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In most European countries, public entities are subject to IFRSand must prepare their accounts accordingly. While local GAAP isaligned to IFRS, it is here and in taxation that key differencesemerge.
The European Union's alignment to the InternationalFinancial Reporting Standard (IFRS) for accounting purposes makesfinancial reporting in Europe quite streamlined for companies.Private entities need to follow the local GAAP (Generally AcceptedAccounting Principles), but in most European countries it isaligned to IFRS.
Differences do exist however, and one source of difference isthe fact that IFRS as adopted by the EU is sometimes behind theactual IFRS standards. This is because the EU goes through anendorsem*nt process, and this can result in a gap of approximatelysix months between the implementation of a new standard, andimplementation in practice.
With regard to private entities and local GAAP, it is in the fewEuropean countries where this is not aligned to IFRS, in whichdifferences occur. For example, in Italy, goodwill should be amortised, revaluation is notallowed, there are specific capitalisation rules and useful livesand only operating leases are recognised.
Form of reports
A source of difference is not so much the accounting principlesbut in the form of accounting reports, and how you need to preparethe accounting information in order to be compliant with localrules. For example, you will find that in France and Romania, there are very specific regulations around chart ofaccounts, format of the trial balance, general ledger andaccounting reporting. When operating in these jurisdictions,it's recommended to work with a local provider whose experts can help you navigatethe report particulars.
Different countries = different tax rules
On the whole when it comes to financial reporting, the mainsource of difference is not so much on the accounting side at all,but on the tax side. This is evident in itself when we look at thevaried rankings of EMEA jurisdictions in the Financial Complexity Index.
You need to follow local tax rules in order to file your returnsand make tax payments in-country, and there is a variance betweenthe IFRS / local GAAP and what you need to calculate and reflectfor tax purposes.
It's not surprising to see these difference in the Europeantax landscape as the purpose is very narrow - to provideinformation to the governmental authority and pay taxes on yourlocal profits and activities.
Tax is not regulated by an international body as in the case ofIFRS, and tax regulation does vary depending on individual countrypolicies and governmental targets.
Efforts to align
There are various initiatives in Europe that look to align taxregulation. The EU is making moves to harmonise VAT legislation, making the rules more similar across membercountries. And the common tax base is a recent initiative thatwould see companies with activities in various EU countriescumulate their expenses and revenues for a consolidated calculationof the profits. These would then be split among countries dependingon the level of activity. While there are these initiativesintended to make tax more consistent, there is at the end of theday, a distinct national, local, flavour.
Financial reporting checklist
When it comes to financial reporting in different jurisdictions,there are several aspects you need to consider.
- The format of the financial reportcountry-to-country and specific requirements, which can vary incomplexity.
- Differences in terms of theaccounting treatment. Usually the difference areas are in, forexample, foreign exchange rates, fixed assets and how depreciationis calculated, inventory valuation.
When you expand operations to a new country, you need to look atthe form of the financial report and also the substance, becauseit's in these where local rules may be different to IFRS. Youneed to consider how you are going to incorporate those local rulesinto your general financial reporting system.
Impact on your bottom line
Knowing and understanding these differences in financialreporting in Europe is essential in order to be able to properlyestablish your operations, and understand the true cost of doingbusiness in your new location.
Working with a third party provider in-country often proves tobe the optimal solution for companies, as it gives them access toexperts with the local language, and understanding of how swiftlyaccounting and tax rules at country-level can change.
Having professionals to hand who can technically assess thelatest changes, and explain how they will impact your business– in practical terms – is invaluable.
Talk to us
TMF Group's team of accounting and tax professionals in offices across virtuallyevery country of EMEA can be your trusted partner on the ground,and help drive efficiency in your operations.
Contact us today.
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The content of this article is intended to provide a generalguide to the subject matter. Specialist advice should be soughtabout your specific circ*mstances.
