Companies Bill 2016
The Companies (Accounting) Bill 2016 was finally published on 5 August 2016. This Bill transposes the EU Accounting directive 2013/34/EU which was expected to be enacted in mid July 2015. Note that this is currently at Bill stage and no time period has been given as to when this will be enacted into law. The contents of this Bill cannot be utilised until it is enacted into law. It is hoped this will be in the near future so that accountants and companies can finally utilise Section 1A of FRS 102 and FRS 105. The principle differences from the existing legislation are:
- Expanded definition of whether a lower company is a subsidiary company of a superior company to include persons acting in their own name or on behalf of the superior company
- An increase in the current size thresholds for small and medium companies together with the introduction of thresholds for a medium group and micro company thresholds. See existing and new proposed thresholds below:
- A reduction in size criteria for holding companies exempt from preparing consolidated financial statements. Under the proposed Bill all companies other than small or micro group’s (that can avail of the small or micro companies regime) must prepare consolidated financial statements. Currently all medium sized groups avail of this exemption which will not be permitted under the proposed Bill.
- An increase in the number of groups and small companies that can avail of the audit exemption and/or file small company abridged financial statements if applicable as a result of the increased thresholds.
- Once the small company definition is met then that company can qualify for the small companies regime which is not currently included in existing law. This will allow companies to adopt Section 1A of FRS 102 which cannot currently be adopted by Irish companies. Section 1A of FRS 102 requires the financial statements to be prepared using the recognition and measurement requirements of FRS 102 but to use the disclosure requirements of the Companies Act small companies regime as opposed to the more detailed disclosure requirements of each of the Sections within FRS 102.
|However as the financial statements are still required to show a true and fair view, directors of companies will still have to consider whether additional disclosures on top of the Companies Act disclosures are required to show the true and fair view. Once Section 1A of FRS 102 can be claimed it will allow entities to claim exemption from the requirement to prepare a cash flow statement.
Although not required by company law Section 1A encourages entities to include the below in order to ensure the financial statements show a true and fair view:
- Once the micro company definition has been met then that company qualifies for the micro companies regime. Once the company applies the micro companies regime it must then apply the financial reporting standard ‘FRS 105’. FRS 105 cannot be applied currently as the micro companies regime is not included in existing company law. FRS 105 does not require any further disclosures in addition to those required by Company Law. Under FRS 105:
|This is a very simple standard and the financial statements will just include:
- No business review required to be included in the directors report for small companies applying the small companies regime.
- A holding company of a group must meet the medium/small group requirements/thresholds in order for a small/medium holding company to be able to be classified as a small/medium company for company law purposes. This differs from existing legislation as even where a small company does not meet the definition of a small group and consolidated financial statement are not prepared it can apply some of the exemptions available to small companies in its own right if the company itself meets the definition of a small company (e.g. the ability to file small company abridged financial statements).
- The ability for medium companies to file abridged financial statements will no longer be available.
- Companies that apply the micro companies regime in the preparation of financial statements are deemed to show a true and fair view. No further disclosures are required.
- More judgements with regard to the notes to be included in the abridged financial statements of small companies as the new section adds the requirement that; any other notes should be included as deemed necessary in order to show a true and fair view. Current legislation provides very specific guidance on what notes to include.
- Introduction of three new schedules dealing with the format requirements for companies applying the small and mirco entities regime; Schedule 3A for small companies regime, Schedule 3B for the micro companies regime and Schedule 4A for small group companies applying the small companies regime.
- Small changes to the existing Schedule 3 of Companies Act 2014 which deals with the accounting principles, format and content of financial statements. Examples of changes include: no need for a comparative fixed asset note, accrued income to be disclosed separately in the notes, wording in the profit and loss account is to exclude the words ‘on ordinary activities’
- Ability to apply the IFRS formats to the profit and loss and balance sheet
- Ability for the profit and loss account to be referred to as an ‘income and expenditure account’ if applicable.
- In the consolidated financial statements where exemption is claimed not to disclose the parent entity profit and loss account, the profit/loss must be disclosed in the face of the entity balance sheet (currently disclosed in the notes).
- Where first annual return is late the company is not excluded from claiming audit exemption (currently only permitted by concession by the CRO).
- The Bill proposes that the Irish Auditing and Accounting Supervisory Authority (IAASA) shall be allowed to attach terms and conditions to an authorisation of certain categories of liquidator.
- The Bill proposes to abolish “non-filing structures” in their current form for Irish unlimited companies by expanding the definition of designated ULCs to include additional corporate structures.
- The Bill proposes to insert a new Part 26 ‘Payments to Governments’, containing the Directive’s requirements with regard to preparing and filing with the CRO, by large companies, large groups and public interest entities active in the mining and extractive industries, annual reports on payments made to governments.
- The Bill proposes to obligate auditors to report on the corporate governance statement to ensure information is consistent, whether material misstatements have been noted and that the report complies with the requirements of the Act
What do accountants need to know/do?
Review their client listing to assess which companies can apply Section 1A of FRS 102 and which can apply FRS 105 and plan the practice schedule accordingly.
Advise clients of the additional choices available with regard to accounting standards (FRS 105/Section 1A FRS 102) on enactment of this Bill and the benefits this will provide with regard to the reduced disclosure requirements.
For Section 1A of FRS 102 advise the directors of the decisions that will be required to be made by them in assessing whether additional disclosures are required on top of the Company law requirements in order to show a true and fair view.
Advise holding companies of medium group’s that currently claim exemption from preparing consolidated financial statements on the basis of size, of the reduced size thresholds with regard to this exemption. The thresholds will now be reduced to the new small group thresholds as detailed above.
Accountants that have prepared financial statements in accordance with the FRSSE ‘effective 1 January 2015’, FRS 102 or old GAAP if still applicable for the previous period end will need to assess the transition adjustments required on transition to FRS 105 to derecognise certain assets and liabilities due to the simplistic nature of this standard.
Advise clients of the benefits and drawbacks of adopting the micro companies regime so that directors of companies really appreciate the implications of choosing FRS 105 and the micro companies regime. Some of the implications are:
- If the company increases in size the company will then no longer meet the requirements of the micro companies regime and as a result will have to go through the pain of transitioning to a new accounting standard all over again;
- Given the simplicity of the financial statements, for an external party reviewing these financial statements, they may not provide enough detail e.g. banks, potential customers.
- The company’s balance sheet only shows cost and does not allow entities to show fair values.
Advise clients who are currently classified as a medium company on the basis that they do not meet the current small company thresholds/requirements of the likelihood that the thresholds will be increased which will therefore provide those entities with the ability to claim audit exemption and file small company abridged financial statements (therefore resulting in less information being available to the public in the CRO) on the adoption of the new act assuming the company meets the increased threshold requirements and the requirements in the proposed S.280A-280B.
Advise clients of the impact S.280B may have on holding companies that when taken together do not meet the requirements of a small group. If the small group exemption is not met then the holding company cannot be considered a small company for the purposes of filing abridged financial statements. As a result full financial statements must be filed with the CRO. Under existing company law such a holding company can apply the exemptions for abridged financial statements.
As a result of the increased exemptions for a small company and the possibility of claiming audit exemption, review the client listing to assess which companies can claim audit exemption on adoption of the Bill.
Advise clients who prepare consolidated financial statements of the proposed requirement to disclose the profit/loss of the parent entity on the entity balance sheet.
Be aware of the proposed exemptions from the disclosure of directors remuneration under S.305, 305A, 306 and transactions and arrangements with directors under S.309 (other than amounts owed by directors to the company as this will still require disclosure under S.307 & S.308) for companies that qualify for the micro companies regime therefore reducing the amount of information visible to the public.
Advise clients who are likely to fall within the new medium company thresholds that the abridgement option to only disclose results from the gross profit line in the profit and loss account will no longer be available and therefore the turnover and cost of sales figures will now need to be disclosed on enactment of the Bill.
Advise clients (that have companies that apply the small companies regime) of the additional judgements that will need to be considered by directors when deciding what notes to include in the small company abridged financial statements given the fact that the new Bill requires consideration of other notes to be included which are not specifically mentioned in Section 353 in order to show a true and fair view.
Advise group’s that currently provide a Section 357 guarantee (to allow the subsidiary to file the company’s consolidated financial statements instead of its own) of the fact that the parent will now have to guarantee not only the liabilities recognised in the balance sheet of the subsidiary at the balance sheet date as is currently required but also commitments of the subsidiary at that date that were not required to be recognised.
Be aware of the change in some formats to the profit and loss account and balance sheet as included in the revised Schedule 3 (applicable to all companies other than those companies that apply the small or micro companies regime), the new Schedule 3A (applicable for the small companies regime) and the new Schedule 3B (applicable for the micro companies regime).
Advise clients currently availing of non-filing structures of the proposed changes to the definition of a designated ULC and the impending requirement to file accounts with the CRO that were previously not filed under old legislation.
Advise clients currently operating in the mining and extractive industries of the pending requirements under Part 26 of filing payments made to governments with the CRO.
Ensure auditors are aware of their increased reporting requirements on the corporate governance statement to ensure information is consistent, whether material misstatements have been noted and that the report complies with the requirements of the Act.