UK COMPANY ACCOUNTS The New Reporting Regime FACTSHEET 02 SIZE REALLY DOES MATTER

UK COMPANY ACCOUNTS The New Reporting Regime FACTSHEET 02 SIZE REALLY DOES MATTER

Contents Introduction... 2 Scope... 2 Effective date... 2 What the changes mean... 3 Eligibility criteria... 4 More on size thresholds... 5 What do you need to do now?... 6 Page 1

Introduction The Companies, Partnerships and Groups (Accounts and Reports) Regulations 2015 (SI 2015/980) introduced significant changes to UK company law, particularly the small companies regime. These include: new criteria for qualifying as a small company changes to the information required in small company accounts amended accounts formats different filing obligations Other changes have also been introduced which affect a much wider range of companies depending on their individual circumstances. To ensure compliance with the new legal requirements, the Financial Reporting Council has updated UK accounting standards. An overview of the UK financial reporting framework that will apply in future is provided in Factsheet 01 of this series. In this Factsheet we focus on the eligibility criteria and size thresholds for UK company accounts that will help you to determine the accounting regime which will apply to your company micro-entities, small entities, medium-sized or large. Scope The new regulations affect all entities that fall within the scope of the Companies Act 2006 (the Act). Any entities that are required by law to prepare accounts under the Act are affected. Effective date The new regulations are generally effective for accounting periods commencing on or after 01 January 2016 with early adoption permitted for accounting periods commencing on or after 01 January 2015. However the increased small company thresholds cannot be early adopted for the purposes of audit exemption. Therefore early adopters that are small companies under the new revised limits will still require an audit if they exceed the previous small company limits. Audit exemption will be available for accounting periods commencing on or after 01 January 2016 unless the UK Government decides to break the link between the small company audit exemption thresholds and the small company accounting thresholds. In addition the removal of the option for a company to disclose only the principal subsidiaries and associates in the accounts, with a full list attached to the annual return, is effective for accounts approved on or after 01 July 2015. After that date details of all the subsidiaries and associates must be listed in the accounts. Early adopters must apply all the provisions of the new regulations. It is not possible to pick and choose which to apply early. Page 2

What the changes mean As the thresholds for small and medium-sized companies have increased and there have been changes to the eligibility criteria, all companies should consider where they fit in the new regulations. Beyond that the extent of the change will depend on the size and nature of the company and its individual circumstances. The key changes affecting companies of different sizes are summarised below. Large companies Greater flexibility in the Companies Act balance sheet and profit and loss account formats. This effectively allows adoption of the formats and terminology in EU adopted International Financial Reporting Standards and FRS 101 Reduced Disclosure Framework. Requirement to include details of all related undertakings in annual accounts approved on or after 01 July 2015. Wider scope of the audit report in relation to the directors report and, if applicable, the strategic report and the separate corporate governance statement. Medium-sized companies Greater flexibility in the Companies Act balance sheet and profit and loss account formats. This effectively allows adoption of the formats and terminology in FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland. Requirement to include details of all related undertakings in annual accounts approved on or after 01 July 2015. Wider scope of the audit report in relation to the directors report and, if applicable, the strategic report and the separate corporate governance statement. The option to file abbreviated accounts with the Registrar of Companies has been withdrawn. Small companies Greater flexibility in the Companies Act balance sheet and profit and loss account formats. This effectively allows adoption of the formats and terminology in FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland. New option to prepare an abridged balance sheet, abridged profit and loss account or both. Reduction in the number of notes to the accounts that are specifically required by law, although there is still a requirement for the accounts to show a true and fair view. The option to file abbreviated accounts with the Registrar of Companies has been withdrawn. Accounts to be filed with the Registrar of Companies are those prepared for the members i.e. full or abridged accounts, although the option not to file the directors report and/or the profit and loss account remains. Micro-entities No requirement to prepare a directors report Page 3

Eligibility criteria The selection of which regime to apply will depend on a number of factors including the following: the nature of the entity to identify any exclusions group considerations size limits. The following table outlines the key eligibility criteria for the micro-entities, small entities and medium-sized regimes. Regime > Micro-entities Small entities Medium-sized Eligible entities Company Micro-entity parent company that heads up a small group Ineligible entities Any company excluded from the small companies regime Financial institution Charity Parent company that chooses to prepare group accounts Subsidiary company included in group accounts Company Small company parent that heads up a small group LLP Other types of entity that would meet the criteria if it were a company (e.g. charity) Public company Financial institution including insurance company and banking company Member of an ineligible group Company Medium-sized company parent that heads up a medium-sized group LLP Other types of entity that would meet the criteria if it were a company (e.g. charity) Public company Financial institution including insurance company and banking company Member of an ineligible group Size thresholds An entity qualifies if it does not exceed two or more of the thresholds shown Turnover - 632,000 Gross assets - 316,000 No. of employees - 10 Turnover - 10.2m Gross assets - 5.1m No. of employees - 50 Turnover - 36.0m Gross assets - 18.0m No. of employees - 250 Notes 1. As a general rule the entity must fail to meet the qualifying conditions for two consecutive years before it ceases to qualify. 2. The turnover threshold is proportionately adjusted for periods of less than one year. 3. Gross assets are the total of fixed assets and current assets. 4. No. of employees is an annual average based on the number of persons employed under contracts of service in each month added together for all the months in the financial year and divided by the number of months in that year. 5. A group is ineligible if any of its members is, in broad terms, a quoted company (or similar) or a financial institution including an insurance company and a banking company. Reference should be made to the Companies Act 2006 for the detailed rules in each case. 6. The size thresholds for Limited Liability Partnerships (LLPs) have not yet been changed. See the comparison table on the following page. Page 4

More on size thresholds The table below shows the changes in the size thresholds introduced by the new legislation both for a single entity and for groups. Turnover Gross assets Employees Regime Revised Previous Revised Previous Unchanged Micro-entities 632,000 632,000 316,000 316,000 10 Small entities 10,200,000 6,500,000 5,100,000 3,260,000 50 Medium-sized 36,000,000 25,900,000 18,000,000 12,900,000 250 Small group Gross 12,200,000 7,800,000 6,100,000 3,900,000 50 Net 10,200,000 6,500,000 5,100,000 3,260,000 50 Medium-sized group Gross 43,200,000 31,100,000 21,600,000 15,500,000 250 Net 36,000,000 25,900,000 18,000,000 12,900,000 250 Notes 1. The changes in the limits apply to companies, including charity companies, but currently not to LLPs. It is expected that the LLP regulations will be updated in due course to ensure equivalence with the new requirements for companies. 2. If a company is a parent company, then the group is tested against the limits by adding the relevant figures for the parent company and its subsidiary undertakings. The group limits may be satisfied either before the elimination of inter-group transactions and balances (referred to as gross ) or after the elimination of inter-group transactions and balances (referred to as net ). Page 5

What do you need to do now? You need to consider now where your company fits in the new eligibility criteria. The increase in the size thresholds is substantial and many companies that are currently classified as medium-sized will fall into the small entities regime. This may significantly reduce the presentation and disclosure requirements of FRS 102 as applied to small entities. The accounts requirements of the micro-entities regime are much simpler and less onerous than those for small entities which may facilitate the production of year end accounts although you will still need to maintain adequate accounting records. It s not just about size thresholds. The ineligibility criteria have also changed which may enable you to move down to a less demanding regime. You should also take account of any expectations for changes in the size of the company. Rapid growth in your company s operations may quickly push you into a higher accounting regime. In this case it may make sense to adopt the higher regime earlier than is strictly necessary in order to avoid some of the pitfalls associated with transition from one regime to another. To discuss any of these points or to find out more about the new financial reporting regime under UK GAAP please contact Peter Edwards, Head of Audit and Assurance Services. e: peter.edwards@alliotts.com t: 020 7240 9971 Notes: The information set out in this Factsheet is based on our understanding of the financial reporting provisions as at 04 December 2015. The content of this Factsheet has been provided for general guidance only.it does not necessarily stand on its own and no responsibility for loss occasioned by any person acting or not acting as a result of this material can be accepted by the writer or Alliotts or any of its partners and employees. Alliotts are registered to carry on audit work in the UK and regulated for a range of investment business activities; and licensed to carry out the reserved legal activity of non-contentious probate in England and Wales by the Institute of Chartered Accountants in England and Wales. Page 6