Companies (Accounting) Act 2017 implementation

Aug 03, 2017
With the commencement of the legislation, the focus turns to implementation.

President Higgins signed the Companies (Accounting) Act 2017 (CA 2017) into law on 17 May 2017. The Act, apart from Section 80 relating to the definitions of ‘EEA company’ and ‘Non-EEA company’ (more on this later in the article), was commenced on 9 June 2017. Primarily, CA 2017 amends the Companies Act 2014 (CA 2014) to transpose the requirements of the 2013 EU Accounting Directive (completed in 2013 during the Irish EU presidency), although it also introduces certain other changes to Irish company law.

Chartered Accountants Ireland welcomes the enactment and commencement of CA 2017. Particularly so because, with the introduction of the long-awaited small companies regime (SCR) and micro companies regime (MCR), it places Irish small and micro companies on an equal footing with their counterparts in Northern Ireland and Great Britain as regards financial reporting simplification and burden reduction.

In an article I wrote in the October 2016 edition of Accountancy Ireland entitled “The Accounting Bill has landed…”, I discussed some of the key aspects of the Bill following its publication. This article is intended as a reminder of, and in some cases an update on, some of these key aspects. We are currently in the process of producing a number of documents for members specifically relating to the SCR and MCR. We are working with the Institute’s Accounting Committee to produce a Technical Release dealing with the form and content of entity financial statements prepared in accordance with those regimes, and a suite of Proforma Financial Statements reflecting the new legislation will be issued shortly by Practice Consulting.

So while I discuss the SCR and MCR at a relatively high level below, I would refer members to the above-mentioned documents for more detailed analysis and guidance. There are, of course, other important aspects of CA 2017 which I will discuss in some detail also. However, I am confining myself for the purposes of this article to reporting and filing-related aspects of the new legislation. Some other issues considered in the article include commencement provisions, changes to company law accounting requirements generally, new reporting requirements regarding payments to governments and changes to certain filing requirements (e.g. the amendment to the Section 357 guarantee and new filing requirements for certain unlimited companies and other company types).

Commencement of CA 2017

Statutory Instrument No. 246 of 2017 (S.I. 246/2017) commenced the legislation (other than Section 80) and established 9 June 2017 as the "appointed" day on which CA 2017 came into operation. The commencement approach taken by the Department of Jobs, Enterprise & Innovation (DJEI) could be described as a type of ‘principles-based’ approach. Rather than specifying commencement for individual sections, the provisions generally commence on 9 June 2017 with certain specific exceptions, namely provisions relating to:

  • The financial statements of a company;
  • Directors’ reports, including group directors’ reports;
  • Statutory auditors' reports on the above-mentioned financial statements and directors’ reports;
  • 'Payments to governments' reports, both entity and consolidated, and reports prepared in accordance with equivalent reporting requirements;
  • Auditors' reports under the European Communities (Undertakings for Collective Investment in Transferable Securities) Regulations 2011 (as amended) – S.I. No. 352 of 2011 – and the European Union (Alternative Investment Fund Managers) Regulations 2013 (as amended) – S.I. No. 257 of 2013.
These provisions commence by reference to financial years beginning on or after 1 January 2017.

Of course, readers of the October 2016 article will be aware of the “early adoption” proposals in the Bill, which are now contained in Section 14 of CA 2017. Referred to as “specified provisions”, companies may opt to prepare and approve statutory financial statements in accordance with these specified provisions for any financial year which commenced on or after 1 January 2015. The specified provisions include, but are not limited to, the adoption of the SCR and MCR and related accounting and disclosure requirements in sections of amended Part 6 of CA 2014 along with the new Schedules 3A and 4A to CA 2014 under the SCR and Schedule 3B to CA 2014 under the MCR. While the commencement of CA 2017 will likely have come too late for companies preparing 2015 financial statements, they may prove popular for 2016 financial statements that had not yet been approved, and beyond.

SCR and MCR

As mentioned above, commencement allows for a level playing field for Irish small and micro companies and supports, for instance, the adoption of Section 1A of FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland by small companies and FRS 105 The Financial Reporting Standard applicable to the Micro-entities Regime.

Adopting the SCR involves compliance with Schedules 3A and (if applicable) 4A and the requirements of the other provisions of CA 2014 (as amended by CA 2017) pertaining to the preparation of statutory financial statements, as well as the application of “applicable accounting standards” (e.g. Section 1A of FRS 102). Similarly, adopting the MCR involves compliance with Schedule 3B and the requirements of the other provisions of CA 2014 (as amended by CA 2017) pertaining to the preparation of statutory financial statements, as well as the application of “applicable accounting standards” (e.g. FRS 105).

Members are reminded that, while the financial statements prepared in accordance with the MCR are presumed by the law to give a true and fair view, there remains an overarching obligation on directors of companies adopting the SCR to prepare financial statements that give a true and fair view which, depending on the circumstances of the company, may necessitate providing disclosures over and above those mandated.

While not dealing with the SCR and MCR requirements in detail as noted earlier, a few notable points include:

  • The cash flow exemption in Section 7 of FRS 102 is available to small companies;
  • Companies applying the MCR are exempt from providing directors’ remuneration disclosures, though unlike in the UK, this exemption does not apply to companies applying the SCR;
  • There are reduced disclosure requirements with regard to staff costs;
  • There is an exemption from the requirement to provide details of authorised share capital, allotted share capital and movements;
  • Companies applying the MCR are exempt from preparing a directors’ report (subject to the required information on the acquisition or disposal of own shares being provided in the financial statements) and there is an exemption for companies adopting the SCR from the requirement to include a business review and information on the use of financial instruments in the directors’ report.
It is important to note that the Irish SCR and MCR requirements are not exactly the same as those contained in UK company law. For example, contrary to UK law and FRS 102, Irish companies cannot fair value stock. More disclosures are required in the financial statements of Irish micro companies than are required by UK micro companies, such as information in relation to accounting policies and the appropriation of profit and loss. In addition, while there may be some element of overlap, members will note that the Irish SCR and MCR company law disclosure requirements are not included in Section 1A of FRS 102, or FRS 105, respectively. Appendix C of Section 1A contains the UK company law disclosure requirements for small companies. Companies adopting Section 1A in the preparation of their financial statements must provide these disclosures. Certain of these disclosures are not replicated in Irish law, but must also be provided where applicable by Irish companies adopting Section 1A (e.g. the disclosure of the years in which assets were severally revalued, the relevant valuations and the names and qualifications of the valuers where the revaluation was undertaken in the reporting period). As such, Irish companies will have to give due consideration to both the Irish company law disclosure requirements and the disclosure requirements in the relevant accounting standard.

There are a number of significant aspects of the new small and micro company financial reporting regimes that I believe worthwhile to emphasise at this point. First, the simplifications introduced in Ireland (and in previous years, in the UK) derive from EU legislation aimed at reducing burdens on small and micro companies across Europe. The EU introduced the small company requirements on the basis of “maximum harmonisation” (i.e. member states were not permitted to mandate disclosures in small company financial statements over and above those required in the Directive). Also, it would be important to point out that the adoption of either the SCR or the MCR is not mandatory for qualifying companies. Depending on the information needs of companies and their stakeholders, Irish and UK small and micro companies can “choose up” from a hierarchy of financial reporting frameworks that ranges from FRS 105, through “full” FRS 102, to EU-endorsed IFRS, with reduced disclosure frameworks available for group companies (within FRS 102 or FRS 101 for companies which are members of IFRS groups). It is a very proportionate approach taken to financial reporting in both jurisdictions and is, I believe, to be commended.

Qualifying for the SCR and MCR

The size criteria for qualifying as a small or micro company in CA 2017 are unchanged from the Bill – see Table 1.

The application of the size criteria for qualifying as “small” has not changed (i.e. generally speaking, companies must meet two out of three of the size criteria in relation to the current and previous financial years; two consecutive years to lose or gain status, etc). “Ineligible entities” such as companies traded on the Irish Stock Exchange, public interest entities, credit institutions or insurance undertakings and certain other undertakings specified in Schedule 5 to CA 2014 (being largely entities regulated by the Central Bank of Ireland) cannot qualify as small, even if they meet the size criteria.

CA 2017 introduces the concept of a small group for the first time into Irish company law. In order for a holding company to qualify as a small company, the group which it heads must meet the small criteria on a gross or a net basis. No member of the group can be an ineligible entity.

To qualify as a micro company, the company must first qualify as a small company (e.g. the same restrictions on ineligible entities apply) and meet the micro company size criteria in the same manner as discussed above for small companies. Holding companies that prepare group financial statements, subsidiaries included in the consolidated financial statements of a higher parent, investment undertakings and financial holding undertakings are excluded from the MCR.

Abridged financial statements

Small and micro companies are exempt from filing a profit and loss account and a directors’ report (as noted above, micro companies are exempted from preparing a directors’ report at all, subject to the required information in respect of the acquisition or disposal of own shares by the company being provided elsewhere as a note). The balance sheet filed is that which is prepared under the SCR/MCR with no abridgement, while all notes to the statutory financial statements, including profit and loss account notes, must be filed.

Further changes of note are that (i) there is no longer a specific requirement to file details of directors’ interests; and (ii) the profit appropriation analysis, where included in the profit and loss account in the statutory financial statements, must be included in a separate disclosure note when filing abridged financial statements.

Audit exemption

The audit exemption thresholds remain aligned with the criteria for qualifying as a small company. One important distinction, however, needs to be drawn between the SCR and the audit exemption provisions. As noted above, in order for a holding company to qualify for the SCR, it must head up a group which also meets the small criteria. However, in order for a small company to be able to avail of audit exemption, one must assess whether the largest group to which the company belongs qualifies as a small group.

  • If yes, then the company may avail of audit exemption as long as other criteria, such as the timely filing of annual returns (group-wide), are met.
  • If no, then audit exemption is not available to any of the companies in that group.
So, to assess qualification for the SCR for the purposes of preparation of financial statements, one must “look down” to include the company and its subsidiaries in the analysis. To assess qualification for audit exemption, however, one must also “look up” to see if the largest group to which the company belongs, including all higher holding undertakings and fellow subsidiaries, qualifies as small.

In addition, relevant securitisation companies cannot qualify for the audit exemption in relation to their individual financial statements, and similarly, the presence of such an entity within a small group will also preclude all members of that group from availing of the audit exemption.

Medium companies/groups

While the size criteria to qualify as a medium company/group have been increased (see Table 1), the benefits of qualifying as medium as distinct from large have been significantly reduced by CA 2017. There is no longer any abridgement exemption for filing purposes available for medium companies. Holding companies of medium groups are also no longer exempt from preparing consolidated financial statements. One notable medium company exemption retained is the exemption from the requirement to disclose remuneration for audit, audit-related and non-audit work.

Given the increase in the medium company size criteria, some medium companies at the upper end of the balance sheet total and turnover range may become subject to the directors’ compliance statement requirements in CA 2014 (which applies to companies whose balance sheet total exceeds €12.5 million and turnover exceeds €25 million). Given their size, medium companies are, however, excluded from the requirement to establish an audit committee and from those related disclosure requirements.

Changes in general accounting requirements

Aside from the introduction of the SCR and the MCR, CA 2017 introduces some significant changes in the general accounting requirements of Part 6 of, and Schedule 3 to, CA 2014. Given space constraints, I cannot go into great detail in this article on the changes. Much of the engagement we have had with members prior to enactment focused on the small and micro company requirements. Members need, however, to be aware that for accounting periods beginning on or after 1 January 2017 (or earlier where companies early adopt the specified provisions discussed above), it is not at all a matter of ‘status quo’ for other companies not adopting the SCR or the MCR.
Some of the changes are mandatory, others represent optional provisions and there are a small number of disclosure items that are no longer required. Below is a flavour of some of the changes.

Changes relating to disclosure requirements:

  • Additional disclosure requirements of (i) name and legal form of the company; (ii) its place of registration and registered number; (iii) the address of its registered office; and (iv) where the company is being wound up, information in respect of notification of liquidation;
  • Where an intermediate parent avails of the consolidation exemption, disclosure of the registered office of the higher parent is required (whether incorporated in the State or outside the State);
  • The requirement to disclose payments to third parties for making available the services of any person as a director of a company or of its subsidiaries or otherwise in connection with the management of the affairs of the company or its subsidiaries;
  • The requirement to disclose not only the fact that an accounting policy has changed, but also the reason for the accounting policy change and, to the extent practicable, the impact of the change on the financial statements for the current and preceding financial year;
  • Additional disclosure requirements in the directors’ report in relation to the acquisition of own shares, including the reasons for any acquisitions made during the financial year and the proportion of called-up share capital held at the beginning and end of the financial year;
  • A reinstatement of the relief from providing comparatives relating to note disclosures of movements in fixed assets and provisions. However, comparatives are still required for movements in reserves;
    Disclosures regarding creditors – disclosure of amounts of debts payable by instalment separately from those not payable by instalment is no longer required;
  • Disclosure of capital expenditure amounts authorised but not yet contracted for is also no longer required;
  • The order of the Schedule 3 note disclosures is now specified – “…in the order in which, where relevant, the items to which they relate are presented in the balance sheet and in the profit and loss account”; and
  • Appropriation of profit analysis is required either at the foot of the profit and loss account, the face of the balance sheet or as a note to the financial statements.

Changes relating to formats:

  • The profit and loss account format options have been reduced from four to two (old formats three and four have been deleted); and
  • More flexibility is permitted in the presentation of the profit and loss account and the balance sheet, providing the information presented is “at least equivalent to that which would have been required by the use of such format had it not been thus adapted” and is “in accordance with generally accepted accounting principles or practice”. This change may facilitate wider adoption of FRS 101 by IFRS group companies.

Other accounting-related changes:

  • The legal definition of a subsidiary is now more closely aligned with the accounting definition;
  • The amended definition of “credit institution” – to clarify that the activity of a credit institution must include the carrying on of the business of accepting deposits or other repayable funds from the public and granting of credit for its own account. Previously, there were concerns that the definition could include certain group treasury functions as well as other forms of activity which were previously never regarded as falling within the generally accepted meaning of a “credit institution”;
  • The definition of “profit and loss account” has been amended to clarify that “in the case of a company not trading for the acquisition of gain by its members, the expression means an income and expenditure account” and that references to profit and loss accounts throughout should be read accordingly, which will be of particular relevance to charity company financial statements;
  • The intermediate parent consolidation exemption has now been extended to also be available where the higher parent holds more than 90% of shares in the company and the remaining shareholders approve the availing of the exemption;
  • The conditions for accounting for a merger have been amended to be based on common control transactions (see “Other Amendments” later in this article);
  • Equity accounting is permitted in the individual entity financial statements for participating interests in associates (subject to being permitted under the relevant GAAP); and
  • Goodwill and intangible assets – where the useful life of these assets cannot be reliably measured, the period chosen for amortisation must not exceed 10 years and no reversals of impairment adjustments on goodwill are permitted.
Just a flavour, as I say, and I could go on, but the editor is getting cross! Work is under way in developing guidance on these changes, which will issue in due course. Keep an eye on the usual Institute information channels.

Filing requirements 

Section 357 guarantee

The guarantee requirements for a subsidiary to avail of the exemption from annexing its financial statements, under Section 357 of CA 2014 (previously referred to under old company law as a “Section 17 guarantee”), have been extended to incorporate a guarantee with regard to all “commitments entered into by the company”, not just “all amounts shown as liabilities in the statutory financial statements” as was the case prior to the amendment.

Unlimited companies

CA 2014 defines a number of different types of unlimited companies (a private unlimited company – “ULC” – a public unlimited company – “PUC” – and a public unlimited company that has no share capital – “PULC”). For the purpose of the filing exemption, the law also distinguishes between an “ULC” and a “designated ULC”; the filing exemption not being available to designated ULCs. The filing exemption is also not available to PUCs or PULCs.

CA 2017 has significantly broadened the scope of ULCs captured within the meaning of “designated ULCs”. This results in a wide range of ULCs which will now be obliged for the first time to file statutory financial statements, in particular:

  1. ULCs that have been at any time during the financial year a direct or indirect subsidiary of a limited undertaking;
  2. ULCs that have been at any time during the financial year a holding company of a limited undertaking; and
  3. ULCs, the direct or indirect members of which comprise any combination of companies such that the “ultimate beneficial owners enjoy the protection of limited liability”.

S.I. 246/2017 did not specify explicitly the commencement provisions for filing provisions – only that provisions relating to financial statements would commence by reference to financial years beginning on or after 1 January 2017. We understand that the intention was for the new filing requirements to apply with respect to the filing of financial statements for financial years commencing on or after 1 January 2017. This is consistent with commentaries issued by various legal firms on commencement of these provisions. So, for example, an ULC impacted by these changes, with a 31 December 2017 reporting date, would have to annex financial statements to its 2018 annual return.

A concession was, however, granted to ULCs that are holding companies with limited liability subsidiary undertakings (i.e. (2) above) to delay implementation to financial years beginning on or after 1 January 2022, unless coming under the definition of a “designated ULC” by virtue of other provisions. 
Designated ULCs are subject to the standard filing requirements that apply generally.

Investment companies, UCITS plc corporates

New filing requirements are also introduced for investment companies (falling under Part 24 of CA 2014) and Undertakings for Collective Investment in Transferable Securities (UCITS plc corporates). Prior to commencement, such entities, which are subject to filing obligations with the Central Bank, were exempt from filing financial statements, directors’ reports and auditor’s reports with the Companies Registration Office (CRO). This new CRO filing requirement has not been inserted into the Irish Collective Asset-management Vehicles (ICAV) Act 2015. These requirements are also understood to apply to financial periods commencing on or after 1 January 2017.

External companies with branches

The definitions of “EEA company” and “Non-EEA company” have been expanded to extend the filing requirement of external companies with Irish branches to instances where the Irish branch is a branch of an unlimited subsidiary of an EEA or Non-EEA limited company. Previously only EEA and Non-EEA external limited companies had filing obligations in respect of their Irish branches. As mentioned earlier, S.I. 250/2017 revoked the original commencement of this particular amendment and as a consequence, this has been deferred for the present.

Payments to governments

The new Part 26 of CA 2014 imposes a new requirement on certain large companies, large groups and public-interest companies involved in the mining, extractive or logging industries to prepare an annual report on payments they have made to governments of any countries under a number of different headings. The requirement commences for financial years beginning on or after 1 January 2017 and the payment reports must be filed with the CRO, and therefore be publicly available. Holding companies subject to the obligation to report will have to prepare payment reports on a consolidated basis. In such circumstances, there is an exemption for the holding company and its subsidiaries from the obligation to prepare an entity payment report.

“Payments” are defined to include payments in kind for “relevant activities” (logging, mining and quarrying activities), and the types of payments include taxes on income, production or profit (not VAT, personal income taxes or sales taxes), royalties, dividends (other than dividends paid to the government as an ordinary shareholder on the same terms as other ordinary shareholders), license fees etc.

The content of the payment reports is specified to include information on:

  • The government and country to which each payment has been made;
  • Total amounts paid to each government;
  • Total amounts paid per type of payment made to each government;
  • Total amounts paid attributed to specific projects;
  • Payments resulting from relevant activities of a mining or quarrying undertaking; and
  • Payments resulting from the relevant activities of a logging undertaking.
The legislation exempts a payment (or a series of payments within a financial year) amounting to less than €100,000 from the reporting requirement. There is no requirement for the payment report to be included in the financial statements, nor is there a requirement for any form of assurance report. The report does have to be approved by the board of directors, however, and signed on their behalf by at least two directors, where there are two or more directors. The payment reports are to be filed with the CRO within 11 months of the end of the financial year.

Other amendments 

Share for share acquisitions – Section 72 “merger relief”

Previously, an Irish company acquiring an Irish company through a share-for-share acquisition was subject to Section 72 CA 2014 “merger relief”, which required it not to record any share premium on the transaction. The CA 2017 amendment now extends the Section 72 “merger relief” to share for share acquisitions by Irish companies of companies in any jurisdiction.

Group reorganisations

Under CA 2014, the legal ability to apply merger accounting was restricted to essentially share-for-share transactions (i.e. the cash consideration had to be less than 10% of the nominal value of the shares issued). CA 2017 amends this and now permits the use of merger accounting in the case of common control transactions, and consequently, merger accounting will be permitted in cases where the consideration is cash or inter-company balances provided the transaction is between entities under common control and the other criteria are met.

Conclusion

Now that the legislation in place, the focus switches to implementation. The changes impact on the financial statements of companies preparing Companies Act financial statements and some of the changes will also impact companies preparing EU IFRS financial statements. While EU IFRS financial statements do not have to comply with the provisions in the Schedules to CA 2014 (as inserted by CA 2017), unless otherwise required by EU IFRS, they do need to comply with the provisions in the main body of CA 2014, as amended.

In the words of Captain Jean-Luc Picard of the USS Enterprise, “Engage” (and soon)!

Mark Kenny is Director of Representation & Technical Policy at Chartered Accountants Ireland.