EU Seeks Insight Into Accounting Rules, Small-Company Investment

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By David R. Jones

Medium and small-sized companies in Europe might find it easier—and cheaper—to attract investors in coming years under a European Commission effort to attract buyers for their stocks and bonds.

The EC, the administrative arm of the European Union, wants feedback on its plan for promoting listings by small and medium-sized enterprises (SMEs), including assessing whether obstacles—such as accounting practices—hamper institutional and retail investments in SME shares and bonds, the professional organization Accountancy Europe said Jan. 2.

The commission said it welcomes in particular the views of “stock exchanges, institutional investors, consumer and investor organisations, brokers specialised in SMEs,” and advisers that support SMEs’ initial public offerings.

The EU defines SMEs as companies with an average market capitalization of less than 200 million euros ($240.4 million).

Hindrance From Accounting Standards?

The project includes questions on whether differences in national accounting standards hinder investments across EU national borders.

Respondents are asked to rate the importance of national accounting standards on an ascending scale of one to five—from “completely irrelevant” to “highly relevant—in deterring investments across jurisdictions.

The questions form part of the EC’s efforts to create a regulatory system for SME listings as part of its 2015 action plan to forge a Capital Markets Union (CMU).

The drive to create the CMU is assuming greater urgency as the U.K. prepares to divorce the EU next year, a June 2017 review of the CMU effort said.

The CMU aims to establish a single market for capital spanning EU national borders by 2019. Responses to the EC questions might help determine if the EU needs to help reconcile cross-border accounting rules.

Though the EU as a whole implements international financial reporting standards for large domestic and foreign listed companies as issued by the International Accounting Standards Board, it hasn’t adopted IASB’s standard for SMEs because it conflicts with the EU’s 2013 directive on financial reporting.

Small-Company Rules Clash With EU

“The IFRS for SMEs Standard was assessed to be incompatible with the EU Accounting Directive in a few respects,” so the EU didn’t adopt it, IASB said in a notice on its web site.

SMEs admitted to trading on multilateral trading facilities (MTFs)—self-regulated trading arenas in Europe that operate outside traditional stock markets. They typically supply financial information based solely national accounting standards, according to the 2015 CMU action plan.

This information could prove insufficient, though, to meet the needs of international investors, the plan said, because it lacks comparability across EU member states’ differing accounting requirements.

IFRS prohibits listed companies—those trading on either a regulated market or an MTF—and financial institutions from using IFRS for SMEs.

EU Aid Needed to Boost SME Investment

EU policy-makers must do more to boost public listings of SMEs, as the amounts raised on markets dedicated to SMEs have dropped by 9 million euros compared to levels before the 2008 financial crisis, the June 2017 CMU review found.

“Particular challenges are faced by small and medium-size companies seeking to raise less than EUR 100 million through public issuance,” the review said, as “the current regulatory environment may discourage these firms from raising capital on public markets.”

The CMU could give SMEs better access to public markets—especially risk finance—by knocking down barriers to cross-border investments, as well as encouraging investors to assume stakes in smaller companies and giving banks fresh lending opportunities, the review said.

The Commission, as part of the CMU Action Plan, is committed to review the regulatory barriers to small firms for their admission to trading on public markets and to ensure that the regulatory environment for the SME Growth Markets is fit for that purpose, the European Securities and Markets Association, an independent EU authority overseeing financial markets, said in a November 2017 report.

“The CMU Action Plan stressed the need to ensure that the SME Growth Markets strike the right balance between providing sufficient investor protection and avoiding unnecessary administrative burden,” the EC said

The EU expects to issue new rules in the second quarter of 2018 designed to make SME listings simpler and cheaper.

Response to the EC questions must be received by Feb. 26, 2018.

To contact the reporter on this story: David R. Jones in London at correspondents@bloomberglaw.comTo contact the editor responsible for this story: S. Ali Sartipzadeh at

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