New rules for company accounts go a step too far - here's why small firms should beware

The new Companies Act means some firms will be entitled to file potentially misleading figures.

By Liz Hughes Head, ACCA Ireland

IT IS NOT often that you will hear our organisation saying that the removal of an administrative burden on small businesses is a bad thing.

However, the new Companies (Accounting) Act 2017 will go a step too far by allowing what the Act refers to as ‘micro companies’ to produce annual financial statements that are so abridged and so lacking in information that they will be unacceptable to lenders, suppliers and credit rating agencies.

Micro companies are classified as those that meet at least two out of these three criteria: they have a turnover under €700,000, a balance sheet total below €350,000 and a maximum of 10 employees.

While the Act has some benefits, its limitations could be detrimental to business and indeed could lead to deception and risk for smaller businesses.

For example, a company could use artificially profitable sales (to a connected business) to mislead a lender into thinking the company is very profitable.

Assets could have been significantly devalued or destroyed just after the year end, and this would be hidden under the regime. Substantial deferred taxation liabilities might become due shortly after the year end and this would also be hidden.

As a result, a lender or supplier will not rely on micro-entity regime financial statements and will simply refuse the lending or credit until full financial statements are prepared.

The micro-company accounts are so misleading that the Act has to specifically deem them legally to be ‘true and fair’ because under no other measure could they be deemed so.

In this context, does the Act save a micro business time and money in the long-run? The answer is no.

Adopting the new micro-company formats will not save companies any money on bookkeeping costs, as the information omitted from the financial statements will still have to be calculated anyway for taxation purposes.

However, if the business does not borrow from banks and does not need material amounts of credit from suppliers then the new rules have some advantages.

Directors’ pay will not need to be disclosed under the new rules. The requirement to publically disclose directors’ pay in Companies Registration Office for small companies was introduced in 2015.

For some directors this was a source of embarrassment for different reasons; some because it was so low and others because it was so high.

In fact, it caused embarrassment to the extent that some companies even converted to unlimited companies status solely to avoid disclosure of directors’ pay.

Such disclosure will cease to be a requirement under the new micro-entity rules.

Significant reduction in financial statements

Micro-entity financial statements will be significantly tighter: two to three pages long compared to the 15-to-20 page financial statements a small or medium company would usually have.

This is due to a micro entity no longer being required to disclose related-party transactions, post balance sheet events, market value of investment property, and details of creditors or a directors’ report.

The Act includes additional amendments to company law: the size limits and discourse required in financial statements for small and medium companies changed; consolidated financial statements will be required by law for medium companies; and large mining and logging companies will have to make additional discourse.

Based on the new act, we recommend that micro entities consider their position very carefully before adopting the new slimmed down accounting rules.

I predict that many entities will produce micro-entity financial statements with a lot of voluntary additional disclosures so as to satisfy their stakeholders, although I don’t expect many will disclose directors’ remuneration voluntarily.

Liz Hughes is head of accountancy body ACCA for Ireland and mainland Europe.

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