Decoupling of small company definition and audit exemption thresholds

By James Barbour, ICAS Director, Technical Policy

3 September 2014

James Barbour gives an insight into the BIS decision to "consciously uncouple" the audit exemption thresholds from the small company definition.

When a certain celebratory couple decided to "consciously uncouple" earlier this year it led to considerable discussion on social media.

Not to be outdone, the Department for Business Innovation and Skills (BIS) decided to follow suit and "consciously uncouple" the audit exemption thresholds from the small company definition. This would take us back to the situation that applied for accounting periods ending on or before 30 September 2012 where the two definitions were not aligned. 

This proposal is contained in the consultation document "UK Implementation of the EU Accounting Directive: Chapters 1-9: Annual financial statements, consolidated financial statements, related reports of certain types of undertakings and general requirements for audit" recently published by BIS, in which it sets out its proposals for introducing the requirements of the EU Accounting Directive in the UK.

Currently for a company to be entitled to take advantage of the audit exemption provisions contained in the Companies Act 2006, it has to satisfy the small company definition as per section 382 of the Act. The current small company definition which specifically excludes some companies, including public companies, requires that a company satisfy 2/3 of the following qualifying conditions (and a two year rule applies):

  • Turnover not more than £6.5 million;

  • Balance Sheet Total (Fixed plus current Assets) not more than £3.26 million; and

  • Not more than 50 employees.

Under BIS' proposal the audit exemption criteria will remain at this level but the small company definition will be raised to the following:

  • Turnover not more than £10.2 million;

  • Balance Sheet Total (Fixed plus current Assets) not more than £5.1 million; and

  • Not more than 50 employees.

Additionally, BIS is considering narrowing the restriction that excludes all public companies from taking advantage of the small company financial reporting regime and hence the ability to take advantage of audit exemption. The proposed revised prohibition in relation to public companies would only apply to companies whose securities are admitted to trading on a regulated market.

The paparazzi might not be following this issue but it is a very important matter for ICAS members, particularly those who either have SME clients or indeed work in such businesses.

Further Reading

UK implementation of the EU Accounting Directive - UK Government proposes increase in small company thresholds but no increase in audit exemption thresholds

Topics

  • Development of the profession
  • Audit and Assurance

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