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BIS consults on UK implementation of the EU Accounting Directive

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29 Aug 2014

The Department for Business, Innovation and Skills (BIS) has issued a consultation on the UK implementation of the EU Accounting Directive, which consolidates existing legislation on financial reporting and aims to reduce the regulatory burden on smaller companies.

The European Union published the EU Accounting Directive 2013/34/EU (‘the Directive’) on 26 June 2013, which amended Directive 2006/43/EC of the European Parliament and of the Council and repealing Council Directives 78/660/EEC and 83/349/EEC. The Directive aimed to simplify the accounting requirements for small companies and improves the clarity and comparability of companies' financial statements within the Union. The UK government is now seeking views on the proposed implementation of the accounting and auditing provisions of the Directive into UK law.

The consultation:

  • proposes to increase the thresholds for small and medium-sized companies. The thresholds for determining what is a small company will be raised to the top end of the range permitted by the Directive. A company will be small if it meets at least two of: total assets <£5.1m (up from £3.26m), turnover <£10.2m (up from £6.5m), <50 employees (unchanged). A company will be medium-sized if it meets at least two of: total assets<£18m (up from £12.9m), turnover <£36m (up from £25.9m), <250 employees (unchanged). BIS consider that this would allow approximately 11,000 additional companies to access the small company accounting regime;
  • implements changes to comply with the new largely harmonised small company regime whereby the Directive prevents member states from requiring more than a minimal set of mandatory notes to the financial statements unless additional disclosure is necessary for a true and fair view. In practice, this means that many small companies will present fewer notes in future;
  • asks whether small companies should be allowed to only prepare abbreviated accounts for shareholders; currently they must prepare full accounts for shareholders and may file abbreviated accounts. The government believes the question of the level of detail should be one for shareholders;
  • asks whether the existing restrictions - whereby the small and medium-sized company regimes cannot be adopted by ineligible companies and members of ineligible groups - should be amended. The Directive will continue to require that public companies (in the UK a PLC) with securities admitted to trading, credit institutions and insurance companies are ineligible. BIS are asking whether they should maintain the other classes of ineligibility including being an unlisted public company (in the UK a PLC), MiFID investment firm, UCITS management company, or e-money issuer and, in the case of the medium-sized limits, the majority of other regulated UK financial services companies;
  • explores the opportunities offered by the option to provide greater flexibility in the layout of the profit and loss account and balance sheet. In particular, BIS is seeking views as to whether it would be possible to adopt International Financial Reporting Standards (IFRS) formats, removing a further complexity for companies adopting Financial Reporting Standard (FRS) 101;
  • amends the approach in relation to the writing off of goodwill and development costs. In the rare situations where the useful economic life cannot be reliably estimated, the government is proposing that they should be amortised over a maximum of ten years (the top end of the range permitted by the Directive) – assuming this change is made, the FRC will consider amending Financial Reporting Standard (FRS)102 which currently includes a limit of five years;
  • proposes removing the option whereby a company preparing consolidated financial statements has a choice to only list the principal subsidiaries in the notes to the financial statements and provide a full list with the annual return. Problems with compliance for companies taking this option have been identified by BIS as part of the Red Tape Challenge (link to UK government website); and
  • proposes that micro-entity companies should no longer have to prepare a Directors’ Report; they are already exempt from filing this.

The consultation paper also:

  • asks whether the small company audit exemption thresholds should be changed at the same time as the small company accounting regime thresholds. The government’s current view is that they should not, and are likely to be consulted on as part of implementing the EU Audit Reform regime;
  • proposes making a change to the statutory contents of the audit report from the amended EU Statutory Audit Directive at the same time as these accounting changes. Auditors must state whether, based on the knowledge obtained during their audit, the directors’ report and any strategic report (a) comply with applicable law and (b) contain any material misstatements; and
  • asks questions about the application of the small companies regime to charitable companies. The government is proposing that, as such companies are outside the scope of the Directive, they will not be subject to the restriction on which notes to the financial statements may be required by law. This would allow the law to continue to require companies with the Charities Statement Of Recommended Practice (SORP).

The Accounting Directive must be incorporated into UK law no later than 20 July 2015, but permits that the changes may first apply for financial years beginning on or after 1 January 2016.

The Financial Reporting Council is expected to consult in due course on the changes to UK financial reporting standards that will be required as a result of the implementation of the EU Accounting Directive in the UK.

Comments are invited by 24 October 2014.

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