What Are the Requirements of Directive 2013/34/EU?

Directive 2013/34/EU, the Accounting Directive, standardizes financial reporting across the European Union. Its objective is to enhance the clarity and comparability of financial statements, and it establishes a common legal framework to simplify accounting rules, particularly for smaller businesses, reducing administrative burdens. The directive replaced the former Fourth and Seventh Company Law Directives, merging their principles into a single legislative instrument to ensure financial information is consistent and reliable.

Scope and Company Categorization

Directive 2013/34/EU applies to limited liability undertakings in the EU, including public and private limited liability companies and certain partnerships. The requirements are scaled based on company size to ensure reporting obligations are proportional. The directive classifies companies into four categories: micro, small, medium-sized, and large, based on not exceeding at least two of three criteria: balance sheet total, net turnover, and average number of employees.

To account for inflation, these thresholds were increased by approximately 25% for financial years beginning on or after January 1, 2024. Micro-undertakings are those with a balance sheet total up to €450,000, net turnover up to €900,000, and an average of 10 employees. Small undertakings have thresholds of a €5 million balance sheet total, €10 million in net turnover, and 50 employees.

Medium-sized undertakings are defined by a balance sheet up to €25 million, net turnover up to €50 million, and an average of 250 employees. Companies that exceed at least two of these criteria for medium-sized undertakings are classified as large.

Annual Financial Statement Requirements

A core principle is that annual financial statements must provide a “true and fair view” of a company’s financial position and performance. If the directive’s provisions are insufficient, the company must provide additional information in the notes. The statements must include a balance sheet, a profit and loss account, and notes to the financial statements.

The directive prescribes specific layouts for the balance sheet and profit and loss account, which companies must use consistently. Departures are allowed only in exceptional cases and must be justified. The notes provide supplementary information not on the face of the other statements, such as accounting policies, valuation methods, and long-term debts.

The directive simplifies these requirements for smaller companies. Micro-undertakings may be exempt from preparing notes if key information is disclosed on the balance sheet, while small undertakings have reduced disclosure requirements and can prepare abridged balance sheets and condensed profit and loss accounts.

Consolidated Financial Statements and the Management Report

The directive requires groups of companies to prepare consolidated financial statements, presenting their finances as a single economic entity. This obligation falls on a “parent undertaking” that controls one or more “subsidiary undertakings.” Control is presumed if the parent holds a majority of voting rights or can appoint or remove a majority of the subsidiary’s management body.

The consolidated statements include the parent and all subsidiaries, following the same “true and fair view” principle. Small groups are exempt from this requirement unless an affiliated undertaking is a public-interest entity.

Medium-sized and large companies must also prepare a management report. This narrative document provides a fair review of the business’s development, performance, and position. The report must also describe the principal risks and uncertainties the company faces, including its use of financial instruments and risk management policies.

Country-by-Country Reporting Obligations

The Accounting Directive was updated to include public country-by-country reporting for large multinational groups with annual consolidated revenues over €750 million. These groups must publicly disclose a report on their income tax information to enhance corporate tax transparency.

The directive also has specific rules for large undertakings and public-interest entities in the extractive or logging industries. These companies must publish an annual report detailing payments made to governments in each country of operation. Reporting is required on a country-by-country and project-by-project basis for any payment or series of payments of €100,000 or more in a financial year. The report must detail payments like taxes, royalties, and dividends.

Non-Financial and Sustainability Reporting Framework

The directive’s framework was expanded by the Non-Financial Reporting Directive (NFRD), which integrated new disclosures into the management report for large public-interest entities with over 500 employees. These entities were required to publish information on policies related to:

• Environmental protection
• Social responsibility and the treatment of employees
• Respect for human rights
• Anti-corruption and bribery matters

The NFRD has since been replaced by the Corporate Sustainability Reporting Directive (CSRD), which took effect in early 2023. The CSRD expands reporting to all large companies and all listed companies, except micro-undertakings. It introduces more detailed reporting requirements, mandates the use of common European Sustainability Reporting Standards (ESRS), and solidifies the concept of “double materiality.” This concept requires companies to report on how sustainability issues affect their business and their own impact on people and the environment.