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The government is consulting on the implementation of the EU Accounting Directive proposed changes to the audit exemption provisions in Companies Act.

The Department for Business, Innovation and Skills (BIS) has launched a consultation on the implementation in the UK of the EU Accounting Directive (2013/34/EU) that covers, amongst others, proposals for the preparation of annual financial statements, consolidated financial statements and general requirements for audit.

Small companies

The consultation proposes to increase the turnover and balance sheet thresholds (respectively to £10,200,000 and £5,100,000) that a company needs to assess, together with the number of employees which will be kept at 50, to establish whether it qualifies as small for accounting purposes under Companies Act 2006. As a consequence of the increases, a substantially larger number of companies will fall into the small companies’ regime, estimated at 11,000 by BIS.

However, at least at the initial stage of implementation of the Accounting Directive, the government is not proposing to provide audit exemption to all the companies qualifying as small under the new rules. In practice the thresholds for small companies’audit exemption will not increase and will stay the same that currently apply for a company to qualify as small (ie £6,500,000 turnover, £3,260,000 balance sheet total and 50 employees).

Therefore there will be a difference between the thresholds applicable to determine whether a company qualifies as small for accounting purposes and those that apply for audit exemption. The Companies Act audit exemption provisions will need to be modified to reflect the specific threshold figures rather than referring back to the thresholds that apply for small company regime for accounting purposes.

The consultation hints at the fact that in future the thresholds for small companies audit exemption will be reviewed, probably to bring them in line with those for accounting purposes as in the current legislation; however, no timescale is set under the current proposals.

Public companies

In any case the scope of audit exemption is going to be increased under the proposed regime as certain public companies will fall within it. Currently public companies are excluded from the small companies accounting regime and from audit exemption. The consultation proposes to allow public companies that meet the size criteria, but excluding those whose securities are traded on a regulated market, to apply the small companies accounting regime.

At the same time public companies will be able to take up the exemption if they meet the audit exemption thresholds and if their securities are not traded on a regulated market. Additionally Public Interest Entities (PIEs), ie broadly companies listed on a regulated exchange, credit institutions and insurance undertakings, will also be excluded from the small companies regime and audit exemption.

Group companies

Currently small companies that are part of group are not able to take up audit exemption unless the group qualifies as a small group for accounting purposes. While the thresholds to qualify as a small group for accounting purposes are proposed to be increased (to £10,200,000/12,200,000 net/gross turnover and £5,100,000/6,100,000 net/gross balance sheet total respectively), the group thresholds for audit exemption are not to be changed (staying at £6,500,000/7,900,000 net/gross turnover and £3,260,000/3,900,000 net/gross balance sheet total respectively. The wording of Companies Act will therefore need to be changed to state the specific amounts for audit exemption rather than referring to the definition of a small group for accounting purposes.

Ineligible groups

Currently groups containing public companies fall within the definition of an ‘ineligible group’ and companies that are part of such groups and that would otherwise qualify as small are excluded from applying the small companies accounting regime and from audit exemption.

The consultation proposes to change the legislation so that the presence of a public company in a group would no longer make that group ineligible and its members will not be prevented from applying the small companies accounting regime and from taking up audit exemption.

Implementation timetable

The proposals implementing the Accounting Directive are set to apply to financial years commencing on or after 1 January 2016. However, BIS is also consulting on whether it would be appropriate to allow early adoption, in advance of the mentioned date, as that would be beneficial to some entities; for example a public company qualifying as small for accounting and audit exemption purposes may find it useful to adopt the accounting regime that would be applicable to its circumstances going forward.

The closing date for the consultation is 24 October 2014 and the document includes a response form that could be e-mailed to BIS at the address provided within.

(article by ACCA)