Small company abbreviated accounts: A regulatory burden or a vital requirement? (2011)

The findings of this research report are relevant to the debate surrounding recent European Commission (EC) proposals that would permit Member States to simplify accounting obligations for the smallest companies.

Specifically, the Commission initially soughtto exempt micro-entities, defined as companies not exceeding two of three criteria (a balance sheet total below €500,000, annual turnover below €1 million, and average employment of 10) from the Accounting Directives.

The UK government subsequently indicated a willingness to use the micro-entity exemption to reduce the burdens on micro-companies. Under a new compromise package (announced on 31 May 2011), the EC has now proposed a reduction in the thresholds to a balance sheet total below €250,000, annual turnover below €500, 000 and average employment of 10.

This new package proposes simplified rules for profit and loss and balance sheet reporting requirements, with a requirement for simplified balance sheet information to be filed.

The proposals will be considered by the European Parliament and have been welcomed by the UK government. Limited companies in the UK are required by law to prepare financial statements giving a true and fair view of the company's financial performance and financial position for members and file a copy, in full or abbreviated form, at Companies House.

Companies required to prepare full accounts must provide a balance sheet (statement of financial position) and a profit and loss account (income statement). Small companies filing abbreviated accounts must register an abbreviated balance sheet and related notes, but not a profit and loss account or other financial statements required of large companies.

Little evidence is available, however, regarding the views of preparers and, particularly, users of the utility of abbreviated accounts.

To contribute to the policy debate, this study addresses the following questions: 

• Why do small company directors file abbreviated accounts?
• Who uses small company abbreviated accounts, and for what purposes?
• What are the advantages and disadvantages of abbreviated accounts to preparers and users?
• To what extent do users rely on the abbreviated accounts and what other sources of information do they use?
• What role do accountants play in the preparation, and use, of abbreviated accounts?
• What are the advantages and disadvantages to preparers and users, if the abbreviated accounts option was abolished and small companies were (a) obliged to file full accounts or (b) exempt from the statutory requirement to file accounts?