Accounts simplification for European micro-enterprises

The European Parliament last month decided to release micro entities from their obligation to set up annual accounts. The proposal aims to change the directive on accounts simplification for companies of certain legal forms.

This could be considered a step back for transparency.

The proposal’s initial objective was to simplify the business environment, particularly the financial reporting requirements for micro-entities. This would further enhance their competitiveness while releasing their growth potential. The changes should therefore lead to a reduced administrative burden and increased safeguarding. It would also mean that micro-entities’ reporting requirements would be more aligned with the real needs of users.

What will the results be should the European Council agree to this change? It would appear that the effects would be manifested in a change in the accounts guidelines on a wider European level. In spite of this, member states would still enjoy the right to decide to release micro-entities from the implementation regulations of the EU accounts directive if these entities are finance companies below the size criteria: a balance sheet total of more than €500,000, a net turnover of more than €1 million, and/or more than 10 employees on average employed during the business year.

This is not good news for credit reporting agencies whose primary role is providing company information relating to bankruptcies and the like.

It would also appear that 82 per cent of the companies in 15 European countries employ not more than 10 people.

We can therefore assume that round about 75 per cent of the capital companies in Europe fulfil all criteria of the European Commission. As micro entities, they could be released from the publication obligation.

CSB Group believes this means one may no longer track information rights of third parties such as banks, business partners and employees who would have to resort to alternative substitutes to obtain the necessary information.

The positive news is that Malta forms part of a so-called stable blocking minority that consists of other member states among which are Belgium, Austria, Italy, Luxembourg, Portugal, France, and Spain.

These countries represent 126 votes of 345 represented in total in the Council. Since the draft directive requires a qualified majority of 255 votes, the proponents of the change directive, especially Germany and the UK, cannot carry their point.

Nevertheless, in particular the two latter countries, urge the new Council presidency (Belgium) to put the topic on the Council’s agenda in order to cause a negotiated solution. A decision whether the new Council presidency will get into this is still outstanding.

The European Council, presided by Hungary, has not agreed to Parliament’s attempt and a new proposal is being discussed as the Hungary presidency aims to find a middle ground but has been unsuccessful so far. Companies with turnover less than €500,000, a balance sheet amount of less than €250,000 and fewer than 10 employees shall be relieved from publishing financial figures.

Germany and France also attempted to find a consensus, as exponents of the two opposed positions.

One is left with questioning what problems micro-entities would encounter when procuring capital, seeing that transparency is increasingly significant for investors and creditors in the wake of the recent financial crisis. They are therefore at a competitive disadvantage.

Medium-sized companies were already facing financing problems due to their small capital cover which are bridged by availability of trade credits.

Influential and reliable information sources for the participants in the economy is now risking running dry due to the reform. What will become of debt collecting entities who oversee public sources of information?

Mr Zammit is chief executive officer of CSB Group.