Audit exemption: The rules one year on
New audit exemption thresholds were introduced 12 months ago, but there is still some uncertainty around how the transitional provisions affect the first year of application. Anne Adrain summarises this, and the other changes, one year on.
For accounting periods commencing on or after 1 January 2016, the audit exemption thresholds for turnover and balance sheet total have been increased to £10.2m and £5.1m, respectively. The threshold for the number of employees remains the same at 50.
As well as meeting two out of the three conditions in the current year, the need to also meet these conditions in the previous year remains (referred to as the two-year rule).
Following the introduction of the Companies, Partnerships and Groups (Accounts and Reports) Regulations 2015, entities with accounting periods commencing on or after 1 January 2016 must apply the revised qualifying conditions as set out below.
The audit exemption test remains that a stand-alone company (ie one which is not a member of a group) must meet the definition of a small company. In summary, this means that it must meet these conditions taking account of the two-year rule (see below), and must not be ineligible.
|New threshold||Previous threshold|
|Turnover||Not more than £10.2 million||Not more than £6.5 million|
|Balance sheet total 1||Not more than £5.1 million||Not more than £3.26 million|
|Number of employees 2||Not more than 50||Not more than 50|
1 Balance sheet total means the sum of all the amounts shown as assets in the balance sheet (ie fixed assets plus current assets) without any deduction for liabilities.
2 Number of employees is calculated by summing the number of persons employed under contracts of service by the company in each month (whether throughout the month or not), dividing by the number of months in the financial year.
The qualifying conditions are deemed to have been met in a year when an entity meets at least two of the three criteria in that year. However, consideration has to be given to the two-year rule (obviously excluding a company’s first year).
The wording of section 382 of the Companies Act 2006 (the Act) was amended by the Small Companies (Micro-Entities’ Accounts) Regulations 2013.
This, however, did not result in a change in substance. The revised wording of section 382 of the Act - “that affects its qualification as a small company only if it occurs in two consecutive years” - is intended to have the same meaning in substance as the previous wording ie:
- (a) if the qualifying conditions are met in that year and the preceding financial year;
- (b) if the qualifying conditions are met in that year and the company qualified as small in relation to the preceding financial year;
- (c) if the qualifying conditions were met in the preceding financial year and the company qualified as small in relation to that year.
This provision is particularly relevant when determining whether a company qualifies for audit exemption in the first year that these new regulations take effect, ie for accounting periods commencing on or after 1 January 2016.
The transitional provisions on first application are that the current year and previous years need to be assessed on the basis of the revised qualifying conditions.
If we assume that a stand-alone company has a year end of 31 December 2016 then the simplest way of applying the transitional rules is to see whether the company satisfies the revised qualifying conditions in both the years ended 31 December 2015 and 31 December 2016.
If it does, then the company will be entitled to take advantage of audit exemption provided it is not ineligible.