The Gazette 1980

GAZETTE

DECEMBER1980

COMPANY LAW NOTES Fourth Council Directive on the Annual Accounts of Certain Types of Companies (78/660/EEC)*

Background The Fourth Directive, which deals with the content, layout, audit and publication of the accounts of public and private companies, was adopted by the Council of Ministers of the EEC on 25 July, 1978. The implementing legislation must be enacted by the Member States before 15 August 1980 and it must enter into force within a further eighteen months at the latest, i.e. by 15 February 1982. At present it seems unlikely that the Irish legislation will be published much before the end of 1980, but it should be possible for it to be enacted by the ultimate target date of 15 February 1982. The main purpose of the Directive is to require the publication in standard form of certain financial information relating to companies established in different Member States, thus making such information available in a comprehensible form throughout the EEC. However, as many of its provisions are optional, the exact form in which die Directive is likely to be implemented in Ireland will not be known until the draft legislation is published. Scope In Ireland, the Directive will apply to public and private companies limited by shares or by guarantee and its most noticeable effect here will probably be the requirement that private companies should publish their Annual Accounts. The Directive does not apply to non- profit-making organisations and Member States need not apply its provisions to banks, other financial institutions and insurance companies (as it is intended to introduce special directives dealing with their accounts at some later date). Member States are also allowed to require less detailed disclosure of small and medium sized companies, but no company can be entirely exempted merely on grounds of size. The Directive applies only to accounts of individual companies and does not require consolidated accounts since these are to be governed by the draft Seventh EEC Directive on Company Law. Pending its adoption, Member States may apply certain provisions of the Fourth Directive to "affiliated undertakings". The Directive lays down minimum standards; Member States may therefore impose exacting requirements in their national legislation should they wish to do so. Content The "Annual Accounts" referred to in the Directive consist of the Balance Sheet, the Profit and Loss Account and the Notes on the accounts. The over-riding require ment is for the Annual Accounts to give a "true and fair view" of the company's assets, liabilities, financial position and profit or loss, even if this involves some departure from the provisions of the Directive. This basic principle of Irish accountancy practice, which is already given the force of law by Section 149 of the Companies Act, 1963, will therefore continue to operate after the implementation of the Directive. The Directive contains numerous provisions relating to

the contents of the Balance Sheet and Profit and Loss Account as well as detailed definitions of many items to be included in those accounts. These requirements will not result in any major alteration of present Irish accountancy practice, apart from the fact that such matters will now be governed by law rather than by the accountancy bodies' decisions as to what is necessary in order to present a "true and fair view" of a company's financial position. The Directive also lays down strict rules relating to valuation: the basic approach is that of historical cost accounting, with specific provisions requiring the company to be valued consistingly from year to year as a going concern, such valuations to be carried out on a prudent basis but taking accruals into account. Only profits made at the Balance Sheet date may be included, but account must be taken of all income and charges relating to the financial year irrespective of the date of receipt or payment; all forseeable liabilities and potential losses must be taken into account and depreciation must always be provided for. Member States may, however, authorise or require the use of inflation accounting, provided historical cost figures are also given for Balance Sheet items such as fixed assets. The Directive contains extensive requirements relating to the contents of the Notes on the accounts. For example, these must show details of companies in which at least 20% of the share capital is held, details of move- ments in the company's own share capital, long term liabilities (i.e. those becoming due after more than five years), financial commitments not included in the Balance Sheets, turnover analysed by activity and geographical market, employees analysed by category and directors' emoluments and loans. The company's Annual Report must include a review of the company's business during the financial year and a statement of important events since the year-end as well as an indication of the company's likely future development, its research and development activities and information about acquisitions of its shares. Layout One of the move obvious effects of the Directive will be seen in the new layout of the Balance Sheet and Profit and Loss Account, which will have to be presented in strict accordance with one of the formats prescribed in the Directive. There is a choice of vertical or horizontal layout for both the Balance Sheet and the Profit and Loss Account and, in addition, there are two possible forms of Profit and Loss Account. Member States have the option of allowing companies a choice between the layouts permitted by the Directive or, alternatively, of requiring the adoption of only one of them. Audit The Directive lays down as a general rule that all • (O. J. L221 of 14.8.78).

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