UK implementation of the EU Accounting Directive
The UK Government proposes an increase in small company thresholds but no increase in audit exemption thresholds.
The above proposals have emerged in the BIS Consultation paper "UK Implementation of the EU Accounting Directive, Chapters 1-9". This consultation provides the legal foundations upon which the UK's financial reporting framework is built.
In June 2013, the EU adopted a new Accounting Directive – "EU Directive 2013/34/EU on the annual financial statements, consolidated financial statements and related reports of certain types of undertakings".
This new Directive consolidates, modernises, and updates the previous 4th and 7th company law directives governing this area of regulation. It introduces a building block approach to the statutory financial statements that companies prepare, with increasing levels of disclosure dependent on the size of the undertaking. It seeks to increase the comparability of financial reports across Member States by reducing the number of options available to the preparers of financial statements in respect of recognition, measurement and presentation. Further, the Accounting Directive creates a largely harmonised small company regime and limits, for the first time, the amount of information that Member States are permitted to require small undertakings to place in their annual statutory accounts. However, the effects of this on the UK are limited as we had already implemented many of the options previously available and which form the basis for this regime.
The UK is required to transpose the Accounting Directive into UK law no later than 20 July 2015. However, the UK Government is proposing to take up the option permitting that the changes may first apply to financial years beginning on or after 1 January 2016.
Summary of UK Government Proposals
- Raise the thresholds for determining company size (micro-entity, medium-sized and large) in line with the mandatory thresholds imposed by the Accounting Directive. The turnover and balance sheet total (fixed plus current assets) thresholds would be raised to £10.2 million and £5.1 million respectively. They are currently £6.5 million and £3.26 million respectively;
- Take up the option to maximise the threshold for determining what is a small company and so allow around 11,000 additional companies to access the small company accounting regime;
- Consider if the method for determining thresholds for company size should be amended where "net turnover" is not a relevant factor for a company or where it might be more appropriate to consider the thresholds on a consolidated or aggregated basis;
- Implement changes to comply with the new largely harmonised small company regime - including changes to the mandatory notes to the accounts;
- Consider whether small companies should be permitted to prepare an abbreviated balance sheet and abbreviated profit and loss account;
- Review the exclusion of public companies from the small company regime and the medium-sized company regime;
- Explore the opportunities offered by the option to provide greater flexibility in the layout of the profit and loss account and balance sheet;
- Amend the approach in relation to the writing off of goodwill and development costs as required by the Accounting Directive.
- Require that information on subsidiaries included with the consolidated financial statements is only provided as a note to those statements;
- Remove the requirement for micro-entity companies to prepare a Directors Report;
- Seek views on the interaction of the Accounting Directive with the UK's statutory audit framework; and
- Seek views on the implications of the revised accounting framework for charitable companies.
The UK is required to transpose the Accounting Directive into UK law no later than 20 July 2015. It is proposed to take up the option permitting that the changes may first apply to financial years beginning on or after 1 January 2016 but BIS are inviting views on whether adoption of the new reporting framework ahead of this date may be desirable or practicable. The Government proposes to introduce legislation implementing the Directive early in 2015.
The Accounting Directive determines which companies are within scope of mandatory audit for financial statements. The Directive introduces changes related to audit in three areas:
- The companies within scope of audit, impacting upon the application of the audit exemption;
- The audit report; and
- Group reporting of fees paid for non-audit services.
The Accounting Directive adopts a new approach to what was previously the exemption from the audit requirement for the accounts of small undertakings. Previously the 4th Company Law Directive contained a Member State derogation allowing the introduction of an audit exemption for some or all small undertakings. Instead the Accounting Directive simply excludes all small undertakings, other than those that are Public Interest Entities, from the audit requirement. It is then a matter for Member States to require an audit as a matter of national law in those cases where they consider it appropriate.
The balance sheet and turnover thresholds for small undertakings have been raised. Given the Government's proposals on the implementation of this change for some undertakings that currently are medium-sized, it would be possible to provide an audit exemption to some or all of the current medium-sized companies qualifying as small under the increased accounting thresholds. However, the Government is not proposing to increase the audit exemption thresholds for the small undertakings as part of the initial implementation of the Accounting Directive. This will mean that the balance sheet and turnover thresholds for the small undertakings will differ for the purposes of the small companies regime for accounting purposes and the small companies audit exemption.
The small companies audit exemption in the Companies Act will therefore need to be amended so that it no longer refers back to the thresholds that apply for small company regime for accounting purposes. Instead the audit exemption framework in the Companies Act will have to explicitly set out the current thresholds so that those thresholds continue to apply for the purpose of audit exemption, while the thresholds that apply for the purpose of the small companies accounting regime are increased.
The Government intends to consider in due course the possible increase in the audit exemption thresholds for small undertakings. However this will not form part of the initial implementation of the Accounting Directive or of the Audit Directive and Regulation.
BIS Elects for 'Decoupling' of Small Company Definition and Audit Exemption Thresholds - James Barbour gives an insight into the BIS decision to "consciously uncouple" the audit exemption thresholds from the small company definition.