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December 18, 2012

EC to propose mandatory non-financial reporting

The European Commission (EC) will propose a change in European Union (EU) law to make further non-financial disclosures for certain companies mandatory, The Accountant has learnt.

The EC plans to introduce amendments to the accounting directives 78/660/EEC and 83/349/EEC aimed at strengthening non-financial reporting requirements for large companies across the EU. The amendments will also apply to EU-listed companies registered in a third country.

At the moment, EC’s draft legislation is subject to inter-service consultation, a process which would allow Directorates-General (as are known the various EC’s departments and services) to give their input on the proposal.

The draft bill, which is not expected to be officially published until January 2013 but which has been seen by this publication, would make it compulsory to include environmental, social and employee aspects; respect of human rights and anti-corruption and bribery matters in companies’ annual reports.

The EC also proposes companies should report on the policies adopted in these areas and if they do not have policies in place, advise on the reasons why companies are not taking steps in that direction.

The proposed legislation would leave it up to the companies to decide what "high quality, internationally accepted frameworks" they adopt when reporting non-financial information.

However, in a footnote the EC recommended the following internationally accepted reporting frameworks could be used: OECD guidelines for multinational enterprises, UN Global Compact, ISO 26000 or the Global Reporting Initiative.

The draft regulation applies to companies with more than 500 employees and either their balance sheets exceed EUR20m ($26.5m) or have net turnovers of more than EUR40m.

Lack of transparency and diversityIn addition a new section in the accounting directive will require large listed companies to provide information on their diversity policy, including aspects such as age, gender, nationality, education and professional background.

The proposed amendments are based on a consultation with stakeholders and interested parties that found inadequate transparency in non-financial reporting and insufficient diversity within company’s boards.

The EC consultation found only 2,500 out of 42,000 large EU companies formally disclose non-financial information on a yearly basis and that even when these disclosures are provided, the information does not meet adequately the needs of users.

The EC also observes that national legislations are evolving separately, leading to fragmentation in legislative reporting frameworks across the EU. This results in inconsistent information, confusion and higher costs for companies, investors and other stakeholders, the EC notes.

Similarly, the EC warns the lack of diversity in company boards could lead to "group-think processes", a situation when the similar background of individuals results in less debate and challenges within the group.

Lack of diversity within the board members, the EC maintains, may prevent the board from undertaking an effective oversight of the executive directors and the management of the company.

Related linkEuropean Commission

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