By / June 9, 2013

New legal framework for financial statements

The current legal framework for financial statements was enacted three decades ago and has been heavily amended since. The Commission’s…

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The current legal framework for financial statements was enacted three decades ago and has been heavily amended since. The Commission’s proposal for a new directive aims at consolidating and simplifying the law, reducing the administrative burden for small undertakings, as well as enhancing the transparency of payments made to govern­ments by the extractive industry.


At present the financial statements of under­takings are regulated by the 1978 Directive on annual accounts and the 1983 Directive on consolidated accounts. These Direc­tives not only contain many cross-refe­ren­ces, but have also been amended several times. As a result, the legal framework is very com­plex.

Commission proposal

In October 2011, the Commission adopted a proposal for a new Directive on annual financial statements, consolidated financial statements and related reports aimed at replacing the two existing directives.

It provides for full (maximum) harmoni­sation of the definitions of types of under­takings (small, medium, large) on the basis of balance sheet total, net turnover and number of employees. Micro undertakings were not defined in the original proposal. However, requirements for such undertakings have since been simplified in the recent Directive on annual accounts of micro entities.

An important aspect of the proposal is the simplification and full harmonisation of rules regarding the preparation of financial statements by small undertakings. Small groups of undertakings would not need to file consoli­dated financial state­ments.

The proposal also contains rules aimed at making financial statements more trans­parent, com­prehensible and compa­rable between Member States (MS). This is achieved inter alia by reducing the discretion enjoyed by MS when imple­menting the directive.

A major innovation is the introduction of a duty for large undertakings and public-interest entities active in the extractive industry or in the logging of primary forests (e.g. the Brazilian rainforest) to publish reports on any payments made to national governments. Reporting is to be done by country and pro­ject. However, undertakings would be exemp­ted if reporting is prohibited by criminal law in the recipient country.

Positions of the institutions

Financial analysis and stock market reports
© Wrangler / Fotolia

In September 2012 the Legal Affairs Committee (rapporteur: Klaus-Heiner Lehne, EPP, Germany) adopted a report on the proposal. After a series of trilogues, a compromise text was agreed in April 2013.

The text integrates the 2012 Directive on annual accounts of micro entities. It contains a definition of micro undertakings and a rule allowing MS to exempt them from a number of reporting obligations and to allow them to use abridged balance sheets. In addition, micro undertakings also benefit from all simplifi­cation measures available to small under­ta­kings. At the same time, the maximum thresholds used to define small undertakings are lowered, although MS will be allowed to raise them within limits.

As regards payments made to governments by the extractive industry and loggers of primary forests, the exemption from reporting due to criminal sanctions in a third country has been deleted. Such payments need not in any case be reported if they are below €100 000 per year. Moreover, an anti-evasion clause ensures the duty to report cannot be avoided by split­ting payments to levels under the threshold.

The Com­mission may lay down (in dele­­gated acts) criteria of equivalence be­tween third-country reporting rules and the Direc­­­tive. It may also specify (in implementing acts) which national reporting regimes actually fulfil those criteria. An undertaking which has published such an equivalent report would not have to provide another report under the Directive.

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