EUROPEAN COMMISSION Brussels, 21.4.2021 SWD(2021) 81 final COMMISSION STAFF WORKING DOCUMENT Fitness Check on the EU framework for public reporting by companies Accompanying the document Report from the Commission to the European Parliament, the Council and the European Economic and Social Committee on the review clauses in Directives 2013/34/EU, 2014/95/EU, and 2013/50/EU {COM(2021) 199 final}



Contents EXECUTIVE SUMMARY 1.INTRODUCTION 1.1Scope of the evaluation 1.2Main requirements applicable to each type of company 1.3Review clauses 2.BACKGROUND TO THE INITIATIVE 2.1Legislation history 2.2 Baseline scenario 3.INTERVENTION LOGIC 4.EVALUATION QUESTIONS 5.METHOD 5.1Overall approach 5.2Past evaluations 5.3Information and data gathering 5.4Limitations 6.IMPLEMENTATION STATE OF PLAY 7.ANSWERS TO THE EVALUATION QUESTIONS

7.1Effectiveness of the EU framework 7.1.1Effectiveness of the EU framework on regular public reporting by all limited liability companies 7.1.2Effectiveness of the EU framework on regular public reporting by listed companies 7.1.3Effectiveness of the EU framework on regular public reporting by non-listed financial institutions 7.1.4Contribution to the wider objectives 7.2Efficiency of the EU framework 7.2.1Efficiency from the perspective of the reporting entity 7.2.2 Digitalisation as a source of efficiency for both users and preparers 7.3Relevance of the EU framework 7.3.1Continued relevance of the wider objectives 7.3.2Continued relevance of the EU framework 7.4EU added value of the EU framework 7.4.1EU added value for all limited liability companies 7.4.2EU added value for listed companies 7.5Coherence 7.5.1Coherence of the requirements within the EU framework on public reporting by companies 7.5.2Coherence between the requirements imposed by the EU framework on public reporting by companies and the requirements imposed by other Union legislation 8.CONCLUSIONS ANNEX I – Consultation of the Regulatory Scrutiny Board ANNEX II – Procedural information

ANNEX III – Stakeholders consultation (synopsis report) ANNEX IV – Member States’ use of options under the IAS Regulation ANNEX V – EU legislative framework for periodic reporting by companies – overview of reporting obligations ANNEX VI – Financial and non-financial information – an overview of documents and contents ANNEX VII – Literature study on the benefits of IFRS (update from the 2015 IAS Regulation review) ANNEX VIII – EU approach on the digitalisation of public financial reporting ANNEX IX – Data structuring, an overview ANNEX X – SME definition and micro-regime List of abbreviations and acronyms used in this report ADAccounting Directive (Directive 2013/34/EU) AFRAnnual Financial Report (as defined by the Transparency Directive) APIApplication Programming Interface ARCAccounting Regulatory Committee BADBank Accounts Directive (Council Directive 86/635/EEC) BRISBusiness Registers Interconnection System CBCRCountry-By-Country Reporting CLDCompany Law Directive (Directive 2017/1132/EU) CMUCapital Markets Union

CRDCapital Requirements Directive (Directive 2013/36/EU) CRRCapital Requirements Regulation (Regulation (EU) No 575/2013) CSDRCentral Securities Depositories Regulation (Regulation (EU) No. 909/2014) CSVComma-separated values file EEAEuropean Economic Area EBAEuropean Banking Authority EEAP European Electronic Access Point EGESCExpert Group of the European Securities Committee ESGEnvironmental, Social and Governance eIDASRegulation (EU) No 910/2014 on electronic identification and trust services for electronic transactions in the internal market EITIExtractive Industries Transparency Initiative ESEFEuropean Single Electronic Format ESMAEuropean Securities and Markets Authority GAAPGenerally Accepted Accounting Principles nGAAPnational Generally Accepted Accounting Principles (in a Member State) GRIGlobal Reporting Initiative IADInsurance Accounts Directive (Council Directive 91/674/EEC) IASBInternational Accounting Standards Board IFRSInternational Financial Reporting Standards ISINInternational Securities Identification Number

MSMember State MTFsMultilateral Trading Platforms NCANational Competent Authority NFRDNon-Financial Reporting Directive (Directive 2014/95/EU) OAMOfficially Appointed Mechanism (body for national storage of regulated information) P&LProfit & Loss PIEPublic-Interest Entity PRProspectus Regulation (Regulation (EU) 2017/1129) REFITRegulatory Fitness and Performance Programme RTSRegulatory Technical Standards SMEsSmall and medium-sized Enterprises TCFDTask Force on Climate-related Financial Disclosures TDTransparency Directive (Directive 2004/109/EC) TFEUTreaty on the Functioning of the European Union XHTML EXtensible HyperText Markup Language XLSXMicrosoft Excel Open XML Spreadsheet XMLEXtensible Markup Language EXECUTIVE SUMMARY Context and objectives The primary function of public reporting by companies is to enable stakeholders to make informed decisions so as to protect their interests, make investment decisions, or hold companies publicly accountable. The range of stakeholders includes predominantly investors, creditors, civil society and trade unions. Public reporting by companies established in the EU is largely governed by the EU framework on public reporting. The aim of the information to be published under the EU framework is to contribute to the broader EU objectives to achieve (i) an efficient functioning single market; (ii) an integrated capital market; (iii) financial stability, and (iv) sustainable growth.

The legal instruments that make up the EU framework for public corporate reporting have been adopted progressively over the last decades. They span an era with varying levels of ambition on European integration and significant changes in the way business creates value, largely driven by fast technological developments, and increasing societal accountability. The EU framework assessed in this fitness check comprises the legislative instruments that were adopted from 1978 to 2014, namely the Accounting Directive (AD) including the Non-Financial Reporting Directive (NFRD), the Bank Accounts Directive (BAD), the Insurance Accounts Directive (IAD), the Transparency Directive (TD) and the IAS Regulation (IAS). These instruments apply cumulatively. They set out tailored requirements depending on the type and size of companies: limited liability companies, listed companies, non-listed financial institutions and insurance companies. This fitness check was largely structured around these different types and sizes of companies, recognising that the companies often have different stakeholder compositions. Corporate reporting has evolved to make companies more accountable on broader economic and societal issues. Today, it covers a broad range of financial and non-financial information such as financial statements, management reports or reports on payments to government. This fitness check assesses whether the EU framework has effectively and efficiently achieved its intended objectives and is still fit for purpose in the light of evolving societal and technological challenges, including the increased importance of sustainability aspects such as climate change. The fitness check also seeks to identify potential inconsistencies or overlaps with other EU legislation. This fitness check assessment was initiated in 2018. It is based on research carried out by Commission services a thorough consultation including a written public consultation as well as interactions with stakeholders (conference, workshops) and with key expert groups. Key findings The underlying objectives of the EU framework remain relevant. The EU continues to be the right level to set public reporting policies to pursue the objectives of developing the internal market and an integrated capital market in general. The effectiveness of the EU framework was first assessed against the immediate objectives of providing stakeholders with financial and non-financial information that is sufficient in quantity and quality, relevant, comparable, reliable and timely. The EU framework was then assessed in terms of its contribution to broader EU objectives of (i) an efficient functioning of the single market, (ii) an integrated capital market, (iii) financial stability and (iv) sustainable growth. Overall, the EU framework for corporate reporting achieves the immediate objectives to a great extent. In particular, the IAS Regulation appears to be the most effective instrument in ensuring high-quality and comparable public financial information across the EU. Public reporting by companies to stakeholders is a very important factor in assessing whether the broader EU objectives are achieved, but it is not the only factor. It is difficult to isolate the impact of the EU framework on public reporting from other factors such as other EU financial regulations pursuing the same objectives (e.g. prudential regulation), or additional national legal requirements for directives that set a minimum level of harmonisation. Nevertheless, academic research provides empirical evidence that the EU framework has reduced the cost of capital, as confirmed by feedback received during the consultation process. However, there are a number of caveats to the overall effectiveness of the EU framework. As regards financial information, the Accounting Directive (AD) ensures that limited liability companies publicly disclose a minimum set of information commensurate to their size (micro, small, medium, large) and provide the necessary information to stakeholders. But the AD has a number of lacunas, especially in terms of the relevance and comparability of information. As regards relevance, there are lacunas due to the lack of standardisation on certain accounting treatments – an example is leases. The Member States have mitigated the overall impact of these lacunas, either by supplementing the minimum requirements of the AD in their national Generally Accepted Accounting Principles (nGAAP) or by expanding the scope of companies allowed or required to use International Financial Reporting Standards (IFRS). Lacunas can also be identified in relation to limited availability of data about exposures to financial risks that are linked to sustainability, notably climate risks. As regards comparability, the minimum harmonisation and principles-based approach in the AD leads to a fair level of comparability in form (prescribed lay-outs) but in substance comparability is not so good, given the numerous options available. This is mainly a concern for stakeholders with an interest in companies with cross-border operations, i.e. larger companies. As a mitigating factor, these count for 2% of all EU limited liability companies. As regards the timeliness of information provided to stakeholders, the AD permits companies to publish information up to 12 months after the balance sheet date. The publication deadlines implemented by Member States is effectively from 4 to 12 months, with nine Member States granting companies more than 10 months before publication. Such long deadlines raise concerns on the relevance of information for stakeholders, especially trade creditors. There is also evidence that many companies tend to delay publication beyond the legal deadlines. This may be a consequence of insufficiently dissuasive penalties issued in the Member States. The lacunas in the Accounting Directives are more acute for banks and insurance companies complying with nGAAP, because the EU framework has become less relevant than supervisory reporting, which has been drastically upgraded at the EU level for banks and insurance companies in recent years. The wide use of IFRS standards by large banks and the concentration of the banking industry have significantly reduced the banking assets volumes reported under the Bank Accounts Directive. Both Directives still contribute in terms of improving the relevance and comparability of financial statements through their definitions and lay-outs of the financial statements. The aim of non-financial reporting is to meet stakeholders’ information needs, which have expanded beyond the financial performance of reporting entities. Non-financial information is increasingly important for investors, creditors and other users such as civil society organisations. The Non-Financial Reporting Directive (NFRD) has led to an increase in the quantity of non-financial information disclosed. But some significant deficiencies in company disclosures have nevertheless been identified, including the failure to disclose all relevant information, and the limited comparability and reliability of the information disclosed. Although the NFRD was a pioneering piece of legislation when it was adopted in 2014, it may no longer be an adequate response to new challenges, in particular the growing needs of investors and other stakeholders for information on the sustainability crises that we face. As a result, as regards the broader objective to achieve sustainable growth, the assessment suggests that the EU framework does not ensure that reporting practices are adequate to enable stakeholders to make informed decisions and hold companies accountable for their impact. The extent to which the EU framework contributes to the broader objective of sustainable growth therefore remains limited. As regards the management report, there is a growing demand for a better link between financial and non-financial information, better comparability if possible, and the need for more information on intangibles. Country-By-Country Reporting (CBCR) in the extractive and logging sectors is a new policy. It is too soon to tell whether this has produced significant changes in governments’ accountability and resource management in resource-rich countries. However there is no doubt that it has been effective in increasing the transparency of payments made by companies to governments linked to the exploitation of natural resources. Civil society and business alike are concerned by the lack of a global level playing field since the policy is applied only by the European Economic Area, United Kingdom, Canada, and more recently by Switzerland. A level playing field would ensure full reporting coverage and ease the concerns of EU companies in terms of competition. The scope to apply this policy in the logging industries appears to be very narrow, and it triggers hardly any reports. Users report certain shortcomings in the design of the policy such as on joint ventures and difficulties in terms of access and use (machine readability). The reliability of financial information disclosed by listed companies was found to be overall good, due to the cascade of requirements of collective board responsibility for the true and fair view of financial statements, to the mandatory statutory audit for all listed companies, and securities market supervision. However, enforcement practices of national supervisors still differ significantly across the EU. The Wirecard case confirmed this and indicated that the EU framework presents potential weaknesses as regards the effectiveness of enforcement practices, in particular as regards the lack of coordination between national authorities and the independence of the authorities in charge of examining financial information. Turning to efficiency, performing a cost/benefit analysis of the entire EU reporting framework proved difficult. To begin with micro companies, the Commission services remain unconvinced that EU reporting requirements are relevant to the 14.2 million micro companies. The attempt to reduce the reporting cost when revising the Accounting Directive in 2013 by bringing in a super-simplified reporting regime has only partly been achieved. One reason is that even if the majority of Member States have alleviated the micro regime, about half of the Member States have not fully implemented the simplified regime, which affects at least 40% of micro companies. Another reason is that even where a simplified regime is in place, many micro companies are unaware of it, especially when they use the services of an external accountant. Some are reluctant to change practice. A key finding of this fitness check as regards efficiency is the need to tap the potential of digital tools to structure, re-use, secure, disseminate and give easier access to both financial and non-financial information. The EU framework has started to do so, for instance with the recent adoption of the ESEF Regulation under the Transparency Directive, which makes the consolidated IFRS financial statements of listed companies both human and machine-readable, and with the recent adoption of Directive (EU) 2019/1151 as regards the use of digital tools and processes in company law. However, much remains to be done. The new action plan on the capital markets union adopted in September 2020 suggested creating a European Single Access Point (ESAP) as a matter of priority. IFRS standards can only be incorporated into EU law if they meet the criteria for endorsement laid down by the IAS Regulation. One criterion is the conduciveness to the European Public Good, which encompasses significantly broader considerations than the capital provider focus adopted by the International Accounting Standard Board (IASB) in developing IFRS standards. Currently, the IAS Regulation provides limited flexibility to amend standards as issued by the IASB, in case a standard would not meet the technical endorsement criteria or not be conducive to the EU public good. Introducing greater flexibility in the IAS Regulation’s endorsement procedure could in principle be considered beneficial to address situations in which only some aspects of a standard would not meet the technical endorsement criteria or not be conducive to the EU public good. However, the EU has so far been able to deal with such situations using the limited flexibility available within the confines of the IAS Regulation (the so-called “carve-out” power and the “top-up”) and has only needed to do so sparingly on only two occasions since 2003 to cover very limited elements of two standards. This suggests that the endorsement procedure foreseen in the current legal framework provides sufficient flexibility in most cases. There may nevertheless be a case to clarify the endorsement criteria included in the IAS Regulation, in particular in light of the growing importance of sustainability considerations for investment decisions.

Finally, the EU reporting framework is generally internally consistent. There are risks that different pieces of EU legislation that require sustainability disclosures may lack coherence, in particular regarding the financial sector. Legislative and non-legislative developments in this field will need to be followed closely to ensure that the overall sustainability reporting framework remains coherent. Follow-up Although it is beyond the scope of the fitness check to provide follow-up action, this section highlights some of the main areas that could be addressed to improve the EU framework. The EU framework on public reporting for non-financial information is relatively recent, but its requirements and public reporting practices are not commensurate with the EU’s ambition to become a sustainable economy and society. Further digitalisation of public reporting could significantly improve companies’ access to and use of public reporting. The IAS Regulation appears to be the most effective instrument in ensuring comparable and complete financial information across Europe. Based on further consultation with all stakeholders, a comprehensive cost-benefit analysis could be carried out to assess whether to expand the scope of EU-endorsed IFRS to all companies listed on regulated markets and, as a company option, to small and medium-sized enterprises (SMEs) that plan to issue securities or to larger non-listed companies. As regards limited liability companies in general, more could be done to ensure they publish financial information without delay. Some aspects of CBCR for extractive and logging industries could be improved, such as reporting on joint ventures, accessibility and electronic usability, but also to continue to promote reporting worldwide in order to level the playing field. Lastly, ensuring further convergence of supervisory practices across the EU, better coordination between national authorities and the independence of national competent authorities should remain a priority with a view to improving the comparability and the reliability of public reporting by companies. 1. INTRODUCTION Public reporting by companies is a public good that serves the interests of many stakeholders. A broad range of stakeholders such as investors, creditors, employees or depositors use information published by companies for their decision-making. At the heart of any investment decision, timely and high-quality company reporting plays a vital role and underpins the efficient allocation of capital. Civil society organisations and other stakeholders use company information to hold companies accountable, for example on their environmental and social impact. The legal acts that make up the EU framework for public corporate reporting have been brought in progressively over the last decades and set out tailored requirements depending on the type and size of companies. Some legal acts were adopted four decades ago; others only a few years ago. They span an era with varying levels of ambition on European integration, changes to the Treaty, re-balancing inter-institutional powers and financial crises. During that period, the way businesses create value and the context in which they operate have changed significantly. To a large extent, this has been driven by fast-paced technological developments, increased cross-border activities and innovations in the financial industry that have led to changes to accounting techniques and social responsibility. Stakeholders increasingly demand a broader range of corporate information. Company strategies, governance, and environmental and social impacts are increasingly considered in combination with their financial performance when assessing a company’s long-term ability to create value. These rapid changes in investors’ and other stakeholders’ needs for information have also profoundly changed how companies present and disseminate corporate information. Against this background, the European Commission has carried out a comprehensive fitness check to assess whether the EU’s legislative framework governing regular public reporting by companies (hereafter: “the EU framework”) is still fit for purpose. It is part of the Regulatory Fitness and Performance Programme (REFIT), which uses evaluations and fitness checks to assess EU policies. 1.1 Scope of the evaluation One of the EU’s main objectives is to establish a single market based on a competitive social market economy vision. To create a positive business environment, where companies can be set up anywhere in the EU and can do business and invest across borders in a frictionless manner, the EU has developed a framework for limited liability companies. This framework contains harmonised minimum requirements applicable to different stages in the life of a company. They cover the stage when a limited liability company is established (e.g. minimum capital requirements, content of the founding statutes), certain specific situations (e.g. restructuring, takeovers) and the annual publication of corporate information over the course of a company’s life. Another important objective of the EU is to establish a well-functioning, integrated EU capital market that enables capital from investors to flow efficiently to companies. In addition to the EU requirements that aim to ensure the proper functioning of financial market infrastructure (e.g. Central Securities Depositories Regulation, European Market Infrastructure Regulation, Market in Financial Instruments Regulation), companies seeking public funding via capital markets are subject to a broad framework of EU law. The framework includes requirements for listing securities (Prospectus Regulation), protecting investors from insider dealing and market manipulation (Market Abuse Regulation), protecting the rights of shareholders (Shareholders Rights Directive), and other disclosure obligations enabling market participants and other stakeholders to make informed decisions (Transparency Directive). For capital markets to function efficiently it is essential to have a regular flow of relevant, reliable and comparable company information to market participants and other stakeholders. In response to the 2008 financial crisis, the EU carried out an ambitious regulatory reform with the aim of restoring financial stability and building a stable financial system. The result is a significantly enhanced framework of prudential and supervisory oversight of market infrastructure and financial services sectors (banks, insurance companies, etc.) including the creation of the banking union. The EU aims to ensure that growth is sustainable, within the overall goal of achieving sustainable development. Corporate reporting can contribute to this objective by ensuring that stakeholders have access to information about companies’ impact on society and the environment, and about the sustainability-related risks to which companies may be exposed. A regular, transparent and reliable flow of information builds confidence and trust among all stakeholders engaging with companies (investors, creditors, supervisory authorities, employees, depositors). By building trust, this flow of information contributes – along with other pieces of EU legislation on financial services – to achieving the following broader objectives: the efficient functioning of the EU single market, further integration of EU capital markets, financial stability and sustainable growth. The purpose of this fitness check report is to assess the applicable EU measures requiring all limited liability companies to publish regularly information about their activities, performance, risks and impacts with a view to protecting the interest of all stakeholders and achieving the broader objectives mentioned above. This set of rules, the “EU framework”, applies to all financial and non-financial companies, covers a wide range of corporate information and lays down different rules for different types of companies. This report assesses whether these rules:

(I)meet the objectives of satisfying users information needs (effectiveness); (II)continue to be relevant (relevance); (III) have reasonable and proportionate cost for preparers and users (efficiency); (IV) are correctly set at EU level (EU added-value); and (V)are consistent across different pieces of EU legislation (coherence). This fitness check does not cover reporting requirements laid down in other EU laws that also contribute to meeting stakeholders’ information needs, but are neither public nor regular, and do not specifically seek to achieve the above-mentioned wider objectives. Some sectoral EU legislation, in particular the supervisory frameworks for banks and insurance companies, contain rules for both supervisory reporting and regular public disclosures. In 2019, the Commission services carried out a “Fitness Check of the EU Supervisory Reporting Requirements”. This fitness check report complements the 2019 fitness check and assesses the coherence of these sectoral reporting requirements, where publicly available, with the requirements of the EU framework for public reporting. Legislative acts in the scope of this report The EU framework covers rules for regular public reporting by companies on their activities, performance, risks and impacts stemming from the following five EU legislative acts: -The Accounting Directive (AD) as amended by the Non-Financial Reporting Directive (NFRD) is the foundation of regular public reporting, as it provides rules on the preparation, presentation, publication and audit of annual financial statements for all limited liability companies established in the EU. All companies must publish annual financial statements (composed of a balance sheet, a profit and loss account and notes to the financial statements). Medium-sized, large undertakings and public-interest entities (PIEs) are subject to additional requirements, such as the obligation to have their financial statements audited and to prepare a management report. If the company is the parent of a group, it must also prepare and publish consolidated annual financial statements. The AD provides scope to simplify these requirements, depending on the company’s size. In particular, micro companies are subject to some exemptions, and small companies can make use of simplified requirements. Limited liability companies that are listed must also prepare a corporate governance statement. Large companies active in the extractive and logging industry must disclose their payments to local governments (“country-by-country” reports). Under the NFRD, large PIEs with more than 500 employees must include in their management report a non-financial statement with material information on their business model, policies, outcomes, risks and risk management and key performance indicators related to, as a minimum, environmental, social and employee matters, respect for human rights, and anti-corruption and bribery matters. In this staff working document, the term “non-financial information” refers to the information that companies are required to publish in the non-financial statement. -The Bank Accounts Directive (BAD) applies to all banks, irrespective of their legal form. The BAD complements the AD. It aims to harmonise the format and contents of the annual financial statements of all banks established in the EU and sets out some specific accounting treatments, for example on loan valuation, or the fund for general banking risks and audit of financial statements. -The Insurance Accounts Directive (IAD) applies to all insurance undertakings, irrespective of their legal form. The IAD complements the AD. It aims to harmonise the format and contents of the annual financial statements of all insurance undertakings established in the EU and sets out accounting treatments for insurance operations, e.g. technical provisions and audit of financial statements. -The Transparency Directive (TD) applies to all companies (including non-EU country companies) that have securities listed on EU regulated markets. It requires – inter alia – companies to publish an annual (and semi-annual) financial report, which comprises the financial statements, the management report, and statements made by the persons responsible in the company that the financial report gives a true and fair view of the company’s situation. The TD also requires listed companies active in the extractive and logging industries to publish country-by-country reports drafted in accordance with AD rules. -The IAS Regulation applies to all limited liability companies that have securities listed on EU regulated markets, and complements the reporting requirements of the AD, the BAD and the IAD by requiring companies to prepare consolidated financial statements according to International Financial Reporting Standards (IFRS) as endorsed by the EU. Member States can expand the scope of application to other categories of companies and/or financial statements. Annex IV provides an overview of Member States’ use of the options under the IAS Regulation. Cumulative impacts of the legislative acts in the scope of this report for each category of company The legislative acts that form part of the EU framework apply cumulatively to companies within their scope. The figure below shows the scope of each act and provides details on the number of companies in each category. Figure 1: Type of companies covered by EU framework Numbers of companies in each category All limited liability companies established in the European Union (listed and non-listed) fall under the scope of the AD. There were in 2016 around 16.8 million companies in the EU-28, of which 0.6% are large companies, 1.8% are medium-sized, 13.2% are small and 84.4% (14.2 million) are micro companies.

Approximately 6 500 EU and non-EU companies whose securities are admitted to trading on an EU regulated market must comply with additional public disclosure requirements under the TD. In the EU-28, there are 4 947 credit institutions in the EEA subject to BAD requirements (unless Member States opted to require the use of EU-endorsed IFRS), which hold around EUR 37 trillion in banking assets. There is significant concentration of banking assets as approximately the 120 largest EU institutions hold approximately 80% of EU total banking assets. Since most large banks use IFRS and as several Member States have used the option to require all banks to use IFRS, most of the banking assets within the EEA are reported using IFRS. In 2017, over 3 400 insurance companies were active in the European Union and subject to IAD public reporting requirements. Out of this total, 2 912 companies and around 350 groups also complied with the supervisory reporting requirements set by the Solvency II Directive, which includes specific measurement and presentation rules, for insurance contracts distinct from accounting standards. In practice, and taking account of how the NFRD has been transposed in different Member States, approximately 11 700 companies were subject to the reporting requirements of the NFRD in the EU-28. 1.2 Main requirements applicable to each type of company Table 1 provides an overview of the main requirements of the EU framework on regular public reporting by category of company. It shows that specific requirements apply in conjunction depending on the legal form, type of business, size and sector of the company, or type of funding via public markets. Under the AD, all limited liability companies must prepare – at individual level – a balance sheet summarising the main classes of assets they own and the main types of liabilities they owe, as well as a profit and loss statement (P&L), which details their various sources of income and expenses to calculate the company’s annual earnings. As companies grow in size, they become subject to additional requirements such as: ·Publication of “Notes to the Financial Statements” that provide more detailed information on the accounting methods the company uses, the policies it uses to make estimates, and detailed breakdowns or reconciliations of the financial aggregates that appear in the balance sheet or P&L. ·Publication of a management report providing a fair review of the company’s development and performance and describing the main risks and uncertainties. The management report therefore provides contextual information about the company’s context, competitive position and strategy that helps the reader to interpret the “financial statements” (composed of the balance sheet, the P&L and the notes to the financial statements). ·The statutory audit requirement, which involves the company appointing an external auditor to provide an opinion about the true and fair view provided by the financial statements and the management report. These requirements apply to all limited liability companies at individual level. In addition, if the limited liability company is a parent company – i.e. it exerts control or exercises a dominant influence over other company(ies) - the EU framework requires it to publish consolidated financial statements that incorporate the assets, liabilities, income and expenses of all companies in the group as if it was a single economic entity. The parent company is also required to publish a consolidated management report. The parent company publishes two sets of financial statements, one as a single legal entity (known as the annual financial statements) and one as the parent company of a group (the consolidated financial statements). These financial statements are prepared in accordance with national Generally Accepted Accounting Principles (nGAAP) that transpose the Accounting Directive into national law. However, Member States may also choose under the IAS Regulation to permit or require companies to apply International Financial Reporting Standards (IFRS) instead of nGAAP. When a limited liability company issues securities on an EU regulated market (i.e. when it becomes a listed company), additional requirements apply to secure the interests of a wider spectrum of stakeholders. ·The AD requires the company to publish a corporate governance statement outlining the rules, composition and operations of the administrative, management and supervisory bodies as well as the main features of the company’s internal control and risk management processes in relation to financial reporting. ·If the company is a large PIE and employs over 500 people, the NFRD requires the company to publish a non-financial statement to stakeholders covering at least environment, social and employee matters, respect for human rights, and anti-corruption and bribery matters. ·If the company is the parent company of a group, the IAS Regulation requires the company to use IFRS standards to prepare the consolidated financial statements. However, the AD applies to the annual financial statements (for the single legal entity) unless Member States choose to permit or require IFRS. ·The TD requires companies to prepare and publish yearly and half-yearly financial reports. If the company operates in an extractive or logging industry, the TD requires it to publish a country-by-country report outlining its payments to local governments. This country-by-country report must meet the AD requirements. Lastly, specific rules apply to financial institutions (non-listed banks and insurance undertakings). ·The BAD and IAD require financial institutions to apply specific sectoral presentation and measurement rules. However, Member States may elect to permit or require the use of IFRS under the IAS Regulation.

·Considering their significant public relevance, banks and insurance companies are defined as PIEs and subject to a mandatory audit requirement. ·If the bank or the insurance company is a large PIE that employs over 500 people, the NFRD requires it to publish a non-financial statement. If the financial institution is listed, the above rules for listed companies apply. Table 1 provides an overview of how the multiple requirements under the EU framework apply in conjunction. The category “non-listed financial institutions” captures non-listed banks and insurance undertakings. Table 1: EU framework on regular public reporting by type of company Category Size / type The EU framework on regular public reporting by companies AD NFRD IAS TD BAD IAD CBCR Limited liability companies Micro Abridged balance sheet and P&L - - (IFRS = MS option) - - - - Small Financial statements (Balance sheet, P&L, notes) - - (IFRS = MS option) - - - - Medium /Large Financial statements Management report Audit - - (IFRS = MS option) - - - Report on pay-ments to govern-ments Listed companies Listed (individual or parent of a group) Financial statements Management report Corporate governance statement Audit If large and >500 employees: non-financial statement Mandatory IFRS for consoli-dated financial statements. (IFRS for annual financial statements = MS option) Yearly and half-yearly financial report (also for non-EU country issuers). Report on payments to governments. - - Report on pay-ments to govern-ments Non-listed financial institutions Bank (any legal form) Management report Audit If large and >500 employees: non-financial statement - (IFRS MS = option) Financial statement Audit Insurance undertaking (any legal form) Management report Audit If large and >500 employees: non-financial statement - (IFRS = MS option) - Financial statement Audit 1.3 Review clauses Several legislative acts that form part of the EU framework (AD, NFRD and TD) contain review clauses. These review clauses cover reports on payments to governments by extractive and logging industries (CBCR), the financial reporting regime for micro companies, non-financial reporting by certain PIEs, new provisions on digitalisation, simplification, and penalties that were brought in under the TD in 2013. This staff working document accompanies the report to the European Parliament and the Council on these review clauses. It provides complementary information to the content of the report on review clauses but also, due to its wide-encompassing nature, information going beyond the intended scope of the review clauses. 2. BACKGROUND TO THE INITIATIVE 2.1 Legislation history The common objective of the EU framework is to publicly report information on a regular basis that meets users’ information needs to protect their interest in the company, to make investment decisions, or to hold the company accountable. Over time, the range of information that users have deemed to be relevant for their decision-making has evolved and requirements for corporate reporting under EU law have accordingly been modified or complemented. Creating the single market For over four decades, the content, presentation and publication of periodic reports about entities’ activities, performance, risks and impacts for all limited liability companies established in the EU have been based on the Fourth and the Seventh Company Law Directives on annual and consolidated financial statements (both repealed and replaced by the Accounting Directive in 2013). These directives sought to enhance the protection of stakeholders in a context of increased cross-border activity by coordinating national provisions concerning the preparation and publication of annual financial statements. In order to tailor the requirements of these directives to the specific characteristics of banks and insurance undertakings, the EU adopted two additional directives respectively in 1986 (Bank Accounts Directive or BAD) and in 1991 (Insurance Accounts Directive or IAD). These directives provided sectoral adaptations to the general provisions of the Fourth and Seventh Company Law Directives. Enhancing EU capital markets integration In 2000, the Commission estimated that, despite the EU Fourth and Seventh Company Law Directives, financial reporting in the EU had remained fragmented and thus hampered the development of a deep liquid single EU capital market. Enhanced transparency, comparable financial reporting and more extensive disclosures were sought by both investors and supervisors from listed companies whereas the existing directives featured too many national options hampering cross-border investment. As a result, the EU adopted the IAS Regulation in 2002 which requires EU companies with securities listed on an EU regulated market to prepare their consolidated financial statements in conformity with the IFRS endorsed in the EU. As regards the annual financial statements of individual companies (i.e. the annual financial statements), the decision to require or authorise IFRS was left as a Member State option, considering that national regulatory and tax requirements might make the use of IFRS inappropriate in some Member States. Accordingly, the existing Fourth and Seventh Company Law Directives remained the legal basis for profit distribution, discharge of management and creditors’ protection. Besides, the fair value option was also introduced in the Fourth and Seventh Company Law Directives as well as in the sectoral accounting directives (BAD and IAD) in order to reflect developments in international accounting standards pertaining to the valuation of assets. IFRS are developed by the International Accounting Standard Board (IASB) of the IFRS Foundation, a private organisation dedicated to financial reporting standard setting. IFRS are incorporated into EU law by way of amendments to Commission Regulation 1126/2008 (“IFRS Regulation”) after an endorsement procedure designed to secure that their application results in a true and fair view of the financial position and performance of a company, is conducive to the European Public Good and meets the qualitative criteria that make information useful for users. The European Public Good criterion is designed to secure that the focus of the IASB on improving financial reporting does not lead to disregarding other relevant impacts that could affect the European economy, its financial stability or other public policy objectives. In order to meet stakeholders' needs for more transparent information on EU capital markets, a new transparency regime was brought in with the adoption of the 2004 Transparency Directive (TD). Compared to the previous transparency regime, this directive increased the frequency in the disclosure of financial information, brought in rules on the issuer’s liability for late or non-disclosure, and imposed the establishment of national mechanisms for the storage of regulated information (Officially Appointed Mechanisms or OAMs).

Simplifying rules for smaller entities and facilitating access to public reporting by companies The TD rules were further amended in 2013 with a view to simplifying and reducing certain disclosure requirements for small and medium-sized enterprises (e.g. the abolishment of quarterly reporting), and harmonising the disclosure regime of major holding of voting rights. Moreover, in order to facilitate accessibility, analysis and comparability of regulated information, the TD mandated the European Securities and Markets Authority (ESMA) to develop a central European Electronic Access Point (EEAP) providing access to the different OAMs and to develop a harmonised electronic format (the European Single Electronic Format – ESEF) for the disclosure of annual financial reports starting with financial year 2020. In 2013, the Accounting Directive (AD) repealed the Fourth and Seventh Company Law Directives and brought in more granularly staged requirements based on company size. Changes were mainly adopted with a view to reduce the reporting burden for small and medium-sized companies (“Think Small First”). Another change was a requirement for Country-By-Country Reporting (CBCR) by large companies in the extractive and logging industries to disclose payments to governments. Widening the scope of disclosures to non-financial information In 2014, the Non-Financial Reporting Directive (NFRD) amending the AD was adopted. It brought in stronger non-financial disclosure requirements compared to those added to the Directive in 2003 (which referred only to employee and environmental matters), with the aim of improving the quality and quantity of non-financial information reported by companies. Companies were required to comply with the new provisions on non-financial reporting for the first time in 2018, covering financial year 2017. The Commission proposed in April 2016 amendments to the AD aiming to ensure that multinational companies disclose corporate tax payments to governments as well as related information on a country-by-country basis, to inform the public at large on the taxes paid per jurisdiction in comparison to actual activities of a company in each jurisdiction. The adoption of the Commission’s proposed modifications was pending at the time of drafting this report, and is therefore not considered. The following graph provides an overview of the adoption of the various instruments included in this fitness check over time. Figure 2: Timing of instruments 2.2 Baseline scenario Any evaluation needs an appropriate point of comparison to help capture the change that EU intervention has brought over time. Conceptually, the main baseline (or counterfactual) is the situation where the EU would not have acted in respect of the single market, the integrated capital market, financial stability and sustainability, by including the measures in the scope of the fitness check. However, in practice, this approach is complicated by the nature of the fitness check being an evaluation of a group of measures taken at different points in time as described above. When the Commission proposed the Fourth Company Law Directive on annual financial statements in 1971, companies had been legally required to disclose financial information for some time by national laws of the then six Member States of the European Community. Most Member States regarded disclosure of financial information by limited liability companies as a natural consequence of their limited liability, irrespective of the size of the company. This is what could be retained as the baseline scenario for the public reporting by limited liability companies, to be modulated in a Union of 28 Member States with varied historical background. For listed companies, the adoption of the IAS Regulation in 2002 ended a situation, where Member States allowed listed companies to use a variety of different national and international financial reporting frameworks (including US GAAP). The baseline here could be the counterfactual of a hypothetical current situation of multiple financial reporting frameworks used by EU listed companies. However, for the effectiveness analysis of the EU framework developed over a long period of time, it is more meaningful to investigate whether the objectives of the EU framework are met, and hence use the desired outcome as a point of comparison. When assessing efficiency-related evaluation questions, the fitness check compares the actual situation with a desired, better outcome: whether EU intervention is implemented in a most efficient manner or if the current level of efficiency can be improved. When assessing the relevance of reporting, the needs for stakeholders today are considered. When assessing the added value, the fitness check compares the current situation with a desired steady state situation: whether action could be taken at a different level and lead to a better outcome. When assessing the coherence the fitness check looks at the current situation: whether current requirements of the reporting framework and of other EU laws are consistent. 3. INTERVENTION LOGIC Figure 4 summarises the intervention logic. Stakeholders, who demand financial and non-financial information about companies’ activities, performance, risks and impacts, include not only shareholders and potential investors, but also lenders, customers, suppliers, employees and authorities as well as society at large. They expect this information to be useful for their decision-making so as to protect their interests, to invest and allocate capital between different companies’ (main market participants’ interest), or to hold companies accountable on wider societal issues (main NGO’s interest). Absent any regulatory requirements, companies would voluntarily prepare regular reports on their activities, performance, risks and impacts in order to manage their business as well as to communicate with their stakeholders. However, voluntary public reporting does not lead to an efficient outcome in terms of the quantity and quality of information provided to stakeholders. Corporate reporting is a public good, i.e. it is non-rivalrous (one person's "consumption" does not reduce the amount available for others) and non-excludable (once reporting is publicly available, individual consumption cannot be charged). Also, companies will not voluntarily disclose the quality and quantity of information that various stakeholders need. Indeed, absent regulatory requirements, the quality and quantity of the information disclosed fully depends on the entity’s own communication strategy, which can lead to obscuring information that could be useful for stakeholders’ decision-making. In addition, voluntary public reporting does not secure consistency over time and across reporting entities with regards to the measurement and presentation of similar economic transactions. As a consequence, voluntary public reporting does not allow stakeholders to draw informed comparisons between companies’ performance and financial position or to assess the progresses in achieving the company’s financial objectives and forecasts. Finally, voluntary public reporting does not secure an equal access to information to stakeholders whether in terms of content or timing. Accordingly, some interested parties may not be in a position to exercise their rights or may bear opportunity costs because of a lack of timely information. Against this background, it is logic that Member States already had national company law requirements on the preparation and publication of annual financial statements before the Commission proposed the Directive on annual financial statements in 1971. EU regulatory action was deemed necessary for ensuring that stakeholders throughout the EU have access to comparable information about companies that is sufficient both in quality and quantity in order to be useful for their decision-making. This is the “immediate” objective of EU intervention for public reporting. In doing so, EU intervention seeks to contribute to the wider Union objectives mentioned in section 1.1 “Scope of the evaluation”, namely: (i) an efficient functioning of the EU single market; (ii) an integrated EU capital market; (iii) financial stability and (iv) sustainable growth. These wider objectives are reflected in the recitals of the five legislative acts of the EU framework. Contribution of public corporate reporting to the four wider objectives As summarised in figure 3 and further explained below, the immediate objective of the EU framework contributes to the wider objectives.

Figure 3: Contribution of the immediate objective of the EU framework to wider objectives of EU action As regards the efficient functioning of the EU single market, the EU legislation on public reporting by companies requires a minimum level of harmonised information about companies’ activities, performance, risks and impacts in order to enable stakeholders to better assess and compare the companies’ situations and performance at a pan-European level. This facilitates cross-border establishment and investments and contributes to the wider objective of achieving the EU single market. This objective is pursued by the five legislative acts in the scope of this fitness check, but has been the cornerstone of the AD which laid down the first set of public reporting rules for EU companies. With regard to entities with securities listed on EU regulated markets, the EU public reporting framework provides a high level of harmonisation in financial reporting and hence promotes the integration of EU capital markets. By securing a single set of rules, it also fosters capital markets’ efficiency in the EU. Enhancing transparency, comparability and accountability of listed entities is expected to increase investors’ confidence, promote better capital allocation by market participants, and lower the cost of capital for companies. As a result, it is expected to contribute to more integrated and efficient EU capital markets. The TD and the IAS Regulation in particular have had as a main objective the enhancement of transparency on EU capital markets and their integration. As regards financial stability, prudential regulation and supervision of the financial institutions’ sector play a key role. Public reporting by companies, especially by listed banks and insurance undertakings, also contributes to the objective of financial stability, in at least two ways. Firstly, considering that the IFRS-based financial information (as required by the IAS Regulation) is the starting point for the calculation of prudential requirements for listed banks, their supervisory oversight is largely influenced by financial reporting rules. Secondly, transparent and timely public reporting by financial sector operators enhances market discipline and confidence in the resilience of the financial sectors, which contribute to financial stability. From that perspective, the TD and the IAS Regulation pursue the objective of financial stability. The sectoral legislation (the BAD and the IAD) by widening the scope of public reporting to all banks and insurance companies have also sought to contribute to the financial stability objective. As to sustainable growth, public reporting by companies has gradually expanded to provide, beyond financial information, a broad range of non-financial information. This development resulted from investors’ increasing interest in a larger set of information to assess the prospects of companies. It was also driven by the desire from a wider audience to make companies accountable on important societal issues. This development has been supported by the EU legislative action. In the context of the long-term strategy for sustainable growth of the Commission, EU legislation on corporate reporting has required companies to regularly publish environmental, social and employee-related information. The NFRD is particularly relevant in pursuing the sustainability objective. Table 2 provides an overview of the expected relative contribution of the EU framework to the wider objectives. The “+” shows the intended relevance of the acts for the different objectives: Table 2: Wider objectives of EU action



WIDER OBJECTIVES SPECIFIC OBJECTIVES EU FRAMEWORK AD IAS TD BAD IAD ► EU single market ·Cross-border investments ·Cross-border establishment ·Stakeholder protection ++ ++ ++ ++ + + + ++ + + + + + + + ► Integrated EU capital market ·Access to capital ·Capital allocation ·Integrated securities market + + ++ ++ ++ ++ ++ ++ ► Financial stability ·Public confidence in company reporting ·Trust in the resilience of specific sectors (banking and insurance) + ++ ++ + + ► Sustainable growth ·Increase corporate accountability ·Good corporate governance ·Improve social and environmental disclosures by companies ++ ++ + + +



Intervention logic – visual chart Figure 4: Intervention logic for public reporting by companies NEEDSA wide range of stakeholders need company information that is useful for their decision-making and to hold companies accountable for wider societal impacts.NEEDSA wide range of stakeholders need company information that is useful for their decision-making and to hold companies accountable for wider societal impacts. OBJECTIVESThe immediate objective of public reporting by companies is to provide stakeholders with sufficient financial and non-financial information both in terms of quantity and quality, in order to enable them to make informed decisions. This will in turn contribute to achieving the wider objectives of the EU single market, EU capital markets integration, financial stability and sustainable growth.OBJECTIVESThe immediate objective of public reporting by companies is to provide stakeholders with sufficient financial and non-financial information both in terms of quantity and quality, in order to enable them to make informed decisions. This will in turn contribute to achieving the wider objectives of the EU single market, EU capital markets integration, financial stability and sustainable growth.

Inputs:Activities:Inputs:Activities:INPUTS / ACTIVITIESTime and staff costs; IT and system costs; outsourcing costs for reporting entities.Collection, compilation, storing and processing of information by reporting entities;Preparation of periodical reports (audited annual financial statements, management report, corporate governance statements, non-financial statements, payments to governments);Publication of periodical reports (business registers, company’s website and/or national gazette, other media, Officially Appointed Mechanisms for storage).INPUTS / ACTIVITIESTime and staff costs; IT and system costs; outsourcing costs for reporting entities.Collection, compilation, storing and processing of information by reporting entities;Preparation of periodical reports (audited annual financial statements, management report, corporate governance statements, non-financial statements, payments to governments);Publication of periodical reports (business registers, company’s website and/or national gazette, other media, Officially Appointed Mechanisms for storage). OUTPUT / ACTIONThe EU framework requires regular public reporting: All limited liability companies, banks and insurance undertakings must prepare and publish annual financial statements and management reports (AD/BAD/IAD).Listed companies must prepare and publish their corporate governance statements (AD), and their yearly and half-yearly financial reports (TD). Listed companies that are parent undertakings shall prepare their consolidated financial statements in accordance with EU endorsed IFRS (IAS).Large PIEs have to publish a non-financial statement covering environmental and social issues, human rights, anti-corruption and bribery, and diversity on company boards (NFRD).Large companies and PIEs active in extraction or logging sectors have to prepare and publish annual country-by-country reports on payments to governments (CBCR-AD/TD).OUTPUT / ACTIONThe EU framework requires regular public reporting: All limited liability companies, banks and insurance undertakings must prepare and publish annual financial statements and management reports (AD/BAD/IAD).Listed companies must prepare and publish their corporate governance statements (AD), and their yearly and half-yearly financial reports (TD). Listed companies that are parent undertakings shall prepare their consolidated financial statements in accordance with EU endorsed IFRS (IAS).Large PIEs have to publish a non-financial statement covering environmental and social issues, human rights, anti-corruption and bribery, and diversity on company boards (NFRD).Large companies and PIEs active in extraction or logging sectors have to prepare and publish annual country-by-country reports on payments to governments (CBCR-AD/TD). RESULTSExpected results of EU legislation for public reporting by companies include improvements in the quantity and quality of information available to stakeholders and public at large. Improvement is measured by assessing whether the information publicly reported is relevant, comparable, reliable and timely.RESULTSExpected results of EU legislation for public reporting by companies include improvements in the quantity and quality of information available to stakeholders and public at large. Improvement is measured by assessing whether the information publicly reported is relevant, comparable, reliable and timely. ••••••••IMPACTSPublic reporting by companies contributes to the wider objectives of:Improving the functioning of the EU single market (cross-border business and investments);Integrating EU capital markets;Supporting financial stability;Supporting sustainable growthIMPACTSPublic reporting by companies contributes to the wider objectives of:Improving the functioning of the EU single market (cross-border business and investments);Integrating EU capital markets;Supporting financial stability;Supporting sustainable growth

••••••••••EXTERNAL FACTORSTechnological developments (IT);Other EU and Member States’ legislation;Member States’ implementation / gold plating;Increasing public demand for accountability;International agreements and standards.EXTERNAL FACTORSTechnological developments (IT);Other EU and Member States’ legislation;Member States’ implementation / gold plating;Increasing public demand for accountability;International agreements and standards. 4. EVALUATION QUESTIONS This fitness check assesses the fitness of the companies’ public reporting obligations against the five better regulation criteria of effectiveness, efficiency, relevance, coherence and EU added value. For each criterion, specific evaluation questions were designed using evidence collected during the evaluation process. Table 3: Evaluation questions per evaluation criterionEffectivenessEffectiveness EffectivenessEffectivenessHas the EU framework on public reporting by companies been effective in enabling informed decision-making by stakeholders by ensuring the timely reporting of relevant, comparable and reliable financial and non-financial information? In doing so, has the EU framework contributed to the wider objectives of the EU single market, capital markets integration, financial stability and sustainable growth?Has the EU framework on public reporting by companies been effective in enabling informed decision-making by stakeholders by ensuring the timely reporting of relevant, comparable and reliable financial and non-financial information? In doing so, has the EU framework contributed to the wider objectives of the EU single market, capital markets integration, financial stability and sustainable growth? To what extent are the costs of implementing the framework justified and proportionate to the benefits? Is there room for enhancing efficiency for both users and preparers, for instance by making better use of digitalisation?To what extent are the costs of implementing the framework justified and proportionate to the benefits? Is there room for enhancing efficiency for both users and preparers, for instance by making better use of digitalisation?Are the originally pursued objectives still relevant, whether in terms of completeness (new needs), or accuracy (changes in, or disappearance of needs)?Are the EU instruments still relevant in the light of the evolution of needs and problems in the area of public reporting by companies? Are the originally pursued objectives still relevant, whether in terms of completeness (new needs), or accuracy (changes in, or disappearance of needs)?Are the EU instruments still relevant in the light of the evolution of needs and problems in the area of public reporting by companies? Is the EU the right level to design policies in order to obtain valuable results over and above unilateral and non-coordinated action by each Member State?Are there policies that could be better achieved at the international level?Is the EU the right level to design policies in order to obtain valuable results over and above unilateral and non-coordinated action by each Member State?Are there policies that could be better achieved at the international level?Are there significant inconsistencies, overlaps or synergies as regards the preparation, publication and dissemination of financial and non-financial information by companies between the legal instruments within the scope of the fitness check? Are there significant inconsistencies or overlaps between the EU framework for public reporting by companies and other Union legislation as regards content, format, timing, dissemination channels of reported information? Are there significant inconsistencies, overlaps or synergies as regards the preparation, publication and dissemination of financial and non-financial information by companies between the legal instruments within the scope of the fitness check? Are there significant inconsistencies or overlaps between the EU framework for public reporting by companies and other Union legislation as regards content, format, timing, dissemination channels of reported information? EfficiencyEfficiencyCoherenceCoherenceEU added valueEU added valueRelevanceRelevanceEU added valueEU added valueRelevanceRelevanceCoherenceCoherence 5. METHOD 5.1 Overall approach The fitness check aims at assessing the combined impact of the five EU legislative acts that constitute the EU framework for regular public reporting by companies. As outlined in section 1.1 “Scope of the Evaluation”, the EU framework provides for specific requirements depending on the legal form, the size and the shareholding of reporting companies. Accordingly, the fitness check assesses the cumulative effects of the various pieces of legislation in the EU framework, considering separately the following categories of entities: limited liability companies, listed companies, and non-listed financial institutions. This approach by category of entities is applied throughout the report to answer the evaluation questions with some adaptions in the following sections: Effectiveness In order to assess the effectiveness in achieving the wider objectives laid down in section 3 “Intervention logic” (despite the impracticability of disentangling the effects of the framework from other EU legislations and national laws), the fitness check first assesses whether the EU framework achieves its immediate objectives of providing stakeholders with financial and non-financial information that is sufficient in quantity and quality to enable them to make informed decisions. This immediate objective is assessed against measuring whether the regular disclosures required by the five legal acts provide relevant, comparable, reliable and timely information. As a second step and consistent with the intervention logic described in section 3, section 7.1.4 considers how regular public reporting by companies of financial and non-financial information contributes to achieving the wider objectives of an efficient functioning of the single market, the integration of EU capital markets, financial stability and sustainable growth. In particular, this section considers empirical evidence from academic research demonstrating the existence of causal relationships and mechanisms of effects between the quality of financial reporting by companies and the behavioural consequences on capital market participants. The choice of these four qualitative features (relevance, comparability, reliability and timeliness) is based on existing conceptual frameworks for corporate reporting. These characteristics describe what useful information is and how it relates to decision-making: ·Relevant means that reported information is useful for decision-making. Relevant information is information that will make a difference to a decision maker. It matters that all relevant information is provided as its omission would mislead the decision maker.

·Comparable means that common data content and formats allow stakeholders to compare information about activities, performance, risks and impacts between companies and over time. ·Reliable refers to whether information is free of material error and bias, and not misleading. Basically, reliability refers to the trustworthiness of the information. If stakeholders cannot trust the published information, it is useless for decision-making. ·Timely means information is provided within a reasonable period after the end of the reporting period. It would not make sense for stakeholders to receive information that is too late to make a decision with practical effects, for example to protect their interests or to make investment decisions. In addition, considering that different stakeholder groups have different interests in public reporting, the fitness check aims at identifying the extent to which the EU framework meets the expectations of the main stakeholder groups defined in section 7.1 Effectiveness. Efficiency of the EU framework In addition to assessing the extent to which the costs of implementing the EU framework are justified and proportionate to the benefits for each category of entity, the fitness check also considers more specifically the requests for simplifications expressed by stakeholders with a specific focus on digital technology. Relevance of the EU framework In addition to assessing whether the originally pursued objectives are still relevant, this section considers whether the EU framework is still relevant in view of more recent business and regulatory acts and their impact on user needs. EU added value of the EU framework This section considers whether the EU level is the right one for setting corporate reporting policies promoting an integrated capital market, safeguarding financial stability and improving sustainable growth, as well as whether setting these policies at the international level would be better suited. Coherence of the EU framework This section considers more specifically possible inconsistencies or overlaps between the legal instruments that constitute the EU framework for regular public reporting by companies, and between these legal instruments and other pieces of EU legislation. 5.2 Past evaluations The Commission issued in June 2015 a report on the evaluation of IAS Regulation. The report assessed the impact of adopting IFRS in the EU. It concluded that IFRS had made EU capital markets more efficient by making companies' financial statements more transparent and easier to compare. The report identified areas for improvement, such as collaboration between actors in the IFRS endorsement process. This evaluation builds upon this earlier analysis, in particular in the section of the key evaluation questions (section 7). 5.3 Information and data gathering Figure 5 gives an indication of the consultation activities and studies carried out specifically for this fitness check:

Figure 5: Consultation activities This fitness check is based on several data sources (studies, surveys, interviews, public consultation, conference, workshops, and bilateral meetings with stakeholders) carried out during 2018 until the second quarter of 2019. The Commission launched a public consultation on the EU regulatory framework for public reporting from March till July 2018 to collect the views, evidence and expertise from any interested stakeholder. Stakeholders from 23 Member States and 25 non-EU countries submitted 338 responses. The vast majority of respondents represented an “organisation or company” (82%), 9% were public authorities or international organisations and the remaining 9% were private individuals. Within the category "organisation or company", 25% were "company, SME, micro-enterprise and sole trader", 25% were "industry associations" and 21% were "non-governmental organisations". In terms of geographical coverage, over 60% of the responses were submitted by entities located in Germany, the United Kingdom, Belgium and France. Around 25% of respondents were companies with cross-border activities. For the purpose of this fitness check the type of stakeholder is more relevant than the organisation form. Acknowledging that mapping respondents into stakeholder categories is not straightforward (for example banks are preparers and users (lending) and some respondents are associations representing a larger number of stakeholders), it is interesting to note that investors and analysts using public reporting by companies seem underrepresented. Only 13% of the respondents were identified investors, while only 5% were creditors (banks as a proxy). Most respondents were preparers, accounting professionals and public authorities (60%). This reflects a general difficulty for policy making on public reporting and accounting standard setting: investors and analysts engage to only a limited extent in public consultations compared to other stakeholder groups. This fitness check sought to overcome the underrepresentation of investors by organising a workshop on corporate reporting with investors. Stakeholders did not respond evenly to all the different sections of the questionnaire. Civil society and employees unions, for instance, largely responded to the Non-Financial Reporting (NFR) section but did not or hardly respond to questions on financial reporting and digitalisation. Interestingly, investors and institutional investors responded more to NFR questions than to the financial reporting parts. Overall, sections 1 (assessing the fitness of the EU framework), 2 (the EU framework for all companies) and 5 (NFR) were the most frequently answered. The section reviewing the EU financial reporting framework for banks and insurance companies had least responses with mainly banks and academics sharing their views. DG FISMA published the “summary of responses to the public consultation on public reporting by companies” on 18 November 2018. Whereas the responses are a very important source of input for this fitness check, the overall limited number of responses, the skewed distribution of types of respondents / stakeholders and their geographical concentration imply that it is not statistically representative. The responses are therefore used as a qualitative input. In addition to the fitness check consultation, a high-level conference on “The future of corporate reporting” was held on 30 November 2018, and a number of ad hoc workshops and stakeholder meetings were hosted: ·A workshop addressing the European Single Electronic Format (ESEF), involving preparers, analysts and professional associations; ·An open stakeholder meeting on NFR, involving companies, investors, civil society organisations and other stakeholders; a meeting with civil society organisations, and a meeting with companies to hear their views on NFR; and a multi-stakeholder workshop on NFR to test some of the preliminary findings of this fitness check; ·A workshop addressing financial reporting from the viewpoint of users and investors. On targeted topics of interest for the fitness check, DG FISMA surveyed the Accounting Regulatory Committee (ARC), the Expert Group of the European Securities Committee (EGESC) and the Company Law Expert Group on the Business Registers Interconnection System (CLEG-BRIS). The evaluation is also underpinned by two specific studies respectively on the reporting on payments to governments by extractive and logging industries (VVA, 2018) and the accounting regime of micro companies (CEPS, 2019). The Commission services’ evaluation of the IAS Regulation conducted in 2015 brings additional robust evidence. Further details on the various consultation activities and their outcome are given in Annexes II and III. These are referred to where appropriate to support assertions made in the body of this staff working document. 5.4 Limitations One major limitation of the fitness check stems from the fact that four out of the five acts that constitute the EU framework on public reporting by companies are Directives, which by definition are required to be transposed by Member States into national law. This implies in practice that stakeholders with an interest in public reporting usually do not draw a distinction between the requirements arising from Union law and additional national rules. This limitation is especially acute with regard to the requirements applicable to limited liability companies as the EU framework features Member States’ options and does not address all types of economic transactions, rights and obligations The fitness check does not assess the Member States exercise of options or supplementary requirements stemming from Member States’ national Generally Accepted Accounting Principles (nGAAP).that complement the EU framework. Other limitations of this evaluation stem from data availability, measurability of outcomes such as compliance costs, benefits for companies (assessment of benefits stemming directly from reporting in a quantified manner), timing (some data and evidence will only become available in the future) and the difficulty to correlate costs and benefits with the preparation of financial statements and non-financial reporting obligations. Compliance costs typically arise from the preparation, audit and dissemination (e.g. filing with a register, posting on a web site, publication activities) of the information. This fitness check focuses on the preparation costs, but encounters the following practical challenges: ·As regards filing with an authority, filing fees do not stem from EU action as it is a national business register’s or an OAM’s decision to impose such fees on companies;

·Costs in relation to other publication channels selected by a company, such as its own web pages, typically depend on the company’s choices and on the structure of its own web site. Such costs are difficult to isolate. As regards preparation costs in relation to financial reporting, there are a number of inherent difficulties: ·It is difficult to delineate costs in relation to the preparation of financial statements from the cost of ongoing administration and other reporting requirements. Typically, in order to manage its business, a company must register transactions and maintain records throughout the year, prepare company tax returns and provide statistical data, etc. So, there is a considerable portion of the EU obligation that companies would apply anyway, in a “business as usual” situation. The “cost of doing business” would therefore exist, even absent any EU or national public reporting requirement. Besides, Union requirements on the preparation of annual financial statements substitute national requirements that were in place before EU legislative action, including for other reasons than corporate reporting (tax returns, statistics...). It would be especially challenging to quantify costs, if one only took into account any additional costs arising from EU legislation on the top of national legal obligations. So, a portion of the preparation costs should not be attributed to EU intervention. However, assessing this proportion is a particularly difficult exercise, but it is estimated that the larger the company, the closer the non-EU attributable costs gets to 100%. ·The relevant directives are largely minimum harmonisation. This means that some cost for the preparation of financial reporting is due to additions by national legislators and should therefore not be attributed to EU action. ·The super-simplified regime offered by the Accounting Directive for micro companies is an option for the Member States. Hence, where that option is not used companies are subject to more demanding requirements than they are under EU intervention. For these reasons, the cost-benefit analysis focused primarily on the preparation of financial reporting by micro companies, which represent more than 80% of the EU companies and for which the cost of public reporting is relatively higher than for large companies. Attention was also paid in this exercise to costs attributable to the preparation of CBCR for extractive and logging industries and non-financial reporting (NFRD, including the treatment of information arising from risk management processes). Additional limitations apply to the NFRD. Since companies only reported according to the provisions of the directive for the first time in 2018, there is inevitably a lack of comprehensive and historical data about how the directive has influenced company reporting of non-financial information and about the views of the intended users of that information. A number of studies, covering the 2018 and 2019 reporting cycles, have nevertheless been very useful for this fitness check, even though companies are still adapting to the requirements of the directive, and the situation can be expected to evolve further in the next reporting cycles. 6. IMPLEMENTATION STATE OF PLAY As part of this fitness check, the Member States’ implementation of the existing EU framework was also assessed. In this context, Member States’ compliance with EU law constitutes the pre-condition for the relevant EU policy objectives to be reached effectively. While certain EU legal instruments (e.g. the Regulations) become directly applicable following their publication in the Official Journal of the European Union, certain others (e.g. the Directives) require Member States to bring in national transposing measures. According to the EU Treaties, the Commission has the duty to ensure the application of EU law under the control of the Court of Justice of the EU. The Commission is therefore responsible for monitoring how EU law is implemented, solving problems with Member States so as to remedy any possible breaches of EU law, and taking infringement action when appropriate. For this purpose, it carries out compliance assessments for all Directives published in the Official Journal of the European Union that require transposition measures. It also handles complaints concerning possible breaches of EU law by the Member States received by members of the public, businesses and civil society. In order to assess the Member States’ implementation of the existing EU framework, the Commission mainly focused on the results of the compliance assessments for the Accounting Directive, the Non-Financial Reporting Directive amending the Accounting Directive, and the 2013 Directive amending the Transparency Directive. In order to facilitate the Member States’ implementation of the directives, the Commission services organised transposition workshops with Member States’ representatives to provide informal guidance on how to transpose specific provisions of the AD and the NFRD. During these workshops, Q&As and non-papers to clarify definitions and provisions were shared with the participants. State of play of transposition in Member States Despite significant delays in the notification of their national transposing measures, to date all 28 Member States have completed the transposition of the AD, the NFRD and the 2013 Directive amending the TD. All the infringement cases that were initially opened for late transposition were subsequently closed. For these three directives, the Commission services assessed the compliance of the national transposing measures with each directive’s most important provisions. Such compliance check was based – in part – on a preliminary assessment of the national transposing measures per each Member State carried out by an external contractor. Compliance issues emerging from the compliance assessment As for the AD, only a few non-critical issues were identified during the compliance assessment of the changes brought in by the new Directive adopted in 2013. A minority of Member States struggled with the removal of a restriction that existed thus far to have only ordinary activities in the turnover, resulting in potentially uneven definitions of turnover across the EU. In addition, Member States have had slightly varying interpretations of certain accounting rules in the AD. As for the NFRD, several issues were identified during the compliance assessment. Firstly, some Member States have not been sufficiently clear or precise in the transposition of the concrete disclosure requirements contained in the directive. Secondly, there are concerns about the collective responsibility of the members of the administrative, management and supervisory bodies of undertakings with regard to the non-financial statement if this is published in a separate report. Lastly, the exemption that applies to certain subsidiary undertakings has been limited in some Member States. As for the TD, a few Member States had difficulties with the transposition of the notification requirements for holders of financial instruments allowing the acquisition of shares to which voting rights are attached. Some issues have also been identified with the establishment by some Member States of certain minimum effective, proportionate and dissuasive administrative measures and sanctions for breaches of the national provisions transposing the TD rules. Table 4 summarises the above: Table 4: State of play of transposition and main implementation issues

7. ANSWERS TO THE EVALUATION QUESTIONS This section assesses the EU framework on public reporting against the following criteria: effectiveness (7.1), efficiency (7.2), relevance (7.3), EU added value (7.4) and coherence (7.5). 7.1 Effectiveness of the EU framework The overarching evaluation question is whether the EU framework on public reporting by companies has been effective in enabling stakeholders to make informed decisions by ensuring the timely reporting of relevant, comparable and reliable financial and non-financial information on companies’ activities, performance, risks and impacts. Public reports are useful for stakeholders when they can use them for informed decision-making. For example, forecasting future cash flows (predictive value) or comparing past evaluations or predictions with actual achievements (confirmatory value). Providing information with confirmatory value is especially useful with a view to assessing management stewardship and confronting past forecasts with actual achievements. The usefulness of publicly reported information depends on who the stakeholders are and what they expect. The number and types of stakeholders depends on the type and size of the reporting entity. A fully management-owned micro company has a very limited number of stakeholders compared to a listed company, which is accountable to a much broader range of stakeholders and has to cater for a multi-facetted reporting. This Fitness Check identifies three types of reporting entities (see also Table 1 in section 1.1) with the five main categories of stakeholders (investors, creditors, employees, civil society and authorities). This fitness check also recognises that some stakeholder groups are not homogenous. For example, investors may have different interests (e.g. different levels of interest in sustainability), risk appetite, and time horizons for their investments; institutional investors or private equity funds may have direct access to companies that retail investors do not have. This fitness check also considers that stakeholders with privileged insider access to information, such as manager-owners or tax authorities are less prone to see value in public reporting. Hence, they are not further considered in the remainder of this exercise. Limited liability companies Micro companies are often management-owned companies with sole proprietorship. They usually recourse to bank funding (loans and overdrafts). In most cases they have a single line of business with none to very little cross-border activity. Micro companies may have chosen the limited liability legal form to shield the personal property of the owner-manager from business risks or for tax reasons. Small companies usually have more substantial amounts of bank lending and a more complex ownership structure including external investors. They may have more complex group structures (also for tax purposes) and some cross-border business. Medium and large non-listed companies can comprise very large family-owned companies or companies whose ownership is more widespread. Some are comparable to international listed groups in terms of size and cross-border activities and can employ thousands of employees. They have registered shareholdings. Investment funds or asset managers may hold direct participation in their share capital. All limited liability companies have trade creditors (e.g. product or service suppliers with varying contract terms and conditions) who may use the annual financial statements to assess the creditworthiness of companies. Employees can also use such statements to evaluate the profitability and pension contribution capacity of their employers. In general, civil society is more interested in impacts of companies on society and the environment and more concerned by activities of larger companies. Listed companies Listed companies have diversified widely dispersed (largely anonymous) shareholdings including direct and indirect investments by institutional investors such as life insurance companies, pension funds or hedge funds. Virtually all have EU cross-border business. They can be global players with more than 100.000 employees and complex international group structures. Public reporting by listed companies is subject to supervision by securities market supervisors. Non-listed financial institutions Banks take deposits and grant loans on their own account, have access to central bank liquidity, and are subject to specific prudential requirements on solvency, resolution, deposit guarantees, and banking supervision. To the extent that banks are listed, the regular public reporting requirements for listed companies apply. Insurance undertakings underwrite insurance risks for their own account and are subject to specific prudential requirements on solvency, governance, and insurance supervision. To the extent that insurance undertakings are listed, the regular public reporting requirements for listed companies apply. Depositors of banks and policyholders of insurance undertakings are protected by a cascade of regulatory requirements, including prudential and supervisory frameworks as well as deposit and insurance scheme guarantees, and they usually do not rely on public reporting by financial institutions in order to protect their interest. Table 5 summarises for each category of entities the main stakeholder groups for which public information is useful for their decision-making. Table 5: Stakeholder groups per type of entity

Category Size / type Stakeholders Investors (Equity) Creditors (debt funding + trade creditors) Employees Civil society Others Limited liability companies Micro Manager / owner (1 or very few shareholders) Banks, trade creditors Direct employer / owner relationship In excep-tional cases Authorities Small Manager / owner + few registered shareholdings Banks, trade creditors Direct employer / owner relationship In some cases, depending in impacts Authorities Medium Registered shareholdings (e.g. family), asset managers Banks, trade creditors Structured employee representation In some cases, depending on impacts and size Authorities Large Registered shareholdings (e.g. family), asset managers Banks, trade creditors Structured employee representation NGOs Authorities Listed companies Listed (group) Shareholders on secondary markets, investment funds, asset managers Banks, trade creditors, holders of listed debt securities Structured employee representation NGOs Authorities Non-listed financial institutions Bank (any legal form) Registered shareholders (cooperative shareholders) Interbank lenders, creditors, depositors holders Structured employee representation Depending on impacts and size Authorities Insu-rance undertaking (any legal form) Registered shareholders (cooperative shareholders) Policy holders Structured employee representation Depending on impacts and size Authorities 7.1.1Effectiveness of the EU framework on regular public reporting by all limited liability companies Table 6 summarises the requirements of the EU framework on regular public reporting by all limited liability companies (14.2 million micro, 2.3 million small, 0.3 million medium and 0.1 million large companies). These requirements stem from the AD, the IAS Regulation where Member States have decided to expand the scope of mandatory application of IFRS (see Annex IV), and CBCR where the company is large and is active in the extractive or logging sector. One Member State requires the use of IFRS for all limited liability companies, 15 Member States permit the use of IFRS by all limited liability companies, and four Member States only permit the use of IFRS by subsidiaries of parent undertakings reporting under IFRS. Evidence indicates that where the use of IFRS is permitted, take up remains limited and the vast majority of companies choose using national GAAP. Table 6: Requirements of the EU framework on regular public reporting by all limited liability companies Category Size / type The EU framework on regular public reporting by all limited liability companies AD IAS CBCR Limited liability companies Micro Abridged balance sheet and P&L - (IFRS = MS option) - Small Financial statements (Balance sheet, P&L, notes) - (IFRS = MS option) - Medium / Large Financial statements, management report, audit - (IFRS = MS option) Extractive or logging sector (large) Conclusion on the Effectiveness of the EU framework on regular reporting by all limited liability companies For a majority of stakeholders, the information provided under the EU framework applicable to all limited liability companies is relevant. Even if the AD has lacunas and did not keep pace with regulatory and business developments, this does not appear to be a major issue in practice as Member States have largely supplemented the EU framework in their national legislation (or allowed the use of IFRS). Comparability of published information is adequate in form due to prescribed lay-outs but perfectible in substance. This is mainly a concern for stakeholders with an interest in companies with cross-border operations, i.e. larger companies. These count for 2% of the total number of EU limited liability companies. Stakeholders tend to point to IFRS-based solutions to address this. Reliability of the information published under the EU framework seems adequately safeguarded by collective board responsibility for giving a “true and fair view”. The statutory audit requirement, which is commensurate to the size of companies, offers an additional safeguard for users of information of a fair portion of larger companies. The timeliness of information provided to stakeholders depends on how Member States have implemented the publication provisions of the AD. Even though sometimes published earlier due to national laws, the AD allows publication of the information up to 12 months after the end of the reporting period significantly which reduces the relevance of the information for stakeholders. Moreover, there is evidence that not all companies comply with the timeliness of their publication obligations. This lack of compliance may be a consequence of insufficiently dissuasive sanctioning regimes implemented in the Member States. The usefulness of CBCR in bringing transparency on payments to governments by extractive and logging industries is widely recognised by civil society. Relevance The vast majority of stakeholders consulted for this fitness check does not dispute the relevance of the financial information provided under the EU framework applicable to all limited liability companies (Q16-Q17). Even if there is growing debate and research about the usefulness of financial reporting for decision-making, users consider that financial statements have an important confirmatory role. Companies’ information in the financial statements may be seen to be essentially about past events with limited forward-looking value. Nevertheless, in their responses to the consultations, stakeholders outlined that financial statements have an important confirmatory role and did not call for amendments to the AD in order to require additional forward-looking data in the financial statements such as future cash flows. Arguably, the AD has not been updated to reflect all regulatory and business developments. In consequence, there are numerous areas for improvement which were identified through Commission research and consultations: ·Lacunas in recognition and measurement principles for the preparation of financial statements: the AD may not adequately portray some transactions, for instance the revenues from multiple-element-sale contracts or the underlying assets and liabilities of lease contracts. ·Lacunas in the completeness of financial statements: for example, the AD does not require the preparation of a cash-flow statement or a statement of changes in equity.

·Insufficient content of the management report: management reports include more forward-looking and risk oriented, narrative information. As such investors consider it a key document. Some analysts argue that the management report could include key performance indicators to strengthen comparability as well as (not necessarily financial) information on intangibles. Member States have mitigated the impact of these lacunas, either by supplementing the minimum requirements of the AD in their national legislation (as illustrated in figure 6), or by expanding the scope of the companies allowed or required to use IFRS. A majority of stakeholders consider the EU framework as overall relevant and support the status quo (Q12). However, the variety of nGAAPs resulting from the situation ma