Researchers studying accounting have devoted increasing attention to private firms in the last decade (Bar-Yosef et al., 2019; Beuselinck et al., 2023). This is due not only to the desire to expand beyond the extensive literature on public firms but also to the need to understand the specific characteristics of these firms (e.g. in terms of ownership and managerial structures, firms’ debts and relationships with lenders and supplier–customer relationships in the local and international supply chains in which they are embedded), the effects of such characteristics on accounting (Minnis & Shroff, 2017; Hope & Vyas, 2017) and the differences from public firms’ reporting behaviours. The specific agency issues, business contexts and regulatory settings that characterise private firms make the study of these companies promising and richly interesting. The EU setting deserves particular attention, as much country-level legislation requires private firms to publish at least their annual reports. Even if disclosure requirements are differentiated according to firm size between micro, small, medium and larger firms, in the EU, almost all limited liability firms are subject to specific mandatory requirements. This data availability makes the EU setting an attractive ‘laboratory’ (Beuselinck et al., 2023) in which to study private firms’ reporting behaviours. Combining such information may allow the formation of promising research questions and consistent research contexts. But there are still relevant differences in local accounting regulations across countries. For example, exemptions in filing income or cash flow statements and line item aggregation in balance sheets are not always homogeneous. In Italy and France, income statements are required for small firms, while in Germany, the Netherlands and the UK, income statements can be omitted by such firms. Income statement data (i.e. sales or costs) may thus be lacking for small firms in some jurisdictions. The exemption allowed in publishing cash flow statements does not make immediate data on operating, financing and investing cash flows available, so these data must instead be reconstructed from income statements and balance sheets. Furthermore, in certain countries, unlimited liability firms are not required to publish their financial statements, except in cases where the company exceeds a certain size (as in Germany) or in relation to the types of shareholders (as in Spain). This contributes to the different availability of financial information for these entitites. Another difference relates to the accounting standards applied, as country-specific rules either permit or prohibit the adoption of IFRS for private firms’ consolidated and unconsolidated financial statements. For example, in most of the countries considered, IFRS can only be voluntarily adopted for consolidated financial statements, while in other countries (such as Denmark, Italy, the Netherlands and the United Kingdom) IFRS can be voluntarily adopted also for unconsolidated financial statements. As previously shown, notwithstanding Directive 34 and the move towards IFRS, the valuation approaches transposed in local rules still differ significantly from the IFRS, particularly in countries where historical cost accounting remains the central reference for financial statement valuations. This is particularly true in Italy, Ger-many and France. In such jurisdictions, taxation or credit protection still prevails over capital market pressures. In contrast, in Denmark and the UK, the local GAAP are very close to the provisions of the IFRS, having introduced for many assets the adoption of fair value or the revaluation model. A fruitful research design should take into consideration the differences highlighted with the aim of composing meaningful and homogeneous samples. A research setting that includes private firms without considering the different local accounting rules they are required to follow may lead to unreliable results. On the other hand, this heterogeneity in disclosure requirements and the variable availability of data could be harbingers of comparative research into the various incentives to increase the quality of financial disclosures. Different provisions for abridged financial statements may represent an opportunity, as it may be interesting to study which incentives prompt companies to provide this information on a voluntary basis. This kind of analysis may also foster a more precise understanding of the information needs of external parties—such as creditors, competitors, tax authorities, customers and suppliers—and of the ability of different local accounting rules to meet these different needs.
Incollingo, A., Lionzo, A., Private Firm Accounting in the EU: Still an Incomplete and Fragmented Picture, in Alberto Incolling, A. I., Andrea Lionz, A. L. (ed.), The European Harmonization of National Accounting Rules. The Application of Directive 2013/34/EU in Europe., Springer, Lugano 2023: 2023 313- 328 [https://hdl.handle.net/10807/301419]
Private Firm Accounting in the EU: Still an Incomplete and Fragmented Picture
Lionzo, Andrea
2023
Abstract
Researchers studying accounting have devoted increasing attention to private firms in the last decade (Bar-Yosef et al., 2019; Beuselinck et al., 2023). This is due not only to the desire to expand beyond the extensive literature on public firms but also to the need to understand the specific characteristics of these firms (e.g. in terms of ownership and managerial structures, firms’ debts and relationships with lenders and supplier–customer relationships in the local and international supply chains in which they are embedded), the effects of such characteristics on accounting (Minnis & Shroff, 2017; Hope & Vyas, 2017) and the differences from public firms’ reporting behaviours. The specific agency issues, business contexts and regulatory settings that characterise private firms make the study of these companies promising and richly interesting. The EU setting deserves particular attention, as much country-level legislation requires private firms to publish at least their annual reports. Even if disclosure requirements are differentiated according to firm size between micro, small, medium and larger firms, in the EU, almost all limited liability firms are subject to specific mandatory requirements. This data availability makes the EU setting an attractive ‘laboratory’ (Beuselinck et al., 2023) in which to study private firms’ reporting behaviours. Combining such information may allow the formation of promising research questions and consistent research contexts. But there are still relevant differences in local accounting regulations across countries. For example, exemptions in filing income or cash flow statements and line item aggregation in balance sheets are not always homogeneous. In Italy and France, income statements are required for small firms, while in Germany, the Netherlands and the UK, income statements can be omitted by such firms. Income statement data (i.e. sales or costs) may thus be lacking for small firms in some jurisdictions. The exemption allowed in publishing cash flow statements does not make immediate data on operating, financing and investing cash flows available, so these data must instead be reconstructed from income statements and balance sheets. Furthermore, in certain countries, unlimited liability firms are not required to publish their financial statements, except in cases where the company exceeds a certain size (as in Germany) or in relation to the types of shareholders (as in Spain). This contributes to the different availability of financial information for these entitites. Another difference relates to the accounting standards applied, as country-specific rules either permit or prohibit the adoption of IFRS for private firms’ consolidated and unconsolidated financial statements. For example, in most of the countries considered, IFRS can only be voluntarily adopted for consolidated financial statements, while in other countries (such as Denmark, Italy, the Netherlands and the United Kingdom) IFRS can be voluntarily adopted also for unconsolidated financial statements. As previously shown, notwithstanding Directive 34 and the move towards IFRS, the valuation approaches transposed in local rules still differ significantly from the IFRS, particularly in countries where historical cost accounting remains the central reference for financial statement valuations. This is particularly true in Italy, Ger-many and France. In such jurisdictions, taxation or credit protection still prevails over capital market pressures. In contrast, in Denmark and the UK, the local GAAP are very close to the provisions of the IFRS, having introduced for many assets the adoption of fair value or the revaluation model. A fruitful research design should take into consideration the differences highlighted with the aim of composing meaningful and homogeneous samples. A research setting that includes private firms without considering the different local accounting rules they are required to follow may lead to unreliable results. On the other hand, this heterogeneity in disclosure requirements and the variable availability of data could be harbingers of comparative research into the various incentives to increase the quality of financial disclosures. Different provisions for abridged financial statements may represent an opportunity, as it may be interesting to study which incentives prompt companies to provide this information on a voluntary basis. This kind of analysis may also foster a more precise understanding of the information needs of external parties—such as creditors, competitors, tax authorities, customers and suppliers—and of the ability of different local accounting rules to meet these different needs.
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