Small companies in the European Union will be allowed to file pared-down annual financial statements, under a measure approved last week by the European Parliament.

Parliament voted during its June 12 meeting in Strasbourg to streamline the accounting rules for smaller companies as part of an overhaul of two existing accounting directives. The intended goal is to cut down on red tape faced by businesses. The new accounting directive allows smaller companies to produce abridged balance sheets and profit and loss statements. Information provided via notes will drop from an estimated 14 to 24 items to 8 to 13 items. The directive defines smaller companies as those with fewer than 50 employees, a turnover of not more than €8 million and/or a balance sheet total of not more than €4 million. Those thresholds would increase over time with inflation.

Officials estimated that new definition of smaller companies will apply to more than 90 percent of EU businesses. Proponents said the measure could save small businesses billions of euros annually.

“Financial reporting obligations have been modernized and costs reduced, in particular for SMEs,” Michel Barnier, commissioner for the internal market, said in a statement.

The new directive is a replacement for two previous directives, dating back to 1978 and 1983, which had been amended so many times over the years that it created a complex and overly burdensome web of rules for companies to follow.

The directive gives member states discretion, however, on whether to implement the scaled down requirements. Member states would be allowed to bump up the threshold for “small” companies to turnover of not more than €12 million and a balance sheet of not more than €6 million. Member states also would be allowed to impose more stringent accounting standards on smaller companies in their own jurisdictions. The timeline for adoption by member states is from the current year until 2015.

Smaller companies would be allowed to provide additional financial information if they desire. In member states with a single filing system, the directive calls for the information prepared to be similar to tax returns. The EU rule will not require small companies to have an audit. However, member states could still require audits.

The directive went even further for so-called micro-entities. Those companies – with fewer than 10 employees, a turnover of not more than €0.7 million and/or a balance sheet total of not more than €0.35 million – will be allowed to prepare very simple balance sheets and profit and loss accounts with practically no notes. 

Proponents said this “think small first” approach will ensure a company's financial reporting requirements are more proportionate to its size. The rules do not apply to public interest entities.

The decision was welcomed by the European Small Business Alliance (ESBA).

“The new accounting directive is an important next step in the overall simplification process, which started with the exemption of micro-entities from certain burdensome obligations regarding annual accounts,” Patrick Gibbels, an ESBA representative in Brussels, said in comments reported by the EurActiv news site. “It is now up to the member states to make the best possible use of this directive.”

An industry group representing accountants was not in favor of some of the changes. Richard Martin, head of corporate reporting for the Association of Chartered Certified Accountants (ACCA), told EurActiv the directive will cause “a substantial loss of information to users” which could ultimately harm SMEs looking for access to financing, and in turn hinder the region's economic recovery.

Martin urged member states to retain rules requiring smaller firms to continue to provide information on post-balance sheet events, related-party transactions, and movements on fixed assets.

“Without these, users need to beware that some small company accounts might be misleading,” Martin said.

EU officials rejected the option of adopting the International Financial Reporting Standard (IFRS) for SMEs because they said doing so would not simplify or reduce the administrative burden faced by small and medium-sized enterprises. Similarly, officials also held off on requiring businesses to file financial information in the eXtensible Business Reporting Language (XBRL) or another common electronic format.

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