Overview of Statements
Financial statements must be prepared in accordance with the requirements of Schedule 3 and 4 of the Companies Act, or in accordance with International Financial Reporting Standards and the relevant requirements thereunder. The profit and loss account and the balance sheet and their statutorily required notes are the financial statements under the 2014 Act.
The 2014 Act refers to “financial statements” in place of “accounts”. It refers to statutory financial accounts, to distinguish financial accounts which are prepared solely to comply with the Companies Act and others. Part 6 of the Companies Act, 2014 restates the provisions in relation to the financial statements to be prepared by companies, the periodic returns to be made to the CRO and the audit of financial statements.
All companies must keep books of accounts. The profit and loss account and the balance sheet (the financial statements) are prepared from the underlying books of account, which reflect the company’s transaction in the relevant period.
Companies must prepare an annual profit and loss account, balance sheet and directors’ report and procure an auditors’ report. The legislation sets out the required format of the accounts and notes under the Companies Act framework. The statutory framework and format or an alternative approved financial reporting framework must be employed.
Reporting and Filing
The financial statements together with a directors’ report and auditor’s report (unless exempt from audit), based on the accounts must be laid before the general meeting. The information to be contained in the accounts is specified by Companies Act. There is an overriding requirement that the accounts give a true and fair view of the company’s business, assets and liabilities.
Auditors are required to report to the members on the profit and loss account and balance sheet. There is an exemption from the requirement for audit for certain smaller-scale companies. The auditors must comment on whether the accounts represent a true and fair view of the profits income and expenditure etc., in the case of a profit and loss account and the company’s assets and liabilities in the case of the balance sheet.
The directors of a small company or a medium sized company may prepare an abridged balance sheet for filing in the CRO. The legislation defines the extent of the abridgement.
The directors of a medium-sized company may prepare an abridged balance sheet. This requires more information than applies in the case of a small company. A full balance sheet is still required to be disclosed at the general meeting. A small company need only present an abridged balance sheet to its members and annex it to its annual return.
True and Fair View I
The directors of a company shall not approve the financial statements (prepared for the purposes of the Act), unless they are satisfied that they give a true and fair view of the assets, liabilities and financial position, as at the end of the financial year, and profit or loss, for the financial year—
- in the case of the financial statements of the company alone (as distinct from the company and its subsidiary undertakings, if any, taken as a whole); and
- in the case of the company’s group financial statements, of the company and all the subsidiary undertakings included in the consolidation taken as a whole, so far as concerns the members of the company.
The statutory auditors of a company, in performing their functions under the Acts in relation to the company’s statutory financial statements, must have regard to this directors’ duty
True and Fair View II
The requirement that accounts give and a true and fair view is overriding. Following literally, the schedules and forms of the legislation or the alternative framework, may not necessarily be enough to provide a true and fair view. The notes to the accounts are required to explain departures from the standard rules and formats.
Accounting Standards provide in detail, in relation to what is required in various types of case, in order to give a true and fair view. Accountants, in the preparation of accounts and auditors, have professional obligations to apply and observe the requisite accounting standards and ensure that any departures are made, only when and to the extent necessary.
In practice, businesses prepare statements of income and expenditure, balance sheets and other accounts on an ongoing basis, in order to enable management to determine the current trading and financial position of the business. The management accounts are not statutory accounts. They are usually produced in the same broad format as the statutory accounts, in accordance with accountancy practice and principles.
Management accounts may be prepared for a range of purposes. They may be adjusted to meet the needs of the business best. They may act as a means of measuring the profitability of departments or products. They may be used to apportion and control costs. They may be used to assist in pricing in complex cases.
Traditionally, books of account were kept in paper form. They may now be kept in documentary or non-documentary form. They must be capable of reproduction in a permanent form.
Requirements for Accounts I
The books of accounts must correctly record and explain the transactions of the company. They must enable the financial position of the company to be determined at any time with reasonable accuracy. They must enable the directors to ensure that the statutory accounts comply with the requirements of the Companies Act. They must enable the statutory accounts of the company to be audited properly.
The accounts must give details of the receipt and expenditure of monies for the relevant periods. They must give an account of the assets and liabilities of the company. They must give details of the company’s business including all goods and materials purchased, sold and supplied. They must give details of stock.
The balance sheet and profit and loss statement must be signed by two directors. They may not be circulated, unsigned. A summary may be issued unsigned.
Requirements for Accounts II
A company which fails to comply with the above obligations and any officer in default is guilty of Category 2 offence. Directors who fail to take reasonable steps to ensure compliance with the obligation to keep accounts may be liable on summary conviction to imprisonment for up to 12 months or a fine or both.
In some circumstances, the directors can be made personally liable for the company’s debts where the failure to keep accounts has impeded the winding up. In considering whether to impose personal liability, the court will have regard to the extent of the loss caused by the failure to keep the requisite accounts.
It is a defence to prove that defendant had reasonable grounds for believing that a competent and reliable person was charged with the duty of ensuring that the obligations were complied with and that the latter person was in a position to discharge the duty.
Accounting Conventions and Standards I
The Companies Act gives legal effect to certain basic accounting principles. This includes the following
- that accounts are prepared on the basis that company shall continue into to trade (as a going concern);
- that accounting policies should be applied consistently in the accounts and over time;
- prudence (include realised profits only, anticipate liabilities by provision for and recognition of losses early);
- take account of all income and charges for the year;
- determine the value and extent of each asset and liability separately;
The 2017 Act reaffirms that assets must be both presented and accounted for in accordance with their substance over legal form. This follows accounting developments as reflected in financial reporting statements and standards. It provides that the Companies Act schedule 3 requirements do not apply to matters/items which are not material for the purpose of giving a true and fair view of the requisite matters.
This gives expression to the materiality concept which has long since been central to accounting practice. Material is defined as the status of information where its omission or misstatement could reasonably be expected to influence decisions that users make on the basis of the financial statements of the company. The materiality of individual items is to be assessed in the context of other similar items.
Accounting Conventions and Standards II
Statements of Standard Accounting Practice (SSAPs), and latterly Financial Reporting Standards (FRSs) have been issued by or on behalf of Irish / UK accounting bodies, setting out the appropriate treatment of particular items and classes of transactions, for the purpose of giving a true and fair view. These standards are to be followed, save where they would not give a true and fair view of the underlying position.
The International Accounting Standards (IAS) were an older set of standards for financial statements. They were formerly issued by the Board of the International Accounting Standards Committee (IASC). Since 2001, a new set of standards, the International Financial Reporting Standards (IFRS) and has been issued by the International Accounting Standards Board (IASB).
The International Financial Reporting Standards are the basis of EU legislation on the accounts of quoted companies.
Financial Reporting Framework I
Companies may prepare accounts in accordance with the IFRS standards or the Companies Act standards. Group accounts must be prepared in accordance with IFRS standards if the company is admitted to trading on a stock exchange in any state in the EU.
Once a company elects to prepare accounts on the basis of IFRS standards, it should continue to do so until there is a relevant change of circumstances. This includes
- cessation of quotation on a regulated market;
- the parent company ceases to be so quoted, or
- the company becomes a subsidiary of a company or member of a group which does not prepare IFRS standards accounts.
Companies must prepare financial statements under the relevant financial reporting framework. They may be either Companies Act financial statements or IFRS financial statements. The directors of a company shall not approve financial statements unless they are satisfied that they give a true and fair view of the assets, liabilities, and financial position at the year end and profits and loss for the financial year.
Financial Reporting Framework II
Companies Act financial statements must comply with the provisions of Schedule 3 to the Companies Act in relation to accounting principles to be applied, the form and content of the balance sheet, profit and loss account and additional information to be provided. Where compliance with those requirements would not be sufficient to give a true and fair view of the matters, the necessary additional information must be given by way of a note to the items.
If in special circumstances, compliance with the provisions of the Companies Act is inconsistent with the requirement to give a true and fair view of the matters and provision, the directors shall depart from those provisions to the extent necessary to give a true and fair view. Particulars of the departure and the reasons for it must be set out in the notes to the accounts.
Statements may be prepared either (as the company elects) in accordance with the Companies Act requirements or International Financial Reporting Standards. Entity financial statements prepared in accordance with the Act are referred to, as “Companies Act entity financial statements.” Financial statements prepared in accordance with international financial reporting standards are referred to, as “IFRS entity financial statements.”
In respect of a company not trading for the acquisition of gain by its members, the entity financial statements shall be prepared in accordance with the Companies Act.
EU legislation requires group companies whose securities are quoted on a regulated stock exchange in the EU, to use International Financial Reporting standards. These are common EU-wide standards designed to promote uniformity in investment markets. Other companies may use these standards or prepare accounts in accordance with the Companies Acts provisions.
The Financial Statements:Basic Company Information
Every company must (set out details of
- its name and legal form;
- place of registration and registered number,
- registered office; and
- if it is being wound up,
Where the company is a group company, the information must also be provided in respect of the holding company. In the case of group accounts, there can be a single reference and cross-reference.
One of the grounds of exemption from group financial accounts for an intermediate level holding company is that there is a higher-level group company. The names and particulars of this undertaking whose consolidated financial statements apply must be provided.
Financial Statements; Profit and Loss Account
Every company must prepare a profit and loss account. A small company need not file it with the CRO. The profit and loss account must be made up to a date within nine months of the AGM at which it is presented. The balance sheet must be made up to that same date.
The profit and loss account is defined as a statement of the performance of the company showing revenues, expenses, gains, and losses earned and incurred by the company during the relevant period in a manner required by the relevant accounting reporting framework adopted by the company.
In the case of financial statements prepared in accordance with IFRS standards, it means a statement of profit and loss or other equivalent terms as referred to in those standards. In the case of a company not trading for the acquisition of gain by its members (e.g. a charity), it means an Income and Expenditure Account. Reference to a profit and loss account, group financial statements, and consolidated profit and loss accounts are to be interpreted accordingly.
Financial Statements; Balance Sheet
Every company must prepare a balance sheet, as at its financial year end date.The balance sheet must show the assets and liabilities of the company at the relevant date. It usually shows assets at historic cost. Certain matters are to be provided for, by way of notes to the accounts.
The corresponding amounts for each item in the balance sheet profit and loss accounts should be given for the previous year.
Smaller scale companies may prepare and file an abridged balance sheet. They may prepare an abridged balance sheet only, for the shareholders. Medium-sized companies can prepare and file an abridged balance sheet which is more detailed than that which small companies may provide There must be a greater breakdown of items. A full balance sheet must be prepared for the shareholders.here are a number of alternative formats for the profit and loss account and balance sheet.
Certain Balance Sheet Items I
Fixed assets are those intended to be used on a continuing basis in the business. Long-term assets are those intended to be held for more than one year. Current assets are those intended to be held for less than one year.
How assets are treated will depend on the type of company rather than the type of asset. What may be a current asset in one business, may be a long-term or fixed asset in another business.
Fixed assets must be depreciated over their useful economic. Depreciation must be shown as a deduction against the balance sheet cost value.
Balance sheet costs are generally historical (i.e. the original cost). There is an option to use current cost accounting. Assets are revalued (usually upwards), and any surplus must be placed in a revaluation reserve, which is not distributable as a profit. This is less commonly used in periods of lower inflation.
The 2017 Act amends the requirements regarding the set off of assets and liabilities. The gross amounts must be disclosed in notes where set off is permissible under the Financial Reporting Standards. Investment properties must be shown as a separate category of fixed assets. This may be done in the notes. Prepayments must be shown separately from accrued income on the face of the balance sheet or in the notes.
Certain Balance Sheet Items II
Generally, fair value is to be shown for other investments including real property and financial instruments. Financial instruments must be shown at fair value where there is a reliable market value and a ready market. If this is not available, they are to be shown with reference to the market value of the constituent elements of similar instruments, if they have a reliable market. Otherwise, the fair value produced by valuation models methods may be used. If none of these measures can be made, they are to be shown in accordance with historical or current cost accounting rules.
The profit for the financial year must be shown on the face of the balance sheet unless the opening and closing profit or loss reserves are reconciled at the foot of the profit and loss account or an appropriation of profit reconciliation is shown as a note to the financial statements. The surplus in the profit and loss account (accumulated undistributed profits) may be transferred to reserves and may be distributed. Most other reserves are not distributable,
Provisions represent the sums set aside, to provide for anticipated future liabilities. Provision is commonly made against taxation and other known future expenditure. They may be known and certain (e.g. tax due) or may relate to contingent or disputed liabilities. They are charged to profits when the reserve is created or increased.
Details of short and long-term debt must be shown. Share capital and allotments made during the year must be shown. Long-term debts must be shown separately from shorter-term debt.
Balance Sheet Valuations
Companies usually use the historical cost accounting rules. They reflect assets at their actual monetary cost, subject to depreciation.
The alternative accounting rules are the fair value accounting rules. The 2017 Act restates the fair value accounting rules. A combination may be used for different classes of assets and liabilities, subject to disclosure and other requirements.
Alternative valuations rules may be used for the valuation of fixed assets other than goodwill. They may be revalued to market value. Goodwill must be valued at fair value.
Where goodwill, development costs or other intangible assets have a useful life that cannot be reliably measured, a life of less than 10 years must be attributed and used. If an impairment of goodwill has been recognised in its valuation, it is not to be reversed even if the reason for the impairment has ceased.
In relation to financial instruments, IFRS standards may be used with the relevant disclosures for investments. The Companies Act fair value rules allow financial instruments to be carried at fair value subject to making the relevant disclosures.
2017 Act & Notes
The 2017 Act made minor changes only to the disclosures required by way of notes to the financial accounts. There is a requirement that the notes should be presented in the order of items to which they relate in the balance sheet and profit and loss accounts.
- Where fixed assets are valued under alternative accounting rules, the comparable amount under historic cost accounting rules must be stated.
- There must be a reconciliation of movements in the profit and loss account reserve. It may be shown at the foot of the profit and loss account.
- The nature of amount and effect of items of income and expenditure that are exceptional by virtue of their size or instance must be shown.
- The particulars of the financial impact of material events occurring after year-end must be shown;
- Particulars must be given of the holding companies of the group preparing group financial statements incorporating the company including certain particulars.
The first financial accounting year begins at incorporation and ends on a date no later than 18 months later. Each subsequent financial year begins at a date immediately after the previous financial accounting year and continues for 12 months or such other period, not being more than 7 days shorter or longer than 12 months, as the directors may determine to be its financial year end date.
Except where there are substantial reasons not to do so, which reasons must be disclosed in notes to statutory financial statements, the directors of a holding company, shall ensure that the financial year end dates of each subsidiary, coincide with that of the holding company.
A company may by notice in the prescribed form given to the CRO, alter its financial year end date and its previous financial year end date. Subsequent financial year end dates are then the anniversary of the new financial year end date and are thereby adjusted accordingly. A notice may not alter a financial year end date if the alteration would result in a financial year in excess of 18 months.
A notice purporting to alter a company’s current or previous financial year end date is not valid if given less than 5 years after the day on which there has fallen the new financial year end date specified in a previous notice. This does not apply to a notice given by a company
- that is a subsidiary undertaking or holding undertaking of another EEA undertaking if the new financial year end date specified coincides with that of the other EEA undertaking;
- that is being wound up; or
- where the ODCE, on application to him or her by the company, directs that it shall not apply.
References and Sources
Companies Act 2014 S.287- S.296 (Irish Statute Book)
Companies Act 2014: An Annotation (2015) Conroy
Law of Companies 4th Ed. (2016) Ch.18 Courtney
Keane on Company Law 5th Ed. (2016) Ch.30 Hutchinson
Other Irish Sources
Tables of Origins & Destinations Companies Act 2014 (2016) Bloomsbury
Introduction to Irish Company Law 4th Ed. (2015) Callanan
Bloomsbury’s Guide to the Companies Act 2015 Courtney & Ors
Company Law in Ireland 2nd Ed. (2015) Thuillier
Pre-2014 Legislation Editions
Modern Irish Company Law 2nd Ed. (2001) Ellis
Cases & Materials Company Law 2nd Ed. (1998) Forde
Company Law 4th Ed. (2008) Forde & Kennedy
Corporations & Partnerships in Ireland (2010) Lynch-Fannon & Cuddihy
Companies Acts 1963-2012 (2012) MacCann & Courtney
Constitutional Rights of Companies (2007) O’Neill
Court Applications Under the Companies Act (2013) Samad
Company Law – Nutshell 3rd Ed. (2013) McConville
Questions & Answers on Company Law (2008) McGrath, N & Murphy
Make That Grade Irish Company Law 5th Ed. (2015) Murphy
Company Law BELR Series (2015) O’Mahony
Companies Act 2006 (UK) (Legilsation.gov.uk)
Statute books Blackstone’s statutes on company law (OUP)
Gower Principles of Modern Company Law 10th Ed. (2016) P. and S. Worthington
Company Law in Context 2nd Ed. (2012) D Kershaw
Company Law (9th Ed.) OUP (2016) J Lowry and A Dignam
Cases and Materials in Company law 11th Ed (2016) Sealy and Worthington
UK Practitioners Services
Tolley’s Company Law Handbook
Palmer’s Company Law