EU Commission Increases Threshold – New Size Classes for Companies by 2024

On October 17, 2023, the European Commission decided to raise the thresholds for companies and corporate groups by around 25 percent EU-wide, for the first time since 2013. This decision takes into account the ongoing inflation in the Eurozone, which has been over 24 percent since the last adjustment. The delegated act (C2023 7020) applies to financial years beginning on or after January 1, 2024, with member states having the option to allow these changes for financial years starting from January 1, 2023.

 

New thresholds in detail

• Micro-enterprises: Balance sheet total increased to 450,000 euros (previously 350,000 euros) and annual turnover to 900,000 euros (previously 700,000 euros).
• Small enterprises (lower range): Balance sheet total increased to 5 million euros (previously 4 million euros) and annual turnover to 10 million euros (previously 8 million euros).
• Small enterprises (upper range): Balance sheet total now 7.5 million euros (previously 6 million euros), annual turnover 15 million euros (previously 12 million euros).
• Medium/Large enterprises: Balance sheet total at 25 million euros (previously 20 million euros), annual turnover 50 million euros (previously 40 million euros).
• The criteria of employee count remains unchanged.

Implications of raising the thresholds

With this adjustment, approximately 1.1 million companies in the Eurozone will be subject to less stringent reporting, auditing, and disclosure requirements. More than 50 percent of these companies will be micro-enterprises.

The update is a response from the Commission to the economic situation in the Eurozone and takes into account the inflation rates since the last adjustment. Despite calls from some experts for a more substantial increase, it is nonetheless a step towards reducing risks for companies. This is especially important as the revision reduces the risk for many companies of moving into larger classes due to inflation and thereby having to fulfill more extensive accounting obligations.

 

Impact on ESG reporting obligation

Of particular interest is the effect of these changes on sustainability reporting. As the requirements of the CSRD and the Taxonomy Regulation are closely linked to company size, careful planning and adjustment to the new thresholds will be crucial for many companies.

For companies that become medium-sized enterprises due to the increase in thresholds, the obligation to expand the management report with a sustainability report is likely to be eliminated. This gives them a time buffer, as the obligation to implement the CSR Directive would then apply from 2026 instead of 2025.

However, it is advisable for these companies to prepare early for the requirements of sustainability reporting. They should use the extra time to set the stage for transparent, meaningful, and efficient reporting.

 

What happens next?

The European Parliament and the Council of the EU now have two months to review the amendment directive to raise the threshold. If no objections are raised, adoption and publication can still take place in the last quarter of 2023. Once the amendment directive comes into force, member states must implement it within twelve months. 

You can download the full text of the delegated act here.

 

Retroactive increase in thresholds: recommendations for companies and audit mandates

If there is a retroactive increase in thresholds in national law, companies that would still be considered medium-sized based on the old thresholds as of December 31, 2023, may choose to waive the audit of the annual financial statements and management report. It is recommended for these companies to include a termination clause in the audit engagement agreement in the event of a retroactive increase. Existing contracts should be reviewed for possible adjustment options.

In any case, all affected companies should closely monitor further developments in this area in order to respond promptly to new developments.