Small Companies

Small Companies Regime

The Companies Act 2017 provides a new financial reporting regime for small companies. Companies which qualify as such may opt into the regime in relation to the preparation of their financial statements and reports. They may alternatively elect to report in accordance with the standard regime for medium and small size company.

Many of the key provisions are available to small companies for financial years beginning after 1st January 2017. In theory, small companies may adopt the provisions for financial statements and reports in respect of earlier periods after 2015.  It may not be feasible to apply it back this far, because the legislation commenced on 9th June 2017.

The small companies regime may be adopted only if it gives a true and fair view of the assets, liabilities and financial position of the company and the results for the requisite reporting period. Directors must determine whether the company can comply with this overriding requirement. Compliance may require additional disclosures or departures from the standards. Full particulars of all departures must be disclosed. In some instances, a small company must undertake greater disclosure under FRS in order to give a true and fair view.


Statutory Format

The statutory format for the profit and loss account and the balance sheet must follow schedule 3A, subject to permitted modifications. The profit for the year is required to be disclosed in the abridged financial statements to be filed in the CRO.

The general concepts applicable to financial reporting standards generally, apply to the small and micro entity companies regimes. FRS102 1(A) is an adaptation of the general accounting reporting framework which fits with the small companies regime. The disclosure requirements are modified to some extent under the small companies regime. Certain provisions applicable to credit institutions do not apply.

Where a small company adopts FRS 102 1A, there are no additional primary statements.  One of the principal effects of the regime is that there are reduced notes and disclosures in the financial statements.  A cash flow statement and a statement of changes in equity are no longer required.


Substance over Form

In accordance with the general principles, if compliance with Section 3A would not be sufficient to give a true and fair view of the requisite matters, then additional information must be given in the financial statements or in a note to them.

Where in the particular special circumstances, any provisions of the Act are inconsistent with the overriding obligation to give a true and fair view of the assets, liabilities and financial position of the company, the directors shall depart as necessary from them in order to give a fair view of the requisite matters. The particulars of the departure and the reasons must be given in a note to the financial statements.

Companies must ensure that their financial statements include a statement as to whether they have been prepared in accordance with the applicable accounting standards. Where applicable, they must identify any material departure, the effect of departure and give the reason.

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.


Basic Requirements

The small company regime requires statutory financial statements comprising

  • a balance sheet at the financial year end;
  • the profit and loss account for the financial year;
  • other additional statements and information required by the relevant reporting framework;
  • comparative information for the previous year (other than year 1).

The legislation as amended requires the following notes

  • name and legal form of the company
  • place of registration of the company and its registered number,
  • registered address
  • whether the company is being wound up;
  • additional disclosures as required to give a true and fair view.
  • the average number of employees without categorisation.

General Disclosures

Companies must disclose changes in their accounting policies. Accounting policies should not change under the financial reporting standards unless they provide reliable and more relevant information in respect of the company’s financial position, performance, cash flows etc.

The accounts or notes must give details of the individual items of income and expenditure which were exceptional by reason of their size or incidence.

There are a number of disclosures required in relation to

  • post year-end material transactions.
  • particulars of a change in the format of the financial statements and the reason for it
  • reasons for particulars of a combination of item categories in the Companies Act schedule.

The financial impact of off-balance sheet arrangements must (continue to) be disclosed. Information must be given in relation to the fact of the transaction, its nature and purpose.

Where an asset and liability relate to more than one balance sheet item, this is to be disclosed. Where assets and liabilities or income and expenditure are offset in the statements in accordance with accounting standards, the gross amounts must be disclosed.

The particulars of the write off of goodwill, financial or other fixed assets must be disclosed separately or on the face of the account.


Some Modifications and Exemptions

The following are exempted from disclosure or subject to modified disclosure under the small companies regime.

  • information on related undertakings;
  • disclosure of staff details by category may be undertaken in the aggregate and for the number of staff;
  • disclosure of authorised, allotted and share capital movements;
  • financial assistance for the purchase of shares,
  • disclosure of accounting policies;
  • disclosure of auditor’s remuneration.

Assets

Additional notes must be set out certain further details on certain assets either on the face of the financial statements or in notes. They include

  • debtors falling due in more than and less than one year;
  • income and interest from group undertakings shown separately from other income and interest;
  • corresponding interest and group payments to be shown separately;
  • movements in fixed assets including costs and accumulated depreciation for each item;
  • disclosures of investment properties and certain other assets included at fair value; to include the basis of valuation and assumptions, techniques, and departures from market price;
  • movement in the fair value reserve.

Small companies regime companies may use the historical cost accounting rules.

Movement in revaluation reserves must be shown including transfers in and out, sources and application.

Derivative financial instruments are to be disclosed by their class and nature, including significant terms and conditions which affect their fair value, timing and uncertainty as to future cash flow obligations.


Shares

The information required to be disclosed in the notes in relation to shares include

  • details of share capital, classes, numbers at year end and beginning.
  • shares in holding company held directly or by an agent.
  • a reconciliation of each class of shares from the year beginning to year-end showing changes including disposals, acquisitions and cancellations
  • reasons for acquisitions,
  • particulars of restrictions on distributable profits (under certain statutory provisions).
  • disclosure of accounting policies in determining the treatment of items in the profit and loss account and balance sheet.

Appropriations of Profit

The appropriation of profit and loss accounts must include

  • opening profit and loss reserve balance,
  • dividends paid other than those accrued during previous years;
  • amount of dividends declared and due
  • transfers between profit and loss reserve and another reserve;
  • change in the balance and the profit and loss account reserve within the year;
  • total profit and loss reserve.

This information should be included as a note, at the end of the profit and loss account or as a movement on the balance sheet.


Disclosures of Loans and Obligations

The amount of convertible debenture loans must be set out. Creditors falling due within one year and after one year must be shown separately in the accounts.

Further details of Indebtedness must be given. Amounts for creditors due must be analysed into amounts due within five years of the year-end and after this period.  Further disclosures are required in respect of payments by instalments. Details of the security are required in respect of liabilities.

Particulars must be given of guarantees, contingencies, commitments, and security over any of the company’s assets to secure the liability of another entity.

Amounts with respect to retirement benefits must be separately disclosed. Separate disclosures must be made for past directors. Disclosures of significant assumptions in the valuation models providing retirement benefits must be disclosed.

Commitments guarantees undertakings or contingencies given on behalf of a group company an entity in which the company has a participating interest must be separately disclosed.  This is generally a shareholding held on a longer-term basis for the purpose of securing a contribution to the entity’s activities by the exercise of control or influence arising from or related to the interest.


Directors and Related Parties

Many of the key disclosure obligations continue to apply such as

  • disclosure of directors’ remuneration and payments to connected persons,
  • payments to third parties for services of directors
  • disclosure of directors’ loans, guarantees, credit transactions, directors’ material interest in transactions.

The accounts or notes must give details of the individual items of income and expenditure which were exceptional by reason of their size or incidence.

Disclosure is required of statements and transactions with related parties if they are material and have not been concluded under normal market terms. Where there is a category of transaction, they may be aggregated provided that they have the same risk profile and this is not distortive.

The definition of related parties for the small companies regime is narrower. They are

  • holders of participating interests,
  • undertakings in which the company has a participating interest and
  • directors of the company or holding company.