05 April 2013

FEE: Main matters of the accountancy profession on the EC Proposals for the recast of the 4th and 7th Accounting Directives

Main matters related to accounting and financial reporting:

General accounting principles should be applicable to all aspects of financial reporting

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. They are instrumental to fulfil the primary objective of reporting to provide relevant and useful information to users.

Therefore, these interrelated principles should be generally applicable to all aspects of accounting and financial reporting including recognition, measurement, presentation and disclosure.

FEE questions the real benefits of a fully prescribed reporting regime for small companies

FEE noted that the final report of the European Parliament Legal Affairs Committee (JURI Committee) of 25 September 2012 included further reductions to the set of disclosures prescribed in the EC proposals. It proposed to remove the disclosure requirements of off-balance sheet transactions for small companies, related party transactions for small and medium-sized companies and post balance sheet events for any type of companies.

FEE finds this very unfortunate and therefore urges all parties involved in the trilogue to maintain the mandatory disclosures on off-balance sheet and related party transactions as well as post balance sheet events for small companies. This is a critical element of transparency and does not create administrative burdens.

Furthermore, FEE supports 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 of the financial position and performance of all reporting entities, including small ones. This is particularly important for the many EU Member States where virtually all companies are small entities. In such Member States, the premise on which the EC Proposals are built, with a more elaborate disclosure regime for medium-sized and an even more complete one for large entities is irrelevant.

Fair value accounting should be permitted as a Member State option

While the EC Proposals intended to keep a Member State option to permit or require fair value accounting as an alternative measurement base for specific assets, the JURI Committee in its final report of 25 September 2012 proposed to prohibit this practice by the deletion of the option from Article 7.

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 urges all parties involved in the trilogue discussions to retain a Member State option permitting or requiring fair value accounting for certain relevant account balances. A possible blanket prohibition of fair value accounting would have significant negative implications for transparency and for those Member States that have already adopted this approach.

Make the use of IFRS for SMEs possible

FEE urges all the parties involved in the trilogue to permit Member States to opt for the use of IFRS for SMEs for national reporting purpose if they so desire. The Accounting Directive should not include obstacles which go against this. The Presidency compromise text of 19 June 2012 would be a good approach. FEE wrote to the IASB and encouraged it to change its approach to unpaid subscribed share capital.

Permit merger accounting as a simplification measure

The provisions allowing merger accounting are removed from the EC Proposals. This is likely to be of concern to certain companies as merger accounting is widely used in practice which often better reflects the economic substance of the underlying transactions for certain types of business combination, e.g. transactions under common control or a group restructuring. This accounting option also simplifies accounting and thus reduces costs for preparers.

Therefore, FEE encourages the parties involved in the trilogue discussions to reintroduce the provision allowing the Member States to permit the use of merger accounting.

Requiring cash flow statements would benefit enterprises and stakeholders

It is a missed opportunity not to have prescribed the preparation and presentation of a cash flow statement for certain types of companies in the EC Proposals.

Therefore, FEE encourages the European Parliament as well as the Council and European Commission to consider the mandatory 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.

The auditor’s involvement with financial statements and the management report

The auditor’s view as to the entity’s assumption that it is a going concern:

The European Commission proposals to reform the statutory audit5 include a proposal in Article 22, 2 (l) that the auditor is required to provide a statement on [management’s assessment] and disclosure of the audited entity’s ability to meet its obligation in the foreseeable future and therefore continue as a going concern.

FEE encourages all parties involved in the trilogue to consider the inclusion of such requirement in the Accounting Directives, or to at least include a clearer statement that the accounting policies note should include a confirmation by management that the accounts have been prepared on a going concern basis or an explanation why that basis in not appropriate.

Swift finalisation of the debate on Country-by-Country reporting

FEE has supported the idea of improving transparency and accountability in resource rich emerging economies while warning against the risk of obscuring financial statements with Country by Country information rather than including such information in a separate report. FEE appreciates that the political debate is no longer only centred on these matters but has started to take a broader perspective on the EC Proposals and is now focused on the development of an accounting framework fit for purpose for the European economy.

Therefore, FEE encourages all parties involved in the trilogue discussion to close the gap between the different views on Country-by-Country reporting to allow for a successful finalisation of the Accounting Directive as a whole. This Directive will underpin an accounting framework which is likely to remain applicable in Europe for a considerable time in the future, therefore the decisions the Institutions are about to take are critically important.

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