Financial Reporting Brief
Our featured article for October is A New Challenge – The Companies Accounting Bill with Brendan Sheridan commenting on the new Bill, which is based on the EU Accounting Directive 2013, and the changes proposed with legislation likely to be introduced in the coming months.
A New Challenge – The Companies Accounting Bill
A new Companies Accounting Bill has been introduced in Ireland. While it is not certain when the Bill will be brought into Irish Legislation it is understood that it is on a priority list, particularly as it has passed the two-year timeline for Member States to legislate for EU requirements. It is likely therefore that the legislation may be enacted by the end of 2016 or early 2017.
In understanding the proposed new requirement it is helpful to go back to the originating legislation, the EU Accounting Directive 2013. A factsheet published by the Federation of European Accountants (FEE) at the time provides a useful synopsis:-
- The 2013 Accounting Directive provides the legal framework for single company and consolidated accounts for undertakings in the EU.
- The Directive must be transposed into the national legislation of each Member State within two years of publication.
- The Accounting Directives in force prior to 2013, albeit amended and expanded over the years, dated back to 1978 for single company accounts (the 4th Directive) and to 1983 for consolidated accounts (the 7th Directive). These have continued to be the foundation of Irish company law on accounting.
- The objective of the Directive is to simplify EU rules on company law, accounting and auditing with the stated aim of reducing administrative costs for EU businesses.
- To be achieved through a combination of:-
- Repealing company law Directives that dealt mainly with domestic situations or removing certain disclosure requirements for companies and branches
- Simplifying disclosure requirements for companies and branches
- Further reducing reporting and auditing requirements for small and medium-sized enterprises.
- Introducing a new obligation for large extractive and logging companies to report the payments they make to governments (the so called country by country reporting).
- Reporting would also be carried out on a project basis, where payments have been attributed to specific projects.
The majority of EU Member States have by now legislated for the Directive and its requirements, and therefore legislation in Ireland will enable Irish companies to be on a level playing pitch for accounting and reporting purposes with their European competitors.
The Irish Companies Bill
The Bill introduced in Ireland runs to 92 sections and 161 pages with new schedules to replace the current schedules 3 and 4 of the Companies Act 2014, which deal with single entity and group financial statements requirements. The Bill also includes a new part on ‘Payments to Governments’, requiring the preparation of and filing of information with the Companies Registration Office. These requirements have been extended beyond large companies and groups to all public interest entities irrespective of size, that are active in the mining, extractive and logging industries.
The Bill also includes other amendments to various sections of the 2014 Act where provisions did not quite achieve their intended purpose.
Features of the Bill
The Bill sets out new criteria for companies to qualify as ‘small’, ‘medium’ or ‘large’ and introduces a new ‘micro’ category of company. The current thresholds are indicated in brackets.
|Net Turnover||€700,000||€12m (€8.8m)||€40m (€20m)|
|Balance Sheet Total||€350,000||€6m (€4.4m)||€20m (€10m)|
|Average no. of employees||10 (10)||50(50)||250(250)|
To qualify, a company must not exceed 2 of the 3 thresholds. Large companies are those which exceed 2 of the 3 thresholds for medium companies.
Medium size companies are to be required to file full shareholders’ financial statements without any abridgement. The profit and loss account must show turnover and cost of goods sold.
The Bill makes certain changes to accounts formats and reinstates the comparative exemption for analysis of fixed assets, provisions and reserves. It also requires a company to disclose name and legal form, place of registration, registration number, address of registered office and if being wound up, a statement that a liquidator has been appointed.
Where exemption from consolidation is being availed of by a 90% subsidiary, minority shareholder approval must be obtained.
The Bill, when enacted, will require a much broader scope of corporate structures to file financial statements than is the case at present. The provisions incorporate requirements to file financial statements which ultimately, directly or indirectly, have members in a form which affords limited liability protection.
More companies with subsidiaries will be required to produce group financial statements as the exemption on the grounds of size is to be confined to micro and small companies.
Investment companies (including certain UCITS investment companies formed under the Companies Act) will be required to file annually their directors’ report and financial statements with the Companies Registration Office.
Accounting Standards Developments
The Bill, when legislated for, will enable companies that meet the size criteria to adopt FRS 105 applicable only to micro-entities, or a new Section IA for FRS 102, and which replaces the FRSSE, which applies to both small and micro entities. In the UK, where the new legislation was enacted in 2015, these changes have been effective for accounting periods beginning on or after 1 January 2016, with early application permitted for accounting periods beginning on or after 1 January 2015. It is yet to be clarified, pending legislation, when the standards will be effective in Ireland.
Some of the main features of the micro-entities framework include:-
- A simpler balance sheet and profit and loss account
- A director’s report is not required
- Notes to the accounts are not required with instead ‘minimum accounting items’ to be disclosed at the foot of the balance sheet to include details of any advances, credit and guarantees with directors (companies only), and details of any financial commitments, guarantees and contingencies.
- If information additional to the minimum is being disclosed, the entity must follow the requirements of the relevant standard.
- The fair value accounting and alternative accounting rules cannot be applied.
Other significant aspects of FRS 105 include:-
- No accounting policy options are available e.g. borrowing costs and development costs must be expensed
- No accounting for deferred tax or equity-settled share based payments
- Other simplifications to requirements, including those in areas such as post –employment benefit plans, financial instruments and foreign currency transactions.
When introduced, FRS 105 will be applied retrospectively. The Standard does not apply to all entities and there are certain classes of entity excluded, many of which are in financial services. With regards to group accounts, a fully consolidated subsidiary cannot qualify as a micro-entity. A parent entity is also subject to certain restrictions.
The financial statements of a small entity adopting Section 1A of FRS 102 will be entitled to avail of a reduced level of disclosures, limited to those required by law. The disclosures must be sufficient to give a true and fair view of the assets, liabilities, financial position and profit or loss of the entity for the reporting period. Extensive guidance is provided for directors on the additional disclosure that may be needed to meet this requirement.
The financial reporting community - preparers, auditors and regulators - together with those that make use of financial statements and other information in their decision making and other considerations - have been challenged in the past year or so with the introduction of the new accounting standards and the Companies Act 2014. The Bill, when enacted, will add new challenges to familiarise with and implement the requirements. Time and resources must continue to be invested by entities in this process.
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Irish/UK GAAP / GAAS & Related Developments
IFRS & Related Developments
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Financial Reporting Brief
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- August 2016: Uncertainty – The Accounting and Reporting Challenge
- July 2016: Non-GAAP Measures – Focus of Attention
- Quarterly Financial Reporting Brief: July 2016
- June 2016: The Challenges of a New Leasing Standard
- May 2016: Revenue Standard - Moving Towards Implementation
- April 2016: A Focus on Non-Financial Reporting
- Quarterly Financial Reporting Brief: April 2016
- March 2016: Integrated Reporting – A Way Forward for Corporate Reporting?
- February 2016: Lease Accounting: The New Standard
- January 2016: Transparency of Reporting: Importance to Financial System
- Quarterly Financial Reporting Brief: January 2016
- December 2015: Supervisors Help Response to Reporting Challenge
- November 2015: CORE & MORE
- October 2015: Corporate Reporting – Future Expectations
- Quarterly Financial Reporting Brief: October 2015
- September 2015: Conceptual Framework – A New Foundation