Financial reporting for SMEs Main issues for French entities 13 May 2010

2 Financial reporting for SMEs Main issues for French entities Current financial reporting regime in France Impact of the European Parliament resolution of 10 March 2010 French proposals concerning Financial Reporting for Micro-entities Why does France consider the IFRS for SMEs inappropriate as a general rule in Europe? IFRS for SMEs: an opportunity to modernise accounting rules

3 Financial reporting for SMEs Current financial reporting regime in France (1/2) All entities (whether a natural or legal person) carrying on a commercial activity are required to produce annual financial statements (balance sheet, P&L account and notes to the financial statements) in accordance with the following fundamental accounting principles: True and fair view Receivable-payable basis Historical cost convention Prudence Going concern The main users of company financial statements are: Management (particularly in small structures) Credit institutions Tax and social security authorities Customers and suppliers Employees Current owners (capital providers)

4 Financial reporting for SMEs Current financial reporting regime in France (2/2) Companies have available 2 national regimes: one for their individual accounts and one for their consolidated accounts Micro-entities are companies having turnover under 80,000 (sale of goods) or 32,000 (providing services) Micro-entities are not required to use a double-entry accounting system and may instead maintain a sales and purchases day book Specific tax regime is in place for these entities (auto-entrepreneur) In addition, simplified balance sheet, P&L account and notes to the financial statements are authorized for some companies not exceeding: 534,000 of turnover 267,000 of total assets and 10 employees

5 Financial reporting for SMEs Impact of the European Parliament resolution of 10 March 2010 (1/2) EC proposes to introduce a new category of companies (Micro-entities) into the EU legislative framework Very small firms meeting 2 of the following criteria could be exempted from all accounting obligations: drawing up annual accounts, publishing them, drawing up a management report and arranging for the accounts to be audited: Balance sheet total under 500,000 Net turnover under 1,000,000 Average of 10 employees during the financial year Each Member State would have to grant such exemption and companies would still have however to keep records on their business transactions and financial situation According to EP: This exemption would concern 75% of the EU companies The proposal could save an estimated at 6.3 billion (i.e. 1,169 per company) The Council of Ministers must examine this proposal before its adoption

6 Financial reporting for SMEs Impact of the European Parliament resolution of 10 March 2010 (2/2) In France, it would have as a result the exclusion of around 840,000 companies, i.e. 85% of general commercial companies The French companies concerned are opposed to the abolition of accounting obligations. They consider that: A simplified standard accounting system established at European level guarantees their stability and enables them to remain competitive The European Accounting Directives guarantee transparency and financial security -Financial statements must enable managers to assess the enterprises performances and draw up forecasts and complete tax and other returns (social security, etc.) -In the current economic and financial crisis, the presentation of information drawn-up applying precisely defined and generally accepted accounting rules is a key factor in securing access to financing in the best conditions (micro-credit) The assessment of the cost reduction appears debatable It does not consider the increase in certain costs resulting from the absence of financial information (e.g. finance costs or customer/supplier risk) The preparation of the various tax and social declarations is much more burdensome

7 Financial reporting for SMEs French proposals concerning Financial Reporting for Micro-entities (1/5) In connection with the current discussions with the EC, France is proposing to keep Micro-entities within the scope of the Accounting Directives and to introduce a very simplified accounting regime for those meeting 2 of the following criteria: Balance sheet total under 250,000 Net turnover under 500,000 Average of 5 employees during the financial year

8 Financial reporting for SMEs French proposals concerning Financial Reporting for Micro-entities (2/5) The very simplified accounting regime would consist in: Drawing-up relevant simplified financial statements Balance Sheet AssetsGross Accumulated amortization & depreciation NetLiabilities Fixed assetsNet equity Inventories Of which: share capital Trade and other receivables Provisions for losses Cash and cash equivalents Financial liabilities Trade and other payables Total

9 Financial reporting for SMEs French proposals concerning Financial Reporting for Micro-entities (3/5) The very simplified accounting regime would consist in: Drawing-up relevant simplified financial statements Profit & Loss Account ExpensesRevenues Outside costs and purchasesTurnover Payroll costsReversal of provisions and depreciation Depreciation charges and provisions Other income Other expenses Income taxes Profit of the year Loss of the year Total

10 Financial reporting for SMEs French proposals concerning Financial Reporting for Micro-entities (4/5) The very simplified accounting regime would consist in: Drawing-up relevant simplified financial statements Notes to the financial statements CommitmentsTotal amount of the commitment at year end Commitments made for leasing purposes Security provided (e.g. mortgages, guarantees, etc.) Notes receivable discounted...

11 Financial reporting for SMEs French proposals concerning Financial Reporting for Micro-entities (5/5) The very simplified accounting regime would consist in: Simplifying some accounting principles concerning -Fixed assets (assets of small amount, depreciation, formation expenses, …) -Inventories -Cut-off transactions (prepaid and accrued expenses)

12 Financial reporting for SMEs Why does France consider the IFRS for SMEs inappropriate as a general rule in Europe? A standard too complex to respond to the needs of SMEs The introduction of a new standard would be a source of complexity -French companies already have available 2 national regimes for their individual and consolidated accounts -French non-listed companies can opt to use full IFRS in drawing up their consolidated accounts The fundamental principles of the full IFRS remain (fair value, discounting, substance over form) Applying the IFRS for SMEs to individual statutory accounts would be burdensome for companies with numerous new restatements for tax purposes The introduction of the IFRS for SMEs would involve extra costs for companies Costs of transition and initial application -training of the personnel, tax advisers and members of the tax authorities, adaptation of information systems, adaptation of the companys financial communication Annual recurring costs -restatements required in order to calculate results for tax purposes, converting accounting data to accounting indicators used in company law – distributable profit, for example - or in private financing agreements, such as covenants -outsourcing the drawing up of accounts or the accounting processing of certain complex transactions Ongoing adaptation costs inherent to the evolution of the IFRS for SMEs over time

13 Financial reporting for SMEs Why does France consider the IFRS for SMEs inappropriate as a general rule in Europe? The evolution of the IFRS for SMEs will not be under the control of the EU France will not commit to a standard that is bound to change considerably over the next 3 years Given its experience with full IFRS, France does not wish to be dependent on a private organisation (IASB) The IFRS for SMEs does not cover the same scope of application as the Accounting Directives

14 Financial reporting for SMEs IFRS for SMEs: an opportunity to modernise accounting rules The publication of IFRS for SMEs is the right time to reopen the debate on modernisation of accounting rules in Europe for small listed groups -By reducing the volume of information they are required to provide by way of notes to their financial statements -Creation of a financial and regulatory environment suited to Small and Medium-sized Issuers Listed in Europe (SMILEs) -reviewing their current obligation to publish financial information in accordance with full IFRS -allowing them to use the IFRS for SMEs to present their financial statements (while adding certain requirements regarding financial information) for unlisted groups looking for a greater level of comparability of their accounts at European level (without having to opt freely for full IFRS) -By undertaking work inspired by the IFRS for SMEs on updating and modernising the accounting directives -This review-based approach would enable an independent accounting framework to be maintained at European level Thoughts on modernising the French consolidation rules