Following a public consultation that the Finance Ministry had promoted on the implementation in Italy of the Directive 2013/34/EU on annual and consolidated financial statements and related reports, the Italian Government has recently issued (May 2015) the Legislative Decree n. 171 draft containing modifications to the current legislation that will affect the domestic framework on accounting and audit requirements. The document, which is currently under examination by the Parliament, contains many innovative elements; the most relevant ones will be commented and analyzed in the present article.
We have already examined the proposed changes to the Civil Code and would like to focus now on the main amendment proposals to Legislative Decree 9 April 1991 n. 127, which disciplines consolidated financial statements; each paragraph will contain the reference to the article of the European Directive that has imposed the modification.
Exemptions from consolidation (Article 3 and Article 23). The first paragraph of article 27 has been updated in order to align the domestic parameters of medium-sized groups with the European limits (Article 3), and has incorporated the provision of exempting such medium-sized groups from the preparation of consolidated financial statements (Article 23). The second paragraph of article 27 has in addition been amended in order to establish that public interest entities are excluded from such exemptions (the current disciplines only excludes listed entities from the exemption).
Article 27 has furthermore been amended at paragraph four, which states that sub-holdings are exempted from consolidation pursuant to paragraph 3 only if their holding draws up its consolidated financial statement in accordance with the law of the Member State by which that parent undertaking is governed, or in accordance with the current domestic discipline (Legislative Decree n. 127/1991), or in accordance with international accounting standards adopted by the EU. This provision stresses the importance of implementation of international accounting standards, that increasingly represent a guideline also for our domestic accounting discipline.
Cash flow statement (Article 4). Paragraph one of article 29 has been amended in order to include the cash flow statement as a mandatory statement included in the financial statement, coherently with the option granted by the Directive and with the amendments to first paragraph of article 2423 of the Civil Code.
Materiality (Article 6.1.j). The new paragraph 3-bis of article 29 introduces the new concept of materiality as expressed by the Directive, granting the option of not having to comply with the obligation related to recognition, measurement, presentation, disclosure and consolidation when the effect of complying is immaterial. The same paragraph, however, re-affirms the obligation related to the respect of the general standards and rules in order to ensure a correct bookkeeping and accounting process, and states that the entity must disclose the criteria used in complying with the materiality principle in the notes to the financial statement.
Own shares acquisition (Article 10). Pursuant to the provisions of the Directive and the amendments to article 2357-ter related to the accounting treatment of own shares acquisition, fourth paragraph of article 31 has been modified by inserting the obligation of setting-off the book value of shares against the portion of shares and reserve they represent, according to the provisions of article 2424-bis.
Investments (Article 24). Following the option granted by the Directive, first paragraph of article 33 has been amended by stating that the setting-off of shares in the capital against the portion of shares and reserve they represent, shall be effected on the basis of book values as they stand on the date on which the entity is included in a consolidation for the first time (current discipline) or at the date of acquisition of the shares (amended option).
Furthermore, after first-time consolidation, any differences arising from this set-off shall be entered against the balance sheet items that have values above or below their book value. If a difference remains, it shall be recorded as goodwill and presented in the consolidated balance sheet; if an impairment emerges (for its total or partial value), the corresponding amount shall be transferred to the consolidated profit and loss account.
Article 34 has been amended at paragraphs 2 and 3 in order to align it with the Directive, by introducing the option of derogating the application of the same measurement bases in exceptional circumstances, with appropriate details to be shown in the notes to the financial statement. In addition, the new article contains the obligation of re-measuring the book value of those items previously measured with different measurement bases.
Notes to the financial statement (Articles 16, 17, 18 and 28). There are numerous proposed amendments to article 38, the most important of which will now be analyzed.
New paragraph b-bis introduces the obligation of presenting fixed assets movements with related details: original cost, previous re-measurements, depreciations, write-offs, additions, dismissals.
Paragraph h has been modified by introducing the obligation of presenting and explaining amount and information related to guarantees or future liabilities not recorded in the balance sheet, as well as leave indemnity provisions or similar commitments.
Paragraph m has been modified with the purpose of requesting specific information on the different amounts and natures of expenditure and revenue items which are of exceptional size or incidence. Such requirement is coherent with the proposed modifications to the profit and loss account framework, and related disclosure, inserted in articles 2425 and 2426 of the Civil Code; section E of the profit and loss account shall in fact be removed and related exceptional items of expenditure and revenue registered in the corresponding expenditure and revenue category, for which a breakdown will have to be disclosed to permit the identification of amounts and natures of exceptional events.
Paragraph o contains reference to additional information requested, related to advances and credits granted to members of the administrative, managerial and supervisory bodies, with specific indications of applied conditions such as the interest rates, main conditions and any amounts repaid or written off or waived, as well as commitments entered into on their behalf by way of guarantees of any kind, with an indication of the total for each category.
Paragraph o-bis, which contains the request to disclose the details that have led to accounting changes and accruals carried out only pursuant to specific tax requirements, is not any longer operating in our discipline following the Company reform, that has modified many Civil Code articles. This paragraph is therefore repealed.
Paragraph o-ter has been modified by amending sub-paragraph 2 and inserting new sub-paragraph 2-bis and 2-ter. The proposed amendments, which are part of a whole process of harmonization regarding financial instruments and derivatives, require disclosure on the conditions and terms of the underlying contracts which might influence the amount, expiration and the existence of future financial flows; on the models and techniques used to measure fair value when market value is not available; on the changes in fair value registered in the profit and loss account or in the net capital; on the changes in the fair value reserve accrued in the present year. All these new requirements are meant to bring our domestic discipline closer to the international accounting framework, to the general accounting standards and also to the International Financial Reporting Standards (particularly to the requirements contained in the IFRS 13).
Proposed repealing refers to the second paragraph of article 38, that currently requests companies to list the entities included in the consolidation perimeter according to the full consolidation, proportional consolidation and equity method. Article 2-bis is also repealed based on the modified article 2426 of the Civil Code that expressly refers to the International accounting standards for the definitions of financial instrument, fair value, derivatives and related party.
Publication of the financial statement. Second paragraph of article 42 is repealed in order to eliminate the obligation of mentioning the publication of the financial statement (in the Registry Book) in the Official Bulletin of limited companies, which has been repealed by Law 266/1997.
Financial institutions. Article 44 has been amended in order to clarify that Legislative Decree n. 127/1991 does not apply to those entities under the regulatory supervision of the Bank of Italy, which fall under the provision of Legislative Decree 1 September 1993 n. 385 (Banking Act) and Legislative Decree 24 February 1998 n. 58 (Finance Act).
BP&A, Finance and Business Consulting
Co-author of the volume “Codice commentato dei principi contabili internazionali IAS/IFRS“, Maggioli Editore