We are sharing this update from ACCA, our professional body, for the interest of clients and contacts. The content is (c) ACCA
Top tips to help with challenges when applying thresholds
Although the audit thresholds are set out in legislation, the application of it can be sometimes very challenging with changes in circumstances such as acquisition or disposal of subsidiaries, impact of Brexit etc.
Companies are exempt from audit as per section 477 of Companies Act 2006 (the Act) if they qualify as small companies under section 382-384, unless they are members of a group or are charities and hence are required to follow the different charity audit thresholds.
A company is small if it meets two out of three of the following criteria for two consecutive years
|‘New’ limits (for periods beginning on or after 1 January 2016) (net)||‘New’ limits (for periods beginning on or after 1 January 2016) (gross)|
|Turnover||< £10.2m||< £12.2m|
|Total assets||< £5.1m||< £6.1m|
|Number of employees||< 50||< 50|
Once a company size is established, it must meet or cease to meet only when the limits are exceeded for two consecutive years (see S.382(2) of the Act). The audit exemption does not apply if the company is ineligible.
The following should be borne in mind when applying the above thresholds:
1. A company must have an audit if at any time in the financial year it has been:
- a public company (unless it’s dormant)
- a subsidiary company within a group which is not small
- an authorised insurance company or carrying out insurance market activity
- involved in banking or issuing e-money
- a Markets in Financial Instruments Directive (MiFID) investment firm or an Undertakings for Collective Investment in Transferable Securities (UCITS) management company
- a corporate body and its shares have been traded on a regulated market in a European state.
2. The ineligible rules only refer to the financial year for which the accounts relate.
3. A group has to meet the above limits as a whole to be able to exempt from an audit. If the group does not qualify as a small group, then an audit will be required for each group member.
4. There is an exemption for subsidiaries under section 479A-479C if they meet certain criteria and if the parent company provides a guarantee in respect of all actual outstanding liabilities and all contingent liabilities at the end of the financial year.
5. Due to Brexit, from 1 January 2021 section 479A subsidiary audit exemption is only available if its parent undertaking is established under the law of any part of the United Kingdom, as highlighted in this ACCA article.
6. Under the old rules a plc in the group would make the entire group ineligible but under the new rules a plc will only make that company and group ineligible if the plc is also a traded company (eg listed on the London Stock Exchange). Another benefit is that a group with an AIM-listed plc company will not make the group ineligible, and this was not available under the old rules. So having a ‘vanity plc’ in the group will no longer, on its own, prevent other group companies preparing accounts under the small regime and claiming small audit exemptions.
7. For financial reporting periods commencing on or after 31 December 2020, only a parent established in the UK will be able to provide the guarantee for subsidiary audit exemption. Companies which previously looked to an overseas parent in the EU will either need to obtain the guarantee from a UK registered parent (if there is one) or have the financial statements audited.
8. A small subsidiary company which is part of a large group (which is not ineligible), can qualify as small for accounts preparation purposes. Then the small company can prepare its financial statements in accordance with FRS 102 Section 1A, but an audit would still be required unless an exemption is taken as described above.
9. A dormant company is generally entitled to exemption from audit. Under s.480, a company is exempt from the requirements of this Act relating to the audit of accounts in respect of a financial year if:
a. it has been dormant since its formation; or
b. it has been dormant since the end of the previous financial year and the following conditions are met:
- as regards its individual accounts for the financial year in question, it is entitled to prepare accounts in accordance with the small companies’ regime, or would be so entitled but for having been a public company or a member of an ineligible group; and
- it is not required to prepare group accounts for that year.
10. Although small companies are exempt from an audit under the criteria, they may still undertake an audit for various other reasons eg:
- the company’s lender requires an audit
- a grant provider requires an audit
- directors or shareholders may request an audit assurance
- the company constitution may require it
- to support the future sale or public offering of the business.