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