Select Committee on European Scrutiny Thirty-Seventh Report



14. ACCOUNTING STANDARDS

 

(23522)

COM(02) 259

Draft Directive of the European Parliament and of the Council amending Council Directives 78/660/EEC, 83/349/EEC and 91/674/EEC on the annual and consolidated accounts of certain types of companies and insurance undertakings.

Legal base:

Article 44 EC; co-decision; qualified majority voting

   

Document originated:

28 May 2002

Deposited in Parliament:

31 May 2002

Department:

Trade and Industry

Basis of consideration:

EM of 26 June 2002

Previous Committee Report:

None

To be discussed in Council:

No date fixed

Committee's assessment:

Politically important

Committee's decision:

Cleared

 

Background

    1. The 2000 Lisbon Council stressed the need to accelerate completion of the internal market for financial services and set a deadline of 2005 to implement the Commission's Financial Services Action Plan. The Commission's Communication "The EU's Financial Reporting Strategy: The Way Forward" of June 2000 set out the Commission's plan for achieving common internationally agreed accounting standards by 2005 for publicly traded companies. We cleared that communication in July 2000[29]. This strategy was implemented through the Regulation of the European Parliament and the Council on the Application of International Accounting Standards (IAS), adopted by the Council of Ministers on 7 June 2002[30]. We had cleared the draft Regulation in July 2001[31].
    2. The document

    3. This draft Directive would amend three of the EU Accounting Directives[32], on which current EU accounting requirements are primarily based, in order to:

    • remove all existing conflicts between the Accounting Directives and IAS;

    • ensure that all optional accounting treatments currently available under IAS are available to EU companies which do not prepare their annual or consolidated accounts in accordance with the IAS Regulation and continue to have the Accounting Directives as the basis of their accounting legislation; and

    • update the structure of the Accounting Directives to provide a framework for financial reporting both consistent with modern practice and flexible enough to allow for future developments in IAS.

The Commission intends to propose amendments to the fourth Accounting Directive[33] in order to achieve similar consistency.

    1. To achieve these aims the Directive would:

    • amend the accounting provisions of the Directives to enable Member States to change national law so that companies that are not to be subject to the IAS Regulation are able to comply fully with IASs adopted under the Regulation. This would enable Member States to permit or require accounting practices required by IAS to be implemented in such circumstances;

    • amend the accounting requirements of Directive 91/674/EEC on the accounts of insurance undertakings to enable them to use fair values when valuing financial instruments (the other Directives were amended to allow this treatment last year);

    • amend the requirements of the annual report (known in the UK at present as the directors' report) that would apply to all companies, whether or not subject to the IAS Regulation. These would require more extensive disclosure, such as a balanced and comprehensive analysis of the development of the company's business and its position, and information relating to uncertainties and risks;

    • remove exemptions from parts of the Accounting Directives currently available to certain listed small and medium-sized companies; and

    • amend provisions relating to the statutory audit report, which would apply to all companies subject to a statutory audit, whether or not subject to the IAS Regulation. These are intended to reflect current best practice in Member States regarding the format and content of audit reports.

    1. It is expected that the Directive will be passed by the European Parliament and the Council by April 2003.
    2. The Government's view

    3. The Parliamentary Under-Secretary of State for Competition, Consumers and Markets, Department of Trade and Industry (Miss Melanie Johnson) tells us:
    4. "The Accounting Directives have remained largely unchanged since their adoption. In this time, accounting theory and practice have developed significantly. In many respects, the Accounting Directives remain consistent with current accounting theory and practice. However, in certain areas their requirements are out of date and incompatible with IAS, which the EU will be adopting further to the IAS Regulation.

      "The Government is committed to the harmonisation of financial reporting in the EU and world-wide through the implementation of globally agreed accounting standards developed by the International Accounting Standards Board. It has been pressing for the modernisation of the Accounting Directives. It is necessary for the success of IAS following the IAS Regulation that the Directives reflect current accounting developments and be sufficiently flexible to accommodate future developments in IAS. Modernisation is also important because the Accounting Directives will continue to be the basis of accounting legislation for companies not preparing their accounts in accordance with IAS.

      "Subject to detailed consideration of the wording in the draft Directive, the Government is broadly content with the proposals. They will enable companies to prepare their accounts using modern international practices. The Government will seek to ensure that the revised Directives will be structured so as to allow for future incremental developments in IAS without the need for further amendments. The Government will need to consider whether the proposals regarding the annual report should apply to medium sized companies, especially those whose shares are not listed. The proposals for amendments to auditors' reports are close to current best practice in UK but the Government will need to consult carefully on the detail. The proposal to do away with exemptions from parts of the Accounting Directives currently available to certain listed small and medium sized companies is already reflected in UK legislation.

      "The Government supports the Commission's intention to present consistent proposals in respect of Directive 86/635/EEC covering banks and other financial institutions. These proposals should be introduced during the negotiations so that all the Accounting Directives are amended at the same time."

      Conclusion

    5. This draft Directive would, if the detail matches the Commission's stated intention, usefully enhance accounting practice in the EU and maintain compliance with internationally accepted standards. We are content to clear the document, but we ask the Minister to inform us if, during the progress of the draft Directive, significant difficulties for the UK arise.

 


29  (21402) 9637/00; see HC 23-xxvi (1999-2000), paragraph 18 (26 July 2000). Back

30  Not yet published in the OJ. Back

31  HC 152-i (2001-02), paragraph 53 (18 July 2001). Back

32  Council Directive 78/660/EEC (requirements in respect of annual accounts of companies), Council Directive 83/349/EEC (requirements in respect of consolidated accounts of companies), and Directive 91/674/EEC (requirements in respect of annual and consolidated accounts of insurance undertakings). Back

33  Council Directive 86/635/EEC(requirements in respect of annual and consolidated accounts of banks and other financial institutions). Back

 
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