Accounting & Tax

EU Orders Off-Balance-Sheet Disclosures

Small and medium-sized businesses garner exemptions.
Stephen TaubDecember 16, 2005

The European Union is requiring listed companies to disclose off-balance-sheet transactions and provide more information about their corporate-governance practices, according to The Financial Times.

The new rules, proposed by the European Commission in October 2004, are partly in response to accounting scandals at Enron Corp. and Parmalat, the paper pointed out. Both companies have been accused of hiding their crumbling financial positions in hard-to-decipher off-balance-sheet vehicles.

Under the new rules, listed companies must disclose all off-balance-sheet arrangements — including related financial impacts — in notes to the annual and consolidated accounts, according to the FT. Companies must also publish an annual corporate-governance statement.

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In addition, listed companies must provide more information on “unusual transactions,” including, for example, arrangements with the spouse of a board member, noted the report.

Small and medium-sized enterprises (SMEs) will have more breathing room under the new legislation than they would have had under the original commission proposal, said the paper. Indeed, the commission expanded the definition of SMEs so that more companies would be eligible for the exemptions. “We improve disclosure for the most complex listed and unlisted companies and at the same time allow member states much more scope for reducing burdens on small and medium-sized companies,” said Charlie McCreevy, the EU internal market commissioner, reported the FT.

Klaus-Heiner Lehne, a German Christian Democrat member of the European Parliament, reportedly said: “If the directive had been left as it was originally proposed, it would have cost companies billions of euros. Now common sense has triumphed.”