New regulations have reduced the burden of financial reporting and audit obligations for smaller companies. Other changes which have been made will affect companies of all sizes. The Companies, Partnerships and Groups (Accounts and Reports) Regulations 2015 came into force on 6 April 2015 and apply to financial years beginning on or after 1 January 2016. Company directors can elect to take advantage of the new regime for a financial year beginning on or after 1 January 2015 but before 1 January 2016.
Some of the more significant changes are summarised below.
Small companies and groups
The new regulations increase the thresholds which determine when a company or group qualifies as small for the purposes of certain accounting and reporting exemptions, and for exemption from audit. In order to qualify as small, a company or group must meet at least two out of three qualifying conditions, which are amended as follows:
Companies (other than parent companies):
- Annual turnover must be not more than £10.2m (previously £6.5m)
- Balance sheet total must be not more than £5.1m (previously £3.26m)
- Average number of employees must be not more than 50 (no change)
- Aggregate annual turnover of the group must be not more than £10.2m net or £12.2m gross (previously £6.5m net or £7.8m gross)
- Aggregate balance sheet total must be not more than £5.1m net or £6.1m gross (previously £3.26m net or £3.9m gross)
- Aggregate number of employees must be not more than 50 (no change)
Public companies are not able to take advantage of the small companies' regime. Previously, a company was also excluded from the regime if, although it was itself a private company, it was a member of a group which included a public company. This has been changed so that a private company will only be excluded from the regime if it is a member of a group which includes a public company which is a traded company (i.e. a company with voting shares admitted to trading on an EEA regulated market, such as the main market of the London Stock Exchange). Subsidiaries of companies admitted to trading on AIM, for example, will therefore now be able to qualify as small.
Although a company which would qualify as small under the new regime, but would not do so under the old regime, can elect to adopt the new regime for a financial year beginning on or after 1 January 2015 but before 1 January 2016, it will not be exempt from audit in that year.
Parent companies are not obliged to prepare group accounts if they are subject to the small companies' regime. This exemption has been extended to parent companies which are prevented from qualifying as small only by the fact that they are public companies, as long as they are not traded companies. Companies admitted to trading on AIM will still, however, be required to prepare group accounts under the AIM Rules for Companies.
Small companies will be able to prepare an abridged balance sheet and an abridged profit and loss account if approved by all of the company's shareholders. The option of filing accounts at Companies House which are an abbreviated version of the accounts prepared for shareholders has been removed.
There are substantial changes to the notes small companies are required to include in their accounts. Whilst small companies are losing the benefit of some exemptions, including in relation to off-balance sheet arrangements, the overall number of notes required has been significantly reduced.
Companies which qualify as micro-entities are no longer required to prepare a directors' report.
Medium-sized companies and groups
The qualifying conditions for medium-sized companies (of which two out of three must be met) have also been amended:
Companies (other than parent companies):
- Annual turnover must be not more than £36m (previously £25.9m)
- Balance sheet total must be not more than £18m (previously £12.9m)
- Average number of employees must be not more than 250 (no change)
- Aggregate annual turnover of the group must be not more than £36m net or £43.2m gross (previously £25.9m net or £31.1m gross)
- Aggregate balance sheet total must be not more than £18m net or £21.6m gross (previously £12.9m net or £15.5m gross)
- Aggregate number of employees must be not more than 250 (no change)
As with the small companies' regime, private companies will no longer automatically be excluded if they are a member of a group which includes a public company, but will still be excluded if the group includes a traded company.
Companies may use alternative layouts when preparing their profit and loss account and balance sheet, provided that the information given is at least equivalent to the information otherwise required by the standard formats. This is intended to reduce the burden of consolidation for those in a group using international accounting standards.
It is no longer possible for a company to disclose relevant information about its subsidiaries and other related undertakings in its annual return, with only limited information in the notes to its accounts. All required information has to be disclosed in the accounts.
In exceptional circumstances where the useful life of development costs and goodwill cannot be reliably estimated, they must be written off over no more than 10 years. This will require an amendment to FRS 102, which currently requires a maximum write off period of 5 years.
A new option has been introduced, permitting participating interests to be accounted for using the equity method in an investor’s individual financial statements, rather than cost-based or fair value measurement methods.
There are additional requirements for auditor's reports on a company's strategic report, directors' report and corporate governance statement. As well as stating whether, in his opinion, the information given in the strategic report (if any) and the directors' report for the financial year for which the accounts are prepared is consistent with those accounts, the auditor must state whether:
- in his opinion, based on the work undertaken in the course of the audit, any such strategic report and the directors' report have been prepared in accordance with applicable legal requirements; and
- in light of the knowledge and understanding of the company and its environment obtained in the course of the audit, he has identified any material misstatements in the strategic report (if any) and the directors' report and give an indication of such misstatements
The auditor's report on any separate corporate governance statement must also contain additional statements as regards compliance with applicable legal requirements and the identification of material misstatements.
David Wilkinson is a Partner and Danielle Harris is a Senior Associate and Professional Support Lawyer in Fieldfisher's Corporate Group in London.
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