Impact of the Companies (Accounting) Act 2017 on financial statements

This article sets out some of the main implications of The Companies (Accounting) Act 2017 for the statutory financial reports of the smaller companies.

The Companies (Accounting) Act 2017 (CAA), among other things amends a number of the accounting requirements of the Companies Act 2014. As it is amending pre-existing legislation, the citation “Companies Act 2014” has not changed. These accounting amendments are effective for financial reporting periods commencing on or after 1 January 2017 but with earlier adoption possible subject to meeting certain conditions.

Let’s look briefly at some of the more salient changes which include:
• Increases in the financial thresholds for determining the size of a company
• Introduction of size criteria specifically to determine the size of a holding company
• The exemption from the preparation of group or consolidated financial statements on the grounds of:-
    - Size
    - Being a holding company that is also a subsidiary
• New regime for “small” and “micro” companies
• More disclosures/filing for:
    - All companies
    - Medium sized
    - Small sized
    - Unlimited companies

Increased financial thresholds
When determining the size of a company as well as making sure that the company is eligible as defined in law it must also meet certain size conditions. The revised thresholds are:

Holding company – specific size thresholds
Holding companies may qualify as a small company in relation to a financial year if the group, in respect of which it is the holding company, qualifies as a small group in relation to that same financial year. If any company in the overall group is an ineligible company, the group does not qualify as a small or medium group notwithstanding that the relevant size criteria have been met. In order to qualify as a small/medium group, the group must satisfy the size threshold on either the net or the gross basis, if the average number of employees size criterion is not met (i.e.: either the net turnover does not exceed €12m and net total assets do not exceed €6m; or gross turnover does not exceed €14.4m and gross net assets do not exceed €7.2m). The gross size thresholds refer to the statutory numbers in standalone financial statements; whereas the net numbers refer to the amounts that would be included in the consolidated financial statements if such financial statements were to be prepared.

Size exemption – consolidated financial statements
Previously, a company with one or more subsidiaries could avail of an exemption from the preparation of consolidated financial statements on the grounds of size if, essentially, the group did not exceed the medium size company thresholds. Reflecting the scale of companies that can now fall to be treated as medium the CAA restricts this size exemption to small and micro companies. Accordingly, a significant number of holding companies that were previously exempt will find that they are required to produce consolidated financial statements for the first time to meet their obligations under CAA for accounting periods commencing on or after 1 January 2017.

Sub-holding companies’ exemption – consolidated financial statements
Under CA 14 provided certain conditions were met such as the filing of the higher holding company’s consolidated financial statements, a sub-group holding company could avail of an exemption from the preparation of consolidated financial statements for its sub-group. The exemption remains in law but additional conditions have to be met in certain cases. Where the higher parent owns 90% or more of the sub-holding company but not 100% then all the shareholders of that sub-holding company must approve of the taking of the exemption. 

New regime for “small” and “micro” companies
Some of the key characteristics of the new regime for small companies include:

• Small companies must meet certain eligibility criteria for the reduced disclosure regime but even if they do they may always choose a higher accounting framework and forego the reduced disclosures
• Small company financial statements even those adopting the reduced disclosure regime must still give a true and fair view – so directors may find that they have to give disclosures over and above the minimum mandated by law
• While the formats are the same there is reduced disclosure and analysis required in financial statements
• Small company directors’ reports do not require to have a description of the use of financial instruments or a business review

The micro company accounting regime is characterised by:

• Notwithstanding the reduced disclosures, the financial statements of a micro company that comply with the reduced disclosures are presumed to give a true and fair view
• Formats for the balance sheet and the profit and loss account are very summarised and high level – for example fixed assets do not have to be analysed by class or by type
• Notes to the micro financial statements are limited and high level 
• Deferred tax, fair value and revaluations are not permitted under the micro accounting regime.
• A directors’ report is not required. However, note disclosure is required where a micro acquires or disposes of its own shares.

More disclosures/filing under CAA
All companies
While the following information is usually in financial statements it is now a matter of law that the statutory financial statements disclose:

• The name and legal form of the company;
• The place of registration of the company and the number under which it is registered;
• The address of its registered office;
• Where the company is being wound up, the information required by section 595 - generally a statement that the company is being wound up.

In addition, all companies are required to make the following disclosures where relevant:

• Payment to Third Parties for services of Directors;
• Amounts of loans, quasi-loans and credit to Directors (or connected persons) that have been waived during the year

Medium sized
Medium sized companies are no longer allowed to file abridged financial statements and are required to file their full statutory financial statements.

It should also be noted that there has not been any change to the size criteria for the directors’ compliance statement and some companies that qualify as medium for financial statements purposes will be “large” for the purposes of the directors’ compliance statement and accordingly will be required to comply with the requirements of the directors’ compliance statement regime.

Small sized
Notwithstanding the reduced disclosure regime outlined above, CAA required all profit and loss account notes to be included in a small companies abridged financial statements.

Unlimited companies
Private unlimited companies generally are not required to file their statutory financial statements unless designated to do so by law. CAA 14 increases the number of unlimited companies that are designated to file. There are ten criteria set out in law including that if “….the ultimate beneficial owners enjoy the protection of limited liability…” the unlimited company is designated to file its annual statutory financial statements. Generally, the criteria designating unlimited companies to file apply for accounting periods commencing on or after 1 January 2017. There is a deferral for unlimited companies that are parents of limited undertakings where this is the only critierion by which they are considered designated. Such unlimited companies are required to file financial statements for financial years commencing on or after 1 January 2022.

Investment companies
Previously certain investment companies were not required to file their statutory financial statements with the CRO. Following the CAA Part 24 companies are now required to so file.

Filing exemption – parent guarantee
The guarantee from a parent so that a subsidiary does not have to file its own separate financial statements and instead files the parent’s consolidated financial statements has now been extended to cover the subsidiary’s commitments as well as its liabilities.

This article is a brief description of some of the more salient features of CAA. There are many others not mentioned here. The devil is always in the detail and care is needed to identify all relevant changes especially for financial periods commencing on or after 1 January 2017 to achieve compliance with the new law when preparing the annual directors’ report and statutory financial statements.