Comparable and clear company financial statements across the EU
Directive 2013/34/EU on the annual financial statements, consolidated financial statements and related reports of certain types of businesses aims to:
ensure the clarity and comparability of financial statements, other than international financial reporting standards (IFRS);
limit administrative burdens and provide for simple and robust accounting rules, especially for small and medium-sized enterprises (SMEs);
increase transparency of the payments made by the mining and logging industries to governments.
The legislation applies to limited liability types of companies in the European Union (EU).
The legislation defines and differentiates between micro-, small, medium and large companies, on the basis of their:
net turnover; and
average number of employees during a financial year.
For each category, it sets 3 limits, 2 of which must not be exceeded:
micro-undertakings: balance sheet (€350,000), net turnover (€700,000), employees (10);
small undertakings: balance sheet (€4 million), net turnover (€8 million), employees (50);
medium-sized undertakings: balance sheet (€20 million), net turnover (€40 million), employees (250);
large undertakings: balance sheet (€20 million), net turnover (€40 million), employees (250).
Annual financial statements must:
contain, as a minimum, the balance sheet, the profit and loss account and the notes to the financial statements;
give a true and fair view of the company’s assets, liabilities, financial position and profit or loss;
be published by each company in the relevant national business register.
The directive sets out general financial reporting principles, such as consistent application of accounting policies and measurement bases from one year to the next.
Detailed rules cover the presentation of the balance sheets, profit and loss accounts and the notes to the financial statements, as well as management reports, non-financial information, corporate governance and consolidated statements.
The obligations may vary depending on a company’s size and the directive allows for exemptions or simplifications in many areas for micro-undertakings and SMEs. It is up to each EU country to decide on the extent of these exemptions and simplifications.
The financial statements of public-interest entities, medium-sized and large undertakings must be audited by one or more statutory auditors.
Large companies involved in mining minerals, oil, natural gas or other materials or involved in logging in primary forests must publish details of payments over €100,000 in total that they make to governments in any financial year.
The legislation repeals earlier accounting directives (78/660/EEC and 83/349/EEC) and amends Directive 2006/43/EC.It has applied since 19 July 2013. EU countries had to incorporate it into national law by 20 July 2015.
The directive is part of the European Commission’s better regulation programme. This emphasises the importance of quality legislation that ensures administrative burdens are proportionate to the benefits they bring.
Notes to the financial statements: additional information to that contained in a company’s financial statements. This information is provided in the interests of clarity and may include, for example, accounting methodologies used for recording and reporting transactions and pension plan details.
Primary forests: forest of native species, where there is no clearly visible indication of human activities and the ecological processes are not significantly disturbed.
Directive 2013/34/EU of the European Parliament and of the Council of 26 June 2013 on the annual financial statements, consolidated financial statements and related reports of certain types of undertakings, amending Directive 2006/43/EC of the European Parliament and of the Council and repealing Council Directives 78/660/EEC and 83/349/EEC (OJ L 182, 29.6.2013, pp. 19-76)
Successive amendments to Directive 2013/34/EU have been incorporated in to the original document. This consolidated version is of documentary value only.
Directive 2006/43/EC of the European Parliament and of the Council of 17 May 2006 on statutory audits of annual accounts and consolidated accounts, amending Council Directives 78/660/EEC and 83/349/EEC and repealing Council Directive 84/253/EEC (OJ L 157, 9.6.2006, pp. 87-107)
EU programme to support financial reporting and auditing
Regulation (EU) No 258/2014 establishing an EU programme supporting specific activities in the field of financial reporting and auditing for the 2014-2020 period sets up an EU programme to support the activities of bodies which contribute to the achievement of the EU’s policy objectives in relation to financial reporting and auditing.
The regulation covers the period from 2014 to 2020 and sets out rules for the allocation of an initial amount of €43.18 million from the EU’s budget to help develop international financial reporting and auditing standards. Regulation (EU) 2017/827 amended the original regulation increasing the total financial allocation for the programme to €57.007 million.
Following the economic and financial crisis of 2008, it became clear that the issue of financial reporting and auditing needed to be addressed and it became central to the EU’s political agenda. Well-functioning common financial reporting rules are essential for:
the EU’s internal market;
the effective functioning of the capital markets; and
the achievement of an integrated market for financial services in the EU.
The programme was designed to contribute to the objectives of:
ensuring comparability and transparency of company accounts throughout the EU;
ensuring the global harmonisation of financial reporting standards by promoting the international acceptance of International Financial Reporting Standards;
promoting convergence and high-quality international standards for auditing in all EU countries.
The programme covers:
the activities of developing or providing input to the development of standards;
activities relating to applying, assessing or monitoring standards or overseeing standard-setting processes in support of the implementation of EU policies in the field of financial reporting and auditing.
The beneficiaries are:
in the area of financial reporting:
the European Financial Reporting Advisory Group (EFRAG) (€23.134 million)
the International Financial Reporting Standards (IFRS) Foundation (€31.632 million);
in the area of auditing:
the Public Interest Oversight Board (PIOB) (€2.241 million).
It has applied since 1 January 2014.
In 2009, the EU launched a programme to support activities in the fields of financial reporting and auditing. The beneficiaries were the IFRS Foundation, EFRAG and the PIOB. The programme was extended in 2014 for the period 2014-2020 for IFRS Foundation and the PIOB but, for EFRAG, the European Parliament and the Council decided to wait until certain reforms were made to EFRAG’s governance. These governance reforms were implemented in October 2014 thus paving the way for the EU to increase its contribution to EFRAG.
Regulation (EU) No 258/2014 of the European Parliament and of the Council of 3 April 2014 establishing a Union programme to support specific activities in the field of financial reporting and auditing for the period of 2014-20 and repealing Decision No 716/2009/EC (OJ L 105, 8.4.2014, pp. 1-8)
Successive amendments to Regulation (EU) No 258/2014 have been incorporated into the original document. This consolidated version is of documentary value only.
International Financial Reporting Standards (IFRSs)
Regulation (EC) No 1606/2002 on international accounting standards requires all EU publicly-listed companies (ie. EU companies that have issued securities on an EU regulated market) including banks and insurance companies, to prepare their consolidated accounts in accordance with financial reporting standards (IFRSs)* from 2005 onwards.
Using common accounting standards improves the transparency and comparability of company accounts, thus increasing market efficiency and reducing the cost of raising capital for companies.
EU countries have the option to permit or require publicly-traded companies to prepare also their annual accounts in conformity with the IFRSs adopted according to the procedures laid down in the regulation. They may also decide to extend this permission or requirement to non-publicly traded companies when preparing their consolidated accounts or their annual accounts.
To ensure appropriate political oversight, the regulation introduces a new EU mechanism to assess the IFRSs adopted by the London-based International Accounting Standards Board (IASB) in order to give them enforceability within the EU.
Two bodies assist in this process:
the Accounting Regulatory Committee (ARC), chaired by the European Commission and composed of EU countries’ representatives, decides whether to endorse IFRSs on the basis of Commission proposals;
the European Financial Reporting Advisory Group (EFRAG) provides support and expertise to the Commission in the assessment of IFRSs. It is composed of accounting experts from the private sector in several EU countries.
The endorsement mechanism involves a two-tier process:
a regulatory process where ARC decides, on the basis of a Commission proposal, whether the IFRSs are to be adopted;
a technical process with EFRAG providing support and expertise as needed to assess IFRSs and to advise the Commission on whether or not to adopt the IFRSs under consideration.
Commission Regulation (EC) No 1126/2008 sets out the endorsed IFRSs and related interpretations. This regulation has been amended several times to include all the standards presented by the IASB since 2008, including certain amendments from 2012 on consolidated financial statements, partnerships and information to be provided on interests held in other entities.
A page on the Commission’s website listing all the amendments to Commission Regulation (EC) No 1126/2008 is published and updated regularly.
In June 2015, the European Commission adopted a report evaluating the regulation’s operation. It concludes overall that IFRSs have been successful in improving the efficiency of EU capital markets by enhancing the transparency and comparability of financial statements. Some areas for improvement were however identified, such as better collaboration between the parties involved in the endorsement process.
It has applied since 14 September 2002.
International financial reporting standards: previously known as international accounting standards (IASs), international financial reporting standards (IFRSs) and related interpretations (SIC-IFRIC* interpretations), subsequent amendments to those standards and related interpretations, future standards and related interpretations issued or adopted by the International Accounting Standards Board (IASB).
SIC-IFRIC: the Standing Interpretations Committee (SIC) was the predecessor to the International Financial Reporting Interpretations Committee (IFRIC).
Regulation (EC) No 1606/2002 of the European Parliament and of the Council of 19 July 2002 on the application of international accounting standards (OJ L 243, 11.9.2002, pp. 1-4)
Successive amendments to Regulation (EC) No 1606/2002 have been incorporated in the original text. This consolidated version is of documentary value only.
Report from the Commission to the European Parliament and the Council — Evaluation of Regulation (EC) No1606/2002 of 19 July 2002 on the application of international accounting standards (COM(2015) 301 final, 18.6.2015)
Commission Regulation (EC) No 1126/2008 of 3 November 2008 adopting certain international accounting standards in accordance with Regulation (EC) No 1606/2002 of the European Parliament and of the Council (OJ L 320, 29.11.2008, pp. 1-481)