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In FEE's letter, FEE would like to share firstly some general observations followed by a few suggestions for changes to specific provisions of the Proposal and the Transparency Directive. Generally, FEE supports the objectives of better regulation and simplification.
The Commission should, in FEE's view, have considered and carried out a broader exercise focused on a more fundamental review to adapt the Directives better to 21st century accounting requirements characterised by principles-based standards and reflecting the dynamic developments in corporate reporting. A more holistic approach, which FEE strongly favoured, would have required a complete revision of the existing Accounting Directives.
Therefore, FEE sees the current Proposal as a positive step, although only a first step towards such a goal. In FEE's view, the future reporting requirements should introduce high-level principles based on an overarching accounting framework which sets the boundaries upon which detailed requirements can be outlined. This principles-based accounting framework should provide a sound conceptual basis for financial reporting, describing the objective and the users of the financial statements, as well as other qualitative characteristics of useful financial information such as relevance, timeliness, verifiability and understandability. In addition, common examples should be provided as guidelines which can be practically used in a variety of circumstances. Introducing unnecessary detailed requirements for all specific circumstances reduces flexibility and adaptability to the evolving needs of businesses and report users, while the accounting theory and international financial reporting standards continue to evolve.
FEE finds it inappropriate that the Proposal characterises accounting including the preparation of the financial statements and auditing as "burdens” without recognising its beneficial role and added-value to corporate management and the economy as well as its public interest dimension. While there have been attempts to measure the costs, no real efforts were made to assess the benefits.
In practice, accounting is an essential management tool: it facilitates access to finance and creates the trust that enables trade. Auditing provides independent and objective assurance designed to add to the credibility and reliability of the financial information, and contributes to enhancing the operational effectiveness of the internal control system related to financial reporting.
The provisions allowing merger accounting have been removed from the Proposal. This is likely to be of concern to many companies as merger accounting is widely used, particularly when accounting for transactions under common control or for group restructuring, where such treatment is also allowed by IFRS. It would also be burdensome to require acquisition accounting which requires detailed fair value assessment of assets and liabilities in these circumstances.
Therefore, FEE recommends reinstalling the option for Member States to permit, but not require, merger accounting for transactions under common control or for group restructuring.
FEE is of the view that the current drafting represents a missed opportunity to prescribe the preparation and presentation of a cash flow statement for certain types of companies in the Proposal. The cash flow statement is regarded as an essential tool to provide relevant information about the cash generating capacity of a company and to assist in making the connection between the balance sheet and profit and loss account. It gives, in combination with the profit and loss account, a more rounded and complete view of the performance and cash generation capacity of a company, which is particularly important in periods of instability.
Therefore, FEE believes that the inclusion of the cash flow statement in the annual financial statements should become mandatory for large companies and should remain as an option for Member State to require it for medium-sized companies. For small companies, the benefits of providing such a statement may not outweigh the costs of preparation, therefore FEE supports the EC proposal not to require such statements for small companies.
Both the Proposal and the Transparency Directive introduce a requirement for companies in the extractive industries and certain forestry companies to provide disclosures about their payments to government on a country-by-country basis.
FEE is supportive of the efforts by the Commission to improve transparency and accountability in resource-rich emerging economies, although FEE does not believe that these objectives can best be met through disclosure in the annual report, since this document is produced particularly to meet the information needs of investors.
Therefore, FEE recommends that the Proposal and Transparency Directive explicitly provide for presentation of this information in a separate document outside the annual report, probably available on company websites. In addition, having divergent requirements in these two Directives would be inefficient and burdensome. Therefore consistency between the two Directives should be ensured.
FEE understands that the EC’s intention to propose standard forms for management reports developed by ESMA was to simplify the reporting requirements for small issuers in the Transparency Directive. However, FEE is concerned that a one size fits all approach will fail in this case, as management reports cover different aspects of a company’s business. Moreover, companies of various sizes from a whole range of industries face different risks and issues that need to be disclosed in such reports. FEE therefore recommends avoiding standardised forms and templates as legislated in Article 4 point 7.
Overall, FEE believes that the Proposal and the Transparency Directive should be supported and improved.