Accounts and Audit

International accounting standards adopted within the European Union

Regulation (EC) No 1126/2008 of 3 November 2008 adopting certain international accounting standards in accordance with Regulation (EC) No 1606/2002

It sets out the international accounting standards (IAS) which the EU has adopted. Under a parallel regulation (Regulation (EC) No 1606/2002 — International accounting standards), all EU listed companies*, including banks and insurance companies, must prepare their consolidated accounts according to these requirements.
It replaces and repeals Regulation (EC) No 1725/2003 which had previously adopted certain international accounting standards.It has applied since 2 December 2008.

KEY POINTS

The regulation and successive amendments include:

27 IAS ranging from presentation of financial statements to borrowing costs and intangible assets;
16 international financial reporting standards on subjects such as business combinations and insurance contracts;
19 interpretations from the International Financial Reporting Interpretations Committee covering, among others, rights to interests from decommissioning, restoration and environmental rehabilitation funds;
8 interpretations by the Standard Interpretations Committee, including the introduction of the euro and government assistance.

The European Commission:

decides on the applicability of international accounting standards within the European Union after consulting the Accounting Regulatory Committee;
publishes an amending regulation whenever the EU endorses a new standard issued by the International Accounting Standards Board.

BACKGROUND

Listed companies must prepare their consolidated financial statements according to a single set of international financial reporting standards.
The standards aim to ensure the transparency and comparability of company accounts. This information contributes to the efficient and cost-effective functioning of the EU capital market.
For more information, see:
Financial reporting (European Commission).
Listed companies: companies whose securities are traded on a regulated market.

DOCUMENTS

Commission Regulation (EC) No 1126/2008 of 3 November 2008 adopting certain international accounting standards in accordance with Regulation (EC) No 1606/2002 of the European Parliament and of the Council (OJ L 320, 29.11.2008, pp. 1-481)

Successive amendments to Regulation (EC) No 1126/2008 have been incorporated into the original version. This consolidated version is of documentary value only.

Regulation (EC) No 1606/2002 of the European Parliament and of the Council of 19 July 2002 on the application of international accounting standards (OJ L 243, 11.9.2002, pp. 1-4)

Commission Regulation (EC) No 1725/2003 of 29 September 2003 adopting certain international accounting standards in accordance with Regulation (EC) No 1606/2002 of the European Parliament and of the Council (OJ L 261, 13.10.2003, pp. 1-420)

Insurance companies: annual accounts

Directive 91/674/EEC on the annual accounts and consolidated accounts of insurance undertakings

It aims to ensure that the balance sheets of all EU insurance companies have the same layout and the same item headings in order to ensure comparability.

KEY POINTS

The directive applies to all insurance companies or firms except small mutual associations not carrying out insurance business.

It complemented the Fourth Council Directive (Directive 78/660/EEC) on annual accounts of companies with limited liability which has since been repealed and replaced by Directive 2013/34/EU (annual and consolidated financial statements and related reports of certain types of undertakings).

Even if national accounting standards may differ across EU countries, the directive prescribes certain basic information in the interests of greater comparability of consolidated accounts. To this end, the content of the various balance sheet items is determined precisely.

To provide a proper understanding of the financial situation of an insurance companies, the current value of investments, as well as their value based upon the principle of the purchase price or production cost, must be disclosed; disclosure of the current value of investments is also required.

For life assurance provisions use may be made of actuarial methods which may be laid down in national law and with due regard for the actuarial principles recognised.

Lastly, for the calculation of the provision for claims outstanding, any implicit discounting or deduction is prohibited. On the other hand, in the interests of prudence and transparency, precise conditions for recourse to explicit discounting or deduction are defined.

To adapt accounting disclosures to insurance business models, certain requirements are set out relating to the content of the notes on the accounts, e.g. gross premiums broken down by category of activity (accident and health, motor, fire, etc.) and by geographical market.

It must be possible to obtain a copy of accounts and annual reports upon request at a price not exceeding their administrative cost.

DOCUMENTS

Council Directive 91/674/EEC of 19 December 1991 on the annual accounts and consolidated accounts of insurance undertakings (OJ L 374, 31.12.1991, pp.7-31)

Successive amendments to Directive 91/674/EEC have been incorporated into the original document. This consolidated version is of documentary value only.

Directive 2013/34/EU of the European Parliament and of the Council of 26 June 2013 on the annual financial statements, consolidated financial statements and related reports of certain types of undertakings, amending Directive 2006/43/EC of the European Parliament and of the Council and repealing Council Directives 78/660/EEC and 83/349/EEC (OJ L 182, 29.6.2013, pp. 19-76)

Directive 2006/46/EC of the European Parliament and of the Council of 14 June 2006 amending Council Directives 78/660/EEC on the annual accounts of certain types of companies, 83/349/EEC on consolidated accounts, 86/635/EEC on the annual accounts and consolidated accounts of banks and other financial institutions and 91/674/EEC on the annual accounts and consolidated accounts of insurance undertakings (OJ L 224, 16.8.2006, pp. 1-7)

Directive 2006/43/EC of the European Parliament and of the Council of 17 May 2006 on statutory audits of annual accounts and consolidated accounts, amending Council Directives 78/660/EEC and 83/349/EEC and repealing Council Directive 84/253/EEC (OJ L 157, 9.6.2006, pp. 87-107)

Directive 2003/51/EC of the European Parliament and of the Council of 18 June 2003 amending Directives 78/660/EEC, 83/349/EEC, 86/635/EEC and 91/674/EEC on the annual and consolidated accounts of certain types of companies, banks and other financial institutions and insurance undertakings (OJ L 178, 17.7.2003, pp. 16-22)

Commission Recommendation of 30 May 2001 on the recognition, measurement and disclosure of environmental issues in the annual accounts and annual reports of companies (OJ L 156, 13.6.2001, pp. 33-42)

International Financial Reporting Standards (IFRSs)

Regulation (EC) No 1606/2002 on international accounting standards

It requires all EU publicly-listed companies (ie. EU companies that have issued securities on an EU regulated market) including banks and insurance companies, to prepare their consolidated accounts in accordance with financial reporting standards (IFRSs)* from 2005 onwards.

Using common accounting standards improves the transparency and comparability of company accounts, thus increasing market efficiency and reducing the cost of raising capital for companies.

KEY POINTS

EU countries have the option to permit or require publicly-traded companies to prepare also their annual accounts in conformity with the IFRSs adopted according to the procedures laid down in the regulation. They may also decide to extend this permission or requirement to non-publicly traded companies when preparing their consolidated accounts or their annual accounts.

To ensure appropriate political oversight, the regulation introduces a new EU mechanism to assess the IFRSs adopted by the London-based International Accounting Standards Board (IASB) in order to give them enforceability within the EU.

Two bodies assist in this process:

the Accounting Regulatory Committee (ARC), chaired by the European Commission and composed of EU countries’ representatives, decides whether to endorse IFRSs on the basis of Commission proposals;
the European Financial Reporting Advisory Group (EFRAG) provides support and expertise to the Commission in the assessment of IFRSs. It is composed of accounting experts from the private sector in several EU countries.

The endorsement mechanism involves a two-tier process:

a regulatory process where ARC decides, on the basis of a Commission proposal, whether the IFRSs are to be adopted;
a technical process with EFRAG providing support and expertise as needed to assess IFRSs and to advise the Commission on whether or not to adopt the IFRSs under consideration.

Commission Regulation (EC) No 1126/2008 sets out the endorsed IFRSs and related interpretations. This regulation has been amended several times to include all the standards presented by the IASB since 2008, including certain amendments from 2012 on consolidated financial statements, partnerships and information to be provided on interests held in other entities.

A page on the Commission’s website listing all the amendments to Commission Regulation (EC) No 1126/2008 is published and updated regularly.

In June 2015, the European Commission adopted a report evaluating the regulation’s operation. It concludes overall that IFRSs have been successful in improving the efficiency of EU capital markets by enhancing the transparency and comparability of financial statements. Some areas for improvement were however identified, such as better collaboration between the parties involved in the endorsement process.

KEY TERMS

International financial reporting standards: previously known as international accounting standards (IASs), international financial reporting standards (IFRSs) and related interpretations (SIC-IFRIC* interpretations), subsequent amendments to those standards and related interpretations, future standards and related interpretations issued or adopted by the International Accounting Standards Board (IASB).
SIC-IFRIC: the Standing Interpretations Committee (SIC) was the predecessor to the International Financial Reporting Interpretations Committee (IFRIC).

DOCUMENTS

Regulation (EC) No 1606/2002 of the European Parliament and of the Council of 19 July 2002 on the application of international accounting standards (OJ L 243, 11.9.2002, pp. 1-4)It has applied since 14 September 2002.

Successive amendments to Regulation (EC) No 1606/2002 have been incorporated in the original text. This consolidated version is of documentary value only.

Report from the Commission to the European Parliament and the Council — Evaluation of Regulation (EC) No1606/2002 of 19 July 2002 on the application of international accounting standards (COM(2015) 301 final, 18.6.2015)

EU programme to support financial reporting and auditing

Regulation (EU) No 258/2014 establishing an EU programme supporting specific activities in the field of financial reporting and auditing for the 2014-2020 period

It sets up an EU programme to support the activities of bodies which contribute to the achievement of the EU’s policy objectives in relation to financial reporting and auditing.

KEY POINTS

The regulation covers the period from 2014 to 2020 and sets out rules for the allocation of an initial amount of €43.18 million from the EU’s budget to help develop international financial reporting and auditing standards. Regulation (EU) 2017/827 amended the original regulation increasing the total financial allocation for the programme to €57.007 million.

Following the economic and financial crisis of 2008, it became clear that the issue of financial reporting and auditing needed to be addressed and it became central to the EU’s political agenda. Well-functioning common financial reporting rules are essential for:

the EU’s internal market;
the effective functioning of the capital markets; and
the achievement of an integrated market for financial services in the EU.

The programme was designed to contribute to the objectives of:

ensuring comparability and transparency of company accounts throughout the EU;
ensuring the global harmonisation of financial reporting standards by promoting the international acceptance of International Financial Reporting Standards;
promoting convergence and high-quality international standards for auditing in all EU countries.

The programme covers:

the activities of developing or providing input to the development of standards;
activities relating to applying, assessing or monitoring standards or overseeing standard-setting processes in support of the implementation of EU policies in the field of financial reporting and auditing.

The beneficiaries are:

in the area of financial reporting:
the European Financial Reporting Advisory Group (EFRAG) (€23.134 million)
the International Financial Reporting Standards (IFRS) Foundation (€31.632 million);
in the area of auditing:
the Public Interest Oversight Board (PIOB) (€2.241 million).

BACKGROUND

In 2009, the EU launched a programme to support activities in the fields of financial reporting and auditing. The beneficiaries were the IFRS Foundation, EFRAG and the PIOB. The programme was extended in 2014 for the period 2014-2020 for IFRS Foundation and the PIOB but, for EFRAG, the European Parliament and the Council decided to wait until certain reforms were made to EFRAG’s governance. These governance reforms were implemented in October 2014 thus paving the way for the EU to increase its contribution to EFRAG.

DOCUMENT

Regulation (EU) No 258/2014 of the European Parliament and of the Council of 3 April 2014 establishing a Union programme to support specific activities in the field of financial reporting and auditing for the period of 2014-20 and repealing Decision No 716/2009/EC (OJ L 105, 8.4.2014, pp. 1-8)It has applied since 1 January 2014.

Successive amendments to Regulation (EU) No 258/2014 have been incorporated into the original document. This consolidated version is of documentary value only.

The statutory audit — ensuring accurate company financial statements

Directive 2006/43/EC on statutory audits of annual accounts and consolidated accounts

It merges two existing pieces of legislation (Directive 78/660/EEC on individual financial statements and Directive 83/349/EEC on consolidated financial statements) so as to improve the reliability of companies’ financial statements.
It lays down minimum requirements for the statutory audit* of annual and consolidated accounts.
It seeks to ensure that company accounts give a true and fair picture of businesses’ assets, liabilities, financial position and profit or loss.

This summary takes into account the fact that Directive 2006/43/EC has been amended 3 times by Directive 2008/30/EC, Directive 2013/34/EU (which contains the European Union (EU) rules on accounting) and Directive 2014/56/EU.

Public register of auditors

Statutory audits may only be carried out by statutory auditors or audit firms approved by EU countries’ competent authorities.
EU countries must keep a public register of these.
Recognition of audit firms outside their home country

An audit firm wishing to carry out statutory audits in an EU country other than its home EU country must register with the competent authority in the host country.
The competent authority in the host country must register the audit firm if it has been registered with the competent authority in its home country.
Approval of statutory auditors from another EU country

Auditors from other EU countries may have to complete an adaptation period (no more than a maximum of 3 years) and/or tests. This ensures they have adequate knowledge of matters such as company law, tax law and social law. Once they have been approved, they must be entered in the public register.

Continuing education

Statutory auditors are required to take part in continuing education to maintain and upgrade their theoretical knowledge, skills and values.
If they fail to respect these continuing education requirements, they will be subject to sanctions.

Independence and objectivity

EU countries have to ensure that, when carrying out their work, a statutory auditor or an audit firm, and any natural person in a position to directly or indirectly influence the outcome of the statutory audit, is independent of the audited entity and is not involved in the decision-taking of the audited entity.
Independence is required both during:
the period covered by the financial statements to be audited; and
the period when the statutory audit is carried out.

Confidentiality and professional secrecy

Auditors are bound by strict rules to respect the privacy of their clients; however, these rules should not impede the proper enforcement of the directive.
These rules continue to apply to audit firms which have ceased to be involved in a specific audit task.

International standards

All statutory audits should be carried out on the basis of international auditing standards, if and when adopted by the European Commission: The Commission has discretionary power to adopt these standards and it can adopt them only if they respect certain conditions. As long as the Commission has not adopted any international standard, EU countries may apply national standards.

Appointment and dismissal

The statutory auditor or audit firm is appointed by the general meeting of shareholders or members of the audited entity, although EU countries may allow alternatives as long as the independence of the statutory auditor or audit firm from the audited entity is assured.
Auditors or audit firms may be dismissed only where there are proper grounds. Divergence of opinions on accounting treatments or audit procedures is not proper ground for dismissal.

Auditing of consolidated accounts

In the case of consolidated accounts (i.e. of a parent company and subsidiaries), there is a clear definition of responsibilities between the auditors who audit components of the group. The group auditor (i.e. the statutory auditor or audit firm carrying out the audit of the consolidated accounts) bears full responsibility for the audit report.

Quality assurance

EU countries have to introduce a system of quality assurance that is independent of the reviewed auditors and subject to public oversight.

The system includes an assessment of:
compliance with applicable auditing standards and independence requirements;
the quantity and quality of resources spent;
the audit fees charged; and
the internal quality control systems of the audit firms.

The funding for the quality assurance system must be secure and free from any possible undue influence by statutory auditors or audit firms.
Reviewers for specific quality assurance review assignments must be selected by means of an objective procedure designed to ensure that there are no conflicts of interest between the reviewers and the statutory auditor or audit firm under review.

Investigations and sanctions

EU countries must have in place effective systems of investigations and sanctions to detect, correct and prevent inadequate execution of the statutory audit.
Measures taken and sanctions imposed on statutory auditors and audit firms must be appropriately disclosed to the public. Sanctions must include the possibility of withdrawal of approval.
Small businesses

There is no EU requirement for small companies to have a statutory audit.
Where EU countries do require statutory audits of small businesses, these should be conducted taking into account the scale and activities of the companies in question.

Public-interest entities (PIEs)*

The statutory audit of PIEs — because of the need for reliable information and their relevance to the public and investors — is subject to strict rules. These include:

a more detailed audit report which includes information about the conduct of the audit;
auditors/auditing firms must rotate;
a list of non-audit services that cannot be provided by the statutory auditor or audit firm to the audited entity which must be drawn up by EU countries;
limits must be placed on fees charged for non-audit services;
an audit committee is created which has a key role in appointing the auditor and monitoring the audit.
Regulation (EU) No 537/2014 contains further rules specifically applicable to PIEs.

Implementing and delegated acts

The directive allows the Commission to adopt implementing and delegated acts regarding the international aspects of the directive. These can further specify how EU countries’ authorities and the various market participants must comply with the obligations laid down in the directive in this sphere.

BACKGROUND

For more information, see:

Auditing of companies’ financial statements (European Commission)
Reform of the EU Statutory Audit Market — Frequently Asked Questions (European Commission)

DOCUMENTS

Successive amendments to Directive 2006/43/EC have been incorporated in the original text. This consolidated version is of documentary value only.

Regulation (EU) No 537/2014 of the European Parliament and of the Council of 16 April 2014 on specific requirements regarding statutory audit of public-interest entities and repealing Commission Decision 2005/909/EC (OJ L 158, 27.5.2014, pp. 77-112)