Opinion of the European Economic and Social Committee on the "Proposal for a Directive of the European Parliament and of the Council amending Council Directives 78/660/EEC, 83/349/EEC and 91/674/EEC on the annual and consolidated accounts of certain types of companies and insurance undertakings" (COM(2002) 259 final — 2002/0112 (COD))
Date: 2003-01-22
Institutions: European Economic and Social Committee
Subjects: balance sheet, consolidated account, insurance company, publication of accounts, share capital, trading account

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6.4.
The final aim of the proposal is not deregulation but
better regulation: its effectiveness will depend on its quality,
accessibility, necessity, relevance, objective, simplicity, stability
and transparency.

6.5.
The Committee believes that the rules set out in this
directive are also mutually compatible, effective and cost-
effective.

Brussels, 23 January 2003.

The President

of the European Economic and Social Committee

Roger BRIESCH

Opinion of the European Economic and Social Committee on the ‘Proposal for a Directive of the
European Parliament and of the Council amending Council Directives 78/660/EEC, 83/349/EEC
and 91/674/EEC on the annual and consolidated accounts of certain types of companies and
insurance undertakings’

(COM(2002) 259 final — 2002/0112 (COD))

(2003/C 85/31)

On 19 July 2002, the Council decided to consult the European Economic and Social Committee, under
Article 44(1) of the Treaty establishing the European Community, on the above-mentioned proposal.

The Section for the Single Market, Production and Consumption was responsible for the Committee’s
work on the subject. The Committee appointed Mr Ravoet as rapporteur-general.

At its 396th plenary session (meeting of 22 January 2003), the European Economic and Social Committee
adopted the following opinion, with 72 votes in favour and one vote against.

1.

Introduction

1.2.
The Commission communication is split into two
parts: the introduction of IAS in the EU and the alignment of
the existing EU Accounting Directives on IAS.

1.1.
In its communication of 13 June 2000 entitled ‘The
EU’s Financial Reporting Strategy: The Way Forward’ the
Commission proposes that all EU listed companies should be
required to prepare their consolidated accounts in accordance
with International Accounting Standards (IAS) from 2005 at
the latest. The aim of this measure is to enhance overall market
efficiency, thereby reducing the cost of capital for companies.
The communication is in keeping with the Financial Services
Action Plan, which the Lisbon European Council of 23 and
24 March 2000 required to be completed before 2005. The
communication allows the Member States the option of
extending the application of IAS to unlisted financial insti-
tutions and insurance companies in order to enhance compara-
bility throughout the sector and ensure efficient and effective
supervision.

1.3.
To implement the first part, the Regulation of the
European Parliament and of the Council on the application of
International Accounting Standards was adopted on 19 July
2002. This regulation sets out the mechanism for recognising
IAS in the EU.

1.4.
The regulation lays down that from 1 January 2005 all
listed companies should prepare their consolidated financial
statements in accordance with IAS approved for use in the EU.
Member States are allowed the option of permitting or
requiring the application of adopted IAS by the above com-
panies, or by other companies, in the preparation of their

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annual accounts. In its opinion of 17 September 2001, the
EESC underlined the need to take account of
the social
information which has to be made available to employees (1).

2. Summary of the contents of the proposal

for a

directive

To implement

the second part,

the existing EU
1.5.
Accounting Directives will be aligned on IAS.
is this
It
alignment which is the subject of this opinion. Attention is
drawn to the fact that originally these adjustments did not
apply to Directive 86/635/EEC on the annual accounts and
consolidated accounts of banks and other financial institutions.
Following discussions in the Council, however, the current
proposal will also apply to the directive. The following
directives are now to be amended:

— the Fourth Council Directive 78/660/EEC of 25 July 1978
on the annual accounts of certain types of companies;

— the Seventh Council Directive 83/349/EEC of 13 June

1983 on consolidated accounts;

— Council Directive 86/635/EEC of 8 December 1986 on
the annual accounts and consolidated accounts of banks
and other financial institutions; and the

— Council Directive of 91/674/EEC of 19 December 1991
on the annual accounts and consolidated accounts of
insurance undertakings.

1.6.
According to the Commission, the Accounting Direc-
tives will play an important role in the mechanism for adopting
IAS under the proposed IAS Regulation.
In addition, the
intention is that they will continue to be the basis of accounting
legislation for entities which do not prepare their annual or
consolidated accounts in accordance with adopted IAS further
to the IAS Regulation. They also deal with important matters
which are outside the scope of the IAS Regulation (e.g. the
requirement to obtain an audit and to prepare an annual
report) and will continue to govern these areas.

In a certain number of areas the provisions of the
1.7.
largely
Accounting Directives, which have
unchanged for more than 20 years, are inconsistent with IAS.
The Commission wants to remove these inconsistencies with
the present proposal. The proposal will remove all inconsist-
encies between Directives 78/660/EEC, 83/349/EEC, 86/635/
EEC (added) and 91/674/EEC and IAS in existence at 1 May
2002.

remained

( 1) EESC opinion, OJ C 260, 17.9.2001.

2.1.

Fourth Directive on the annual accounts of certain types of
companies

2.1.1. Member States will have the power to permit or
require additional statements, e.g. a cash flow statement, to be
provided in annual accounts.

2.1.2. Member States will have the power, in accordance
with IAS, to permit or require the disclosure of amounts in
items in the profit and loss account and the balance sheet to
reflect the substance of the reported transaction or arrange-
ment, rather than its legal form. Such permission or obligation
may be limited.

2.1.3. Member States will have the power to permit com-
panies to draw up a balance sheet in accordance with the
requirements of IAS. At the same time it is anticipated that
there will be a future reform of the presentation of the income
and expenditure account.

2.1.4.
The recording of provisions is subject to stricter rules
under IAS than under the Fourth Directive. The present
proposal for a directive defines the reporting of provisions
consistent with IAS for companies applying IAS, but provides
for a status quo for the annual accounts of unlisted companies.

2.1.5.
in accordance with IAS 38.

A revaluation of intangible fixed assets is scheduled

2.1.6. Member States will have the power to extend use of
the ‘fair value’ concept, which has already been introduced
into the annual accounts directives by Directive 2001/65/EC,
to other asset categories (possibly only in consolidated financial
statements) and include changes to this value in the income
and expenditure account.

2.1.7.
The underlying requirement to draw up an annual
report that gives a fair review of the development of the
company’s business and of its position is to be extended.
Attention now is to be paid to the company’s performance
and to the biggest risks and uncertainties facing it. An analysis
of the relevant environmental, social and other aspects is to be
provided alongside the financial information if this is necessary
in order to have a good understanding of the company’s
development, performance or position.

In cases where extracts from the annual report have
2.1.8.
been published, it is now laid down in the proposed directive
that, in addition to disclosure of a declaration with or without
qualification, or a declaration without a judgment, it must also
be disclosed whether the auditors have drawn attention in
their report to any matter without qualifying the audit report.
At the same time the proposed directive seeks to bring about
further harmonisation in these audit reports.

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2.1.9.
of the euro.

Changes are to be made further to the introduction

2.4. Directive on the annual accounts and consolidated accounts of

insurance undertakings

2.1.10.
tion from certain obligations.

Listed companies may no longer apply for exemp-

2.4.1. Most of the changes proposed to Directive 91/674/
EEC are consequential
to those to the Fourth Directive
described above.

2.2.

Seventh Directive on consolidated accounts

Under IAS, an undertaking is a subsidiary undertak-
2.2.1.
ing if it is controlled by a parent, irrespective of the existence
of an interest in the capital of the undertaking. The current
requirement in the directive for a participating interest to exist
is to be scrapped, which will bring the directive into line with
IAS requirements.

Also to be scrapped are the rules providing for the exclusion
of an undertaking from the consolidated accounts of the
parent if its activities are incompatible with those of the parent
such that inclusion would fail to meet the requirement to give
a true and fair view of the undertakings included therein taken
as a whole. It is now felt that this is never the case.

2.2.2.
Provisions similar to those in points 2.1.1, 2.1.7,
2.1.8 and 2.1.10 are provided for in the proposals for revising
the Seventh Directive. Where both an annual report and a
consolidated annual report are required, provision is also made
for the two reports to be combined.

2.3. Directive on the annual accounts and consolidated accounts of

banks and other financial institutions

2.3.1. Most of the changes proposed to Directive 86/635/
EEC are consequential
to those to the Fourth Directive
described above.

2.3.2. Member States may also permit or require credit
institutions or certain types of credit institutions to draw up
their balance sheet depending on the type of the balance sheet
items and their relative liquidity.

2.3.3.
As a derogation from the Fourth Directive, Member
States may permit or require credit institutions or certain types
of credit institutions to draw up a performance report instead
of an income and expenditure report if the information to be
set out therein is equivalent.

2.4.2.
Further amendments are scheduled in connection
with the use of fair value in the case of certain specific items
further to IAS 39.

3. General assessment

that

3.1.
The EESC welcomes the alignment of the Accounting
Directives on IAS. The EESC does, however, draw attention to
the fact
IAS are constantly evolving. The proposed
directive will remove all inconsistencies with IAS that existed
on 1 May 2002. But since then a whole lot of major changes
to IAS have been undergoing development. If such adjustments
create new conflicts with the EU Accounting Directives, these
conflicts should in the EESC’s view, be resolved as quickly as
possible.

3.2.
Current EU texts relating to accounting and prudential
aspects of banking supervision continue to refer to subconsoli-
dations (consolidations to be carried out also by subsidiary
enterprises). The EESC draws attention to the failure to take
advantage of the opportunity to abolish these subconsoli-
dations bearing in mind that this form of consolidation is a
relic of the earlier national accounting laws. When we have
standard European accounting laws (in respect of consoli-
dation), such subconsolidations would appear to be superflu-
ous, particularly as regards the prudential supervision of banks.
The EESC therefore proposes that the European Commission
initiate talks with the Banking Advisory Committee to examine
whether the prudential supervision of banks can be organised
without requiring credit institutions to carry out subconsoli-
dation. Once a European group or conglomeration of enter-
prises opts to apply IAS rules (either on a voluntary basis or
under the provisions of the IAS regulation), such a body must
be given the opportunity to draw up only one annual set of
consolidated accounts. In order to clarify the situation, the
EESC proposes that the European Commission provide an
explanation of the relation between the field of application of
the IAS regulation and that of the modernising directive.

As a consequence of the abolition of the exclusion
2.3.4.
its
of an undertaking from the consolidated accounts if
activities are incompatible with those of its parent (point 2.2.1),
the obligation for a parent credit institution to include in
its consolidated accounts subsidiaries that are not credit
institutions and whose activities are a direct continuation of
banking activities is also to be abolished. In any case such an
exception will become superfluous through the amendment to
Directive 83/849/EEC.

3.3. With the introduction of a specific statute for a
the EU took a major step towards
European Company,
harmonising the legal framework within which European
firms operate. The relevant regulation is to come into force on
8 October 2004. The national accounting laws should, in the
EESC’s view, also be adapted by then in order to get the
European Company off on the right foot. Obviously, such a
European Company should be able to apply IAS without still
being subject to national accounting laws.

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3.4.
The evolution of IAS is apparent, among other things,
from the IAS Board’s recent treatment of the issue of the
consolidation of special purpose vehicles (SPVs). For the
banking sector it is important that, even though they need to
be included in consolidated accounts, securitisation vehicles
should not give rise to capital weighting in the prudential
sphere. The same consideration applies in the case of the
insurance sector.

The use of fair value within the banking sector in
3.5.
accordance with IAS is not readily compatible with the rules
of risk management as laid down by the Basle Committee. The
text of the proposed directive could, in the EESC’s view, impose
an obligation on the European Commission to work within
the IASB to ensure that the IAS take more account of the Basle
standards.

3.6.
The EESC believes that, in the prudential area, further
fine-tuning is also necessary between the rules set out in the
Capital Adequacy Directive in respect of investment services
and the IAS.

3.7.
Attention should also be paid to the fact that there are
no IAS covering insurance contracts. It is highly probable that
such a standard will not be adopted by the IASB before 2004.
Until such time as a comprehensive IAS covering insurance
contracts is ready to be applied, the EESC takes the view that
insurance companies should be given the opportunity to make
good this omission by having recourse to ‘best practice’.

3.8.
In the area of taxation, serious problems also arise. The
introduction of IAS at consolidated level is in fact an artificial
approach. For banks it
is almost impossible to draw up
consolidated annual accounts in accordance with IAS without
first drawing up IAS-compatible ordinary annual accounts.
The same applies to insurance companies. Unlike industrial
firms, the impact of IAS-39 on banks and insurance companies
as regards the valuation of financial instruments is in fact very
great. To avoid complex conversions, these institutions should
thus draw up ordinary annual accounts in accordance with
IAS. The EESC concludes that this leads to duplication with
regard to the ordinary annual accounts.

3.10.
In Europe there seems to be a trend developing
towards tax consolidation. In the EESC’s view, the European
Commission should carry out further investigations to deter-
mine whether the IAS provides a good basis for establishing
companies’ tax obligations.

Some Member States have already announced that
3.11.
they will be drawing up new national rules described as
being ‘convergent’ with IAS; such standards will thus not be
completely identical with IAS. The EESC draws attention to
the fact that such measures run counter to the trend towards
establishing international accounting standards. Furthermore,
such measures require enterprises operating at international
level to carry out expensive implementing procedures. An
enterprise operating in five Member States will not just have
to implement a single given standard once; it will be required
to carry out five different implementing procedures, not to
mention the attendant analyses of the differences between the
various procedures.

3.12.
Although the demand for complete conformity
between new national accounting rules and IAS is in line with
the desire to establish uniform accounting standards for all
enterprises in the EU, such an approach will, in practice, give
rise to problems until such time as uniform provisions have
been introduced in all legal areas, such as taxation in general
and withholding tax on dividends in particular. The EESC
therefore calls upon the European Commission to work
towards further standardisation in these fields. Until such time
as this goal has been achieved, the modernisation directive
should give Member States the opportunity to make their
own national provisions for implementing this directive,
particularly with regard to SMEs, which find it particularly
difficult to implement the IAS.

3.13.
The EESC also takes the view that it is essential to
take account of the importance of social and environmental
considerations and believes that information on these aspects
should be included in the annual accounts.

Finally, the EESC highlights the importance of scrupu-
3.14.
lously applying audit rules, such as those laid down by
the International Auditing and Assurance Standards Board
(IAASB).

4. Conclusion

In some European countries, the link between the
3.9.
ordinary annual accounts and taxation does, however, make it
impossible for the moment to find a solution immediately.
Nevertheless it is particularly important that listed companies
should no longer be obliged to use two accounting standards.
The EESC therefore believes that the proposed directive should
contain an article creating a link with tax harmonisation within
the EU. The EESC does, however, take the view that until such
time as tax harmonisation is achieved in the EU, the options
for the Member States set out in the modernisation directive
should be retained in order to facilitate tax-neutral implemen-
tation.

The EESC welcomes the proposals set out in this
4.1.
modernising directive for aligning the EU accounting directives
on IAS. The proposed alignment will make it easier for
investors to compare the annual accounts of companies in the
EU. This, in turn, will help to increase the efficiency of the
market,
thereby cutting companies’ cost of capital. This
conclusion is in line with the conclusions reached by the EESC
in its earlier work on this subject (1).

(1) See the Committee’s Opinion on the application of international

accounting standards — OJ C 260, 17.9.2001.

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There needs to be an awareness of

4.2.
the fact that
European accounting law should clearly evolve further in the
direction of more standardisation. Otherwise, there is, in the
EESC’s view, a real risk that the measure will result in a heavier
reporting burden being placed on the companies concerned.

4.3.
The EESC believes that the tax implications of the
introduction of IAS also require further investigation. The
EESC thus takes the view that further tax harmonisation in the
EU is desirable in this context too.

Brussels, 22 January 2003.

The President

of the European Economic and Social Committee

Roger BRIESCH