This document is an excerpt from the EUR-Lex website
Document 52011SC1290
COMMISSION STAFF WORKING PAPER Part IEXECUTIVE SUMMARY OF THE IMPACT ASSESSMENT
COMMISSION STAFF WORKING PAPER Part IEXECUTIVE SUMMARY OF THE IMPACT ASSESSMENT
COMMISSION STAFF WORKING PAPER Part IEXECUTIVE SUMMARY OF THE IMPACT ASSESSMENT
/* SEC/2011/1290 final */
COMMISSION STAFF WORKING PAPER Part IEXECUTIVE SUMMARY OF THE IMPACT ASSESSMENT /* SEC/2011/1290 final */
Executive
summary The Accounting Directives (hereafter the
"Directives")[1]
deal with the annual and consolidated financial statements of limited liability
companies in Europe. During the past 30 years,
amendments to these Directives have tended to pay insufficient
attention to the comparability and user friendliness of the financial
statements and have gradually increased complexity and the regulatory burden
for companies, especially for the smaller ones. This impact assessment presents the Commission's proposal to modernise and simplify the financial reporting requirements of EU
limited liability companies so as to make them less burdensome and more suited
to users' needs.
1.
problem definition
1.1.
What are the main problems
The preparation of financial statements has
been identified as one of the most burdensome regulatory obligations for
companies[2]. Consultations and analysis indicate that micro
/ small companies face higher administrative burdens in comparison to
medium-sized / large companies. Where a big enterprise
spends one Euro per employee to comply with a regulatory duty, a
medium-sized enterprise might spend four Euros and a small business up to ten
Euros per employee. The financial statements are often not the main
source of information used by stakeholders in smaller entities. Yet, the Directives require the smaller companies to prepare
extensive financial statements and to comply with a number of other
requirements, thus preventing the Member States from designing simpler local
solutions. Smaller companies have to prepare financial statements to a level of
detail suitable only to larger companies. This is especially the case for the
requirements to disclose extensive information in the notes to the financial
statements. In addition, with the absence of a general principle of materiality
from the Directives, trivial information can be presented in the financial
statements for no other reason than complying with regulatory requirements. Due to the current flexibility offered to
Member States in defining company size, companies that are considered as small
under the Directives are categorised as medium-sized or even large under
national rules in many Member States. This affects the
ability of EU companies to compete on a level playing field. Finally, there are around 80 significant
options in the Directive on annual accounts that Member States may adopt or
not, and about 40 options in the Directive on consolidated accounts. Options
generally relate to presentation, recognition, measurement and disclosure in financial
statements, and to the overarching "substance over form" principle.
This creates problems for users of the financial statements, increasing with
company size (medium-sized / large), due to the lack of clarity and
comparability this entails for financial reporting across the Member States. It
can prevent optimal cross border investment decisions, and results in increased
burden for companies with cross border subsidiaries.
1.2.
What are the drivers of the problems?
The Directives are one key driver. EU companies
also face further local financial reporting requirements, such as tax and
statistical reporting, due to national regulations.
1.3.
Impact of the microeconomic problems on the
macro level
The unnecessary and disproportionate administrative cost imposed on small companies hampers economic activity and is an impediment to growth and employment.
1.4.
How big is the problem?
Around 7.3 million companies are within the
scope of the Directives, of which 1.1 million are small. It is estimated that the total costs for small companies of
complying with the requirements of the Directives amounts to €3.1bn annually,
of which €1.7bn constitutes a potential administrative burden.
1.5.
Subsidiarity
There is a need to act at EU level, given that
the main drivers are the EU Directives. The preferred
policy options should be limited to what is necessary in order to attain the
objectives and be proportionate.
2.
Objectives
In line with the overarching objective of
improving the business environment for EU companies, the review of the Directives
aims to (1) reduce administrative burden on companies that are relatively small
in size, to free up resources for growth and job creation; (2) increase the
effectiveness, relevance and understandability of financial reporting; and (3)
protecting the needs of users. The improvements should facilitate the
functioning of the EU's Single Market by encouraging cross-border business
activities.
3.
Policy options
In order to meet the objectives set out above
the Commission services have identified and considered a number of policy
options, first, through an examination of the broad policy options and second,
within the context of the preferred broad approach, through an examination of a
subset of options for the revision of the Directives. The
options examined in this document should be seen as complementary to the 2009 proposal
published on 26 February 2009 aiming to allow the Member States to relieve
micro entities from EU level accounting obligations[3].
3.1.
Broad policy options for reducing administrative
burden and increasing the effectiveness, relevance and understandability of
financial reporting.
Comparing to the baseline scenario (no change),
the range of broad policy options and choice of legal instruments includes the
following: (1)
Baseline scenario (no change); (2)
Better use of existing options in the Directives
by Member States; (3)
Revision and modernisation of selected
requirements currently in the Directives in order to reduce administrative
burdens on companies in the EU, particularly for SMEs; (4)
Creating a wholly new EU accounting framework
and adopting the “International Financial Reporting Standards for SMEs"
for mandatory use within the EU; (5)
Repealing the Directives and allowing the Member
States to put in place whatever basic accounting regime they choose for
unlisted companies. Having compared the broad policy options
above, the preferred option is option 3 consisting in a revision of selected requirements currently in the Accounting
Directives through a new Directive replacing the existing Fourth and Seventh
Council Directives. This is justified as the most reasonable option to achieve
the objectives, having regard to the necessity and proportionality of EU
legislation, the timeline, and its acceptability to stakeholders.
3.2.
Comparison of options within a review of the
Directives
Various options can be considered within the
frame of a review of the existing Directives: Options with an overall reach (1)
Harmonising the definitions of the size of
companies under the Directive ; and/or (2)
Increasing the different thresholds for the size
of company; and/or (3)
Mandating the preparation of financial statements
under an electronic format such as XBRL; Options with an overall reach (mutually
exclusive) Either (4)
Harmonising and clarifying certain basic
principles; and/or (5)
Reducing the number of options available to
Member States; or (6)
Developing a European Accounting Standard; Options specific to small companies
(mutually exclusive) (7)
Simplifying layouts or requiring only key
financial data instead of a fixed balance sheet and profit and loss account
structure; or (8)
Reducing the information given in notes by small
companies and ensuring harmonisation across the EU ("mini-regime"); Options specific to medium-sized / large
companies (9)
Introducing a compulsory cash flow statement. The table below provides an overview of the
analysis of the above options: Option || Size of the companies mainly affected || Requirements targeted to the size of the company || Simplification and elimination of excessive requirements (small) || Clarity and comparability (small / medium / large) || Maintain information value of financial statements (relevance of information) || Preferred option (yes / no / N/A)? 1. Harmonising company size definition || Small, Medium, Large || ++ || ++ || + || - || Yes 2. Increasing the company size thresholds || Small, Medium, Large || ++ || ++ || 0 || - || Yes 3. Mandating an electronic format / XBRL || Micro, Small, Medium, Large || 0 || 0 || ++ || + || No 4. Harmonising and clarifying basic principles || Small, Medium, Large || 0 || 0 || ++ || ++ || Yes 5. Reducing the number of options available to Member States || Small, Medium, Large || 0 || + || ++ || 0 || Yes 6. Developing a EU accounting Standard || Small, Medium, Large || ? || + || ++ || ? || No 7. Simplified layouts or only key financial data || Small || ++ || ++ || - || -- || No 8. Reducing the information given in notes by small companies and harmonisation across the EU || Small || ++ || ++ || + || - || Yes 9. Introducing a cash flow statement || Medium, Large || + || N/A || + || + || No "+" favourable, "++" highly favourable"-" unfavourable, "--" highly unfavourable; "0" neutral; "?" unknown; "N/A" not applicable Source: Commission Services analysis Comparing the options above to the baseline
scenario, the Commission services have identified that options 1, 2, 4, 5 and 8
are worth pursuing. These options are not mutually exclusive and have been
preferred in view of the objectives mentioned above, the potential impacts, and
the potential for general acceptance by stakeholders. These preferred options
also fit with the "think small first" approach supported by the
European Commission.
4.
Analysis of main impacts
4.1.1.
Companies
The preferred options would provide savings up
to a maximum of €1.7bn per year on a recurring basis. The main beneficiaries of
this burden reduction would be small companies (around €1.5bn) as a result of a
regime that would limit disclosures, harmonise company size definition across
the EU, and clarify that the Directives no longer require a statutory audit or
consolidation of small groups. The revision could also have effects on
micro-companies. However these savings would be equally achieved through the
2009 proposal, to which the policy choices in this document are considered to
be complementary, and which effects have been assessed in a separate Impact
Assessment. Other benefits expected for companies remaining
include the increased clarity of financial statements through clearer
principles, and a better comparability stemming from a reduced number of
options, especially for medium-sized and large companies.
4.1.2.
Users of financial reporting
For small companies, key information needs of creditors
would be kept, or even increased in some Member States as disclosures of
"Guarantees and commitments, contingencies, arrangements" and
"Related party transactions" would become mandatory for this category
of company. A positive impact on the information provided
to the users of financial statements of small, medium-sized and large companies
can be expected due to a strongly improved comparability of the financial
statements as well as enhanced clarity based on harmonised principles.
4.1.3.
Public authorities
The revision should have no budgetary consequences
for public authorities.
4.1.4.
Macro-economic and single market
Cutting "red tape" for smaller
companies should contribute to the creation of a
business climate that encourages company formation and entrepreneurship, and
frees up resources of existing companies that can be
reallocated towards productive uses. Fewer options, increasing comparability of the financial statements
of larger companies and a focus on information that is really useful in decision-making
can result in better investment decisions and a better allocation of capital,
thus facilitating cross-border investment, trade and competition.
4.1.5.
Third countries and international relations
The project would improve competitiveness of
small EU businesses vis-à-vis companies from other jurisdictions. Better
comparability and clarity of the financial statements of EU companies could in
addition make the EU more attractive to foreign capital and entrepreneurs.
4.1.6.
Social Impacts
A business climate that encourages company
formation and entrepreneurship, as well as permitting a re-allocation of
resources to operations, should be more favourable to jobs creation than it is
today.
5.
Monitoring and evaluation
A detailed monitoring plan will be part of the
overall monitoring strategy in relation to the general revision of the
Directives. The evaluation will include an assessment of
whether the key objectives have been met, and also possibly allow for further
lessons to be learnt. [1] Fourth Council Directive of 25 July 1978 on the
annual accounts of certain types of companies (78/660/EEC), Seventh Council
Directive of 13 June 1983 on consolidated accounts (83/349/EEC) [2] http://ec.europa.eu/enterprise/policies/better-regulation/administrative-burdens/priority-areas/index_en.htm
[3] See
Proposal for a Directive of the European Parliament and of the Council amending
Council Directive 78/660/EEC on the annual accounts of certain types of
companies as regards micro-entities, COM/2009/0083, available at
http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:52009PC0083:EN:NOT.
The proposal defines Micro-Entities as companies which on their balance sheet
dates do not exceed 10 employees, as well as certain limits for the balance
sheet total and net turnover. EXECUTIVE
SUMMARY
1.
Introduction
Multinationals have worldwide operations
supported by many subsidiary companies. Until now all the activities of a group
have been brought together, every year, into a single set of consolidated
accounts. This allows investors, and other accounts' users to understand the
financial position and profitability of the group as a whole. Country-by-Country Reporting (CBCR) is a
different concept of financial reporting, which would see certain financial
information being presented at a country rather than a global level. CBCR is
not a replacement for consolidated accounts, but a complementary scheme of
reporting.
2.
problem definition
2.1.
What is the problem?
Multinational
Corporations (MNCs) operate in many foreign jurisdictions but detailed
information on their activities in the countries in which they operate is often
not within the public domain. This lack of transparency in country-by-country
financial data stands in the way of greater government accountability, in
particular, in some resource-rich developing countries for the income received
from exploiting natural resources such as oil, gas, minerals and forests. Proponents
of CBCR state that if payments made to a particular government by MNCs were
known, citizens and other interested parties would be better able to demand
that the government accounts for how these incomes have been spent, which in
turn can foster economic growth and help to reduce poverty, corruption and
internal conflict.
2.2.
What are the drivers of the problem?
Currently there
is no obligation to provide financial information on a country-by-country
basis. MNCs could
publish country-by-country information voluntarily, but few do so. Furthermore,
there is an Extractive Industry Transparency Initiative (EITI) which a national government can voluntarily adopt and is
relevant to extractive industry participants, but out of the 50 countries
considered to be hydrocarbon or mineral rich by the IMF only 9 are currently
EITI compliant. Only one country reports payments to governments in respect of
forest activities.
2.3.
How big is the problem?
In the absence of a CBCR requirement there
is no reliable information available on the current level of payments made by
extractive and forestry operators to host governments. In a survey of 11 country reports, the EITI
reported that the surveyed host governments annually received collectively
US$43.5billion from the oil and gas, mining and timber industries[1]. To put this figure in context
the payments represent, on average, 11.5% of these countries' GDP. The Commission Services estimated that listed EU oil and gas companies could collectively have made payments
(including taxes, bonuses and royalties) to governments worldwide of €362
billions in 2009. In its 2009 EITI report Liberia
reported payments to government of US$ 1.9 millions derived from forestry,
which represented 5.7% of the government's revenues from exploiting natural
resource wealth.
2.4.
Subsidiarity
It is preferable to
legislate through EU law to ensure that all EU MNCs exploiting hydrocarbons,
minerals and primary forests[2] are treated equally across the EU.
3.
Objectives
The primary objective is to bring increased
transparency to the operations of MNCs by increasing the disclosures they make
on a country-by-country basis. This should provide relevant information to
civil society in order for it to hold governments accountable for their
receipts from allowing the exploitation of natural resources.
4.
Policy options
In order to meet the objective set out
above the Commission Services have identified and considered a number of policy
options: (1)
No change; (2)
Support an international initiative to require
country-by-country disclosures by MNCs in the extractive industry and loggers
of primary forests. Under this policy option all MNCs (EU and non-EU) would be
subject to new disclosure requirements; (3)
Require disclosure of payments to government on
a country-by-country basis by EU MNCs in the extractive and logging of primary
forest sectors; (4)
Require disclosure of payments to government on
a country- and project- basis by EU MNCs in the extractive and logging of
primary forest sectors; (5)
Require full CBCR by EU MNCs in the extractive
and logging of primary forest sectors (payments to governments, revenues,
costs, profits, tax charges and taxes paid, assets held and intra-group
transactions). The tables below provide an overview of the
analysis of the policy options. Table 1: Assessment of the policy options: Option || Impact on transparency || Impact on competitiveness and level playing field || Potential impact on costs || Estimates of year one compliance cost 0. No change || 0 || 0 || 0 || 0 1. International Action || + || ++ || - || See note 2. Require CBCR of payments to government by extractive and primary logging EU MNCs || + || - || - || €573 millions 3. Require CBCR of payments to government on a country- and project- basis by EU MNCs in the extractive and primary logging sectors || ++ || - || - || €1,145 millions 4. Require full CBCR by EU MNCs in the extractive and primary logging sectors || ++ || -- || -- || €2,887 millions "+" favourable, "++" highly favourable"-" unfavourable, "--" highly unfavourable; "0" neutral Note: The costs of this option would ultimately depend on the precise nature of the scheme of CBCR agreed upon internationally. "Primary logging" refers to logging of primary forests. Source: Commission Services analysis || Table 2: Acceptability to stakeholders: Option || CATEGORY OF STAKEHOLDERS Preparers || Users || Auditing/ accounting firms || Public Authorities || Other 0. No change || 0 || 0 || 0 || 0 || 0 1. International Action || ++ || + || + || + || + 2. Require CBCR of payments to government by extractive and primary logging EU MNCs || + || + || - || ++ || ++ 3. Require CBCR of payments to government on a country- and project- basis by EU MNCs in the extractive and primary logging sectors || + || ++ || - || + || ++ 4. Require full CBCR by EU MNCs in the extractive and primary logging sectors || -- || ++ || -- || - || + "+" favourable, "++" highly favourable"-" unfavourable, "--" highly unfavourable; "0" neutral Preparers: MNCs, other companies, associations of companies; Users: Non-governmental organisations (NGOs), investors; Public authorities: accounting standard setters or National Ministries. Other: political party, law institute, private persons. "Primary logging" refers to logging of primary forests. Source: Commission Services analysis Having compared the broad policy options
above, the best alternative on grounds of competitiveness, transparency and
acceptability to stakeholders is action to support a worldwide initiative to
foster the disclosure of payments to governments by the extractive industry and
loggers of primary forests. However, there is no certainty that an
international agreement on CBCR of payments to governments can be achieved. The preferred policy option is therefore to
require EU MNCs active in the extractive and logging of primary forest sectors
to disclose payments to governments on a country- and project- basis. The
policy would be to target MNCs listed on EU regulated stock markets and EU
unlisted large companies active in the extractive and logging of primary
forests sectors, to ensure a level playing field between these categories of
companies. The development of and support of an
international initiative on CBCR remains crucial as EU action alone on CBCR
will not result in a full picture of government receipts from the exploitation
of natural resources being shown. In particular EU action alone will not
capture the activities of the national oil companies which globally control the
largest share of oil and gas reserves and production.
5.
Analysis of main impacts of the preferred policy option
5.1.1.
Increased transparency
In general terms, CBCR of payments to
government on a country- and a project- basis by the extractive industry and
loggers of primary forests should provide investors and civil society with
significantly more information than today, on what is paid by EU MNCs to host
governments in exchange for the right to exploit the relevant countries'
natural resources. Publicising this information should have the effect of making
governments more accountable. With a project approach, civil society local to a
mine, oil field, forest etc. would know what government receives for exploiting
such local resources.
5.1.2.
Potential strengthening of the Extractive
Industries Transparency Initiatives (EITI)
With increased levels of data on payments
to host governments entering the public domain, there will be increased
pressure on national governments from civil society to account for how the
revenues derived from extractive and loggers of primary forest MNCs have been
spent. Some governments may respond to such calls by implementing EITI locally.
This would mean that potentially more countries would be within the scope of
the initiative. Finally, a significant expansion of EITI reporting countries may
capture non-EU state-owned companies, thus reducing any negative competitive
effects for EU MNCs vis-à-vis the competitive situation with state owned
companies.
5.1.3.
Improved operating environment for the extractive
industry and loggers of primary forests
More accountable governance in resource-rich
countries would bring increased political stability which creates a more stable
business environment for MNCs making significant investments locally.
5.1.4.
Increased administrative costs
There will be increased administrative
costs from the preferred policy option. The Commission Services estimated the
following costs: Table 3: Administrative costs of proposed policy || Estimated Number of companies || Year one cost (€ millions) || Subsequent years' costs (€ millions) Listed extractive MNCs || 171 || 740 || 192 Unlisted large extractive MNCs || 419 || 397 || 103 Forestry (listed and unlisted large MNCs) || 26 || 8 || 2 Total || 616 || 1,145 || 297 These costs assume the information will be
unaudited. A requirement to audit would be estimated to increase annual
recurring costs by approximately €90 millions. Furthermore, the cost estimates
are based on the assumption (made by the surveyed companies) that information
would be disclosed only if it is material.
5.1.5.
Competitive disadvantage
Whilst disclosing payments to government
would not give direct insight into the levels of turnover, costs and profits
that a MNC generates in a jurisdiction, there may be instances when
confidential business data will be revealed or deduced from CBCR data. EU MNCs exploiting
natural resources would also not be on a level playing field in terms of
disclosure when compared with non-EU state owned companies and this may affect
their ability to complete existing contracts and win new ones. It is not possible to place a monetary value
on the loss of competitive position. However, given that some extractive
industry operators have voluntarily decided to disclose some country-by-country
information and a majority of extractive industry respondents to the public
consultation were in favour of disclosing CBCR of payments to governments as a
means to improve government accountability it has been judged that the loss of
competitive position from this policy would be limited. Furthermore, a number
of factors affect the competitive position of EU MNCs in the extractive
industry especially, namely the level of engineering know-how and technical
efficiency. The strengthening of the EITI would also
militate against any possible short-term loss of competitive position, as it
may lead to a more global application and enhanced reputation of compliant
companies.
5.1.6.
Public authorities
The revision should have no budgetary
consequences for public authorities. .
5.1.7.
International relations
Where an EU MNC would have to disclose
payment information, the disclosure of which is prohibited by the domestic law
of a foreign country, the relevant governments could perceive there to be a
breach of their national sovereignty. This point is not clear-cut and industry
and NGOs dispute the point.
5.1.8.
Energy security
Where a country opposes reporting of
payments to government, EU extractive operators may find it harder to operate
locally which might have consequent effect on oil and gas resourcing. In
practice, however, this has not been the case as some companies already
disclose payments to governments on a country basis without impediments to
their activities.
5.1.9.
Social impacts
Within the EU there will be limited social
impacts as EU governments publish national accounts which provide information
on government revenues. However, in other parts of the world, citizens may have
limited information on government revenues. The main social impacts would
therefore be outside the EU.
6.
Monitoring and evaluation
The Commission will monitor the
implementation of the CBCR requirement in cooperation with the Member States. An
evaluation of the effects of the preferred policy will be carried out to see to
what extent the anticipated impacts (increased payments' transparency,
strengthened EITI, improved business environment, increased administrative
costs, and increased competitive pressure) materialise. [1] 2009 EITI overview of country
reports, http://eiti.org/files/Overview%20EITI%20Reports.pdf. [2] Defined in Directive 2009/28/EC as "naturally regenerated forest of
native species, where there are no clearly visible indications of human
activities and the ecological processes are not significantly disturbed."