EU pushes for country-based financial reporting

The European Commission is seeking changes to the Transparency Directive of 2004 and two accounting directives to require listed companies and large private ones to reporting their financial results on a country-by-country basis, and not just on a global level. It also plans to widen the range of reporting required when an investor builds a stake in a business, to include all instruments with a link to equity, rather than just the shares themselves.

• Country-based reporting: The move is quite a controversial one, and not just because of the increased cost associated with it. Country-based reporting could yield a trove of commercially sensitive information for competitors, and especially those based outside the EU, who would not have to make such disclosures themselves. Moreover, such reporting could expose the value of individual customer transactions or trading volumes, if a reporting company has only one or two clients in a particular jurisdiction. More importantly from an investor's viewpoint, country-based reporting may have little to do with the shape of the business model for some companies. But, as the commission points out, investors are not the prime beneficiary. Rather, this move is intended to give outsiders a view. The commission puts it this way: "Reporting taxes, royalties and bonuses that a multinational pays to a host government will show a company's financial impact in host countries."
  
• Stake-building: The reason for this proposal is to reduce scope for market abuse, and it follows cases of covert stake-building in a variety of companies through the use of derivative instruments, including contracts for difference. Of particular note was the market distortion surrounding the failed attempt by Porsche to build a stake in Volkswagen, and the resulting attempt by Volkswagen to secure control over Porsche. It wants trading in all instruments to be reported, once they achieve a certain threshold.

At the same time, the changes to the directive would end a requirement for small and medium-sized companies to report on a quarterly basis.

Source document: The proposal is a 25-page pdf file.