Why You Might Be Failing at Accounting Regulations In Europe

There have been some less obvious casualties of the recent political events in Europe and the US. The American and European Accounting Standards Boards are no longer participating in joint efforts to create a standardised global paradigm for accounting, like they used to in the past. This does not mean that the process is permanently stalled but it is likely to take a different direction in the future. Here are some of the other changes to European accounting regulations which are likely to impact 2017 and beyond.

Anti-globalisation mood

International trade and investment is probably going to be the first major casualty of the new political climate. Mr Hoogervorst, the current chairman of the International Accounting Standards Board (IASB), acknowledged recently that the long time trend towards growing international trade and foreign investment may be interrupted by these events. The actual impact won’t be clear till the actual data is generated in the months to come but the markets are already pricing it in to an extent. Uncertainty is never good for business and unnecessary volatility can reduce valuations. A policy limbo is the last thing that a weak global economy needs.

VAT rules for the digital economy

The EU is certainly not happy with the current state of the VAT rules. They estimate that:

  • €5 billion is lost each year due to non-compliance with the online selling VAT rules
  • €8000 is the VAT compliance cost a company pays for each EU member state that they sell in
  • Non EU companies exploit certain loopholes to circumvent paying appropriate VAT

In order to rectify the situation, the EU has proposed certain changes to the current rules. They want to create a “One Stop Shop” which would offer a single window (in local languages) for companies to pay all their VAT obligations. This would be augmented by removal of exemptions that non-EU companies enjoy for small consignments – making local manufacturers more competitive.

Moreover, micro companies would also benefit from a €10,000 cap and sales below this number would be treated as domestic sales.

International financial reporting standard 9

With the EU adopting the IFRS 9 standard in November 2016, member states are preparing to comply with the new laws. Although mandatory compliance starts in 2018, preparations have already begun, especially for those planning to adopt it sooner.

Early adoption might not be a particularly good idea though, since there is a lot of confusion about what all would change and how to account for it. The problem is of course exacerbated by the lack of any experts in the new standards who can advise on how to go about adopting IFRS 9.

The problem gets even bigger for larger firms. They have to first understand the rules and then coordinate large teams of IT developers, accountants and financial experts to create systems capable of handling the new rules. Then comes the testing and implementation part which is expected to be rather error-prone in the initial few months. For banks which are already under quite a bit of stress, there is an even bigger challenge with increased capital adequacy requirements.

Conclusion

The mix of political turmoil and economic stress would make 2017 and beyond a somewhat challenging prospect. However, governments continue to do their best to reform existing rules, close loopholes and provide support to smaller businesses. It is said that the market anticipates trouble before it actually happens. If that is indeed the case, then perhaps the worst is already over.

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Our Renax Guide to Finance and Accounting Regulations provides information on trends in the industry provides more information on trends in the industry.

Similar posts: The Impact of Over-Regulation on the Financial Services IndustryBack to Basics in RegTech Solutions, The Impact of Over-Regulation on the Financial Services Industry.

14-12-2016

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