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Advanced program in accounting and auditing regulation Accounting Directives. Benoît Lebrun Chairman, Accounting Working Party FEE 7 June 2005. The Fourth Directive and the Seventh Directive Purposes. Protect creditors from companies which offer limited safeguards (limited company)
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Advanced program in accounting and auditing regulation Accounting Directives Benoît Lebrun Chairman, Accounting Working Party FEE 7 June 2005
The Fourth Directive and the Seventh DirectivePurposes • Protect creditors from companies which offer limited safeguards (limited company) • Provide minimum accounting requirements for financial information which should be made available to the public by companies • Reminder : a directive is a requirement to Member States to change their legislation in order that it complies with the provisions of the directive ( regulation)
The Fourth Directive General • Legal forms of companies within the scope of the directive • Components of financial statements : balance sheet, statement of income, notes • Purpose of financial statements : true and fair view • Override principle • Focus on formats of financial statements : primary aspects where harmonization was possible • Two principles to be applied when presenting financial statements : consistency ; prohibition of set-off
The Fourth Directive Balance sheet format • Two formats possible • assets on one side / liabilities including equity on the other side • equity presented as a difference between assets and liabilities • Simplified format allowed for companies which do not exceed the limits of two of the three following criteria : • balance sheet total : 3,650,000 euros • net sales : 7,300,000 euros • average number of employees during the financial year : 50
The Fourth Directive Format of the statement of income • Many possibilities offered by the directives • Presentation of expenses by nature or by function • Presentation where the expenses are deducted from net sales to arrive to the net income • Presentation where expenses is on one side and the revenues on the other side • Simplifications allowed for companies which do not exceed the limits of two of the three following criteria : • balance sheet total : 14,600,000 euros • net sales : 29,200,000 euros • average number of employees during the year : 250
The Fourth Directive Notes on the financial statements • List of 14 aspects to be disclosed in the notes, in addition to information already required by other provisions of the Directive • Simplified version allowed for companies which are authorized to use a simplified balance sheet layout
The Fourth Directive Valuation principles • Going concern • Consistency of valuation • Prudence (realization principle ; post balance sheet date liabilities relating to previous year ; depreciation of assets) • Accrual versus cash basis • Separate valuation of assets and liabilities • Opening balance sheet of a year : closing balance sheet of previous year
The Fourth Directive Cost versus revalued amounts • Purchase price or production cost • Possible option : • replacement value for tangible fixed assets or stock • revaluation of any items to take account of inflation • revaluation for fixed assets • Accounting and legal treatment of the revaluation surplus : included in equity, may be transferred in the capital, cannot be distributed
The Fourth Directive Options relating to assets • Formation expenses (legal costs …) • Interest expense during the production phase of fixed assets • Capitalization of research and development costs • Valuation formula for stocks : weighted average cost, Fifo, Lifo
The Fourth Directive The fair value option • Major option introduced in the Fourth Directive in 2001 • Purpose : to accommodate national accounting requirements based on IAS 39 on financial instruments • Based on the IAS 39 version existing when the amendment was published • All financial assets may be fair valued except : • financial assets held to maturity • loans and receivables originated by the company • Prohibition of the fair value for financial liabilities, with exceptions
The Fourth Directive Other provisions of the Fourth Directive • Contents of the annual report • Publication of the annual financial statements • Audit of the annual financial statements
The Seventh DirectiveObligations to prepare consolidated financial statements • Consolidated financial statements must be prepared by companies controlling other entities • The control over another entity results from : • the holding of the majority of the voting rights • the right to appoint or remove the majority of the directors of the entity • the right to exercise a dominant influence, as a result of a contract or provisions in its by-laws
The Seventh Directive Exemption from the obligation to prepare consolidated financial statements • Companies which, together with controlled entities, do not exceed the limits of two of three criteria (balance sheet total : 14,600,000 euros ; net sales : 29,200,000 euros ; average number of employees during the year : 250) • Companies which are themselves controlled by another company • Exemptions not available to limited companies
The Seventh Directive The treatment of the goodwill • Goodwill : difference between cost of shares of the subsidiary and the proportion which they represent in the net assets of the subsidiary • Option : • amortization determined as for the goodwill in the Fourth Directive • deduction from equity • Negative goodwill : deferred income or immediate gain
The Seventh Directive Consolidation procedures • Elimination of intercompany balances and transactions • Elimination of intercompany gains or losses • Date of the consolidated balance sheet and of the balance sheets of subsidiaries • Consistency of presentation and valuation methods over time • Consistency of valuation methods used within the group • Recognition of deferred income taxes
The Seventh Directive Equity method / proportionate consolidation • Equity method to be applied to an investment in an entity on which the parent company exercises a significant influence • Jointly controlled entities : option to use either the equity method or the proportionate consolidation method
The Seventh Directive Other provisions of the seventh directive • The consolidated annual report • The audit of consolidated financial statements • The publication of consolidated accounts
Conclusions : the achievements of the Accounting Directives • Harmonization of national legislations in respect to : • the obligation to prepare individual and consolidated financial statements and an annual report • the audit and the publication of financial statements • Difficulty to harmonize the accounting requirements in national legislations or accounting standards • the main achievement : the lay-outs • absence of common views on frameworks, concepts, definitions, valuation methods (too many options)