Company Law and IFRS

Introduction 13

I. Company law on annual accounts and capital maintenance 13
i) Legislation on annual accounts and capital maintenance 13
ii) Annual Accounts: terminology 14
iii) Capital Maintenance: terminology 14
iv) Research questions 18
II. Specification 19
i) Legal functions of annual accounts 19
ii) Consolidated and individual annual accounts 20
iii) Listed and unlisted companies 20
iv) Concepts of financial accounting 21
v) Capital maintenance and accounting 22
III. Phases 23
i) Phases of company law on annual accounts (ACL) 24
ii) Phases of accounting methods related to capital maintenance (CCA) 24
iii) Comparison of phases (ACL and CCA) 26
Schedule I: Comparison of phases (ACL and CCA) 27
IV. Justification 27
i) Dutch and EU company law on accounting-based capital maintenance 27
ii) Relevant legal and accounting research 28
iii) Sources 30
V. Chapter outline 30

Chapter I: Early Dutch company law on annual accounts and capital maintenance 33
IA: Development of Dutch company law 33
I.1 Early initiatives 33
I.2 Bill of 1910 35
I.2.1 Annual accounts 36
I.2.2 Capital maintenance 37
I.3 Bill of 1925 38
I.3.1 Annual accounts 38
I.3.2 Capital maintenance 39
I.4 Reactions to the bill of 1925 39
I.4.1 Annual accounts 39
I.4.2 Capital maintenance 41
I.5 Altering Act (Novelle) of 1929 43
I.5.1 Visser committee 43
I.5.2 Altering Act (Novelle) 45
I.5.3 Annual accounts 46
I.5.4 Capital maintenance 48
I.5.5 Link between annual accounts and capital maintenance 48
IB: Act on Annual Accounts (WJO) 50
I.6 Reports on annual reporting 50
I.6.1 Rijkens report 50
I.6.2 Hamburger report 53
I.6.3 Annual accounts and accountability 54
I.6.4 Capital maintenance 55
I.7 Verdam report 56
I.7.1 Annual accounts 56
I.7.2 Capital maintenance 57
I.8 Development of the Act on Annual Accounts (1971) 58
I.8.1 Act on Annual Accounts (WJO) 58
I.8.2 Capital maintenance 60
I.9 Evaluation and concluding remarks 62
I.9.1 Legislation on annual accounts and capital maintenance 62
I.9.2 Replacement value method (CCA) 63
I.9.3 Influence of accounting developments on legislation 64

Chapter II: EEC Company Law Directives on disclosure and capital maintenance and their consequences for Dutch company law 67
IIA: First EEC Company Law Directive (1968) 67
II.1 EEC harmonisation of company law 67
II.1.1 EEC Company Law Directives 67
II.2 Changes to Dutch company law related to the First Directive (1971) 68
II.2.1 First Directive adaptation Act 68
II.2.2 BV-legislation and annual accounts 70

IIB: Second EEC Company Law Directive (1977) 72
II.3 Minimum capital 72
II.3.1 Minimum capital requirement for NV and BV 72
II.4 Implementation in Dutch company law (1981) 74
II.4.1 Second Directive adaptation Act 74
II.5 Ties between capital maintenance and annual accounts 76
II.5.1 Annual accounts and capital maintenance 76
II.5.2 Legal reserves 76
II.5.3 Balance sheet test 78
II.5.4 Capital maintenance: other aspects 78
II.6 The BV Capital Act (1985) 80
II.6.1 Imposing capital maintenance rules on the BV 80
II.6.2 Legal reserves 82
II.6.3 Dutch discussion on legal reserves and audit of annual accounts 83
II.6.4 Dutch discussions on capital maintenance rules for BVs 84
II.7 Evaluation and concluding remarks 86
II.7.1 Annual accounts and capital maintenance: legislative process 86
II.7.2 Influence of accounting developments on legislation 87

Chapter III: The Fourth EEC Company Law Directive on annual accounts and consequences for Dutch company law 89
III. The Fourth EEC Company Law Directive (1978) 89
III.1 Background of the Fourth Directive 89
III.1.1 The draft Accounting Directive 89
III.1.2 The Fourth Directive’s main requirement 90
III.2 The Fourth Directive’s tie between annual accounts and capital maintenance 93
III.2.1 Link between annual accounts and capital maintenance 93
III.2.2 The Fourth Directive’s prudent valuation rules 95
III.2.3 The Fourth Directive’s legal (re)valuation reserves 96
III.2.4 The Fourth Directive’s accounting-based capital maintenance 101
III.3 Implementation in Dutch company law (1983) 103
III.3.1 Dutch discussions on the draft Directive 103
III.3.2 Initial and revised Fourth Directive adaptation bill 105
III.3.3 Introduction of legal revaluation reserves in Dutch company law 108
III.4 Accounting-based capital maintenance 111
III.4.1 Accounting-based capital maintenance from a Dutch perspective 111
III.4.2 Replacement value method (CCA) 113
III.5 Evaluation and concluding remarks 115
III.5.1 Annual accounts and capital maintenance: legislative process 115
III.5.2 Influence of accounting developments on legislation 116

Chapter IV: Subsequent EEC/EU Company Law Directives and developments in Dutch company law 119
IVA: The Seventh EEC Company Law Directive (1983) 119
IV.1 EEC Directive on consolidated annual accounts 119
IV.1.1 The Seventh Directive and International Accounting Standards 119
IV.2 Implementation of the Seventh Directive in Dutch company law (1988) 121
IV.2.1 Consolidated annual accounts 121
IV.2.2 Legal participating interest reserve 125
IV.2.3 Loopholes in accounting-based capital maintenance 126
IVB: Subsequent developments in EEC/EU Directives and implementation in Dutch company law 130
IV.3 Dutch Act on simplifications and clarifications on annual accounts (1990) 130
IV.3.1 Background of the simplifications and clarifications bill 130
IV.3.2 Legal reserves 131
IV.3.3 Annual accounts and capital maintenance 131
IV.4 The EEC Partnerships-Directive and SME-Directive (1993) 132
IV.4.1 The Partnerships-Directive and implementation in the Netherlands 132
IV.4.2 The SME-Directive and implementation in the Netherlands 134
IV.5 Miscellaneous EEC Company Law Directives 136
IV.5.1 Eleventh, Twelfth and Thirteenth EEC Company Law Directive 136
IV.5.2 EEC Accounting Directives for financial institutions 137
IV.6 Adjustments to the Second Directive (2006) and recast EU Directive (2012) 138
IV.6.1 Adjusted Second Directive (2006) 138
IV.6.2 Implementation in Dutch company law 139
IV.6.3 Recast EU Capital Directive (2012) 140

IV.7 Adjustments to the Fourth Directive (2012) and recast EU Directive (2013) 141
IV.7.1 Micro-Entity Directive (2012) 141
IV.7.2 Recast EU Accounting Directive (2013) 144
IV.7.3 Capital maintenance and the recast EU Accounting Directive (2013) 146
IVC: Specific Dutch company law developments on annual accounts and capital maintenance 148
IV.8.1 Dutch research on filing of annual accounts (2006) 148
IV.8.2 Dutch Act on tax based annual accounts of small companies (2008) 149
IV.8.3 Flex-BV Act and capital maintenance (2012) 151
IV.9 Summary and evaluations 157
IV.9.1 Annual accounts and capital maintenance: legislative process 157
IV.9.2 Legislative loopholes in accounting-based capital maintenance 157
IV.9.3 Influence of accounting developments on legislation 158

Chapter V: IAS/IFRS and capital maintenance 161
V.1 Conceptual background of IAS/IFRS 161
V.1.1 Conceptual Framewor 161
V.1.2 The Framework’s concepts of capital and capital maintenance 163
V.1.3 Balance sheet approach 167
V.1.4 Revaluations 168
V.1.5 Equity 170
V.2 Other relevant IFRS developments 170
V.2.1 Distinction between equity and liabilities 170
V.2.2 Performance reporting and comprehensive income 172
Schedule II: IAS I developments; from P&L to (total) Comprehensive Income 176
V.2.3 Reserves and capital disclosures 177
V.2.4 Measurement and fair value 178
V.2.5 Stewardship and accountability 181
V.3 Summary and evaluations 184
V.3.1 Annual accounts and capital maintenance 184
V.3.2 From CCA to FVA 185

Chapter VI: IAS/IFRS and consequences for EU and Dutch company law 189
VIA: Revised EU accounting strategy (1990-2000) 189
VI.1 EC accounting harmonisation and international capital markets 189
VI.1.1 EEC accounting harmonisation and international capital markets 189

VI.1.2 New EC strategy on international accounting standards (1995-2000) 193
VI.1.3 Annual accounts and capital maintenance 196
VIB: The EU legislative measures 198
VI.2 The IAS Regulation 198
VI.2.1 Regulatory framework 198
VI.2.2 Comitology procedure 199
VI.2.3 The IAS Regulation (2002) 202
VI.2.4 Endorsement of IAS/IFRS (2003) 203
VI.2.5 IAS 39 carve out (2004) 204
VI.2.6 IFRS-EU and Member State options 206
Schedule III: IAS Regulation (2002); Member State options 207
VI.3 Modernisation of the Accounting Directives 208
VI.3.1 Interpretative Communication (1998) 208
VI.3.2 Financial Instruments Directive (2001) 210
VI.3.3 Fair value accounting and fair value reserve 212
VI.3.4 The fair value reserve and accounting-based capital maintenance 214
VI.3.5 Modernisation Directive (2003) 220
VI.3.6 Corporate Governance Directive (2006) 224
VI.4 Implementation in Dutch Company Law 226
VI.4.1 Unsuccessful IAS bill (2000-2004) 226
VI.4.2 Bill on the IAS Regulation and modernised Accounting Directives (2004) 231
VI.4.3 The ambiguous option: Dutch GAAP with IFRS-EU valuation principles 233
VI.4.4 Implementation of fair value accounting 234
VI.4.5 Changes to legal reserves 239
VI.4.6 The ‘mixed’ legal revaluation/fair value reserve 240
VI.5 Summary and evaluations 245
VI.5.1 Annual accounts and capital maintenance: legislative process 245
VI.5.2 Dutch legislative process: legal revaluation/fair value reserve 247
VI.5.3 From CCA to FVA 248
VI.5.4 Legal reserves in IFRS-EU individual annual accounts 249
VI.5.5 Member State options of the IAS Regulation: IFRS-EU and capital maintenance 250

Chapter VII: The ties between annual accounts and capital maintenance (r)evaluated 255
VII.1 Recapitulation and conclusions 255
VII.1.1 Research question 255

VII.1.2 The history of the link between annual accounts and capital maintenance 256
VII.1.2.1 First phase 256
VII.1.2.2 Second phase 257
VII.1.2.3 Third phase 259
VII.1.2.4 Historical research - conclusion 261
VII.1.3 The adequacy of the link between annual accounts and capital maintenance 261
VII.1.3.1 Lack of a set of coherent views underlying company law on annual accounts 261
VII.1.3.2 Broad divergence and de-harmonisation 266
VII.2 Suggested way forward 269
VII.3 Suggestions for further research 277

Annex I: Recommendation: Dutch Civil Code 279
Annex II: Recommendation: EU Accounting Directive 280
Annex III: Summary of recommendations 281
Schedule IV: Legal reserves in the Dutch Civil Code (BW) 282
Summary 285
Samenvatting 289
References 297
Index 345