The regulatory framework of accounting and accounting standard-setting bodies in the European Union member states

Abstract

One of the principal features of accounting in the 21st century is harmonisation and stanardisation. Regulation of the European Parliament and European Council No. 1606/2002 harmonizes financial reporting for certain companies in the EU. However, national accounting principles are of great importance for financial reporting. The main purpose of this research was to investigate the application of generally accepted accounting principles, the regulatory accounting framework and the standard-setting bodies of EU member states. The analysis of these accounting issues was conducted with respect to all 28 EU member states. The results indicate that EU member states regulate their principal accounting issues through separate accounting acts or implement those issues in companies acts. Some EU member states do not have national accounting standards, the national accounting principles being incorporated in companies acts and accounting acts. Nevertheless, national accounting standard-setting bodies are governmental organisations in almost half the member states.

Headnote

Abstract

One of the principal features of accounting in the 21st century is harmonisation and stanardisation. Regulation of the European Parliament and European Council No. 1606/2002 harmonizes financial reporting for certain companies in the EU. However, national accounting principles are of great importance for financial reporting. The main purpose of this research was to investigate the application of generally accepted accounting principles, the regulatory accounting framework and the standard-setting bodies of EU member states. The analysis of these accounting issues was conducted with respect to all 28 EU member states. The results indicate that EU member states regulate their principal accounting issues through separate accounting acts or implement those issues in companies acts. Some EU member states do not have national accounting standards, the national accounting principles being incorporated in companies acts and accounting acts. Nevertheless, national accounting standard-setting bodies are governmental organisations in almost half the member states.

Keywords: accounting regulatory framework, accounting standard-setting bodies, the EU member states

1 INTRODUCTION

The European Union is a union of 28 member states that operate in a common political and economic environment. Although there is an intention that European legislation should he harmonised and that some legal instruments should be uniformly implemented across the EU, the acquis communautaire nevertheless admits national specifics and gives a certain freedom to the member states in making decisions on some normative issues. When it comes to accounting, there are certain binding legal acts in the form of regulations, directives and decisions. However, the European Union recognizes recommendations and opinions as non-legally binding instruments (EU, 2010). The most famous accounting regulation is the Regulation (EC) No. 1606/2002 of the European Parliament and of the Council of 19 July 2002 on the application of International Accounting standards (European Parliament, European Council, 2002). The most applicable accounting directives are the Fourth Council Directive of 24 July 1978 on the annual accounts of certain types of companies and the Seventh Council Directive of 13 June 1983 on consolidated accounts. However, as a result of the EU's adjustment to modern changes in financial reporting standards, the Fourth and Seventh Directives were repealed. The new Accounting Directive 2013/34/EU entered into force on 20 July 2013 with a two year period for the incorporation of the new accounting principles into the EU member states' national regulatory frameworks. The main goal of EU accounting legislation is to prescribe the basic accounting principles, valuation methods and the forms of financial statements at a general level allowing the member states to decide between several prescribed EU approaches. However, the only strongly unified part of accounting is the part relating to the consolidated financial statements of companies whose securities are quoted or about to be quoted on the EU market. This has been achieved in such a way that all companies whose securities are admitted to trading on a regulated market of any member state have to prepare their consolidated financial statements under IFRS. Besides, each member state can decide on its own binding rules regarding the application of financial reporting standards to other companies. The main goal of the paper is to analyse the regulatory framework of accounting, the application of national accounting standards in the European Union and to investigate the basic features of accounting standard-setting organisations in the EU member states.

2 THEORETICAL BACKGROUND AND RESEARCH QUESTIONS

2.1 LEGAL REGULAT ION OF ACOUNTING ISSUES

An accounting system of a certain country is determined by its national accounting framework, professional associations, the application of IFRS and/or national accounting standards. Although the principal feature of accounting in the 21st century is the harmonisation of accounting; still, there are many national specifics in the accounting field that differ from country to country. A national accounting framework plays a key role in, for example, determining the major rules of keeping accounting records, defining charts of accounts, preparing annual accounts and the application of national and international accounting standards. Choi and Meek (2005) stress that "the classification is fundamental to understanding and analysing why and how national accounting systems differ". There are many factors that have an influence on accounting systems. The sources of finance, legal system, financial markets, taxation, inflation and accounting development level have been recognised as main factors of influence. Aerts and Walton (2013) emphasize the importance of local cultural differences, where "some countries prefer legal regulation where others like codes of best practice". In order to examine the form of legal act which deals with basic accounting items in the EU member states, the research question was formed: What comprises the regulatory framework of accounting in the majority of EU member states: an Accounting Act or a Companies Act?

2.2 GENERALY ACEPTED ACOUNTING PRINCIPLES

Generally accepted accounting principles (GAAP) are "accounting principles that have substantial authoritative support" (Gibson, 2001) GAAP are minimal commonly accepted accounting requirements in the form of conventions, principles, rules and procedures. The most famous GAAP is the US GAAP. However, each country has its own national generally accepted principles, either in the form of national accounting standards or some other form (law, rules, etc.). Since every country has its own national specifics in the accounting field, globalisation trends have caused the need for accounting harmonisation. Four broad approaches to reducing international diversity in accounting practice are identified in the literature (Jorissen et al., 2006):

a) full global harmonisation,

b) harmonization of accounting policies with those of another jurisdiction issued by an international standard-setting body or the domestic standards of another country,

c) substantial commonality, in which the requirements of domestic standards overlap with standards issued by an international standard-setting body, but not driven to full compliance, in which the IAS form the minimum requirement for domestic standards,

d) internationalization by which domestic standards are determined in the light of international practice, which is subject to innovation and improvement through cooperation and collaboration among standard setters.

Related to the abovementioned trends, International Financial Reporting Standards (IFRS) have become a very important and world-known set of accounting standards. IFRS is "a single set of accounting standards, developed and maintained by the IASB with the intention of those standards being capable of being applied on a globally consistent basis - by developed, emerging and developing economies - thus providing investors and other users of financial statements with the ability to compare the financial performance of publicly listed companies on a like-for-like basis with their international peers. IFRS are now mandated for use by more than 100 countries" (IASB, 2015).

Taking into consideration the importance of IFRS, several approaches to the implementation of generally accepted accounting principles in national legislation can also be noticed through theory. These are (Zager, Mamic Sacer, Sever, Zager, 2008):

- "IFRS implementation for all subjects,

- the exemption of full application of IFRS or national accounting standards for the purpose of small and medium-sized entities (SMEs),

- the direct application of certain IFRS or national accounting standards for the purpose of small and medium-sized entities,

- the exclusive implementation of national accounting standards for all subjects or only for SMEs,

- the direct application of IFRS for SME for the purpose of small and mediumsized entities, and

- the application of national generally accepted accounting principles for all or some entities."

Regulation (EC) No. 1606/2002 is important for the implementation of generally accepted accounting principles in the EU member states' legislations. According to the Regulation all the companies whose securities are admitted to trading on a regulated market of any member state have to prepare their consolidated financial statements under IFRS. However, beside such binding IFRS application, the EU member states can expand IFRS application on non-listed companies and individual financial statements. Based on those findings the goal of the paper was to research the most common approach to the implementation of generally accepted accounting principles in the EU member states' national legislations, so a second research question was posed as follows: Does every EU member state have its own national accounting principles in the form of accounting standards?

2.3 ACOUNTING STAN DARD-SETING BODIES

A standard setting body or similar organisation is vital for accounting standards application in a certain national accounting system since its goals are related to the development, implementation and continuous improvement of accounting standards. Also, national standard-setting bodies participate in the development of global accounting standards. Aerts and Walton (2013, p.15) distinguish several types of accounting regulatory body:

- government - for economic management,

- government - for tax purposes,

- stock exchange,

- private sector body,

- professional accountants, and

- specialist industry organizations.

The importance of national standard-setting bodies is recognized by the Association of Chartered Certified Accountants which conducted a survey of nine national jurisdictions: Australia, Canada, China, Hong Kong, Malaysia, Pakistan, Singapore, South Africa, UK and Ireland (ACCA, 2010). Research on accounting standard-setting bodies in Europe was conducted during 2000 (Fédération des Experts Comptables Européens, 2000). Since these two research projects do not include all EU member states, the paper deals with all 28 EU member states and tests whether government or professional accounting associations are most common standard-setters. So, the third research question developed is: Do the governments of the EU member states have an important role in accounting standardsetting processes? To answer this question it is necessary to research whether accounting standard-setting bodies or similar organisations in charge of accounting principles' development in the EU member states are formed as a governmental body or whether a government has a great influence on accounting standards.

3 DATA COLECTION AND RESEARCH RESULTS

3.1 FIRST RESEARCH QUESTION

In order to be able to answer the first research question, an analysis of the regulatory framework of accounting was conducted. The legal act that includes provisions on accounting documents, accounting records, the form and content of basic financial statements, applicable accounting standards and similar accounting issues was investigated with respect to all EU member states. The research results are presented in table 1.

A thorough analysis of the results indicates that 14 member states (Bulgaria, Croatia, Czech Republic, Denmark, Estonia, Finland, Greece, Hungary, Latvia, Lithuania, Poland, Romania, Slovakia and Sweden) regulate accounting issues by accounting and similar acts. It can be noticed that countries use the terms: Accounting Act, Accounting Law, Accountancy Act, and Law on Accounting interchangeably. There are member states for which some accounting issues are, beside by Accounting Act, regulated by additional acts, e.g. the Annual Accounts Law (Latvia), Law on Financial Statements (Lithuania, Denmark), the Decree on the structure and content of financial statements (Croatia), Annual Accounting Act and the Bookkeeping Act (Sweden). Eleven EU member states (Austria, Cyprus, France, Ireland, Italy, Luxembourg, Netherland, Portugal, Slovenia, Spain and the United Kingdom) use the Commercial Code (Companies Act) as a legal framework for accounting and financial reporting. For the purpose of analysis, the terms Commercial Code, Companies Code, Companies Act, Company Law and Commercial Law are used interchangeably. There are three countries (Belgium, Germany and Malta) that apply a Companies Act and an Accounting Act for regulation of accounting issues, these cases suggesting that Companies Act is still the most important act for accounting regulation. Bearing this in mind, it can be concluded that half of the countries apply a Companies Act (11 plus 3 countries) and the other half an Accounting Act for accounting regulation.

3.2 SECOND RESEARCH QUESTION

Generally accepted accounting principles are a network of conventions, rules, guidelines, and procedures developed by accounting practitioners and standards setters (Revsine, Collins, Johnson and Mittelstaedt, 2012, p.17). As Revsine et al. point out, the goal of GAAP is to ensure that "a company's financial statements clearly represent its economic condition and performance". This paper investigates whether the majority of EU member states have their own national accounting The results from table 2 are summarized according to the common features found in the setting of national accounting principles. As figure 2 shows, generally accepted accounting principles are usually in the form of national accounting standards (in 18 countries: Bulgaria, Croatia, Czech Republic, Estonia, Finland, Ireland, Italy, Latvia, Lithuania, Malta, Netherlands, Poland, Portugal, Romania, Slovenia, Spain, Sweden and United Kingdom). Seven EU countries prescribe the application of national accounting principles as a part of a Companies Act, Law on Accounting or similar legal acts. These are Austria, Belgium, Denmark, France, Hungary, Luxembourg and Slovakia. Only Cyprus does not have its own national accounting standards since IFRS is applicable to all companies. Besides, it is necessary to analyse the cases of Germany and Greece. German generally accepted accounting principles are related to the principles from the Companies Act and the German Accounting Law Modernisation Act. However, Germany has German Accounting Standards too, but these Standards issued by Deutches Rechnungslegungs Standards Committee (DRSC) is supposed to apply to those companies that prepare consolidated financial statements and do not trade on organised EU markets. Although Greek Generally Accepted Accounting Principles are formed as Greek Accounting Standards, they are a part of the law (Annual Financial Statements, Consolidated Financial Statements and Relevant Documents for Specific Legal Entities Law).

3.3 THIRD RESEARCH QUESTION

The accounting standard-setting body or similar organisation in charge of generally accepted accounting principles (standards) can be private or governmental organisations. A private accounting organisation is usually established as a professional body. The most famous professional standard-setting bodies are IASB (International Accounting Standards Board) and American FASB (Financial Accounting Standards Board). On the other hand, there are many governmental organisations which establish accounting and financial reporting rules. The aim of the paper was to investigate whether the majority of accounting standard-setting bodies or similar organisation in charge of the development of accounting principles in the EU member states is formed as a governmental body or whether a government has a great influence on accounting standards. To achieve this goal, research into accounting standard-setting bodies or similar organisations in the EU member states was conducted. The main research results are presented in table 3.

The features of the main accounting standard-setting bodies of all EU member states were analysed and the results indicate that ten accounting standard-setting bodies are private professional organisations (Austria, Bulgaria, Cyprus, Denmark, Germany, Hungary, Ireland, Italy, Netherlands and United Kingdom). In eleven countries (Croatia, Czech Republic, Estonia, Greece, Lithuania, Luxembourg, Poland, Portugal, Romania, Slovakia and Spain) organisations responsible for the establishment of national accounting and financial reporting rules are governmental organisations, ministries or government-established and financed bodies in charge of setting accounting principles. Specific approaches to standardsetting are recognised in seven countries (Belgium, Finland, France, Latvia, Malta, Slovenia and Sweden). The Belgian standard-setting board is an advisory body of the government, while the Finnish and French cases indicate a strong governmental role but the bodies responsible for accounting rules setting involve the representatives of different interest groups. Some countries, such as Latvia and Malta, have two organisations: professional and governmental. However, professional organisations make recommendations or provide professional guidance. Slovenian Accounting Standards developed by Slovenian Institute of Auditors have to be approved by Minister of Finance and Minister of Economic Development and Technology. Finally, the Swedish case is specific because a governmental organisation responsible for accounting principles development has delegated this role to a private sector body.

4 CONCLUSION

The European Union is a union of 28 member states and their accounting systems are in some respects very similar, while in some others, every state keeps its own national specifics. The EU regulatory framework of accounting, in the form of accounting directives and regulations, harmonises some parts of accounting and financial reporting, such as basic accounting principles, valuation methods and the forms of financial statements. Regulation (EC) No. 1606/2002 prescribes the obligatory application of IFRS for the purpose of the presentation of the consolidated financial statements of all the companies whose securities are admitted to trading on a regulated market of any member state. Besides, national regulators have a right to prescribe national generally accepted accounting principles. The main goal of the research was to investigate the form of national GAAP, legal acts governing accounting and to find out the level of governmental influence in the standard-setting process. For the purpose of this study, the EU member states' national accounting systems were examined. According to the research results, it can be concluded that a half of the EU member states regulate accounting issues through an Accounting Act (or similar law) and the other half through a Companies Act. When it comes to the form of national GAAP, the results indicate that 18 EU member states use national accounting standards, while seven countries establish accounting and financial reporting rules through other legal acts (such as Companies Act, Law on accounting, etc.). The last research question was to ex plore whether the majority of accounting standard-setting bodies or similar or ganisations in charge of accounting principles' development in the EU member states are formed as governmental bodies or whether governments have a great influence on accounting standards. The research results show that ten member states have private professional standard-setting bodies while the standard-setting bodies of eleven member states are governmental bodies. However, a further seven countries reveal specific approaches to the setting of standards. In some countries, professional and governmental bodies are jointly in charge of the establishment of accounting and financial reporting principles.

To conclude, globalisation trends have had an impact on the harmonisation trends in accounting. The EU accounting directives and regulations are aimed at integrating and unifying some basic accounting principles for the EU member states. Still, there is much national specificity which can be recognised in the differing forms of national accounting systems.

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