By Stephen Brown, Mazars LLP
All limited and unlimited companies in the UK, regardless of whether they are trading or not, are required to keep accounting records throughout the period. Here, I set out the key financial reporting and accounting requirements for companies trading or investing in the UK.
Where formal financial statements are required, in particular for limited companies, for accounting periods commencing after 1 January 2016 these must include:
- A Strategic Report signed by a director (if applicable);
- A Directors’ Report signed by a director or the company secretary;
- An Auditor’s Report signed by the auditor (if required);
- An Income Statement;
- A Statement of Financial Position signed by the director;
- Statement of Changes in Equity;
- Statement of Cashflows (if applicable); and
- Notes to the financial statements.
The financial statements would need to be consolidated financial statements (if applicable – please refer to size limits).
In general, all private and public limited companies are required to send a full copy of their financial statements to Companies House every year. Once received, all financial statements filed and held at Companies House are available to the general public on request. For this reason the option to file abridged/filleted financial statements is attractive to some small companies.
Small companies are entitled to certain disclosure exemptions in relation to the financial statements they must send their shareholders, and can, in addition, file abbreviated financial statements with the Registrar of Companies. Medium-sized companies can also send abbreviated financial statements to the Registrar but the reduction in disclosure in these financial statements is negligible. For both small and medium-sized companies, the production of abbreviated financial statements is entirely voluntary.
A company/group filing small reduced disclosure financial statements does not need to file a Directors’ Report, or Income Statement and can include fewer notes to the financial statements.
For a company or group to qualify as small, at least two of the following conditions must be met:
- Turnover must be less than £10.2 million;
- Gross assets must be less than £5.1 million; and
- Average number of employees must be less than 50.
For a company/group to qualify as medium-sized, again, at least two of the conditions below must be met:
- Turnover must be less than £36 million;
- Gross assets less than £18 million; and
- Average number of employees less than 250.
The time normally allowed for companies to deliver their financial statements to Companies House is:
- Nine months from the ARD (Accounting Reference Date) for a private limited company.
- Six months from the ARD for a public limited company.
The ARD is the period-end date to which all financial statements are prepared and normally covers a period of 12 months, although this can be extended to a maximum of 18 months. Filing of financial statements for a first year entity must be within 21 months of incorporation. Late delivery of financial statements to Companies House will result in a late filing penalty, which is, technically, a criminal offence for which Directors can be prosecuted.
Regulations regarding the presentation of the primary financial statements in the UK are found in several sources such as UK company law and UK and international accounting standards. Branches or places of business of overseas firms have special registration procedures.
All financial statements in the UK are prepared in accordance with two fundamental accounting concepts:
- Going concern – the financial statements are prepared as if the company will be trading in the foreseeable future (at least 12 months from the date of signing the financial statements);
- Accruals basis – income and expenditure should relate to the period in which it occurred, not the period in which it was received/paid.
Whichever accounting policy is selected, they must be transparent and reflect industry and sector norms.
Until recently, Financial Reporting Standards were developed solely by the Accounting Standards Board (ASB). These standards, in conjunction with the requirements of UK companies legislation (principally the UK Companies Acts), helped make up what is known as UK GAAP, which gives guidance to companies and auditors on how UK financial statements should be prepared to give a ‘true and fair’ view of the company’s financial position.
However, due to increasing globalisation in the world economy, it became necessary to produce a set of International Financial Reporting Standards (IFRS) so that potential investors can compare firms on a global scale.
EU firms with securities that are publicly traded on a regulated stock exchange are required to apply EU-adopted IFRS when producing consolidated financial statements. In the UK, this means any company listed on any of the markets of the London Stock Exchange. Individual subsidiary companies are not required to prepare financial statements under IFRS.
At present, only the types of company detailed above are required to adopt IFRS. However, even companies not required to do so can choose to adopt these new standards.
A company that chooses to use IFRS to produce its financial statements for one financial period cannot change back to UK standards in the following year. There are limited exceptions to this, such as if the company becomes a subsidiary of a group that uses UK standards as opposed to IFRS, in which case the company can revert back to using UK standards.
Listed and AIM companies must use IFRS in their group financial statements – AIM companies because the listing rules require it and full listed companies because regulations require that all companies listed on an EU regulated market use IFRS, as adopted in the EU, in their group financial statements.
Other entities that are not required to use IFRS have the following choices:
- IFRS – any entity, except a charitable one, can adopt IFRS if they wish;
- FRS 101 – (‘IFRS’ with reduced disclosures) This is only available to subsidiaries of parent companies who have adopted IFRS, and it allows the subsidiaries to adopt IFRS but with reduced disclosures;
- FRS 102 – the standard that has replaced UK GAAP;
* FRS 102 – for smaller companies (which is an amendment to FRS102 by way of a new section 1A for small entities) requires entities to apply the full recognition and measurement principles contained in FRS102, but retain presentation and disclosure requirements that are appropriate to a small company.
- FRS103 – Insurance contracts is a fourth standard added to the framework which is relevant to entities that are applying FRS102 and have insurance contracts;
* FRS103 should be applied by an entity that applies FRSlO2 and issues insurance contracts and/or holds reinsurance contracts. This FRS should also be applied to financial instruments (other than insurance contracts) that it issues with a discretionary participation feature.
- FRS105 – the financial reporting standard applicable to micro entities.
Companies that meet the ‘micro’ criteria have the choice of applying FRSlO5 for micro entities. For a company to qualify as micro-sized, at least two of the conditions below must be met:
- Turnover must be less than £632,000;
- Net assets less than £316,000;
- Average number of employees less than 10.
For a company to be eligible to apply FRS105 it cannot meet any of the following criteria:
- Companies excluded from the small companies regime;
- Financial institutions including credit, insurance and banking institutions;
- Small parent companies who choose to prepare consolidated financial statements;
- Companies that are included in consolidated financial statements; and
- Public companies.
FRS105 is effective for accounting periods commencing on or after 1 January 2016.
FRS105 requires only two primary statements and the information contained on these primary statements will be condensed. Amongst other simplifications assets cannot be measured at fair value or at revaluation under FRS105.
As before, FRS105 and FRS102 for smaller companies are not mandatory and a company could instead use full FRS102 or indeed IFRS if it so desired.
Other entities that are not ‘small’ or ‘micro’ and are not required to use IFRS end up with various choices, depending on their situation. Charitable companies are expected to use FRS102 and a new Charities SORP (SORP 2O15) was issued to update the changes to UK GAAP in line with the adoption of FRS102 for accounting periods commencing on or after 1 January 2015.
Stephen Brown is a Partner at Mazars LLP specialising in Audit and Assurance services. This article is an extract from Business Guide to the UK: Brexit, Investment and Trade – 30 Sept 2017- by Jonathan Reuvid (published by Legend Business) https://www.amazon.co.uk/Business-Guide-United-Kingdom-Investment/dp/1785079131/