings,
- reporting on payments to governments,
- regulated data storage,
- Requirements on sanctions and investigations.
In order to reduce administrative costs for listing on a regulated market, the requirement of publishing interim quarterly reports shall be eliminated for all listed entities. Issuers shall continue to publish such information if there is strong demand from investors. The biannual report must be made public within no more than 3 months (as opposed to the previous 2-month term) after the end of the reporting period. In order to take into consideration financial innovation and so that investors and issuers understand the whole structure of the entity’s assets, the definition of the financial instrument has been broadened so that it includes all instruments that have an economic effect that is similar to shareholding and to the rights of acquiring shares, whether these shares award the right to physical settlement. Currently, the Transparency Directive does not require the disclosure of certain types of financial instruments that do not award voting rights, but cannot be used to secretly build up stakes in listed entities, without being issued on the market. Currently, the access to financial information on listed pan-European entities is burdensome: in order to search for information, interested parties must access 27 different national data bases. For an improved cross-border access to regulated information, the current network of officially designated storage instruments must be improved. Consequently, this Directive prescribes the delegation of additional competence to the European Commission, particularly concerning the access to regulated information at EU level.
The plan is that, by January 1, 2010, all annual financial reports be prepared under a unique electronic reporting format, under the reserve that ESMA have performed a cost vs. benefit survey. In order to guarantee the use of the best application framework for the Directives, the sanctioning powers of competent authorities have been strengthened.
The aim of our approach has not been an exhaustive presentation of the two directives. We have analysed simply the initiation of several points of debate concerning the possibly provided for by the two directives and the implementation alternatives for the national legislation taking into account the expectations related to cost reduction and the increase of transparency in the business environment.
To for the Romanian translation of the adopted texts, please follow these links:
Accounting Directive
Transparency Directive
Authors:
Lect. Univ. PhD. Ștefan Bunea, Head of the National Institute for Continuous Professional Development – INDPC, CECCAR, coordinator of CECCAR Working Party on Fiscal and Accounting Regulations
Lect. Univ. PhD. Mădălina Gîrbină, counsellor for the National Institute for Continuous Professional Development – INDPC, CECCAR, coordinator of CECCAR Working Party on Fiscal and Accounting Regulations
