28 November 2012

FEE policy statement on the EC proposals for the recast of the 4th and 7th Accounting Directives

FEE has always been supportive of proposals aimed at better regulation and simplification. Measures seeking to reduce excessive and unnecessary administrative burdens have a significant role to play in increasing productivity and promoting entrepreneurship, especially for small and medium sized companies (SMEs).

Accounting and auditing are not “administrative burdens” but essential tools to enable managers to manage, investors to invest and enterprises to trade, grow and create wealth and employment; accounting and auditing also have a public interest dimension by contributing to improving the functioning of markets and enhancing corporate governance, transparency and stability.

FEE notes that the political debate as it has developed to date has largely been centred on matters related to Country-by-Country reporting; this is evidently an important matter and FEE is supportive of the EC’s initiative to increase transparency and accountability related to payments made to governments of resource rich countries.

However other fundamental issues of a more “technical” accounting nature, that after all were expected to be the main topics in an Accounting Directive and which will have a fundamental and lasting impact on the internal market, seem to be insufficiently addressed. Whilst FEE is supportive of efforts to improve transparency and accountability, it does not believe that Country-by-Country reporting should divert attention from the important goal of developing an accounting framework fit for purpose for the European economy.

FEE encourages all parties involved in the trilogue to redirect their attention and focus on key accounting issues that are essential for the establishment of a robust and long-lasting European accounting framework.

FEE has always been a long-standing supporter of setting robust, high-quality principles at European level, and continues to be of the view that a principle-based approach to accounting and financial reporting is preferable over a rule-based and legalistic approach. A principle-based approach is capable of coping with developments arising in practice and also facilitates effective take-up as the current regulations and standards differ from one EU Member State to another.

As FEE supports a principle-based Accounting Directive, it welcomes the introduction of high-level general accounting and reporting principles, such as the true and fair view, as well as materiality, substance over form, and prudence. These principles are instrumental for accounting and reporting in fulfilling its primary function of providing relevant and useful information to users. These interrelated concepts should be generally applicable to all aspects of accounting and financial reporting including recognition, measurement, presentation and disclosure.

FEE urges all parties involved in the trilogue to re-introduce the mandatory disclosures on off-balance sheet and related party transactions as well as post balance sheet events for small companies.

FEE also recommends giving the Member States an option to require further disclosures for small companies that they deem necessary under their local and particular circumstances to comply with the overarching principle of presenting a true and fair view for all reporting entities’ – including small ones – financial position and performance.

The existing Accounting Directive provides an option for Member States to permit or require fair value accounting as an alternative measurement base for specific assets. In practice, some Member States already use this option and either allow or require the measurement of specific assets (e.g. investment properties) at fair value as it may provide more relevant information to users of the financial statements.

While the EC Proposals intended to keep this option, the JURI Committee in its final report proposes to prohibit this practice by the deletion of Article 7.1b which provided for a Member State option to use fair value accounting for specific assets, mainly for investment properties.

In this respect, it is important to note that since the 2005 IAS Regulation requiring the use of IFRS for consolidated accounts of publicly-traded companies came into force, Member States have also been able to permit or require the application of IFRS for annual accounts (financial statements) of publicly-traded companies and of non publicly-traded companies.

This means that Member States can already permit or require for all companies, which fall under the scope of the 4th and 7th Directives, the use of the full set of IFRS which permits fair value accounting as a measurement base for certain relevant account balances.

In order to increase the usefulness of information in the financial statements, FEE encourages retaining a Member State option permitting or requiring fair value accounting for certain relevant account balances.

FEE encourages the European Parliament as well as the Council and European Commission to take forward the ECON Committee’s proposal related to the preparation of a cash flow statement during the trilogue discussions. FEE recommends as a compromise to require the inclusion in the annual financial statements of a cash flow statement for large companies and to introduce a Member State option to require it for medium-sized companies.

Press release

Policy statement

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