Big changes to abbreviated accounts coming
Accountants will have heard by now that the Companies Act 2006 has been revised for small and micro-entities as a result of the transposition of the EU Accounting Directive into UK legislation. This will have quite a significant effect on the way that small companies prepare their annual reports and the revised Companies Act 2006 comes into mandatory effect for accounting periods commencing on or after 1 January 2016.
The vast majority of small companies file abbreviated accounts with Companies House as permitted in section 444 of the Companies Act 2006; specifically section 444(3A) said that a small company preparing Companies Act accounts may deliver to the registrar:
a copy of a balance sheet drawn up in accordance with the regulations made by the Secretary of State; and
omit such items from the profit and loss account as may be specified by the regulations.
For companies subject to the small companies’ regime, these accounts are currently referred to as ‘abbreviated accounts’. Section 444(3A) has been repealed in the revised Companies Act 2006 and the filing requirements for a company subject to the small companies regime are outlined in section 444(1)(a) and (b).
Section 444(1) of the Companies Act 2006 has been amended to say that the directors of a company subject to the small companies regime:
must deliver to the registrar for each financial year a copy of the balance sheet drawn up as at the last day of that year; and
may also deliver to the registrar:
- a copy of the company’s profit and loss account for that year; and
a copy of the directors’ report for that year.
Readers may have noticed the (extremely) subtle change in wording in the revised Companies Act 2006 from being able to file ‘a’ copy of the balance sheet to having to file a copy of ‘the’ balance sheet which is drawn up as at the last day of the accounting period.
The legislation says that the company may deliver a copy of the company’s profit and loss account and directors’ report for the year and where the company chooses to do this (which will be quite rare in practice as most companies will only want to file the bare minimum), section 444(2) says that a copy of the auditor’s report should be delivered (except where the company has taken advantage of audit exemption) and any directors’ report.
So what does this mean in practice? The concept of abbreviated accounts is abolished for an accounting period commencing on or after 1 January 2016. Section 444(1) offers no choice where the balance sheet is concerned; that must be filed with the registrar together with the associated balance sheet notes. The company can choose to file the profit and loss account as section 444(1)(b) says that the company may also deliver the profit and loss account and directors’ report for the year to the registrar. In practice, many companies will choose not to file the profit and loss account and simply file the balance sheet, which will be the same balance sheet as that prepared for the shareholders, whether abridged (see later) or not. In addition, the notes which accompany the balance sheet will also be filed.
Filleted financial statements
The phrase ‘filleted financial statements’ or ‘filleted accounts’ relates to the financial statements which are submitted to Companies House. The term ‘filleted’ means that the profit and loss account and related notes have been stripped out of the financial statements and these filleted financial statements will then be filed with the registrar. Therefore the registrar receives the balance sheet and the balance sheet notes. In practice there may be more disclosure within the notes submitted to the registrar under the new filing regime than was the case for abbreviated financial statements because of the legally required disclosures for a small company that are needed in the accounts following the transposition of the EU Accounting Directive into company law. For example, the nature and financial effect of material non-adjusting post balance sheet events is a legally required disclosure and it follows, therefore that as this disclosure relates to the balance sheet, this disclosure note will be filed as part of the small company’s financial statements. In addition, any additional disclosures which relate to the balance sheet that are needed in the financial statements to give a true and fair view will also be filed.
Where a profit and loss account is not filed, the small company’s balance sheet delivered to the registrar must disclose that fact to comply with section 444(5A)(a). If the small company is subjected to an audit, the notes to the balance sheet must:
state whether the auditor’s report was qualified or unqualified;
if the report was qualified, disclose the basis of the qualification and reproduce any statement under section 498(2)(a), if applicable;
if the report was unqualified, but contained an emphasis of matter paragraph (for example because of going concern issues), this emphasis of matter paragraph should be included; and
provide the name of the auditor and (where the auditor is a firm) the name of the person who signed the auditor’s report as senior statutory auditor.
In respect of providing the name of the auditor, if the conditions in section 506 of the Companies Act 2006 apply (circumstances in which names may be omitted), the notes to the balance sheet must state that a resolution has been passed and notified to the secretary of state in accordance with that section.
Abridged financial statements
The concept of ‘abridged financial statements’ was introduced into the revised Companies Act 2006. Abridged financial statements allow certain items in the statutory formats to be combined. For example, an abridged profit and loss account will start at gross profit (or loss) rather than turnover as turnover, other income and cost of sales will be combined in the abridged profit and loss account. The main impact of an abridged set of financial statements will be to reduce the disclosure notes because abridged financial statements do not use Arabic numerals from the statutory formats. However, this is complicated by the fact that FRS 102 at paragraphs 1AA.2 and 1AB.2 requires directors to refer to paragraph 1A.16 and provide any additional disclosures that are considered necessary to give a true and fair view (e.g. disaggregating the information in the balance sheet and profit and loss account). Note – there is still a legal requirement for small companies to prepare financial statements which give a true and fair view.
In terms of preparing abridged financial statements all the shareholders must unanimously agree to the abridgement. There is no majority vote, so if one shareholder does not agree to an abridged set of financial statements being prepared then the company simply cannot prepare abridged accounts. The agreement is an annual process because the shareholders can only agree to abridged financial statements being prepared in respect of the preceding financial year and hence one agreement will not cover all subsequent accounting periods.
In respect of the filing requirements, if the company has prepared an abridged balance sheet or profit and loss account, section 444(2A) of the Companies Act 2006 requires the directors to deliver a statement to the registrar that all members have consented to the abridgement.
Micro-entity filing issues
Where a micro-entity is concerned, such entities should file the balance sheet together with the notes, where applicable, at the foot of the balance sheet as a minimum. There is no requirement to prepare a directors’ report for a micro-entity for accounting periods commencing on or after 1 January 2016, so this need not be filed with the registrar. A micro-entity also does not have to file the Format 2 profit and loss account.
The changes to the filing requirements have been incorporated within the revised Companies Act 2006 and the concept of abbreviated financial statements no longer applies. Some material published refers to abridged financial statements as abbreviated financial statements, but these are not the same as abbreviated financial statements that have traditionally been submitted to the registrar.