TT208: UK Implementation of the EU Accounting Directive

Further reducing the administration burden of financial reporting for UK businessesAt the end of August, the Department for Business Innovation & Skills (BIS) issued their consultation paper ‘UK Implementation of the EU Accounting Directive’.

The consultation paper issued outlines how BIS intend to implement the new EU Accounting Directive (‘the Directive’) in the UK.

The proposed changes will effect financial reporting in the UK, particularly the SME market, for which the UK government (and the EU) have ‘a strong and ongoing commitment to reduce unnecessary administrative burdens on businesses’. It is hoped that these changes will also enhance the comparability of financial reports across member states.

As a member state, the UK must accept these changes although retain their support for the delivery of true and fair accounts and maintain importance of the integrity and standard of UK reporting.

The consultation paper covers a whole raft of interesting proposals, not all of which will be addressed in this article. However two key proposals covered which are likely to create significant discussion amongst stakeholders are:

  • Proposal to raise thresholds for determining company size (for accounting purposes only) in line with mandatory thresholds imposed by the Directive and;
  • the government seeking views on the interaction between the Directive and the Statutory Audit framework.

Micro, Small and medium company size changes

The Directive sets mandatory thresholds for micro, small, medium and large companies relative to the average number of employees, balance sheet total and net turnover at the balance sheet date.

The Directive sets a minimum and maximum threshold for small companies, although the UK government has proposed to implement the maximum threshold so to ‘allow more companies/groups to access to the less burdensome small companies regime if they wish,’ and effectively reduce the amount of information required in their financial statements, particularly reducing disclosure in the notes and removing the requirement to prepare consolidated accounts.

The tables below set out the thresholds for micro-entities, small and medium sized entities:

Criteria (company deemed micro sized if it does not exceed the limits of at least two out of three)Micro entity – CURRENTMicro entity – PROPOSED
Net Turnovern/a? £632,000
Balance sheetn/a? £316,000
Employeesn/a10
Criteria (company deemed small if it does not exceed the limits of at least two out of three)Small company – CURRENTSmall company – PROPOSED (based on maximum permitted small company threshold available under Accounting Directive as proposed by UK)
Net Turnover? £6.5m (gross – £7.9m)? £10.2m (gross – £12.2m)
Balance sheet? £3.26m (gross -£3.9m)? £5.1m (gross -£6.1m)
Employees5050
Criteria (company deemed medium if it does not exceed the limits of at least two out of three)Medium company – CURRENTMedium company – PROPOSED
Net Turnover? £25.9m (gross – £31.1m)? £36m (gross – £43.2m)
Balance sheet? £12.9m (gross – £15.5m)? £18m (gross – £21.6m)
Employees5050

The UK government anticipate that the above changes will allow c11,000 additional companies to fall within the small companies’ regime.

Audit requirements

The Directive excludes all small entities, with the exception of certain public interest entities from the audit requirement.

In accordance with the existing Companies Act 2006 legislation, a small sized company/group is required to have a statutory audit. Therefore if the above proposed changes to company size limits were applied for both the accounting and audit exemption purposes, this would increase the number of companies deemed small and thus not required to have a statutory audit.

However, the UK government is not proposing to increase the audit exemption thresholds for small undertakings as part of the initial implementation of the Directive at this point, although it will consider this separately at a later date and will also have sought views on this in the consultation paper.

This proposal will mean that the balance sheet and turnover thresholds for the small undertakings will differ for the purposes of the small companies’ regime for accounting purposes and the small companies audit exemption.

The consultation period is open until 24 October 2014 and changes transposed into UK Law no later than 20 July 2015, although any changes are not expected to first apply until financial years beginning on or after 1 January 2016. The possible option of early adoption of the new rules is also covered in the consultation.

Watch this space…

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