Financial Reporting

Regulatory and Economic Environment

Regulatory and Economic Environment

Introduction

This paper intends to explore the Fourth Company Law Directive of 25 July 1978. The main focus of the paper is on the issues that are faced by accountants while preparing the financial statements. Further, it also examines the benefits gained by the accountants while preparing financial statements. The Fourth Company Law Directive of 25 July 1978 seeks to provide a minimum of coordination of national provisions to ensure the uniformity of annual financial accounts and reports, of the valuation methods used and the rules of publication. Significantly, the Directive required that published accounts should show a “true and fair” view.

Discussion

The purpose, use and benefits of financial statements

The Directives oblige limited liability companies as defined in Article 1 of the Fourth Directive and certain other companies to prepare financial statements. Financial statements assist investors in making informed decisions on the allocation of capital.

Benefits Faced by Accountants

Unnecessary information

The literature and analysis support the comments from stakeholders that the financial statements often contain information that is of little relevance. This is especially the case with the standard disclosures required by the Directives, most of which are not used by banks or other stakeholders banks often ask for other information instead. Feedback from stakeholders and expert groups suggests that a number of these notes have only little informative value to stakeholders. This is also supported by literature on the SME user needs. In short, for smaller companies the costs of preparing sophisticated and complex statutory financial reporting usually outweighs the benefits for the users. In addition, absent a general principle of materiality in the Directives, as seen above, the chances of unnecessary information being produced are higher (Hemetsberger, 2008, p.88).

Key information hidden in notes due to numerous or complex disclosures

For the users of smaller company financial statements, over-sophisticated and complex reporting requirements are less useful than simple and clear ones. Discussions with stakeholders suggest that the current complexity of financial statements can make them meaningless for small entrepreneurs. They often cannot understand the content of the financial statements without the advice of an analyst or accountant. Thus the usability of the financial statements for micro and small companies is reduced both for owners and for business partners. This lends support to the idea that small companies' accounting requirements should be simplified.

Lack of comparability, key information missing due to high number of options and non harmonized principles

Because of the many options currently available to the Member States in the Directives, national accounting legislations are inconsistent in a number of areas across Europe. Non-harmonised principles can result in similar transactions being accounted for very differently across the EU. Both issues increase the lack of comparability of financial reporting across the Member States and hence can prevent optimal cross border investment decisions by the users. Depending on the option retained, this may entail in addition key information to be missing in the financial statements.

For example, the "substance over form" principle is currently an ...