The EU's Fourth and Seventh Directives (the "Accounting Directives") set out the legal framework for accounting by limited liability companies in the EU. These directives require the annual preparation of financial statements, "annual accounts" or "annual consolidated accounts" consisting of a profit and loss account and a balance sheet, together with notes to the financial statements. In addition, the accounts for limited liability companies are required to have a statutory audit produced by an independent auditor.
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The requirements imposed by the Accounting Directives can be relaxed for small- and medium-sized enterprises (see Accounting for SMEs). However, any company that has its securities traded on a public stock market is subject to the full set of accounting and auditing requirements, even if it would otherwise be classed as an SME.
Since 2005, as part of its program to remove barriers to the creation of a single capital market within the EU, under Regulation (EC) 1606/2002 (The IFRS Regulation), the EU has required International Financial Reporting Standards (IFRS) and, where relevant, the previous set of accounting standards (International Accounting Standards - IAS), to be used in preparing the consolidated accounts of all publicly-traded companies.
Individual member states may choose to extend this requirement to other companies, such as privately-held firms or wholly-owned subsidiaries of foreign firms which play an important role in the local economy; in addition to the EU-wide requirement for publicly-traded companies to produce consolidated accounts using IFRS, individual member states may permit or require publicly-traded companies to prepare their annual accounts using IFRS. Under separate EU rules, banking and insurance firms, whether or not they are traded on public stock markets, are also obliged to produce full set of accounts (see Accounting for banks and Accounting for insurance undertakings). In the EU, the term "public interest entity" (PIE) is used to cover all those enterprises which are subject to the full set of accounting and auditing requirements, whether they are publicly traded on securities markets or not.
Recent developments/current issues
European Commission proposals to reform the Accounting Directives
In November 2011, the European Commission presented its proposals for a new Accounting Directive to replace and modernize both the Fourth and Seventh Directives.
The Commission’s proposals are intended to simplify reporting requirements for smaller companies and to improve the comparability of company financial statements within the EU.
For small companies, the Commission is proposing to establish a “mini-regime”, involving a simpler profit and loss account and balance sheet and a limited number of accompanying disclosure notes. Small companies would also no longer be obliged to have an audit, while small company groups would be exempted from the obligation to prepare consolidated financial statements. Though medium-sized companies would retain the statutory audit requirement, the extent of other management information (currently referred to as the Annual Report) would be rationalized. For medium-sized and larger companies, the proposed Directive aims to improve the comparability and clarity of their financial statements by introducing a general principle of “substance over form”, by not requiring the provision of information which is immaterial, and by reducing the number of options that individual EU member states may exercise in implementing the Directive.
The Commission is proposing to raise the company size thresholds for small and medium-sized companies to reflect inflation since 2006 (the last time that these thresholds were set) and to harmonize them across the EU (currently some EU member states have thresholds which are significantly lower than the thresholds suggested by the Commission).
The proposed directive also include a requirement on companies operating in extractive industries (oil, gas and mining) and loggers of primary forests to disclose payments made to the governments of countries in which they operate.