Until now, small and medium enterprises (SMEs) have largely been left out of non-financial information (NFI) disclosures. However, this will change significantly with the Non-Financial Reporting Directive. This chapter analyses the stakeholders' perspective about three core aspects related to this: the usefulness of a simplified NFI standard and/or reporting format for SMEs; if that is an effective means of limiting the burden on SMEs; and, finally, in case of implementing it, if it should be mandatory or voluntary. Data were obtained from the stakeholders' answers provided during the public consultation conducted by the European Union about possible revisions of the Directive 2014/95/EU, from February to June 2020. The results show that the most controversial topic is the mandatory or voluntary nature of the simplified standard for SMEs. Furthermore, there are different opinions about the usefulness and effectiveness of a simplified standard for SMEs, particularly between capital providers versus other entities.
TopIntroduction
Corporate reporting has undergone relevant changes to meet the demands of an increasing range of stakeholders and to respond to external events. Historically, it has moved from a reporting that was essentially financial to a reporting that, in a second phase, also includes disclosures of non-financial information (NFI).
However, concerns about the harmonisation of either financial or non-financial reporting seems to firstly cover larger or listed companies, including small and medium enterprises (SMEs) only in a second phase. Regarding financial information, the effective inclusion of smaller or unlisted entities within the scope of the harmonisation process happened only in the early years of this century, following a more advanced stage of harmonisation for larger or listed ones. This can be demonstrated by the work initiated by the International Accounting Standards Board (IASB), recovering the project started by the previous standard-setter International Accounting Standards Committee (IASC) in 2001, to later develop the International Financial Reporting Standard (IFRS) for Small and Medium Entities (IFRS for SMEs) in 2004.
In this context, it is worth remembering that, previously, the full International Accounting Standards (IAS) and IFRS (full IAS/IFRS) had been already adopted by European Union (EU) through Regulation 1606/2002 of the European Parliament and of the Council of July 19, 2002, which included in its scope, particularly, the entities whose securities are admitted to trading on a regulated market of any Member State, as a mandatory requirement for their consolidated accounts (European Commission, 2002). This relevant step was achieved after almost thirty years, considering that IASC was formed in 1973.
The IFRS for SMEs emerged in a subsequent phase of the IASB’s harmonisation goals, aiming to establish more simplified requirements for such entities. Its scope includes entities that do not have public accountability and publish general purpose financial statements for external users. The benefits of the IFRS for SMEs are multiple, and the following can be highlighted: international comparability between financial reports by using the same accounting language; easier preparation and presentation of consolidated financial statements; and facilitating cross border trade and international growth of SME (Sellami & Gafsi, 2018).
To reduce the reporting burden for SMEs, the IFRS for SMEs is less complex than the full set of IAS and IFRS (full IAS/IFRS), having simplifications not only in terms of recognition and measurement requirements but also in terms of disclosures. However, the IFRS for SME is separate from full IAS/IFRS and consequently is available for any jurisdiction to adopt regardless of whether it adopts full IAS/IFRS or not. For instance, in the EU case particularly, IFRS for SMEs was not adopted.
Concerning NFI, the debate on the need for harmonisation is more recent, despite increasing interest in the last twenty years. As societies are increasingly attentive to socially and environmentally responsible entities, non-financial reporting is becoming a key component of corporate communication and report, and some models have gained prominence, such as the Global Reporting Initiative (GRI) and, more recently, the Integrated Reporting (IR) (Bartolacci et al., 2020; De Villiers et al., 2014; Dumay et al., 2016).
In any case, the perspective of disclosing NFI, as well as the debate on the harmonisation of the non-financial report, has been particularly focused on larger companies, especially on listed entities (Stolowy & Paugam, 2018). This may be explained by the fact that investors' needs regarding the relevance of this complementary information for making the best decisions on allocating their investments in sustainable companies are understood in a long-term perspective. Consequently, this is a matter mostly devoted in literature to large and/or listed entities, as it includes, among other aspects, the mitigation of reputational risks, and then SMEs have largely been left out from NFI disclosures until now.