The European Commission has indicated potential plans for the introduction of new EU-level accounting standards, as part of its wider initiatives to create a single market for capital across the EU’s 28 member states, which it says would help unlock additional funding for Europe’s businesses with a particular focus on supporting SMEs
Its Green Paper on Capital Markets Union (CMU), which is now subject to a three-month consultation, looks at a number of ways of reducing fragmentation in financial markets, diversifying financing sources, strengthening cross border capital flows and improving access to finance for businesses, particularly SMEs.
The proposals include potential changes to tax, company and insolvency laws, where the Green Paper says the current divergence in approach across countries creates barriers to an integrated capital market.
The paper notes: ‘These types of issues are difficult as matters of policy to overcome. However, there is a need to explore whether there are targeted measures, even in difficult areas, which could materially contribute to the goal of CMU, and how to build consensus around them.’
David Strachan, head of Deloitte’s EMEA centre for regulatory strategy, described the Commission’s approach as ‘pragmatic’ saying, We support a period of analysis to identify the barriers to a CMU, rather than jumping in with regulatory proposals. The focus will be on finding market-based solutions to these barriers, so that the new regulations will be a last rather than a first resort.’
On the question of accounting standards, the Green Paper notes that IFRS has had a key role for promoting a single accounting language in the EU, but says that imposing full IFRS on smaller companies, in particular those wanting to access dedicated trading venues, would be a source of additional cost. SME Growth Markets will be set up from 2017 when the Markets in Financial Instruments Directive (MiFID II) comes into force.
The paper states: ‘The development of a simplified, common, and high-quality accounting standards tailored to the companies listed on certain trading venues could be a step forward in terms of transparency and comparability, and if applied proportionally, could help those companies seeking cross-border investors to be more attractive to them. The standard could become a feature of SME Growth Markets, and be available for wider use.’
Richard Martin, head of Corporate Reporting at ACCA said that the institute supported the endorsement of IFRS for groups traded on regulated markets in the EU, so ‘it is logical that we would support, for perhaps smaller EU entities dealt with on other trading venues, a common set of standards, especially if this is based on international principles.’
‘There are, however, likely to be practical difficulties in achieving this common set for the CMU, as evidenced by the number of member state options in the recently revised accounting directive, and the continuing legal and economic differences between member states.
‘There is also a tension between the desire to mitigate the regulatory burdens on smaller entities, and the aim of ensuring that financial statements contain all of the information needed by key user groups,’ said Martin.
Nigel Sleigh-Johnson, head of ICAEW’s Financial Reporting Faculty, cautioned that the Commission would need to evaluate carefully ‘the potential impact of major changes to Europe’s financial reporting regime’
‘Any proposal to move the goalposts to exclude some smaller listed companies from full IFRS reporting will require very careful analysis of the likely costs and benefits.
‘After 10 years of IFRS reporting in Europe, a rigorous debate about this issue is overdue, and during that debate we need above all to hear and understand the views of the investor community,’ Sleigh-Johnson said.
Andrew Strange, financial services risk and regulation director at PwC, said the proposals to implement a CMU ‘represent a tangible shift in focus for Europe’ which could mean ‘very good news not only for Europe's financial and professional services industry, but for a vast range of businesses of all sizes across the EU.’
‘One of the key issues for the UK in the months to come will be the question of supervision. While there is an important role for the European Supervisory Authorities, firms will want to consider carefully which bodies should get more responsibility under CMU. Already we have seen the Bank of England suggest that this is not necessary, and we expect regulators in the UK to oppose ceding additional powers,’ Strange said.
The Financial Reporting Council (FRC) welcomed the Green Paper and said that the debate around accounting standards for smaller listed entities was ‘an area of keen interest for the FRC’
Stephen Haddrill, FRC CEO, said: ‘The FRC is pleased to see a focus on long-termism that we currently promote through the UK stewardship code and we look forward to working with the Commission on their considerations of the role of investors.’
Regarding the taxation aspects covered by the Green Paper, Chas Roy-Chowdhury, head of taxation at ACCA said: 'ACCA welcomes the fact that the European Commission is considering addressing the issue of divergent tax treatments, as this may be an impediment to the smooth functioning of capital markets. We certainly consider that withholding tax for cross-EU dividend payments should be reduced to zero, as there cannot be a justification to such a tax in a single market. The ultimate destination country should be entitled to decide and levy the appropriate level of tax.
'In addition, we agree that the relief for interest, but not for equity, is a hindrance to increasing equity financing and capital formation rather than debt funding. But we consider that any equity tax relief should be in addition to debt relief and not instead of.'
The CMU Green Paper is here: http://ec.europa.eu/finance/consultations/2015/capital-markets-union/docs/green-paper_en.pdf