Implementing the European Union’s accounting directive is going to be challenging for Member States, which will be forced to consider scores of so-called Member State Options for inclusion or exclusion from their national accounting rules, according to accounting experts.
The EU accounting directive entered into force in July 2013, replacing the Fourth and the Seventh Directives on financial reporting, and Member States have one year left to implement it. The new accounting directive requires country by country reporting of payments to governments in order to boost transparency, contains a maximum harmonization regime for small undertakings, and incorporates the micro company regime, which was previously contained in a separate directive.
The country by country reporting requirement has garnered the most attention. The United Kingdom launched a consultation this March on that portion of the directive.
However, also within the directive are roughly 100 Member State Options (MSOs), which means national representatives will have many decisions to make in their implementation. Those MSOs include the pooling of interests for business combinations under common control, time limits for filing accounts, certain exemptions for consolidated financial statements, and disclosures required in the notes of financial statements.
Experts gathered at a roundtable discussion in Brussels last week said the numerous options present both a challenge and “an opportunity to get things right” in national accounting rules. The event was organized by the European Federation of Accountants and Auditors for SMEs (EFAA) in conjunction with the Association of Chartered Certified Accountants (ACCA) and the Nederlandse Beroepsorganisatie van Accountants (NBA). It included representatives from Member States and regulators.
Richard Martin, ACCA’s head of corporate reporting and the discussion’s moderator, said the Member State Options (MSOs) will have a big impact on companies.
“This is an important moment for accounting in Europe. Each Member State has to assess what route to take,” Martin was quoted as saying. “Some of the options are old ones that already existed in the Fourth and Seventh Directives, while others are new, introduced with the new text. However, even if the option is old, the new legislation has triggered a debate on whether we got the law right before, or if there are any amendments that should be made in order to improve the existing regime.”
EFAA pointed out that while reducing the number of MSOs was an objective of the new directive, that overall goal was not achieved as new options were inserted during the late-stage political negotiations at the European Council and European Parliament, and some old ones were retained. This could reduce consistency in accounting rules and the comparability of financial statements throughout the bloc, the EFAA said in its position paper.
That sentiment was echoed by Henk Verhoek, the NBA’s coordinator of financial reporting. “Because of the Member State Options, the level of consistency across Europe has been reduced. One of the objectives might be to harmonize the accounting in the EU so that we have one accounting language. Unfortunately, this is not the outcome of the political process that has taken place within the EU,” Verhoek was quoted as saying.
Verhoek added that soft law issues need to be tackled as well, and national standard setters will need to address areas like lease and pensions accounting.
EFAA has weighed in on the raft of MSOs in the appendix to its report, and is recommending Member States apply the following criteria in deciding whether to adopt certain provisions – better accounting, comparability, relevance, minimizing costs of changing, international harmonization, transparency, and market efficiency. The report also noted that if Member States do not apply certain MSOs, a number of disclosure requirements for small undertakings would end, including significant post-balance sheet events and movements on reserves.
Bodo Richardt, EFAA’s president, said during the discussion that more opportunities are needed for the industry and standards setters to get feedback based on facts rather than “political gut feelings.”
“Platforms to discuss complex accounting issues that deliver recommendations are very important because the political decision-making process itself is complex,” Richardt said. “However, rationality and practicality are very important ingredients, especially for SMEs.”