2017 Act Reforms
The 2017 legislation inserted three new schedules into the Companies Act dealing with the content of financial statements and accounting policies. There are two schedules which deal with group financial statements.
Schedule 3A provides the accounting principles, form, and content of the financial statements of a company qualifying for the small companies regime. Schedule 3B provides the equivalent principles, form, and content for financial statements for a company qualifying for the micro companies regime.
The Schedules set out the respective minimum requirements for small companies regime companies and micro companies regime companies and complement the existing schedule 3, which is applicable to all other companies (subject to alternative accounting frameworks that may be available to them)
The accounting principles and formats for the profit and loss accounts and balance sheet are broadly the same for Schedule 3 and 3A. Schedule 3A provides for a lesser degree of disclosures for small companies.
Micro Companies Regime
The Companies Amendment Act 2017 introduced a fourth class of company based on size. It does not apply in respect of companies which undertake certain activities, particularly in the financial services sector. The legislation came into effect on 9th June 2017. Micro companies may adopt the regime for financial years commencing on or after 1st January 2017.
The entities which are disqualified from the less onerous regime of are broadly the following:
- public companies whose shares are quoted in an exchange,
- credit institutions, insurance undertakings,
- certain other entities, principally in the financial services sector which are set out in Schedule 5 to the Companies Act.
Micro companies are a subset of “small” companies. Of necessity, each micro-company must also qualify as a small company. It may use the small company regime or the micro company regime at its option. It may also opt to adopt the larger company financial framework, employing one of the two alternatives, the Companies Act framework or the IFRS financial reporting framework.
The micro company regime is not available to a holding company that prepares group accounts. The regime is only applicable to the financial accounts of a single entity.
In principle, a micro-company may elect to prepare accounts in accordance with the IFRS (International Financial Reporting Standards) or the Companies Act standards. However, if it adopts the IFRS standards it is required to make certain disclosures which are incompatible with the IFRS standard. Accordingly, micro companies are effectively required to follow the Companies Act financial statement regime.
The Financial Reporting Council, (the UK and Irish Accounting Standards Body) has published financial reporting standards for a `reduced financial disclosure framework and for micro entities regime. The reduced disclosure framework FRS101 has more extensive standards than the small companies regime. The micro entities regime FRS105 is available to qualifying micro companies in accordance with the EU directive.
The general Companies Act financial statement regime requires a balance sheet and profit and loss account, with other additional statements and information required by the relevant financial reporting framework. The financial statement must give a true and fair view of the assets, liabilities and the financial position of the company as at the financial year end date and the profit or loss of the company for the financial year.
Companies Act Schedule 3B
The micro-company regime is reflected in Schedule 3B to the amended Companies Act. The small company regime is reflected in Schedule 3A. The micro company may in effect adopt either.
In the case of a micro company which elects to adopt the micro company regime, it is presumed that compliance with Schedule 3B, the applicable accounting standards and the other provisions of the Act is sufficient to give a true and fair view of the matters above. Accordingly, the provisions as to departure from the Act are not applicable to a company that qualifies and applies the micro company regime.
A company must ensure that the Companies Act financial statements include a statement as to whether they have been prepared in accordance with the applicable accounting standards and identify the standards in question. They must state any material departure from the standards, the effect of the departure and the reasons in the financial statements.
Requirements of the schedule do not apply to items that are not material for the purpose of giving a true and fair view. The 2017 Act introduced this notion of materiality into the requirements for the presentation of financial statements. “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.
Modifications and Departures
In accordance with general principles, if compliance with the standards in the schedule are not sufficient to give a true and fair view of the relevant matters, the necessary additional information would have to be given in the financial statements or in a note to them. However, the statutory financial statements for a company that qualifies for the micro company’s regime are subject to a presumption that compliance with the minimum requirements gives a true and fair view.
If in special circumstances, compliance with the Act (even with additional information) is inconsistent with the requirement to give a true and fair view of the matters, the directors may depart from the Companies Act statement requirements to the extent necessary to give a true and fair view. Particulars of the departure and the reasons for it must be given in a note to the statements.
Companies that use the micro companies regime may amend the formats to show an item in greater detail than required by the format. It may include subtotals for the better presentation and assessment of the company’s financial position.
The requirements of Schedule 3B do not apply to items that are not material for the purpose of giving a true and fair view. Material in this context 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 undertaking. The materiality of individual items is assessed in the context of other similar items.
General Disclosures I
The Companies Act statements require particulars of
- the name and legal form of the company
- the place of registration and number,
- the address of its registered office,
- information regarding winding up if applicable.
Micro companies must disclose the accounting policies adopted and the reasons for any change in accounting policy. The micro entity will adopt the applicable FRS standard (now FRS 105) in almost all cases.
Where there are changes in the balance sheet, the following must also be disclosed.
- changes in the balance sheet format;
- particulars of any offsets of assets and liabilities or income and expenditure in accordance with the relevant financial statements showing gross amounts
- period of write off of goodwill per asset;
- where liability relates to more than one item in the balance sheet; Their relationship should be disclosed.
General Disclosures II
Other disclosure requirements applicable under the Act include
- accounting policies including changes;
- holding of shares in holding company;
- directors’ loans, quasi-loans, credit transactions and guarantees;
- nature, legal form, place of registration and registered office.
The requirement in relation to the holding of shares and shares in the holding company is in accordance with the expanded requirements in the 2017 Act. This is to include particulars of shares held on behalf of the company and reconciliations of shares held at the beginning and end of the year and the reasons for the acquisitions.
Balance Sheet Format
Schedule 3B is in significantly simpler terms than Schedule 3 (general requirements) and Schedule 3A (small company requirements). Schedule 3B provides for a much-simplified balance sheet and profit and loss format for micro companies. However, the only changes that may be made are those set out above.
The principal headings are as follows:
- fixed assets;
- current assets (broken down into pre-payments and accruals);
- creditors due within one year;
- creditors due after more than one year;
- provision for liabilities;
- accruals and deferred income
- capital and reserves
- called up share capital not paid;
There is no requirement to analyse current assets, prepayments, accruals, provisions or deferred income on the face of the balance sheet. Only creditors need be shown for periods of more or less than one year, reflecting the general distinction between long-term and short-term credit / financing.
There are two alternative formats, which are broadly similar, but which are slightly different from a presentational perspective. The principal difference is that in format 2, creditors, capital and accruals, balance assets, while in format 1 assets less all creditors are balanced by capital and reserves.
Profit and Loss Account Format
There is a prescribed format for the profit and loss account. There is one option only. It is in a basic format showing the following
- other income;
- cost of raw materials and consumables;
- staff costs;
- value adjustments and amounts of written off assets;
- other expenses;
The line item headings are required. The line item may be shown in greater detail than in the published the format. Other headings and sub-headings may be included where their inclusion facilitates the assessment of the financial position, profit and loss of the company.
The appropriation of profit and loss must be set out, either in the notes to the financial statements, the profit and loss account or balance sheet. This must set out the amount of dividends paid, recognised and transfers between reserves and movements.
The valuation rules are set out in Schedule 3B. The historical cost accounting rules only are permitted. These are broadly the same as those applicable generally.
In the case of goodwill, development costs and other intangible assets whose useful life cannot be reliably measured, a useful life of less than 10 years must be used. If goodwill has been impaired by the recognition of a value adjustment for a diminution in value, the value adjustment may not be reversed even if the impairment ceases to exist.
Fair value and other accounting rules are not permitted. Accordingly, if a company’s assets have increased in value or it wishes to capitalise development costs to show assets at fair value, it must adopt the small company’s regime.
The provisions in the other financial reporting standards in respect of financial instruments were simplified by the 2017 Act.
Financial Report Council Standards for Micro Regime
The Financial Reporting Council, UK, is the principal standard setting body in respect of Irish Companies Act financial statements. Its principal financial reporting standards co-relate broadly with the various company sizes. Both UK and Irish practice standards derive from the broad EU accounting framework. FRS 105 provides for financial reporting standards applicable to the micro entities regime.
Companies that adopt the micro companies regime that are already using fair value must present the asset at original cost under FRS 105. This may not be appropriate or practicable in some cases. Given the relatively small size of companies qualifying for the regime, issues of fair value are unlikely to commonly arise.
Creditors and Guarantees
Where creditors are secured, this is to be disclosed. The aggregate amount of secured debts and the nature of the security given is to be set out.
Particulars must be given in relation to guarantees. This includes
- charges on assets to secure the guarantee,
- particulars and amount of financial commitments, guarantees and contingencies not set out in the balance sheet;
- an indication of the nature and form of any security given in connection with the guarantees;
- the total amount of commitments in relation to retirement benefits;
- particulars of retirement benefit commitments which are included in the balance sheet.
There are particular required disclosures in respect of the above matters.
Reporting and Filing
A company which adopts the micro company regime is not required to prepare a directors’ report provided that the disclosures regarding the acquisition of shares etc. are given in a note to the financial statements.
The standard provisions regarding the acceptance and signing of the financial statements are applicable. If the financial statements of a company that qualifies for the small companies regime or micro companies regime are prepared in accordance with the relevant regime, the balance sheet shall contain in a prominent position above the signatures, a statement that the statutory financial statements have been so prepared in accordance with the small companies regime or a micro companies regime as the case may be.
A micro company (as with a small company) may prepare abridged financial statements and file those statements only in the Companies Registration Office. This requires the filing of the balance sheet only. The notes to the balance sheet are required. The appropriation of profit and loss account must be shown on the abridged financial statements.