Commission staff working document - Accompanying document to the Proposal for a Directive of the European Parliament and of the Council amending Council Directive 78/660/EEC on the annual accounts of certain types of companies as regards micro-entities - Summary of the impact assessment {COM(2009) 83} {SEC(2009) 206}
Date: 2009-02-26
Institutions: European Commission
Subjects: account, balance sheet, capital market, capital movement, impact study, organisation, publication of accounts

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COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 26.2.2009 
SEC(2009) 207l 

COMMISSION STAFF WORKING DOCUMENT 

Accompanying document to the 

Proposal for a 

DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL 

amending Council Directive 78/660/EEC on the annual accounts of certain types of 
companies as regards micro-entities 

Summary of the Impact assessment 

{COM(2009) 83} 
{SEC(2009) 206} 

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COMMISSION STAFF WORKING DOCUMENT 

Accompanying document to the 

Proposal for a 

DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL 

amending Council Directive 78/660/EEC on the annual accounts of certain types of 
companies as regards micro-entities 

Summary of the Impact assessment 

{COM(2009) 83} 
{SEC(2009) 206} 

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EXECUTIVE SUMMARY 

1. 

INTRODUCTION 

This impact assessment presents the Commission's initiatives to simplify the business 
environment and particularly the financial reporting requirements for micro-entities. 
It  describes  the  problems  related  to  the  current  Accounting  Directives1,  presents  a 
number  of  policy  options,  analyses  their  feasibility  and,  where  applicable,  their 
expected impacts. 

1.1. 

European Economic Recovery Plan  

In  accordance  with  the  goals  of  Lisbon  Agenda,  the  Commission  is  committed  to 
release the growth potential of the small and medium-sized enterprises companies by 
reducing their administrative burden.  

In  the  aftermath  of  the  financial  crisis,  the  Commission  issued  "A  European 
Economic  Recovery  Plan"  to  restore  consumer  and  business  confidence.  The 
European  Economic  Recovery  Plan  pledges  to  reduce  the  burden  on  SMEs  and 
micro-enterprises by  among  others "removing  the  requirement  on  micro-enterprises 
to prepare annual accounts". 

1.2. 

Policy Context 

The aim of the proposals of the Commission that are discussed in this document is to 
reduce  unnecessary  administrative  obligations  and  facilitate  alignment  of  reporting 
requirements to real needs of users and of preparers. 

1.3. 

The EU acquis in company law, accounting and auditing 

In the field of accounting the Fourth Company Law Directive establishes minimum 
requirements for the annual accounts of limited-liability companies. In the time when 
Accounting  Directives  were  developed  the  prevailing  idea  was  that  SMEs  are  not 
fundamentally  different  from  large  companies  and  should  follow  similar  reporting 
requirements. This view has subsequently changed with acknowledgment of distinct 
needs  of  the  SME  group  –  laid  down  as  the  "think  small  first"  principle.  It  is 
important to consider which requirements should be removed or replaced in order to 
simplify financial reporting for micro-entities2. 

1.4. 

Definition of micro entities 

The Commission category of micro entities is set as the smallest enterprises with the 
following definition: 

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Fourth Council Directive of 25 July 1978 (78/660/EEC);  
Seventh Council Directive of 13 June (83/349/EEC) 
The Seventh Company Law Directive does not need to be amended, as already the present text of this 
Directive  gives  the  Member  States  an  option  to  exclude  from  the  obligation  to  draw  up  consolidated 
financial statements companies which together do not exceed the limits of medium-sized company as 
defined in the 4th Company Law Directive (Art. 6(1) of the 7th Company Law Directive). 

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– less than ten employees, 

– balance sheet total below 500,000 EUR, and 

– turnover below 1,000,000 EUR. 

1.5. 

Practices in the main trading partners of the European Union 

In  other  economically  comparable  jurisdictions  and  key  trading  partners  of  the 
European  Union,  the  financial  reporting  requirements  for  small  companies  are 
generally less demanding than the requirements of the Accounting Directives. 

For example in the USA, there is generally no legal obligation to prepare or publish 
financial  statements  for  unlisted  companies.  There  is  no  evidence  that  these  less 
stringent requirements would be a hindrance to US companies in obtaining external 
financing. 

1.6. 

Opinion of the Commission's Impact Assessment Board 

This  Impact  Assessment  takes  into  consideration  the  Commission's  Impact 
Assessment Board's comments provided on 2 February 2009. 

2. 

PROCEDURAL ISSUES, CONSULTATION OF INTERESTED PARTIES AND SUBSIDIARITY 

The  Commission  has  already  taken  a  number  of  simplification  initiatives  to  reduce 
the administrative burden for small and medium-sized companies (SMEs).  

2.1. 

Commission Communication of 10 July 2007 and stakeholder consultation 

In 2005, the Commission launched a programme for measuring administrative costs 
and  to  identify  the  most  burdensome  requirements  with  a  view  to  reducing 
administrative  burdens 
for  EU  companies.  The  Commission  published  a 
communication  in  July  2007  identifying  potential  amendments/changes  to  the 
Accounting Directives.  

In this communication the Commission proposed to introduce a new category of so-
called "micro entities" in the Fourth Directive, which could be optionally exempted 
by Member States from the Accounting Directives. 

In all, 18 Member States' governments, the government of one EEA country and 110 
stakeholders, 
the 
Communication. These contributions originated from 23 countries in total, including 
22 Member States.  

including  European  bodies  and  associations, 

reacted 

to 

80%  of  all  stakeholders  who  responded  to  the  public  consultations  took  either  a 
positive or negative stance to the measure. The majority was in favour of exempting 
micro  entities  from  the  requirements  of  the  accounting  Directives.  The  exemption 
was  supported  by  the  majority  of  the  companies,  public  authorities,  banks  and 
insurance  companies  that  participated  in  the  survey.  The  biggest  opposition  came 
from accountants and auditors.  

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2.2.  Measurement of cost and thresholds for micro-entities 

In  connection  with  the  aforementioned  simplification  initiative,  a  measurement 
exercise  was  carried  out  by  the  consortium  Capgemini/Ramboll  to  determine  the 
costs created by the information obligations (IOs) contained in the EU company law 
acquis. Relevant pre-final results of the measurement exercise are referred to in this 
impact assessment.  

2.3. 

High Level Group on Administrative Burden Reduction 

A report from The High Level Group of Independent Stakeholders on Administrative 
Burdens (HLG), which reflected on the core obstacles for small firms, calls for rapid 
enactment of a Member State option to exempt micro entities and a general overhaul 
of the Accounting Directive with "think small first" as guiding principle. 

2.4. 

European Parliament 

The European Parliament's resolution of 18 December 2008 calls on the Commission 
to  come  forward  with  a  legislative  proposal  that  allows  Member  States  to  exempt 
very  small  undertakings  (micro  entities)  from  the  scope  of  the  Accounting 
Directives.  

2.5. 

Other related Commission's proposals 

In  late  2007,  the  Commission  launched  a  Fast  Track  legislative  action  to  introduce 
two  technical  changes  to  the  Accounting  Directives.  Adoption  is  expected  in  the 
beginning of 2009. 

2.6. 

Subsidiarity 

Following  the  principle  of  subsidiarity,  it  needs  to  be  considered  whether  EU  level 
harmonisation  is  for  micro  entities  is  really  necessary.  Most  obligations  entailing 
administrative burdens derive from EU directives and their reduction needs EU level 
action. 

3. 

PROBLEM DEFINITION 

The  requirements  of  the  Accounting  Directives  apply  to  all  limited  liability 
companies without regard to other factors (e.g. size, financing or type of activities). 
Mostly small companies are subject to the same rules as larger companies. In many 
situations  certain  information  must  be  processed  only  to  satisfy  legal  obligations 
without  real  business  needs.  This  corresponds  to  the  definition  of  administrative 
burden. Two elements of this administrative burden can be further analysed: 

•  Administrative cost that is not related to the size of the company and is therefore 
disproportional for the smallest enterprises as compared to the larger enterprises 

•  Misalignment between requirements of the directives and the needs of the micro 

entities and the users of their financial statements  

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3.1. 

Disproportional administrative (compliance) cost as economic burden 

Start-up  businesses  and  small  enterprises  with  limited  resources  are  sensitive  to 
excessive administrative obligations as they divert resources from the core business 
activities. 

The  substantial  part  of  the  administrative  cost  is  fixed  and  micro  entities  sacrifice 
relatively  much  more  resources  to  comply  with  a  regulatory  duty  than  bigger 
companies. Furthermore, micro entities' statutory financial statements have generally 
little value for its stakeholders.  

3.2.  Misalignment between requirements of the Accounting Directives and the needs 

of micro entities and users of their financial statements 

Usually, very small companies are owner managed and statutory financial statements 
do  not  have  significant  relevance  for  their  reviewing  the  company's  performance. 
Moreover,  investors  in  micro  entities  are  often  limited  in  number,  often  directly 
involved  in  running  the  company  and  with  direct  access/insight  into  company 
accounts. The source of financing is not the stock market but own resources, credits 
from banks or other financial institutions. The main users of the financial information 
(banks  and  tax  authorities)  have  the  possibility  to  demand  information  above  and 
beyond  the  statutory  reporting  requirements.  For  the  other  stakeholders,  the 
information needs are usually not covered by statutory financial information. This is 
because  their  relationships  with  small  companies  are  often  based  on  mutual  trust 
rather than on (access to) financial information and because the current complexity 
of accounting statements makes them often useless / incomprehensible for many of 
the stakeholders. 

3.3. 

How large is the problem? 

Approximately  7.2  million  EU  companies  are  subject  to  reporting  rules  within  the 
scope  of  the  Accounting  Directives.  Some  5.4  million  (around  75%  of  them)  are 
micro entities. 

A  study  prepared  by  Ramboll  Management  concluded  that  the  average  cost  per 
company  to  comply  with  the  requirements  of  the  directives  is  €1558.  Out  of  this 
amount, the administrative burden (i.e. collecting and processing information only to 
satisfy legal obligation without real business need) is €1169.  

The  above  gives  an  approximation  that  the  aggregate  administrative  burden  on  the 
EU level would be around €6.3 billion.  

4. 

OBJECTIVES 

In order to enhance the competitiveness of the micro-entities and release their growth 
potential,  the  administrative  burdens  should  be  reduced  to  the  minimum.  The 
objectives are: 

•  Reduction  of  the  administrative  burden  of  businesses  in  the  EU,  especially  for 
SMEs and micro-entities, while safeguarding adequate protection and information 
to stakeholders.  

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•  Enable alignment of the micro-entities' reporting requirements with the real needs 

of users and preparers.  

5. 

POLICY OPTIONS AND THEIR EXPECTED IMPACT 

5.1. 

Description of policy options 

The Commission Services envisage following possible policy options: 

Option 0. No change to the Directives 

Option 1. Encourage a full use of existing options in the Accounting Directives 

Option 2. Obligatory exemption of micro entities from the scope of the Directives 

Option  3.  Member  State  option  to  exempt  micro  entities  from  the  scope  of  the 
Directives 

Option  4.  Introduction  of  a  simplified  mandatory  accounting  regime  for  micro 
entities 

Option  5.  Amendments  to  the  Accounting  Directive  without  introducing  the  micro 
category. 

5.2. 

Option 0. No change to the Directives 

In the baseline scenario, no action is taken and all 5.4 million micro companies will 
continue following the accounting rules of the directives and spending yearly around 
€6bn to comply with information obligations.  

5.3. 

Option 1. Encourage a full use of existing options in the Accounting Directives 

In  case  no  legislative  changes  are  made,  the  Commission  can  still  call  on  Member 
States to utilise all the simplification options available in the Directives.  

The  estimate  of  the  potential  saving  of  the  full  use  of  existing  thresholds  and 
exemptions  amount  up  to  €1.8bn  for  the  micro  segment.  However  this  amount  is 
unlikely  to  be  attained.  The  current  Directive  builds  on  general  requirements  with 
Member  States  possibility  to  exempt  only  from  some  of  those  requirements  on  a 
piecemeal  basis.  There  is  no  possibility  to  make  more  general  exemptions,  which 
hampers  the  usability  of  these  options,  and  thus  has  made  them  generally  less 
appealing to Member States.  

Furthermore,  this  option  would  not  facilitate  burden  reduction  in  those  Member 
States  that  are  already  using  the  options.  Neither  would  it  address  the  issue  of 
discrepancy  between  the  Accounting  Directives  to  the  user  needs  of  smallest 
companies and the administrative burden resulting from this. 

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5.4. 

Option  2.  Obligatory  Exemption  of  Micro  entities  from  the  scope  of  the 
Directives 

Obligatory  exemption  of  micro  entities  would  eliminate  all  EU  level  accounting 
requirements for this group – a case of maximum harmonization. The impact of this 
option  is  the  same  as  the  maximum  impact  of  option  3,  as  discussed  in  the  next 
section. 

However,  due  to  differences  in  accounting  cultures  and  reporting  traditions  across 
EU, it is very unlikely that such a proposal would be politically acceptable for some 
EU Member States. 

5.5. 

Option 3. Member State option to exempt micro entities from the scope of the 
Directives 

Member States would have the possibility to determine the most relevant rules that 
micro entities should be required to comply with and, for example, integrate various 
reporting requirements into one. 

Exempting micro entities from the scope of the Accounting Directive is expected to 
have the following impacts:  

Reduction of administrative burden. In the maximum scenario where all Member 
States  exempt  micro  companies  and  do  not  impose  additional  requirements  the 
potential savings stemming from the proposal is estimated at €6.3bn (with range of 
€5.9bn  to  €6.9bn).  It  is,  however,  likely  that
  many  Member  States  after  exempting 
micro entities from the Fourth Directive's obligations would impose other accounting 
requirements, e.g. to align tax and financial reporting. Such alternative requirements 
are likely to decrease the burden reduction for companies. However, at this point of 
time it is not possible to quantify the potential effect on EU level. 

More  relevant  and  understandable  information  to  main  users,  including  tax 
authorities  and  creditors,  and  management.  The  accounts  could  be  made  more 
relevant  to  the  needs  of  stakeholders  and  management  of  micro  businesses,  taking 
into account the understandability criterion. 

No  significant  negative  impact  on  the  information  to  the  external  stakeholders 
and  creditors  protection.  The  main  users  of  accounts  of  micro  entities  are  banks 
and  tax  authorities.  Banks  are  generally  no  interested  in  sophisticated  accounting 
information  provided  under  directives'  requirements.  In  their  responses  to  the 
Commission Consultation of 2007, both banks and industry were generally in favour 
of exempting the micro entities from the requirements of the Accounting Directives.  

Impact  on  the  single  market  and  level  playing  field.  Impact  on  single  market  is 
expected  to  be  insignificant  as  the  financial  reporting  needs  of  micro  entities  are 
rather  basic  and  the  statutory  accounts  not  a  generally  important  source  of 
information. Furthermore, only a low number of micro entities are involved in cross 
border activities.  

Some  negative  impact  on  collection  of  statistical  data  in  some  Member  States 
possibly requiring change in methodology of collection of statistical data.  

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No negative impact on collection of information for taxation. The tax authorities 
have the power to demand information according to their reporting requirements and 
to carry out verifications (audits) of the financial information.  

Reduction  of  activities  of  accounting  profession  in  preparation  and  audit  of 
statutory  accounts.  This  is  expected  to  be  partly  substituted  by  use  of  professional 
accountants to other more added value purposes. 

Social aspects. Some reduction of public information available to employees of the 
micro-entities. However, due to direct contact that employees usually have with the 
management and owner(s) of micro entities, the published financial statements have 
a  lesser  role  in  serving  the  information  needs.  Situation  is  similar  to  unlimited 
liability companies of the same size.  

Environmental  aspects.  Minor  positive  impact  due  to  reduction  of  reporting  and 
filing activities.  

Information  to  general  public.  Some  reduction  of  public  information  available  to 
external parties. However this interest is generally very low. 

5.6. 

Option 4. Introduction of a simplified accounting regime for micro entities 

One  option  is  to  include  a  micro-tailored  accounting  regime  into  the  Accounting 
Directives. In contrast to the "exemption option" such a new regime would require a 
longer preparatory and implementing period. Therefore, it is not suitable to achieve 
quick burden reduction at the given timetable.  

5.7. 

Option 5. Amendments to the current Directive without introducing the micro 
category. 

It  is  possible  to  create  some  quick  fixes  to  the  Accounting  Directives.  These  could 
produce limited burden savings in a short time span. However, they do not address 
the main concern of discrepancy between accounting directives and the user needs. 

More  substantial  amendments  would  require  a  longer  preparation  time  and  are, 
therefore, not suitable to achieve quick burden reduction at the given timetable. 

6. 

COMPARISON OF OPTIONS AND JUSTIFICATION FOR THE COMMISSION'S PROPOSAL 

The option that provides the biggest burden reduction is the option to exempt micro 
entities.  This  option  can  also  be  implemented  within  shortest  timeframe.  The 
Commission considers that this option is therefore the most appropriate alternative in 
order  to  significantly  reduce  the  administrative  burden  of  the  small  business  and 
align the reporting requirements with the needs of the users and preparers.  

7. 

MONITORING AND EVALUATION  

This proposal is closely linked to the general modernisation and simplification of the 
Fourth  and  Seventh  Accounting  Directives.  Due  to  the  close  connection  between 
these measures the monitoring and evaluation will be carried out together. A detailed 

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monitoring  plan  will  be  part  of  the  overall  monitoring  strategy  in  relation  with  the 
general revision of the Accounting Directives.  

The  evaluation  of  effects  and  functioning  of  the  exemption  for  micro  entities  will 
include  an  assessment  as  regards  the  key  objectives  of  better  alignment  of  the 
accounting rules with the needs of the users and preparers of the financial reports and 
overall reduction of administrative burden. Furthermore, consideration will be given 
to the quality and accessibility of relevant financial information to stakeholders.  

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