By Richard Martin, head of corporate accounting, ACCA
UK and Irish company law in annual accounts are based on the EU’s fourth and seventh directives. These are currently being comprehensively rewritten for the first time since the 1970s, with the proposed changes being negotiated between the European Parliament, the European Commission and member states.
Last Tuesday (9 April) the European Parliament and the Council of Members reached an agreement to introduce new rules for company accounts (see p4).
The biggest impact will likely be on small company accounts, reducing further the quality of the financial information and potentially making the accounts misleading.
More companies will be classed as small – all those with turnover of up to €12 million. There will also be a new category of ‘micro’ company with a €700,000 turnover limit and fewer than 10 employees. Micro accounts may be severely reduced, with no more than half a dozen balance sheet totals and the same for the P&L, and virtually no notes. Users would be unable to distinguish, for example, how much current assets consisted of stock and how much cash. It would be obvious to users that these were not true and fair accounts as we know them.
And while for other small companies the new accounts would look very much the same as now – the same formats for P&L and balance sheet, accounting policies etc – significant disclosures might be missing as a result of the ‘maximum harmonisation’ approach. The UK and Ireland could not add to the EU disclosure requirements either by company law or by accounting standard, however essential to a true and fair view.
No directors’ report means no information about the business, so it might be hard to make such sense of the financial information. There would be less analysis of the P&L account and of key balance sheet items, such as the breakdown of related party transactions, so they may have been distorted to achieve a particular effect. The second highlights that users may be looking only at part of a bigger picture.
There would also be no obligation to show significant post-balance-sheet events. Users assume that the most recent accounts represent the best indication of present performance or position. They need to be alerted by these disclosures when that does not apply.
Some of the most significant omissions might be retained as a member state option, but this is still being negotiated and the ‘right’ option might not be chosen as part of a no ‘gold-plating’ policy.
ACCA has been working since the proposals were published in October 2011 to minimise the threatened degradation in the quality of financial information available to shareholders and creditors of small companies. This is probably a revision to European accounting which will not come round again for another 20 or 30 years.
This article first appeared in Accounting and Business magazine, UK edition, February 2013.