Reported accounting information has to strike a balance between what is of public interest and that which is commercially confidential. Thus a public view of solvency and credit worthiness of a company is provided for the benefit of those who may trade, or provide credit, to the company. On the other hand finer details of profitability and costs incurred are not publicised as these are commercially sensitive and could be of use to competitors.
Accounting in the UK is based along similar lines to many other countries. There are three aspects:
- Regulatory requirements to publish accounting information which are monitored for compliance;
Such published information is produced after due consideration is given to accounting standards.
- Accounting standards that for most new companies refer to generally accepted accounting principles (GAAP);
Published information, in a form that follows accounting standards may then be subject to audit.
- Audit requirements that reflect the structure, size and relative public interest of the company.
Regulatory requirements and Compliance
Corporate entities are required to be registered with Companies House and are required to file financial statements for each financial year. These are held on the public record. Organising a company’s affairs to discharge these requirements, including use of professional advisors, is known as compliance.
Accounting standards provide guidelines to give some uniformity to accounting practices. UK accounting principles are regulated by the Accounting Standards Board (ASB) a division of the Financial Reporting Council (FRC).
There are three principal platforms for reporting requirements in the UK:
- International Financial Reporting Standards (IFRS) – applicable for all listed companies, in respect of their consolidated financial statements. These are not likely to be a requirement for a new UK company.
- UK Financial Reporting Standards – featuring accounting principles that are generally accepted in the UK. Such “UK GAAP” standards are applicable to all other reporting entities that are not defined as small.
- The Financial Reporting Standard for Small Entities (FRSSE) – a single standard that applies to small corporate entities (as defined by the Companies Act). This represents some simplification on the full suite of Financial Reporting Standards (FRSs), particularly as relates to disclosure requirements, and provides some relief from more complex or onerous disclosures. The majority of new UK companies will fall into this category.
Accounting for Small Companies
The majority of newly formed UK companies will fall into the above mentioned FRSSE category. In subsequent years they may grow to be bigger and out of this category. However as small companies they are able to adopt a simplified approach to produce abrieviated accounts (or “short form”) for filing in the public view. Accounts in this form are limited to a summary of the balance sheet together with notes of explanation of the company’s finances. Such accounts may also be exempt from a requirement for audit (see below)
However small companies still need to prepare a full suite (or “long form”) of accounts. The primary purpose is support returns made to the UK tax authorities. Accounts in this form show detailed analysis of trading, profit and loss accounts together with balance sheets and other supporting analysis. However accounts in this form are not filed at Companies House and are not open to public view.
An audit is an evaluation undertaken to ascertain the validity and reliability of a company’s accounting records. It is undertaken by an independent and approved auditor in order to express an opinion on the company under evaluation.
All companies are required to have their accounts subject to audit. However dormant companies and small companies can claim exemption from this requirement. They must still prepare and file annual accounts.
To be eligible for an audit exemption in the UK, there are three distinct requirements:
- an annual turnover of no more than £6.5 million
- assets worth no more than £3.26 million on their balance sheet
- have fewer than 50 employees on average in the period.
To qualify small companies with a financial year ending on or before 30 September 2012 must satisfy both turnover and asset requirements – being the first two listed above.
Small companies with a financial year ending on or after 1 October 2012 must satisfy any two of the three requirements listed.
For an UK company, the first financial year automatically commences on the last day of the month in which the company was formed. For example a company formed in November 2011 would have its financial year calculated to cover the period from incorporation to the 30th November 2012. This latter date represents the company’s year-end and is known as the “accounting reference date”. An accounting reference date may be changed or shortened under special rules.
The Financial Year for a new UK company will start on the day of incorporation of the company. All companies are required to produce annual accounts that set out the company’s activities and performance during the financial year.
A private company normally has nine months from the end of its financial year to submit accounts and a public limited company has six months to send accounts to Companies House. For the first year of trading the time period is calculated slightly differently.
The essence of the reporting requirements is that certain information about a company’s financial affairs should be available to the public.
This is a complex subject and one where professional advice will be needed. The following general comments are made to highlight the extent to which information becomes recorded in the public domain.
The form, details and contents of accounts for a financial year are stipulated to include the following:
- A profit and loss account (this shows income and expenditure/receipts and payments)
- A balance sheet which must be signed by a director
- An auditor’s report signed by the accountant/auditor (if required)
- A director’s report signed by an officer (i.e. director or secretary of the company)
- Notes to the accounts
However certain small companies can file “abbreviated accounts”. (see above) Such companies thus publish less detail in the public domain. A small company must still provide long or full form (not abbreviated) accounts to support returns made to the UK tax authorities. These are not open to public view.
“Dormant” literally means “sleeping” and technically all companies are dormant immediately after incorporation. Many stay in that condition and around 19% of all companies in the UK are recorded as dormant. Companies can be dormant for various reasons.
Companies become active when there are ‘significant accounting transactions’ during the period.
A company can remain dormant for as long as is necessary – indefinitely, if for example, its purpose is to prevent the name being used by another.
In general terms the compliance requirements for both dormant and active companies are the same. For example both are required to file accounts. However it is the absence of significant accounting transactions that reduces this requirement to a nominal task for a dormant company.