Financial reporting

Companies with limited liability doing business in the EU, whatever their size, have to prepare annual financial statements and file them with the relevant national business register. Groups have to prepare consolidated financial statements.

Financial statements must include – as a minimum – the balance sheet, the profit and loss account and a certain number of notes to the financial statements. Large and medium-sized companies also have to publish management reports.

The rules companies have to follow when preparing financial statements are laid down in Directive 2013/34/EU, known as the Accounting Directive. The aim of this Directive is to harmonise national requirements about

• presentation and content of annual or consolidated financial statements
• presentation and content of management reports
• the measurement basis companies use to prepare their financial statements
• audit of financial statements
• publication of financial statements
• the responsibility of management with regards to all above

The Accounting Directive also aims at reducing the administrative burden for small companies. It allows a simplified reporting regime for small and medium-sized enterprises and a very light regime for micro-companies (those with fewer than 10 employees).

The Directive includes a definition of micro, small, medium and large companies based on thresholds concerning turnover, total assets and number of employees. These thresholds are periodically updated to keep pace with inflation.

Regulation (EC) No 1606/2002 requires all listed companies to prepare their consolidated financial statements in accordance with a single set of international standards. These are the international financial reporting standards (IFRS accounting standards), previously known as international accounting standards (IAS).

IFRS provide a common accounting language used by more than 100 countries. They make company accounts understandable and comparable across international boundaries.

Regulation (EC) No 1606/2002 lays down

• a mandatory rule: all EU listed companies must use IFRS accounting standards as adopted by the EU for their consolidated financial statements
• discretionary provisions: EU countries can opt to extend the use of IFRS accounting standards to annual financial statements and non-listed companies as well

The IFRS accounting standards are developed by an independent body based in London, the International Accounting Standards Board (IASB). The IASB is part of the IFRS Foundation.

When a new standard is issued by the IASB, the EU needs to endorse it before it comes into force. Regulation (EC) No 1606/2002 establishes a specific endorsement process under the responsibility of the European Commission together with the following consultative and advisory organisations

• European Financial Reporting Advisory Group (EFRAG), an independent organisation providing expert advice to the Commission
• Accounting Regulatory Committee (ARC), composed of representatives of EU countries and chaired by the European Commission

The endorsement process

The endorsement process involves the following steps

1. The IASB adopts a new standard, an amendment to an existing standard or an interpretation of a standard
2. The EFRAG provides its advice to the Commission on endorsement
3. If the Commission decides to endorse the new standard, interpretation or amendment, it prepares a draft regulation and submits it to the ARC
4. If the ARC's opinion is positive, the Commission submits the draft regulation to the European Parliament and the Council for a 3-month scrutiny period
5. If there are no objections from the European Parliament or the Council, the Commission adopts the endorsing regulation

Adoption and publication

Regulation (EU) 2023/1803 codifies IFRS accounting standards as adopted by the EU. Every time a new standard is endorsed at EU level, the Commission publishes an amending regulation which is directly applicable in all EU countries.

Periodically, the Commission draws up a non-binding consolidated version of Regulation (EU) 2023/1803 which includes all adopted IFRS accounting standards.

The EFRAG also publishes a status report listing all IFRS accounting standards, amendments to IFRS accounting standards and IFRS accounting standards interpretations endorsed in the EU. The report is regularly updated.

At international level, the EU supports the principle of a common set of worldwide accounting standards for listed companies and works with competent authorities all over the world to promote the adoption of IFRS accounting standards.

As some of its key trading partners have not yet adopted IFRS accounting standards, the EU accepts the accounting standards of certain non-EU countries as equivalent with IFRS accounting standards to facilitate cross-border listing. This allows foreign companies listed on EU markets to prepare their financial statements in accordance with IFRS accounting standards or any other standard which has been declared equivalent to IFRS accounting standards.

• Decision 2008/961/EC on the use by third countries' issuers of securities of certain third country's national accounting standards and IFRS accounting standards to prepare their consolidated financial statements (consolidated version including subsequent amendments)
• Regulation (EC) No 1569/2007 establishing a mechanism for the determination of equivalence of accounting standards applied by third countries issuers of securities (consolidated version including subsequent amendments)

See also:

• Regulation (EC) No 809/2004 implementing Directive 2003/71/EC on prospectuses (consolidated version including subsequent amendments)

Basic information

• Text of the Accounting Directive (2013/34/EU)
• Summary of the legislation: Comparable and clear company financial statements across the EU

Delegated and implementing acts

• Delegated and implementing acts to the Accounting Directive

Transposition by EU Member States

• The Accounting Directive was transposed by all EU Member states into their national law.
• Transposition history of the Accounting Directive by EU Member States
• Guidance on the implementation and interpretation of the Accounting Directive

Legislative history

• Original legislative proposal for the Accounting Directive
• Impact assessment accompanying the legislative proposal for the Accounting Directive
• Executive summary of the impact assessment accompanying the legislative proposal for the Accounting Directive