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EU To Modify Transparency Directive

by Ulrika Lomas, LawAndTax-News.com, Brussels

28 October 2011


The European Commission (EC) is proposing to modify notification requirements for acquirers when they reach a certain stake in a listed company, reduce burdensome reporting obligations for all listed companies, and simplify accounting rules for small- and medium-sized enterprises (SMEs), to produce further cost savings for businesses.

Within a proposed revision of the European Union’s Transparency Directive, investors would be prevented from secretly building up a controlling stake in a listed company ("hidden ownership").

The existing Transparency Directive foresees a number of notification thresholds for acquirers when they reach a certain stake in a listed company. However, under the current rules holdings of certain types of financial instruments that can be used to acquire economic interest in listed companies without acquiring shares are not currently covered by the Directive’s rules for disclosure.

The revised Transparency Directive would therefore require disclosure of major holdings of all financial instruments that could be used to acquire economic interest in listed companies and had the same effect as holdings of equity. It would also require the aggregation of holdings of financial instruments with holdings of shares for the purpose of calculation of the thresholds that trigger the notification requirement.

Under another revision of the Transparency Directive, listed companies, including SMEs, would no longer be obliged to publish quarterly financial information.

Furthermore, by proposing to amend the Accounting Directives, the EC aims to reduce the administrative burden for small companies. Simplifying the preparation of financial statements would also make these more comparable, clearer and easier to understand. It was said that this would also allow users of financial statements such as shareholders, banks and suppliers to gain a better understanding of a company's performance and financial position.

The EC is proposing to revise the current requirements by thinking "small first". This would lead to a “mini-regime”, in which all EU small companies would be able to prepare a simpler profit and loss account, balance sheet and a limited number of accompanying notes which would provide further narrative information on the financial position of the company. There would no longer be an EU requirement for small companies to have an audit.

It was said that thinking "small first" also means that the disclosure requirements for medium-sized and large companies would become more gradual – they would be need to be proportionate to the size of the company and the information needs of financial statement users.

In addition, there would be an increase in the company size thresholds for SMEs, meaning that more companies would fall into these categories, and these thresholds would be harmonized across the EU resulting in more companies qualifying as small and medium-sized.

When examining the various policy options available to replace the existing Accounting Directives, the EC examined and rejected the option to adopt the International Financial Reporting Standard (IFRS) for SMEs at EU level. It was concluded that introducing the IFRS for SMEs would not appropriately serve the objectives of simplification and reduction of administrative burden. For instance, the Accounting Directives do not require that a cash flow statement be prepared, whereas this is mandatory under the IFRS for SMEs.

Unnecessary and disproportionate administrative costs imposed on small companies hamper economic activity and impede growth and employment. The potential cost savings for SMEs from the EC’s measures are estimated at EUR1.7bn (USD2.35bn) per year.

The proposals to revise the Accounting Directives and the Transparency Directive will now be passed to the European Parliament and the EU's Council of Ministers for adoption.

TAGS: investment | small business | business | European Commission | interest | law | accounting | capital markets | equity investment | audit | small and medium-sized enterprises (SME) | international financial reporting standards (IFRS) | financial reporting | standards | regulation | alternative investment | European Union (EU) | Europe

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