Directive 2013/34/EU of 26 June 2013 is aimed at amending Directive 2006/43/EC of the European Parliament and of the Council and repealing Council Directives 78/660/EEC and 83/349/EEC. Such Directive will oblige all Member States to bring into force the laws, regulations and administrative provisions necessary to comply with this Directive by 20 July 2015.
Directive 2013/34/EU introduces new elements and principles related to the preparation of financial statements, both annual and consolidated, and related reports, and to the compliance with new audit requirements to all those companies that are not obliged to adopt the international accounting standard set.
The Directive focuses on small and medium-sized entities (SMEs) and pursues the objective of finding the right balance between the need of a transparent financial reporting and the related burden of administrative costs compared to the benefits received. The European Union has intensively analyzed the obligations and requirements posed on SMEs related to accounting and financial reporting, acknowledging that they often result burdensome and not appropriate for promoting and enhancing real development, internationalization and competitive advantage; however, it remains of primary importance to ensure that financial information is correctly and transparently presented to all those parties who have an interest in the Company, thus establishing a set of minimum requirements that need to be respected by all entities operating in the European territory.
One of the most innovative aspects of the Directive is based on the concept of materiality that, according to article 6.1.j), allows an exception to the recognition, measurement, presentation, disclosure and consolidation when the effect of complying is immaterial. In the Italian legislation, a similar concept is expressed by article 2423-ter of the Civil Code, under which the grouping of certain values in the presentation of the financial statement is allowed if their amount is immaterial. The provisions of the Directive, which considers not only the presentation but also the recognition, measurement, disclosure and consolidation, appears far more extensive than the Italian discipline and might lead to excessive arbitrariness, thus having a negative impact on the general principle of true and fair preparation of the whole financial statement.
Article 6.1.h) requests that “items in the profit and loss account and balance sheet shall be accounted for and presented having regard to the substance of the transaction or arrangement concerned”, thus confirming the approach used by International Accounting Standards that stress the importance of substance over form; based on such concept, transactions need to be recorded considering their true nature (substance) and not just their formal appearance (form), in order not to mislead any third party’s comprehension of the financial statement.
The Italian discipline currently contains a reference to such approach in the Civil Code (article 2423-bis), that has been modified by the 2003 reform but is formulated in an ambiguous sentence that has so far led to misinterpretation and confusion. It should perhaps be appropriate to modify the article and specify that the “economic function” it refers to must be related to the undergoing operations and contracts.
The Directive specifically aims at establishing a common set of accounting standards, in order to promote the integration between domestic accounting standards and the International Accounting Standard (IFRS/IAS) set. The complete integration of accounting standards would allow an easier audibility of Financial Statements internationally, regardless of the dimension or specific obligation of the Company (listed or not listed entity), which might represent an interesting aspects for those Companies with an international ramification or with the objective of attracting foreign capital to support further growth and expansion. On the other hand, the adoption of International Accounting Standards might result burdensome for some SMEs in relation to the complex calculations and valuations that need to be implemented for the fair and true evaluation and presentation of many elements recorded in the accounting books. Particularly, tax implications linked to the adoption of IFRS represent a serious obstacle for Italian companies willing to voluntary adopt IFRS, as the International Accounting Standards base their evaluation process on market value, while the Italian tax discipline imposes rigid fiscal evaluation models.
With the intent of diversifying the requirements on accounting and financial reporting based on the dimension of the entities, the Directive has established specific clusters of both Companies and Groups in order to establish a proportionality in the application of financial reporting requirement. In relation to the parameters of net turnover, balance sheet total and average number of employees, companies or Groups are classified as micro, small, medium or large and are therefore subject to different obligations.The proportionality approach used on imposing different sets of requirements to companies with different sizes is certainly to be seen as a practical and realistic step in order to keep the balance between the need of transparency in the financial reporting and the relative burden of administrative costs.
However, the facilitations allowed to smaller entities appear only partially incisive and productive, as they should be part of a global set of regulations extended to financial and fiscal requirements which may contribute, together with the less stringent accounting requirements, to the effective development and facilitation of smaller companies in terms of access to financial resources, market visibility and internationalization. For example, the provision of article 36.1.a) of the Directive which exempts micro entities from the obligation to present prepayments and accrued income and accruals and deferred income, does not seem to have such an important impact on the simplification of financial statement presentation. Similarly, the provisions referred to medium-sized entities which establish a certain set of simplified requirements, might not be acceptable to those entities which are part of a multinational group, or which are intensively exposed to foreign operations and transactions, and should therefore file detailed and extensive financial reports containing precise information and data, in order to comply with the expectation of its stakeholders.
In brief, fixed numeric parameters used to determine the extension of the reporting and accounting requirements, does not seem appropriate to reach the fundamental objective of the Directive, which is the creation of a homogenous yet fair set of principles and standards, aimed to all entities operating in the European territory and with an international focus.
With specific reference to the obligation of presenting audited financial statements, Directive 2013/34/EU imposes such requirement on medium and large-sized companies and public-interest entities (article 34) and extends the obligation to the management report which must be audited in order to verify the consistency with the financial statement and its compliance with the applicable legal framework.
The current Italian legal framework on auditing focuses on the legal form of the entity whose financial statement must be audited more than its dimensional parameters; it should perhaps be appropriate to review the current legislation and adapt it to the European standards. In addition, the requirements set by the Italian legislation are currently heavier that the European ones, thus in contradiction with the gold plating general principle; the implementation of Directive 2013/34 could therefore be the right opportunity to modify the existing domestic framework in order to comply with the European legislation.
BP&A, Finance and Business Consulting
Co-author of the volume “Codice commentato dei principi contabili internazionali IAS/IFRS“, Maggioli Editore