Small and micro companies

Dec 03, 2018

Company law accounting requirements for Irish small and micro companies.

The Companies (Accounting) Act 2017 (CA 2017) in the Republic of Ireland made a range of amendments to the accounting and filing requirements of Companies Act 2014 (CA 2014), including the introduction of new simplified accounting requirements for small and micro companies. The simpler requirements are contained in the small companies regime (SCR) and the micro companies regime (MCR), which derive from the provisions of the 2013 EU Accounting Directive designed to reduce the administrative burdens on small and micro companies across Europe. A company qualifying for the SCR or the MCR can adopt the simpler requirements of those regimes in respect of financial statements and reports for a financial year in relation to which that company qualifies as a small company or micro company.

While initially, this could lead to quite a number of changes for the financial statements of small and micro companies, as preparers familiarise themselves with the regimes the intended simplification for small and micro companies will become more evident. A number of articles have been written on the topic in previous editions of this magazine. Also, the Institute has recently issued a new Technical Release 04/2018: Companies Act 2014 – Small and micro companies, which is intended as a signpost to assist with the preparation of statutory financial statements of small and micro companies. Rather than repeating the commentary in this helpful reference material, I thought it might be useful to highlight certain aspects of the new requirements through a series of Q&As.

This article is written in the context of a private company limited by shares (LTD).  Where other company types are adopting the SCR or the MCR, additional reference to the relevant Parts of CA 2014 will be necessary – see more on this later.

How do companies qualify to use the SCR and MCR?

In order to apply the SCR or the MCR in the preparation of its financial statements, a company must qualify as a small company or a micro company, as applicable, under CA 2014. The conditions to qualify as a small company are set out in sections 280A (small companies) and 280B (small holding companies) of CA 2014, and those for micro companies are set out in section 280D.

Included in these sections are the new size criteria for small and micro companies, set out in Table 1 below.

table-1-small-micro-company

Aside from the size criteria outlined in Table 1, certain companies are dis-applied from the regimes. For example, “ineligible entities” cannot qualify as small, even if they meet the size criteria. The provisions in sections 280A, 280B and 280D, including the application of the new size criteria, and the definition of “ineligible entities”, have been discussed in some detail in the articles and Technical Release mentioned above. 
It may be helpful for readers, by way of example, to consider how some of these provisions may apply in practice:

Scenario 1

A company that meets the micro size thresholds but is part of a group and included in the consolidated financial statements of that group cannot qualify for the MCR. This is because section 280D(4) of CA 2014 provides that a subsidiary that is included in the consolidated financial statements of a higher holding undertaking cannot qualify as a micro company.

Scenario 2

A holding company that meets the micro size thresholds but produces group financial statements cannot qualify for the MCR. Again, section 280D(4) says that a holding company that prepares group financial statements cannot be a micro company.

Scenario 3

A subsidiary that meets the small size thresholds itself but is part of a larger group that does not meet the small thresholds can qualify for the SCR in preparing its individual financial statements, but not the audit exemption. In order for a small company to be able to avail of audit exemption, the largest group to which the company belongs must qualify as a small group – see more on this below.

Scenario 4

A holding company that meets the small size thresholds but is the holding company of a group containing an ineligible entity cannot qualify for the SCR, as to qualify as a small holding company, no member of the group can be an ineligible entity.

Can all company types qualify for the SCR or the MCR? 

Under CA 2014, the following types of company can qualify for the SCR or the MCR if they meet the conditions for doing so:

  • Company limited by shares (LTD);
  • Company limited by guarantee (CLG);
  • Designated activity company (DAC);
  • Unlimited company (ULC).
CLGs, DACs and ULCs need to refer to Parts 18, 16 and 19 of CA 2014 respectively, in addition to the general accounting requirements in Part 6 and the Schedules.

Public limited companies (PLCs), public unlimited companies (PUCs) and public unlimited companies that have no share capital (PULCs) cannot qualify as small companies or micro companies.  

What accounting standards do companies use when applying the SCR and the MCR?

Under both regimes, companies are required to apply accounting standards in the preparation of financial statements. For companies applying the SCR, typically this will mean the application of Section 1A of FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland. A micro company that chooses to prepare its financial statements in accordance with the micro companies regime must apply FRS 105 The Financial Reporting Standard applicable to the Micro-entities Regime, by virtue of an explicit requirement in the standard. 

Section 1A of FRS 102 and FRS 105 have been amended to reflect the Irish company law disclosure requirements – see more on this below. 

The recognition and measurement requirements of FRS 102 apply to small entities applying section 1A. For FRS 105, separate recognition and measurement requirements are included in the standard.

Do the SCR and MCR mean fewer disclosures are required in the statutory financial statements of companies applying the regimes?

The information required to be provided in the notes to the statutory financial statements of companies adopting the SCR or MCR is driven by sections of the main body of CA 2014 (primarily in Part 6), as well as the requirements in the relevant Schedule to CA 2014 (Schedule 3A (small companies), Schedule 4A (small groups) or Schedule 3B (micro companies)), and the applicable accounting standard. One of the main advantages for companies adopting the SCR or the MCR is a general reduction in the number of notes that are required to be provided in the financial statements. CA 2017 introduced exemptions for small and micro companies from providing certain ‘Part 6’ disclosures. It also introduced the Schedules 3A, 4A, and 3B to CA 2014, which contain less financial statement note requirements than were previously required of these companies (or that are now required of larger companies), by Schedules 3 and 4. 

However, it is important to remember too that CA 2017 also introduced a number of changes to the disclosure requirements that previously existed under CA 2014, including some new note disclosure requirements. For example, the requirements of section 321 regarding the disclosure of accounting policies were extended to include the reason for an accounting policy change and, to the extent practicable, the impact of the change on the financial statements for the current and preceding financial years.  Also worth mentioning is a new requirement to disclose details regarding the company such as the name and legal form of the company;  its place of registration and registered number; the address of its registered office; and additional information where the company is being wound up. These disclosures are required of companies applying the SCR and MCR and indeed are also required of other companies not applying the regimes.

It is worth reminding readers too at this stage that CA 2017 also introduced a new requirement in the Schedules, that the notes be presented 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.

Where can I find details of the disclosures required under the SCR and MCR?

As mentioned above, the information required to be provided in the notes
to the financial statements is driven by sections of the main body of CA 2014 (primarily in Part 6) as well as the requirements of the relevant Schedule to CA 2014, and applicable accounting standards.

The Financial Reporting Council’s December 2017 amendments to
FRS 102 incorporated the new SCR in the Republic of Ireland, including changes to Section 1A of FRS 102 and the inclusion of a new Appendix D to Section 1A specifically for small entities in the Republic of Ireland. These amendments include the legal disclosure requirements for small companies adopting the SCR in the Republic of Ireland based on the requirements of CA 2014, including Schedule 3A, and the relevant sections in Part 6. 

Amendments were also made to FRS 105 to incorporate the new MCR in the Republic of Ireland, including a new Appendix B to Section 6 of FRS 105 specifically for micro entities in the Republic of Ireland. Again, these amendments include the legal disclosure requirements for micro companies adopting the MCR in the Republic of Ireland based on the requirements of CA 2014, including Schedule 3B, and the relevant sections in Part 6.

The inclusion of the Irish legal disclosures of the SCR and MCR into FRS 102 and FRS 105 respectively is sure to be good news for preparers of financial statements under the regimes, creating, so to speak, an effective ‘one stop shop’ of accounting standard and company law requirements for the financial statements of companies applying the regimes.

If I provide the minimum disclosures required under the SCR or MCR in the financial statements, do the financial statements give a true and fair view?

Under section 289 of CA 2014, 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, as at the end of the financial year, and of the profit or loss for the financial year. 

Small companies

While the SCR has a limited set of mandated disclosures, there remains an overarching requirement of CA 2014 for directors of small companies to prepare financial statements that give a true and fair view and as such directors may need to consider providing disclosures in the financial statements above and beyond those specified by CA 2014 where necessary. Section 1A of FRS 102 too has a similar requirement to consider note disclosures in other parts of FRS 102 that may be necessary in order to comply with the requirement for the financial statements to give a true and fair view.

Micro companies

For micro companies adopting the MCR on the other hand, financial statements prepared in accordance with the MCR are presumed in law to give a true and fair view.

If a company qualifies to apply the SCR in the preparation of its financial statements, does it automatically qualify for audit exemption too?

In short, the answer is no. Whether the audit exemption can be availed of will depend on a number of factors and the assessment will vary depending on whether the company is a stand-alone company or part of a group.

Non-group company

A company that is not a member of a group may avail of the audit exemption provided that it qualifies as a small company and meets the other requirements of CA 2014.

Group company

The definition of a group is wider for the purposes of the audit exemption than it is for the purposes of assessing whether a group is small for preparing its financial statements under the SCR. In order for a holding company to qualify for the SCR for the purpose of preparing its financial statements, it must head up a group which also meets the small criteria (‘subgroup’). So there is a ‘look down’ approach taken for the analysis. However, in order for a small company that is part of a group to be able to avail of audit exemption, a ‘look up’ approach must be taken to assess whether the largest group (‘main group’) to which the company belongs qualifies as small.

If the main group qualifies as small, then a small company within the subgroup may avail of audit exemption as long as the other criteria, such as the timely filing of annual returns (group-wide), are met. If the main group does not qualify as small, then audit exemption is not available to any of the companies in that subgroup.

In addition, the presence of a securitisation company (e.g. a ‘Section 110 company’) in the main group precludes all members of the group from availing of the audit exemption.

Does a small company which is not applying the SCR in the preparation of its financial statements, need to present a statement of cash flows?

The requirement to present a statement of cash flows comes from Section 7 of FRS 102, and paragraph 7.1B in Section 7 says that a ‘small entity’ is not required to comply with Section 7. So irrespective of whether a small company is applying Section 1A of
FRS 102 or ‘full’ FRS 102 in the preparation of its financial statements, it does not need to present a statement of cash flows. The small company does, of course, need to meet the definition of a small entity under FRS 102.

Is there a requirement to disclose directors’ remuneration in small and micro company financial statements?

Company law disclosures regarding directors’ remuneration are required in the financial statements of a company adopting the SCR, including the new disclosures introduced by CA 2017 in respect of payments to third parties for services of directors. Companies preparing their financial statements under the MCR are exempt from these requirements to disclose directors’ remuneration.

Do the changes introduced by CA 2017 require more information to be included in financial statements that are abridged for filing purposes?

Depending on the circumstances, this may be the outcome. Whilst overall disclosures for SCR and MCR companies have been reduced, all notes to the statutory financial statements are now required to be included in the abridged financial statements. Prior to CA 2017, a small company was only required to extract certain notes to its financial statements for inclusion in its abridged financial statements.

Section 353 of CA 2014 provides that a company’s abridged financial statements are extracted from its statutory financial statements and comprise the balance sheet and all notes to the financial statements. This requirement includes notes that relate to profit and loss account items, despite the exemption from filing the profit and loss account. It also includes notes to the statutory financial statements required when information is aggregated on the face of the profit and loss account and therefore analysed in a note (as permitted under the SCR). 

In the statutory financial statements, the law allows for the appropriation of profit to be disclosed at the foot of the profit and loss account, on the face of the balance sheet, or in the notes. Where a company has opted in its statutory financial statements to include the appropriation of profit at the foot of its profit and loss account, it must provide this information in a note to its abridged financial statements.

A couple of other relevant observations in respect of filing include:

  • It is no longer a requirement when filing an annual return with abridged financial statements, to annex a separate statement with the information in relation to directors’ interests in shares and debentures.
  • Small and micro companies are exempt from filing a directors’ report. (Note that 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 in the financial statements).

Conclusion

Change will always bring challenges but the good news here is that the simpler requirements of the SCR and the MCR are designed to reduce the administrative burdens on small and micro companies.

As always, an article like this can never be a substitute for reference to relevant law and accounting standards. But help is at hand. Again I would refer you to the articles mentioned earlier and also, in particular, to Technical Release 04/2018: Companies Act 2014 – Small and micro companies. The Technical Release is available in the Knowledge Centre section of the Institute’s website. If you still have a concern, the Institute’s technical enquiry service is available to Institute members and can be contacted at technical@charteredaccountants.ie.

Good luck!

Barbara McCormack is a Manager in the Representation and Technical Policy department at Chartered Accountants Ireland.