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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.


By Richard Martin, head of financial reporting, ACCA

Bob Herz, chair of the US' Financial Accounting Standards Board (FASB), has announced – as I'm sure you've noticed – that he's to retire from the role early. With the IASB's chair, Sir David Tweedie, stepping down next year, it's suddenly 'all change' at the top of the key accounting standards bodies.

Rachel Sanderson in today's FT (£) sees the departures as an opportunity for the accounting profession. I'm not so sure we can call the long-term impact of the departures just yet; Herz's departure in particular raises more questions than answers:

  • Why has Herz left now? It's not the best timing, given the IASB and FASB are both engaged in a major push to try and get a whole series of converged standards agreed to according to a programme endorsed by both the SEC and G20.
  • Is it connected to the FASB Financial Instruments Exposure Draft, which has been less than warmly received in the US and is also divergent from the IASB position? Bob Herz voted in favour of it, but his temporary replacement, Leslie Seidman, voted against.
  • The SEC is meant to be getting closer to a decision on whether to adopt IFRS. Do the changes – particularly the decision to increase the size of the FASB board from 5 to 7 – indicate that the SEC is going to give a 'no' to IFRS, meaning FASB will be needed for longer? After all, the 5 member board (reduced from 7) seemed to be too small and perhaps too dependent on the individuals involved, and was split on some key issues.
  • What does this mean for the current convergence programme? I suspect this will be delayed further.
  • Who replaces Herz and Tweedie? There's an issue in recruiting high quality individuals to boards, and to these roles in particular. There have been suggestions that the search for Tweedie's replacement has been bedevilled by problems; for the FASB role these problems will be even greater given the degree of uncertainty over the longer term future of the organisation.
  • And where next for Herz? He was after all once spoken of as a possible successor to David Tweedie…

Update: There's an interview with Leslie Seidman over on WebCPA