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Implementing the Companies Act for small businesses

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4th Aug 2009
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Steve Collings summarises key aspects of the Act that will affect practitioners dealing with small clients.

The Companies Act 2006 (CA06) has received much publicity within the profession and as it applies for accounting periods commencing on or after 6 April 2008, it is now beginning to bite – especially with April 2009 year ends being prepared. This article looks at the practicalities of the CA06 and how it will typically affect small companies who adopt FRSSE as well as revisiting some key areas. 

I will also revisit the area of small company financial reporting problems and the issues that the QAD and ACCA seem to be picking up on the most.

CA06: The major issues

Under CA06, the accounting provisions are dealt with in part 15 and the auditing provisions are dealt with in part 16. The sections covering accounting and auditing are sections 380 to 539.

The major issues affecting preparer’s of accounts for small companies are as follows:

  • An increase in small company thresholds
  • Medium-sized groups now require an audit
  • A reduction in filing deadlines
  • Directors are now prohibited from signing accounts that are not ‘true and fair’
  • Directors' transactions

Small company thresholds

The new company thresholds for small- and medium-sized companies are as follows:

  < Turnover Balance sheet
(gross assets)
No. of employees
Small company £6.5m £3.26m 50
Small group

£6.5m net

£3.26m gross

£3.26m net

£3.9m gross

50
Medium-sized company £25.9m £12.9m net 250
Medium-sized group

£25.9m net

£31.1m gross

£15.5m gross 250

Where references to ‘net’ and ‘gross’ are made this is in relation to intra group trading. Gross means that intra group sales have not been eliminated; net means that they have been eliminated.

Be careful!

We all know that size limits determine whether a business is deemed a ‘small’ company, and therefore eligible for reduced disclosure. A company must satisfy two out of the three criteria above (turnover, gross assets and employee numbers) for two consecutive years before they can be classed as small. Preparers must understand that where the size limits are increased (as in CA06), they must apply the new thresholds to the comparative year to see if they still qualify as small. 

In addition, preparers must also understand that the exemption from audit test is not the same as the test for determining whether a company is small or not. In order to qualify for audit exemption a company must:

  • Qualify as a small company
  • Have turnover of less than £6.5m
  • Have gross assets of less than £3.26m

Any one breach of the above would render the company subject to audit. In addition, dependant on the company’s articles of association, it could be that a statutory audit is required. If a requirement for audit is simply because of the articles, then the company could be advised to alter its articles by special resolution.

Medium-sized group exemption

Under the previous Companies Act, a medium-sized group was exempt from preparing consolidated financial statements. The CA06 now requires that a medium-sized group must prepare consolidated financial statements. 

Reduction in filing deadlines

The deadline for filing abbreviated financial statements at Companies House has been reduced from 10 months to nine. New filing penalties were also brought into force on 6 April 2008 but affect accounts filed after 1 February 2009. These new penalties also apply to accounts that are filed under the Companies Act 1985, so don't think that just because a client with a July 2008 year end (for example) who is filing late anyway will escape the new penalty regime; they won’t!

Care must also be taken because the filing penalties are doubled when two consecutive sets of financial statements are filed late under CA06. Details of the penalties (which are now substantial) can be found on the Companies House website. It is definitely worth having a timetable for limited company jobs to ensure financial statements are completed in good time.

Directors’ responsibilities: True and fair accounts

Under s.393 CA06, the directors of a company must not approve financial statements that do not give a true a fair view. Previously these provisions were contained within the directors' fiduciary duties. However, what this essentially says is that all financial statements should not have a qualified auditor’s report attached to them unless, of course, for some specific reason (for example the auditors not attending the stock take where stock is material).

For example, where the audit firm issues an adverse opinion (which says that the financial statements do not give a true and fair view) and the directors approve these financial statements, then there is a breach of s. 393 CA06.

Directors' transactions

This is going to cause mayhem in the profession where directors’ loan accounts always remain overdrawn! We all knew directors transactions as ‘loans, quasi-loans, credit transactions and guarantees’. They are now termed ‘advances, credit and guarantees’. 

Previously, where the directors entered into transactions with the company (for example drawing on their current accounts) the accountant would disclose the balance of the directors loan account at the start of the year, the balance at the end of the year and the maximum amount outstanding during the year. This is no longer the case, merely because s.413 of CA06 does not define ‘advances, credit and guarantees’, so more disclosure is required where the loan account becomes overdrawn. 

What does this mean?

Here’s the bad news: rather than disclosing opening balances, closing balances and maximum balances, accountants are now required to disclose:

  • Every transaction in the year which results in the directors loan account becoming overdrawn
  • The amount
  • The interest rate
  • The conditions attached
  • Any amount(s) repaid
  • Total advanced in the year
  • Total repaid in the year

Until an amendment to s.413 can be made, this is what is required under the 2006 Act (don't shoot the messenger!).

Other matters of interest

There are a couple of other matters which could be of interest to practitioners dealing with small companies. 

1.  Abbreviated accounts

Small companies have an option of filing abbreviated accounts or just filing a balance sheet with the related notes.  Be careful with the wording here.

If you are filing abbreviated accounts then you must make a statement on the balance sheet that they have been prepared in accordance with the special provisions relating to small companies within part 15 of the Companies Act 2006.

If you are filing just a balance sheet with the related notes, then the statement must say that the accounts have been delivered in accordance with the special provisions relating to small companies within part 15 of the Companies Act 2006. 

2.  FRSSE

This section is covered in my next article relating to financial reporting problems. Preparer’s of financial statements for accounting periods commencing on or after 6 April 2008 should be referring to FRSSE (effective April 2008). For accounting periods commencing before 6 April 2008, you should continue to use FRSSE (effective January 2007).

Steve Collings FMAAT ACCA DipIFRS is the audit and technical manager at Leavitt Walmsley Associates Ltd and a partner in AccountancyStudents.co.uk. He is also the author of ‘The Core Aspects of IFRS’ which is due to be published in August 2009
 

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Replies (7)

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avatar
By JSJ54
18th Aug 2009 08:35

Two questions, Steve, and thanks for a very useful article
1. Do you have any idea when the amendment to s413 will be made? I don't want to contemplate what will happen in the meantime!

2. I can't see the difference between the two reports for abbreviated accounts.

Thanks once again.

Thanks (0)
collings
By Steven Collings
18th Aug 2009 19:06

CA06
Hello,

At the moment I do not know when (and indeed if) an amendment to s.413 will be made, but I will keep an eye out for it!

Re the abbreviated financial statements - if you are filing normal abbreviated financial statements then the statement at the foot of the balance sheet must say that they have been "prepared" in accordance with the special provisions relating to small companies within part 15 of the CA06.

If you are simply filing a balance sheet with related notes then the statement must say that the accounts have been "delivered" in accordance with the special provisions relating to small companies within part 15 of the CA06.

The difference is merely between "prepared" and "delivered". The article should have had these two words in bold to show the difference.

Kind regards

Steve

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By JSJ54
19th Aug 2009 08:16

Thanks Steve
The Government does appear to be doing something assuming awareness of the problem www.berr.gov.uk/files/file52471.pdf is the same as taking action!

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By klmanagement
23rd Sep 2009 04:34

Behind lower walls

I refer to your article on the CA06.

In Malaysia, the Companies Act (revised in the '00 years) is more or less the same, almost like a duplicate but the matter on hand is much smaller.

"In order to qualify for audit exemption a company must:

Qualify as a small companyHave turnover of less than £6.5mHave gross assets of less than £3.26m"

We do it differently here, of course. With <RM1 million in revenue or just a plain Limited Company will be qualified FOR audit. =)

-- http://www.klmanagement.com.my/ KL Management Services (NF0279) is a Chartered Accountant firm in Malaysia, and is one of the only three (3) firms in Malaysia qualified and connected enough to provide full-fledged CFO services from large multinationals t

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By AndreaTu7
30th Sep 2009 12:51

Abbreviated Accounts
For filing abbreviated accounts, the reference to part 15 of CA06, does this now replace the previous reference to part VII of the CA85?

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By IanBurgess
14th Oct 2009 09:37

Company Secretarial Software

It is probably a good time to computerise a practice's company secretarial procedures for maintaining clients' statutory books in order to save time and ease compliance.

Take a look at PC Share Register Plus, company secretarial software at www.bhis.co.uk

Not only is it very easy to use, but it has the ability to check that your data matches that at Companies House right down to the director/secretary/member level and can even import this data from Companies House to populate or correct your records. There are some videos that show this in action at:

Importing company data from Companies House: http://www.formsonline.info/videos/ImportCompany/ImportCompany.html

Updating company data from Companies House: http://www.formsonline.info/videos/UpdateCompany/UpdateCompany.html

It also has an innovative feature called "Authority2file" which makes the whole process of obtaining a client's authority to file a form completely paperless and automated: http://www.bhis.co.uk/authority2file.htm
 

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By yeboyye
10th Nov 2010 17:01

CA 2006 s413

Steve, any sign of an amendment yet?  I had forgotten about this article but came across it again the other day.

Is there any big difference between Abbreviated Accounts and a Balance Sheet with related notes?

 

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