Financial Reporting

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The UK Companies Act and Accounts

In the UK, the Companies Act 2006 contains provisions which govern the requirements companies are required to comply with in terms of their accounts and bookkeeping.

This article looks at some of the main provisions and is relevant to students studying F4 ‘Corporate and Business Law’. The next article concerning the Companies Act 2006 will look at the various disclosure requirements.

The Companies Act 2006 repealed and restated most of the statutory provisions regarding accounts and audit for accounting periods commencing on or after 6 April 2008, notably:

• the thresholds for determining whether a company is small or medium-sized have been increased;

• the exemption for medium-sized companies from disclosing turnover in their abbreviated profit and loss account has been removed;

• some technical changes have been made relating to group accounts;

• medium-sized and large companies now have to disclose off-balance sheet arrangements in the notes to their financial statements;

• large companies now have to disclose information concerning transactions with related parties in the notes to their financial statements; and

• the threshold for disclosure of political and charitable donations have been raised from £200 to £2,000.

Small or Medium-Sized Thresholds

A company may qualify as small or medium-sized for a financial year if it satisfies any two of the three conditions under the applicable heading as follows:

Small company

Turnover not more than £6.5 million

Balance sheet total not more than £3.26 million

Employee numbers: 50

Medium-sized company

Turnover not more than £25.9 million

Balance sheet total not more than £12.9 million

Employee numbers: 250

Small group

Turnover not more than £6.5 million net or £7.8 million gross

Balance sheet total not more than £3.26 million net or £3.9 million gross

Employee numbers: 50

Medium-sized group

Turnover not more than £25.9 million net or £31.1 million gross

Balance sheet total £12.9 million net or £15.5 million gross

Employee numbers: 250

Where a company has not prepared its accounts in respect of a 12-month period, the turnover thresholds must be proportionately adjusted in order to establish whether the appropriate conditions have been satisfied. Please note that neither the balance sheet threshold, nor the employee number threshold is affected by longer or shorter accounting periods.

Companies Act 2006 sets out further qualification criteria for determining whether a company qualifies as small or medium in relation to the financial year:

• in a company’s first financial year, it will qualify as small or medium-sized as long as it satisfies the appropriate size conditions above;

• in subsequent years, a company will qualify as small or medium-sized, provided it satisfies the size conditions above in both the year in question and the preceding year. Both years are assessed using the thresholds available to the latest year;

• a company that qualifies as small or medium-sized in one year will be treated the same in the next year, even if it fails to satisfy the appropriate size conditions in the following year. If, however, the company does not satisfy the size conditions in the third year, the company must produce the accounts in a format appropriate to its size.

Medium-Sized Groups 

The exemption for medium-sized groups from preparing consolidated financial statements is withdrawn under Companies Act 2006. Therefore, for accounting periods commencing on or after 6 April 2008, medium-sized groups must now prepare consolidated financial statements.

The above provisions apply to accounting periods commencing on or after 6 April 2008. Accounting periods commencing before this date should comply with the provisions laid down in the Companies Act 1985 and 1989.

Record Keeping

Companies must keep adequate records which are sufficient to allow companies to disclose the financial position with reasonable accuracy at any time. In addition, companies must also ensure that they keep records which will give a ‘true and fair view’ as well as complying with legal requirements. These requirements are contained in the provisions at s386 in Companies Act 2006.

It follows therefore that if a company does not comply with these provisions, then the officers are guilty of a criminal offence unless the officer(s) can demonstrate that they have acted honesty and that the default was excusable.

Section 388 (1) of CA2006 states that records must be kept at a company’s registered office or another location where the director(s) consider reasonable. Again, where a director(s) fail to comply with this requirement, then they are in default and guilty of a criminal offence unless they can demonstrate that they have acted honesty and that the default was excusable.

Private companies must keep accounting records for a period of 3 years and public companies must retain accounting records for 6 years. For the purposes of tax, records must be kept until the latest of:

• 6 years from the end of the accounting period to which they relate; or

• the date on which HMRC no longer have the power to enquire into a tax return; or

• the date on which an enquiry into a tax return is completed.

Accounts

All companies must prepare annual accounts for each financial year and the format and content of these accounts (referred to hereinafter as ‘financial statements’) must comply with the extensive regulatory framework. Under the UK Companies Act a company must prepare:

• a profit and loss account;

• a balance sheet; and

• related notes to the financial statements.

Accounting standards may also place obligations on a company to prepare a cash flow statement (FRS 1) and a statement of total recognised gains and losses (STRGL). In addition, companies are also required to prepare a Directors’ Report.

Company law requires a company to prepare financial statements for a financial year but in the UK – as in most jurisdictions – company accounts must also comply with Generally Accepted Accounting Principles (GAAP). GAAP is derived from a number of sources, including:

• Companies Act 1985 and 2006;

• Financial Reporting Standards (FRS), Statements of Standard Accounting Practice (SSAP) and Urgent Issues Task Force Abstracts (UITF);

• International Accounting Standards (IAS);

• International Financial Reporting Standards (IFRS); and

• Interpretations (SIC-IFRIC Interpretations).

There are also some advisory sources of UK GAAP which include Financial Reporting Exposure Drafts (FREDs), Statements of Principles for Financial Reporting and Statements of Recommended Practice (SoRP).

Companies Act accounts consist of a balance sheet, a profit and loss account and notes to the financial statements. They can also include two further primary statements, being that of the cash flow statement and the statement of total recognised gains and losses.

IAS accounts consist of a statement of financial position, a statement of comprehensive income, a statement of changes in equity, a statement of cash flows and notes to the financial statements.

The ‘True and Fair’ Concept

Under the UK Companies Act, a fundamental principle governing the preparation of financial statements is the requirement to prepare financial statements that give a ‘true and fair’ view of the state of the company’s affairs. This concept is found in s396(2) of CA2006. Company directors are prohibited by virtue of s393 CA2006 of approving accounts which do not comply with this concept. International standards have a similar concept, referred to as ‘fair presentation’.

Going Concern

All financial statements are prepared on the presumption that a company will continue in business. Where the directors consider that a company has no realistic alternative but to cease trading or liquidate the entity, then the going concern basis is deemed inappropriate and the financial statements are then prepared on a ‘break up’ basis. Fixed and long-term assets and liabilities should be reclassified as current assets and liabilities and provisions should be created in respect of anticipated further losses to be incurred up to the date of termination of the business.

Under current UK GAAP, the going concern basis should be disregarded when the business has ceased trading or is in the process of liquidation or at the point that the directors consider the business has no realistic alternative but to cease trading. There is a slight discrepancy between current UK GAAP and international accounting standards because under IAS, the going concern basis can be rebutted when the directors intend to either liquidate the entity or cease trading or have no realistic alternative but to do so.

Prudence

The concept of prudence is central to CA2006. Under this concept there are two factors:

• only realised profits can be included in the profit and loss account; and

• all known liabilities and losses must be recognised that relate to the current or previous financial year.

Accruals Concept

The Companies Act 2006 requires that a company’s financial statements must be prepared on the accruals basis of accounting. The accruals basis of accounting requires companies to account for transactions and events as they occur as opposed to when they are paid. The cash flow statement, however, is not prepared on the accruals basis because, by definition, the cash flow statement must be prepared on a cash basis.

Publication

Every shareholder under s423 of CA 2006 must receive the following:

• the company’s statutory annual financial statements;

• the directors’ report; and

• the auditor’s report (where applicable).

Under the CA2006, documents can be sent by personal delivery or post. In addition, they can also be sent by e-mail provided the recipient has given authority to receive them by this means. There is also the option to publish the above documents on a website, though the recipients must be notified that the documents have been published and the recipients must also have given their permission to receiving the above documents by this method.

Filing Requirements

Companies are obliged to file their statutory annual financial statements, directors’ report and auditor’s report (where applicable) at Companies House under s446 of CA2006. Small and medium-sized companies may file abbreviated financial statements whilst dormant companies may file dormant company accounts.

Companies House has very strict filing deadlines, which are as follows (note the filing deadlines below are pertinent to the Companies Act 2006). Companies reporting under Companies Act 1985 are slightly different.

Private Company

Normal accounts: 9 months from the end of the accounting date.

First financial year: longer of 21 months from incorporation and 3 months from the end of the accounting date.

Public Company

Normal accounts: 6 months from the end of the accounting date.

First financial year: longer of 18 months from incorporation and 3 months from the end of the accounting date.

Where the accounting date has been shortened, then the filing deadline is the longer of the normal cases above and 3 months from filing the notice of change at Companies House.

Companies that file late will be subject to financial penalties levied by Companies House which are as follows:

Private Company Public Company

1 month or less £150 £750

More than 1 month up to 3 months £375 £1,500

More than 3 months up to 6 months £750 £3,000

More than 6 months £1,500 £7,500

As you can see the consequences for not filing on time are quite serious. The above penalties apply to accounts delivered late on or after 1 February 2009 regardless of whether or not they are prepared under the Companies Act 2006.

The new filing regulations also introduce a repeat offender penalty. The way this works is by doubling a fine if a company files its accounts late 2 years in a row. However, this new regime will not be imposed where a company has failed to file 2 sets of accounts under CA 2006, so this regime will not arise until early in 2011.

Conclusion

This article has considered some of the more prevalent changes within Companies Act 2006. The next article relating to CA2006 will consider the disclosure requirements in a set of financial statements.

Steve Collings FMAAT ACCA DipIFRS is audit and technical manager at Leavitt Walmsley Associates and a partner in AccountancyStudents.co.uk. He is also the author of ‘The Core Aspects of IFRS and IAS’ and lectures on financial reporting and auditing issues.