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, and of the corporate taxes paid by very large multinational groups.
The legislation applies to limited liability types of companies in the European Union (EU). The legislation defines and differentiates between micro-, small, medium-sized and large companies, based on:
their balance sheet;
their net turnover; and
the average number of employees during a financial year.
For each category, it sets three limits, two 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 Member State to decide on the extent of these exemptions and simplifications.
The financial statements of public interest entities and 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 have made to governments in any financial year.
Amending Directive (EU) 2021/2101 inserts a new chapter (10a) in Directive 2013/34/EU concerning the disclosure of income tax information by multinational groups with annual consolidated revenue of more than €750 million:
the parent companies of such groups will be required to declare, in a specific report published on their website, their revenues, the profits they have made, the corporate income tax paid and the number of employees per Member State, and per non-EU country that does not cooperate with the EU on tax matters or that does not meet all standards and has committed to reform;
business registers will also provide public access to these reports;
non-EU country multinational groups doing business in the EU are required to report similarly.
Regulation (EU) No 258/2014 establishes an EU programme supporting specific activities in the field of financial reporting and auditing for the 2014-2020 period
It 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).
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.
International accounting standards
Regulation (EC) No 1126/2008 of 3 November 2008 adopting certain international accounting standards in accordance with Regulation (EC) No 1606/2002 sets out the international accounting standards (IAS) which the EU has adopted. Under a parallel regulation (Regulation (EC) No 1606/2002 — International accounting standards), all EU listed companies*, including banks and insurance companies, must prepare their consolidated accounts according to these requirements.
It replaces and repeals Regulation (EC) No 1725/2003 which had previously adopted certain international accounting standards.
The regulation and successive amendments include:
27 IAS ranging from presentation of financial statements to borrowing costs and intangible assets;
16 international financial reporting standards on subjects such as business combinations and insurance contracts;
19 interpretations from the International Financial Reporting Interpretations Committee covering, among others, rights to interests from decommissioning, restoration and environmental rehabilitation funds;
8 interpretations by the Standard Interpretations Committee, including the introduction of the euro and government assistance.
The European Commission:
decides on the applicability of international accounting standards within the European Union after consulting the Accounting Regulatory Committee;
publishes an amending regulation whenever the EU endorses a new standard issued by the International Accounting Standards Board.
Listed companies must prepare their consolidated financial statements according to a single set of international financial reporting standards.
The standards aim to ensure the transparency and comparability of company accounts. This information contributes to the efficient and cost-effective functioning of the EU capital market.