EU outlines simpler SME accounting

NEW EUROPEAN DIRECTIVES could cut financial reporting requirements for SMEs and block the use of international standards for the smallest companies.

A draft paper seen by Accountancy Age claims as much as €1.7bn (£1.5bn) could be saved by the proposals, which would usher in a mini-regime for small companies.

Brussels argues the administrative burden reduction will save €1.5bn, while raising the threshold for simpler reporting could save around €0.2bn.

SME reporting might be reduced to disclosures in five key areas: accounting policies; guarantees, commitments, contingencies and arrangements that are not recognised in the balance sheet; post-balance sheet events not recognised in the balance sheet; long-term and secured debts; and related party transactions.

At the same time, efforts to strengthen creditor protection could make disclosures on guarantees, commitments and related party transactions mandatory, but the proposals will apparently reduce the amount of information available overall.

International financial reporting standards for SMEs are not mandatory under the directive, as they "would not serve the objectives of simplification and reduction of administrative burden".

Differences between this draft paper and IFRS for SMEs in areas such as amortisation of goodwill and the presentation of share capital mean that full adoption the global standards "will not be possible".

One expert noted this effectively means national standard setters will be unable to impose IFRS on smaller companies, potentially dealing a blow to global standards.

Another proposal raises the threshold for statutory audit, with 1.4m of the smallest companies - 21% of the market - exempted, while small company groups would no longer have to prepare consolidated financial statements.

For 300,000 medium-sized and larger entities, the directive aims to "improve the comparability and clarity of financial statements". This means the favouring of "materiality" and "substance over form", and the reduction in the number of member state options.

One expert said the small company proposals "could be good", saying simplifying financial reporting requirements is "quite a sensible first step". They welcomed the introduction of mandatory reporting on related party transactions and other investor-focused proposals, saying the directive might "decrease the cost burden on SMEs yet still give account users the information they need".

One proposal focuses on increasing transparency around payments made to governments by the extractive and forestry industries, a move designed to "better satisfy the needs of stakeholders calling for enhanced disclosures".

It could force companies to provide country-by-country data on payments, and might go so far as to demand information on a project-by-project basis.

One critic denounced country-by-country reporting as a hollow exercise that will do little to improve government accountability and could result in EU companies losing contracts.

The draft directive is expected to be finalised in the next few weeks.