European Commission proposes simpler accounting rules for small businesses

The changes are part of a proposed new EU Directive (87-page /285KB PDF) which will “support entrepreneurship and responsible business” as well as reducing reporting obligations for listed companies.

“This package of measures is in the interests of both enterprises and of European society as a whole. It reduces administrative burdens on small and medium-sized enterprises, and sets the conditions for a strong, dynamic social market economy in the medium and long term,” said Commission Vice-President Antonia Tajani in a statement.

The new Directive would consolidate, update and replace the EU’s previous two Accounting Directives as well as update some of the provisions of the Transparency Directive.

Businesses in the EU qualify as SMEs if they have less than 250 employees. In addition, they must have a turnover of less than €50 million, or have no more than €43m on their balance sheet.

Financial statements are important in finance transactions because they are used by lenders to assess and monitor a potential borrower’s creditworthiness.

The Commission said that simplifying the preparation of these statements would make them “more comparable, clearer and easier to understand”.

It would also allow shareholders, banks and suppliers to gain a better understanding of a company’s performance and financial position, it said.

Financial statements must give a “true and fair view” of a company’s assets and liabilities, financial position and profits or losses. Proposing the minimum notes these statements must contain would avoid “disproportionate burdens” on these businesses, the draft Directive said.

Member states should not be able to force companies to present further information, however they would be able to impose more complex requirements on “medium-sized and large undertakings”, it said.

The Commission also proposes revising its Transparency Directive so that listed companies, including SMEs, would no longer be obliged to publish quarterly financial information. This would contribute to further cost savings, it said.

It also aims to improve transparency and promote sustainable business among multinational companies by insisting mining and forestry companies be more open about taxes, royalties and bonuses paid worldwide.

It proposes introducing a system of country-by-country reporting (CBCR) to track payments made by mining and logging companies to governments all over the world. The new system would apply to EU privately-owned large companies or companies listed in the EU that are active in the oil, gas, mining or logging sectors, it said.

The difference between CBCR and regular financial reporting is that it present separate financial information for every country that a company operates in rather than a single set of information at a global level, the Commission said. “Reporting taxes, royalties and bonuses that a multinational pays to a host government will show a company’s financial impact in host countries. This more transparent approach would encourage more sustainable businesses,” it said in a statement.

The Commission also proposes setting up a Social Business Initiative to support companies that have what it describes as a “positive social impact”.

The proposals will now be passed to the European Parliament and the EU’s Council of Ministers. If approved, it is expected that they will have to be implemented into national law by 1 July 2014.

Earlier this year a joint proposal from the Department for Business, Innovation and Skills (BIS) and the Financial Reporting Council (FRC) suggested that introducing simplified annual reporting requirements for small businesses in the UK could save as much as £400m in account preparation costs per year.

Current UK law requires all companies to prepare full financial statements and file annual returns at Companies House. All except some small companies also have to file financial information at Companies House.

If adopted, the UK proposals would apply to all incorporated and unincorporated businesses who meet the Commission’s definition of a ‘micro entity’. These are companies with an annual turnover of less than €500,000 or net assets of less than €250,000 which employ fewer than ten people.